Launch of the Administrative Sanctions Guidance - Derville Rowland, Director General, Financial Conduct

Address by Derville Rowland, Director General, Financial Conduct at the launch of the Administrative Sanctions Guidance, Central Bank of Ireland, Dublin.

Introduction

Good morning everyone!

I am delighted to welcome you here this morning for the launch of the Central Bank’s Guidance on Administrative Sanctions. The purpose of the guidance we are launching today is to help both the financial services industry and the wider public to understand our approach to sanctioning for regulatory breaches under the Administrative Sanctions Procedure.

But first let me explain where administrative sanctions fit in to our overall framework for regulating and supervising conduct risk. The Central Bank regulates financial conduct with the aim of ensuring that the best interests of consumers and investors are protected and that markets operate in a fair, orderly and transparent manner.

Our vision is for a trustworthy financial system supporting the wider economy where firms and individuals adhere to a culture of fairness and high standards. The approach we take is a combination of high quality regulation, assertive supervision, effective gate-keeping and robust enforcement.

We seek to keep on top of practices in the sectors we regulate and supervise, to understand the key risks and motivations driving those practices; and, where appropriate, to deploy enforcement measures to investigate whether and why a breach has occurred, how it can be rectified and how to prevent it recurring in the future.

The Administrative Sanctions Procedure

The Administrative Sanctions Procedure – or ASP for short – is one of those enforcement measures.

All across the world sanctions regimes are used to deter misconduct and to drive regulatory compliance – whether it is ensuring that businesses are not compromising citizens’ health and safety, polluting the environment or violating consumers’ rights.¹

The use of administrative sanctions is not intended to replace criminal enforcement of the law, but rather to complement it.² Increasingly, it is clear that administrative sanctions form a key part of any effective regulatory toolkit as they have certain distinct advantages.

The importance of such sanctions was underlined by the Law Reform Commission (LRC)  which noted that, subject to certain safeguards, “the power to impose administrative financial sanctions is both valuable and necessary in ensuring that financial and economic regulators have the requisite powers to achieve their regulatory objectives.’’

We share the LRC’s view on this point. When it comes to enforcement in financial services, we take action that holds firms and individuals accountable and serves to deter misconduct and promote compliance and high standards.

We have the power to impose sanctions on firms and individuals that breach our regulatory requirements and to publicise the findings.

Let me explain how it works.

Under the ASP we investigate where we are concerned about a possible regulatory breach.  We can then hold an Inquiry to decide if the breach has or is being committed.

The Inquiry’s decision can, in turn, be appealed to the Irish Financial Services Appeals Tribunal and subsequently to the High Court. Alternatively, at any time before the conclusion of an Inquiry, the Central Bank and the regulated firm can resolve the matter by reaching a settlement agreement.  It is important to understand that these types of settlements differ in nature from many other types of out-of-court settlements – notably because details of the sanction and the settlement are published.

We consider such settlements can and do act as an effective deterrent in many cases while also reducing the burden on our finite resources. Our clear expectation is that firms should not waste public resources by deploying excessively lengthy processes either at the supervisory or the enforcement stages of our work.

The numbers tell their own story.

Since 2006, we have imposed almost €100 million in fines in over 130 settled cases under the procedure.

It is worth noting too, that the Central Bank’s sanctions procedure has withstood legal challenge and has been found to be constitutionally sound.³

Why Guidance is Needed

In 2013, the size of the sanctions we may impose increased to €1 million for individuals and up to €10 million - or 10 per cent of turnover – whichever is greater for companies.

Increasingly, we find we are sanctioning conduct that occurred wholly or partly after the higher fining powers came in to force, such as in the recent enforcement action against Permanent TSB, which I will discuss in greater detail later this morning.

Over the years, our public statements have become more detailed, and we always try to highlight the factors that were taken in to account when determining the appropriate sanctions.⁴

However, our experience of settlement discussions has revealed these factors are frequently misunderstood. Incredibly, some firms and their legal advisers appear to believe that they should get credit for co-operating with the regulator for settling - even after adopting an obstructionist attitude.

Against that background and to ensure greater consistency and transparency, we are launching this new guidance document today.

We want to make sure that both the firms we regulate, their legal advisers and the wider public, whose interests we serve, are crystal clear on our approach to administrative sanctions including the factors we take in to account when imposing such sanctions. The guidance will play an important role in this.

Aggravating and Mitigating Sanctioning Factors

As to the Guidance itself, we take into account all of the circumstances of a particular case, including the nature, seriousness and impact of the regulatory breach; the conduct of the regulated firm or individual after the breach; the entity’s previous record; and other general considerations.

Peter Gallagher, Head of our Enforcement Advisory Division, will speak after me and will go into greater detail about the contents of the guidance. For my part, I shall underline a number of key points.

First, as to the nature of the breach itself, I emphasise that each case turns on its own facts. Our experience of investigating wrongdoing by firms and individuals under the ASP tells us that no two breaches are the same. So even if a previous outcome might appear on the basis of a public statement to be relevant to a later case, there will be important differences. We acknowledge in the Guidance that comparator cases may be relevant, but the degree of relevance will vary greatly. 

Second, the behaviour of firms or individuals after the breach will always be relevant to our consideration of the appropriate sanction. Peter will speak to cooperation in greater detail, but the Guidance makes plain that we expect pro-active cooperation with our investigations. That extends from self-reporting, through remediation and cooperation with the investigation, to proactive engagement with the settlement process, if it comes to that. This means that we expect you to co-operate with information requests, to attend interview, and to be candid in all of your dealings with us. I acknowledge that this can be challenging but, as Flannery O’Connor remarked, “The truth does not change according to our ability to stomach it.”

Third, we will of course take the previous record of firms and individuals into account. This is entirely in keeping with sanctioning regimes in the regulatory and criminal jurisdictions, and with our stated aim of changing the culture in financial services.

Finally on the detail of the guidance, you will note that we have set out notes on other general considerations. I underscore that this list is not exhaustive. Just as the types of wrongdoing that we sanction are many and various, the factors that we consider relevant to the appropriate outcome are not limited.

Key Themes

As I mentioned, our public statements can also provide further guidance on how the sanctioning process works in practice.

The public statement we published in the case of the €21 million fine we imposed on PTSB earlier this year is a case in point. The fine, which was reduced from €30 million due to early settlement, is the largest fine we have ever imposed on a regulated firm.
In all, PTSB admitted 42 separate regulatory breaches.

Our investigation sought to determine how and why PTSB failed to fulfil its regulatory obligations to protect its tracker mortgage customers’ best interests and honour their contractual entitlements.

The investigation found that PTSB denied its customers a tracker mortgage or did not put them on the correct tracker rate resulting from a number of failings. I will note, as we did in our public statement, that PTSB engaged purposefully and cooperatively with the investigation. This has not necessarily been the Central Bank’s experience with every bank under investigation in relation to tracker mortgages, and we have taken robust action where appropriate.

I remind each and every firm  under active investigation that cooperation with the regulator is a basic expectation of ours in the context of engagement with firms - whether in a supervisory or enforcement context – and that the lack of cooperation can have a considerable bearing on subsequent sanctions. 

But there have been plenty of other cases besides PTSB which are instructive for those of you wishing to understand what drives the ASP procedure.

Take the recent example of the enforcement action against Wells Fargo, which resulted in a fine of €5.88m.

We set out in the public statement that, in deciding the appropriate penalty to impose, we took in to account: 

• the nature and seriousness of the breaches, which revealed serious and systemic weaknesses in the firm’s regulatory reporting capability;
• the extended period of time over which some of the breaches occurred; and
• the need for an effective deterrent impact on Wells Fargo and other firms.

The public statement also highlights the fact that the firm had not been the subject of any prior enforcement action and its cooperation with the Central Bank during the investigation. The firm’s full admissions at the earliest opportunity in the process was also noted as a mitigating factor.

Earlier this year, we also reprimanded and fined JP Morgan €1.6 million after regulatory breaches relating to the outsourcing of fund administration activities. That represented a 30 per cent reduction on the appropriate fine in line with the discounts provided under the Administrative Sanctions Procedure.

These sanctions reflect the importance we place on firms’ compliance with their legal and regulatory obligations. They also demonstrate that where firms fail to comply with these obligations, we will follow up with both targeted supervisory intervention and robust enforcement action.

It is not litigation

I would also like to stress that the ASP is not litigation, it is an investigation: unlike in most commercial settlements, the parties do not walk away at the conclusion of an enforcement action, perhaps hoping that their paths never cross again.

There is in almost all cases an ongoing supervisory relationship, and cooperation with the regulator is a basic expectation of ours in the context of engagement with firms, whether in a supervisory or enforcement context.

In particular, we often give credit to those who come early to the settlement table, make full and frank admissions and take remedial steps to address the breaches – particularly steps that that go above and beyond the minimum expected by the Central Bank.

A culture of high standards can help rebuild trust

Given the importance of the financial system to our economy and to our society, it is vital that the people working in the financial services sector demonstrate their trustworthiness by doing the right thing by their customers.

Which is where culture comes in.

Driving a positive consumer focused culture is the responsibility of firms in the first instance and we expect boards to ensure they have fully embedded risk frameworks to manage conduct risk and drive positive behaviour at the firms they lead.  We see a culture of high standards as key to restoring and maintaining trust in the regulated financial services sector.

I am sometimes asked what good culture looks like. And I often say that it is about having a set of values and expected behaviours that clearly articulate the intended culture of the firm.

But it is also about living those values – walking the culture walk as well as talking the culture talk.

Many of you here in the room today are lawyers who have a duty to represent your clients to the very best of your professional abilities even when the firms you represent have not met the standards of behaviour and culture that we at the Central Bank expect.

But you also have a responsibility to play a role in the cultural transformation of the financial services industry on which our economy relies – both because it is the right thing to do and also because it makes sense from the point of view of the regulated entities you advise.

Let me be very clear that while the Central Bank absolutely expects firms to prevent wrongdoing in the first place, they can undo some of those wrongs by demonstrating a positive culture in terms of how they deal with regulatory breaches. 

Or put another way, it is never too late to do the right thing.

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 1. Regulatory Justice: Making Sanctions Effective Final Report, November 2006, Professor Richard B. Macrory

2.  Regulatory Powers and Corporate Offences, Law Reform Commission, 2018, p100

3. High Court decision in Purcell v Central Bank of Ireland

4. See Administrative Sanctions Procedure Outline, p35