Executive Summary
2013 marked the establishment of the Financial Conduct Authority on 1 April 2013, succeeding the Financial Services Authority. Total fines reached approximately £474 million across 35 actions, demonstrating immediate enforcement capability in the new regulatory structure.
The year was characterised by two major cases: JPMorgan's £137.6 million fine for the 'London Whale' trading losses, and Rabobank's £105 million LIBOR manipulation penalty. Both cases reflected the FCA's inheritance of complex investigations from the FSA and its capacity to bring them to successful conclusion.
Regulatory Context
The FCA's creation implemented the recommendations of the Financial Services Act 2012, separating conduct regulation from prudential supervision (which went to the PRA for deposit-takers and major insurers). This 'twin peaks' model aimed to address the perceived failures of the FSA's integrated approach.
The new regulator inherited the FSA's enforcement caseload, including the advanced LIBOR investigations and the JPMorgan inquiry. The FCA committed to maintaining enforcement intensity while developing its distinctive approach to conduct regulation.
The regulatory philosophy emphasised judgment-based supervision and early intervention, with enforcement as one of multiple tools for achieving better outcomes. However, the scale of inherited cases meant that traditional enforcement activity remained prominent in the FCA's first year.
Key Enforcement Themes
- FCA established and immediately demonstrates enforcement capability
- London Whale case addresses risk management failures
- LIBOR manipulation enforcement continues from FSA
- Consumer protection cases prosecuted alongside wholesale
- New regulatory structure beds in during active enforcement
Professional Insight
The JPMorgan London Whale case provides essential lessons in risk governance. The bank's Chief Investment Office built a derivatives position that ultimately generated over $6 billion in losses. The FCA's £137.6 million fine addressed failures in risk management, governance, and market conduct.
Critical to the case was the failure of multiple control layers. Risk limits were breached and subsequently amended rather than enforced. Valuation marks were adjusted to reduce apparent losses. Senior management received inadequate information about the position's size and risk. Each failing enabled subsequent failures in a cascade that proved catastrophic.
For risk professionals, the case demonstrates that limits without consequences are not controls. Governance frameworks must include meaningful challenge and consequences for breach, regardless of the business unit's profitability or strategic importance.
The Rabobank LIBOR case continued the FSA's enforcement programme, demonstrating continuity through the regulatory transition. The £105 million fine addressed trader manipulation of benchmark submissions over an extended period.
The FCA's first year established that the new regulator would maintain robust enforcement while developing its distinctive approach. The combination of inherited cases and new investigations demonstrated both capability and capacity.
Looking Ahead
2013 set the foundation for the FCA's enforcement identity. The FX manipulation investigations were underway, positioning 2014 for record enforcement. The new regulator had demonstrated capability; the following years would establish whether this translated into lasting industry change.
The regulatory emphasis on cultural change would evolve from rhetoric to operational reality through SM&CR development and implementation.