FCA Fines Tullett Prebon for “Ineffective Control” of Brokers

The UK’s Financial Conduct Authority (FCA) has fined Tullett Prebon, now part of TP Icap, GBP 15.4 million for “failing to conduct its business with due skill, care and diligence, failing to have adequate risk management systems and for failing to be open and cooperative with the FCA”. In spite of the latter statement, because the firm agreed to resolve the matter it qualified for a 30% discount under an FCA scheme.

The FCA says that following an investigation, it found that between 2008 and 2010, Tullett Prebon’s Rates division had ineffective controls around broker conduct. Lavish entertainment and a lack of effective controls allowed improper trading to take place, including ‘wash’ trades (a ‘wash’ trade involves no change in beneficial ownership and has no legitimate underlying commercial purpose) which generated unwarranted and unusually high amounts of brokerage for the firm.

It adds that senior management wrongly believed sufficient systems and controls were in place, when in fact, systems and controls were not used or directed effectively. “Obvious red flags of broker misconduct and opportunities to probe were missed,” the FCAS says. “For example, when the firm made inquiries of one broker about the basis for inordinately high brokerage on one trade the broker responsible said ‘you don’t want to know’ and no steps were taken to identify the reasons, let alone whether they were appropriate.

“These are serious failings that undermine the proper function of wholesale markets,” the FCA adds.

Tullett Prebon also breached Principle 11 of the FCA’s Principles for Businesses by failing to be open and cooperative with the FCA. This breach occurred between August 2011 and October 2014 and related to the FCA’s request to the firm in August 2011 for broker audio tapes. Although Tullett Prebon had the majority of the audio that the FCA required, it failed to produce the audio to the FCA until 2014, the regulator says, adding that the firm initially provided an incorrect account as to how the audio had been discovered.

“The market performs important public functions and is not a private game of self-enrichment,” says Mark Steward, executive director of enforcement and market oversight at the FCA. “ While these trades did not mislead the market, nor amount to market abuse, the wash trades were entirely improper, undermining the proper function of the market. Senior management and compliance were cocooned from seeing the misconduct, and systems and controls failed to probe broker conduct, even when warning signs were visible.

“The case against Tullett Prebon was a long and complex one,” he adds. “The firm’s failure to be open with the FCA about the existence of key evidence reflected a high degree of culpable incompetence and prejudiced the FCA enquiries.

Colin Lambert

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