Macris and the obligation to cooperate

The critical importance, for both firms and individuals, of the obligation to be open and cooperative with the regulator continues to remain in the spotlight with the publication of a Final Notice addressed to Achilles Macris by the Financial Conduct Authority (the FCA) on 09 February 2016 (the Final Notice). This note considers the details of the Macris case and trends in other high profile “cooperation” cases which have provided guidance on the expectations of both the FCA and Prudential Regulation Authority (the PRA) in this area. We also provide practical guidance on how to manage this obligation on a day to day basis and how to approach critical interactions with the regulator.

The Macris case

This case arises in the context of the infamous “London Whale” outcome but focuses on the behaviour of one senior individual, Mr Macris who was the Head of the Chief Investment Office International (“CIO International”, a division of JP Morgan located in London). Mr Macris held controlled functions CF29 (Significant Management) and CF30 (Customer). It concerns the provision of information by Mr Macris to the Financial Services Authority (the FSA, as predecessor of the FCA) between 28 March 2012 and 29 April 2012 (the Relevant Period). The FCA held that Mr Macris failed to deal with the FCA in an open and cooperative way and disclose information of which it would reasonably expect notice in breach of Principle 4 of the Statement of Principles for Approved Persons.

Mr Macris was responsible for the Synthetic Credit Portfolio (the SCP) which sat within CIO International. From October 2010 CIO International had been the subject of a “close and continuous” supervisory relationship due to high risk and high impact nature of the business. Mr Macris was aware that the FSA had requested to be kept informed of any significant change in CIO International’s portfolio including changes to the risk approach and material changes in strategy. In 2011 the firm resumed its strategy to reduce the size of the SCP with a view to unwinding the portfolio, however in early 2012 the SCP started to incur significant mark to market losses (from 9 January to 10 April 2012 the SCP’s losses grew from $31m to $610m).

Mr Macris led two key interactions with the FSA during the Relevant Period. On 28 March 2012 he attended a scheduled “close and continuous” supervisory meeting with the FSA in which the SCP was specifically discussed. Mr Marcis updated the FSA on “both positive and negative developments” including that the SCP had made a loss of $200m and had experienced rebalancing issues. However the Final Notice concludes that this did not go far enough to cover the “full extent of the difficulties that the SCP was then facing” and therefore prevented the regulator from having the opportunity to ask follow up questions. Some specific examples of information the FSA expected to be made aware of include:

• breaches of internal risk limits - which indicated that the risk of the SCP was increasing
• that no further trades were to be executed - which represented a change in strategy for the SCP
• increased reporting measures had been implemented - which indicated that the risk of the SCP was increasing

On 10 April 2012 the firm requested a telephone call with the FSA to provide it with an update following press speculation on 06 April about the firm’s SCP exposure. Mr Macris led this call, which was also attended by others within the bank, with the objective of correcting “any inaccurate impression” created by the press. The Final Notice concludes that the reassurances given by Mr Marcis were not balanced, measured and open as he gave the impression that there were no wider issues of concern with the SCP and that this approach prevented the regulator from having the opportunity to ask follow up questions and to form its own assessment of the actions the firm was taking in respect of the SCP. Some specific examples of information the FSA expected to be made aware of include:

• additional breaches of internal risk limits - further limits had been breached
• year-to-date losses had increased to approx. $610m - which represented a material change in the SCP, and 
• significant losses were likely that day due to press coverage - estimated at $100m to $700m

In addition Mr Macris permitted the FSA to be provided with inaccurate information during the call on 10 April 2012, in which it was confirmed that the SCP’s Value at Risk figure had been reduced from $115m to $58m. Mr Macris was aware that this reduction resulted from a change in modelling methodology rather than the risk having reduced.

The FCA imposed a £792,900 financial penalty on Mr Macris who settled the matter at Stage 2, however notwithstanding this he secured a 30% discount due to a “significant change in the nature or seriousness of the action being taken and agreement would have been possible at an earlier stage if the action had been commenced on a different footing”. The Final Notice concluded that Mr Macris’ actions were negligent, rather than deliberate and accepted, as a mitigating factor, that the firm had clawed back certain benefits from Mr Macris when his employment was terminated in July 2012 (resulting in a 10% reduction at Step 3 of the penalty procedure).

In May 2015 the Court of Appeal upheld Mr Macris’ claim that the FCA had prejudicially identified him in the firm’s final notice in September 2013 and should have granted him third party rights pursuant to section 393 of the Financial Services and Markets Act 2000. The FCA’s appeal in the Supreme Court is due to be heard later this year and it is likely that the regulator will continue to pursue this appeal, notwithstanding the publication of the Final Notice, given the importance of this policy issue for the FCA.

The obligation to cooperate

Both firms and approved persons are under an express obligation to be open and cooperative with the FCA and PRA. During 2015 and early 2016 we have continued to see the regulators pursuing cases for failure to be open and co-operative with the regulator.

In respect of the FCA, these cases have led to increasingly large financial penalties against firms ranging from 30-45% of the overall financial penalty in the matter. These cases arise from a number of factual scenarios including the failure to provide:

• factually correct information and to correct factual inaccuracies when identified
• accurate information during the course of an Enforcement investigation
• notification without delay of key changes in senior management, and
• unreasonable reliance on others to notify the regulator

This is also an area of focus for the PRA who issued a Final Notice in August 2015 against the Cooperative Bank Plc for a failure to notify in a timely manner.

For firms and individuals who fall within the remit of the FCA and PRA’s Senior Managers and Certification Regime (which come into force on 07 March 2016), this obligation will be enshrined within the Code of Conduct Rules:

• “You must be open and cooperative with the FCA, the PRA and other regulators” (Individuals, Rule 3)
• “You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice” (Senior Managers, SC4)

All firms and individuals (whether within the Senior Managers Regime or not) should take steps to refresh their understanding of the cooperation obligations to both the FCA and PRA and any decision making processes around regulatory notifications of this nature.

Practical tips for interactions with the regulator

• All interactions with the regulator are important - be sure you understand what the regulator is asking for - don’t make assumptions. If in doubt, ask. Ensure all information provided is clear, complete and accurate. A speaking note can be helpful to ensure attendees understand the key messages to be delivered.
• Keep a clear and complete record - ensure a copy of all information submitted is kept and can be retrieved at a later date. Take detailed attendance notes of any interactions with regulators and get them approved by the attendees. Send a summary note to the regulator to ensure that everyone understands the information relayed and any actions arising from the interaction.
• Senior management oversight - ensure appropriate senior management oversight of interactions with regulators. This should assist with ensuring consistent messaging and demonstrating that issues are receiving the right level of attention.
• Reassurances must be balanced, measured and open - the information provided must enable the regulator to be well informed enough to ask questions and reach their own assessment on the issues. Resist the urge to gloss over difficult messages.
• Timely and pro-active notifications - make sure notifications are made in a timely way. Make good use of scheduled meetings or request a specific time to discuss an issue with the regulator. If the matter is urgent, say so and make sure the regulator understands the reason for the request.
• Culture and leadership - the health of the regulatory relationship is often seen as an indicator of culture. This does not mean that you must always say yes to a request from a regulator (requests should be proportionate and clear and any deadlines should be reasonable), but it sets the tone for an open and respectful engagement. The regulators expect those in senior roles to role model these behaviours.