Barclays Caught in Brand New Regulatory Bear Trap Costing £38 Million

In yet another case of confirmed malpractice affecting thousands of clients, Barclays Bank was today fined £37.75 million by the Financial Conduct Authority (FCA) for failing to properly protect clients’ custody assets worth £16.5 billion. The FCA's fine is the largest of its kind relating to custody assets. According to the FCA investigation, clients risked “incurring extra costs, lengthy delays or losing their assets if Barclays had become insolvent,” spanning 95 custody accounts in 21 countries.

The FCA identified “significant weaknesses” in how the bank carried out financial services in the ‘Barclays Investment Banking Division’ between November 2007 and January 2012 – a period of history dominated by the global financial crisis.

David Lawton, FCA Director of Markets, said: “Safeguarding client assets is key to maintaining market confidence if firms fail - Barclays' lack of focus on the rules was unacceptable. Our on-going scrutiny of firms’ compliance reflects the importance of the regime, which protects custody assets worth £10 trillion held in the UK.”

Furthermore, Tracey McDermott, a senior FCA director was quoted as saying that Barclays “failed to apply the lessons from our previous enforcement actions,” in a sign that regulatory guidelines and enforcement often fail to gain traction among the larger financial firms.

Systematic Risk Prevention

Appropriate management and real-time accounting of custody assets is often difficult due to Liquidity availability and the complexity involved in managing a $16 billion of assets spread across multiple asset classes, including property and fine art. The lack of price certainty for some assets was an exacerbating factor in the global financial crisis as market participants were unable to accurately see the true value of their portfolios.

Amid fear, panic and market Volatility many market participants preferred to sell at the first rate available which in turn fueled a negative spiral of declining asset prices, more selling and more asset price declines. In 2008 and since, the FCA has communicated on multiple occasions its view of the importance of safeguarding client assets for the good of the bank itself, the wider banking industry and the British economy.

According to the FCA, Barclays did not accurately reflect ownership links within its Investment Banking Division and failed to establish legal agreements on many assets held there. In a further 'egg-on-face' moment, Barclays was found to have erroneously claimed ownership rights to assets that actually belonged to clients.

As is often the case with brand damaging regulatory penalties, Barclays Bank opted for the FCA’s early settlement option and qualified for a 30% discount on the fine, saving the bank over £15 million.

Ponderings

Some reasonably intriguing questions arise however. Given the approximate size of the mismanaged assets (£16.5bn) in this case comprising a mere 0.15%-0.25% of total custody assets under management in the UK, overlayed by an ever entrepreneur-friendly self-regulatory regime - what was(is) the quality of custody management amongst the remaining 99.75%?

And how much more potential for sizable fines does the FCA have? Assuming a conservative 5% of total assets were(are) not being "adequately safeguarded" in this way - if the FCA were to penalize and fines were proportional, the accumulated potential for FCA revenue generation balloons from £33.75bn to £755bn. You could even say there would be room for a bonus at the FCA for the first time that puts bankers to shame.

Penny for a whistle-blower?