TPEL is an electronic and voice inter-dealer market broker which acts for institutional clients only, but an admonition from the UK's regulator against it contains some salutary lessons for exchange-facing private banks and most other firms that do not want to fall foul of FCA principles 2, 3 and 11.

In relation to the breach of Principle 2, which orders firms to conduct business with due skill, care and diligence, Tullet Prebon ignored blatant signals of misconduct on the part of brokers. When a trade generated high brokerage and a senior manager asked the broker responsible if it was an error, the broker said: “you don’t want to know.” Nobody followed the clue up.

In relation to the breach of Principle 3, which orders every firm to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems, the systems and processes that could have spotted and dealt with misconduct went unused for monitoring and compliance purposes.

In its final notice on the subject, the FCA expresses alarm at brokers generating unwarranted brokerage for Tullett Prebon between September 2008 and June 2011, where seven brokers on four desks in the rates division (as opposed to the treasury and credit divisions, which also contained traders) carried out name passing business and collaborated with traders to set up improper trades that generated approximately £390,000.

Name-passing broking involves a broker providing bid and offer information to potential trade counterparties. Once a broker has arranged a trade and has confirmed the trade price, volume and terms with the counterparties, the counterparties’ names are revealed to each other and they come to an agreement. The broker then charges the clients a brokerage fee (pre-fixed between Tullett Prebon and the trading firms in question) in relation to the trade.

Monitoring, compliance responsibilities and entertainments

The most important failings as regards principles 2 and 3 fall into three areas: monitoring, compliance responsibilities and controls over entertainment expenditure. The compliance department did not effectively monitor the brokerage being generated in the name-passing part of the rates division, or communications between brokers in that division, and neither did anyone else. Desk heads and divisional directors had some compliance-related responsibilities but were not well enough aware of them and some of them ignored clear 'red flags.'

One senior manager in the rates division said of the compliance department: "So as a function of actually overlooking the business and giving us the direction and steer from a compliance perspective, we didn’t have one." Another said: “[There] wasn’t any feed down of compliance issues anywhere, it just wasn’t there.”

As for entertainments, a regime of authorisation was in place and there were policies to cover it in the compliance manual and staff handbook, but all this was very vague. There were no policies or processes whereby people (either in the divisions or the finance department) looked at entertainment expenditure on a ‘by broker’ or ‘by trader’ basis. Some brokers and divisional directors were not evene aware of any policies. The compliance department did not monitor expenditure on entertainments at all.

The rule of thumb was that 3% of desk revenue could be spent on entertainments - which included food, drinks and holidays - but the expenditure was often more lavish and senior managers often did not follow the policies. Tullett Prebon awarded one holiday in Las Vegas and California to a trader at the behest of a broker because the trader had agreed to pay an improperly higher price for a trade.

Failure to be open

Principle 11, on the subject of relations with regulators, states that a firm must deal with its regulators in an open and co-operative way and must tell the appropriate regulator anything relating to it of which that regulator would reasonably expect notice.

Here, the FCA ordered TPEL to produce recordings of brokers' conversations. TPEL told it that it had deleted them in accordance with it audio deletion policy. It was true that there was a 12-month audio deletion policy in place, but it had not actually deleted most of the recordings and therefore ought to have passed them on to the FCA.

The FCA says that 'senior manager A' (in the legal department) received an email from TPEL’s voice communications department that said that at least some of the audio in question was available. He failed to tell the regulator.

The FCA then asked Tullett Prebon to find out whether some different recordings had been deleted in line with the 12-month policy or whether they had been preserved; most of them were indeed available but the compliance department made no attempts to find them, even though it could have done so simply by asking the voice communications department.

Nearly two years after the FCA’s original demande for information, senior managers A and B became aware of further "historic broker audio," as the FCA calls it. There was a delay of more than six months before the FCA had it because they kept quiet about it.

TPEL agreed to resolve the matter early and therefore only had to pay 70% of the usual penalties. Were it not for this, it would have had to pay £15 million for contravening principles 2 and 3 and £7 million for contravening Principle 11.