In the first of what could represent an avalanche of related fines for the financial services community, the UK Financial Services Authority (FSA) has this week fined the London branch of Toronto Dominion Bank £7 million for repeated systems and controls failings around the pricing of sophisticated financial products. This is the bank’s second fine for systems and controls failings and the fourth largest levied by the FSA; a precedent may be being set…
The breaches relate to pricing issues that were uncovered on a proprietary trader’s books within Toronto Dominion’s Credit Products Group. Amongst other failings the FSA found that Toronto Dominion failed to follow its established procedures in ensuring the trader’s books were independently verified, and did not have adequate controls in place that could have detected the pricing issues.
In November 2007 Toronto Dominion was fined £490,000 when a fixed income trader, Simon Brignall, attributed false values to his trading positions and created fictitious trades to hide significant losses on his book.
Margaret Cole, FSA director of enforcement and financial crime, explains the significance of the follow up penalty: “This is one of our largest fines and it underlines the seriousness with which the FSA views repeat offences. When we uncover failings in a firm we expect them to put it right immediately and to take special care to ensure it does not happen again. Toronto Dominion clearly failed to apply proper controls in this area despite its previous sanction and repeat offenders need to know that they will face severe consequences.”
The fine is a clear signal from the regulator that it is coming good on its threat to bare its teeth at those that fail to heed its warnings. “It is important that firms trading in sophisticated and often illiquid financial products have robust controls in place, particularly in times of increased market volatility. Where a firm doesn’t do this the FSA will take action,” warns Cole.
Much like Barclays earlier in the year, Toronto Dominion cooperated fully with the FSA and agreed to settle at an early stage of the FSA’s investigation, thus granting them a discount on the total amount of the fine. Without the discount the fine would have been £10 million. Toronto Dominion’s senior management has also commissioned a thorough review of the matter, as well as a wider review of its systems and controls framework and business strategies, says the FSA.
Transparency around pricing practices has become a key issue for the market, especially at the complex end of the product spectrum and it is seemingly of growing interest to the regulatory community. Regulators like the FSA are keen to get down to the data details to ensure that systems and controls actions are being taken in the relevant places. This will also have the effect of forcing firms to invest in stronger validation processes around their pricing data and third party independent data feeds.
The FSA fine can also be viewed in the context of the FSA’s recently implemented liquidity risk regime, which involves yet more tracking of data around systems and controls (this time for liquidity risk measurement). The industry can expect similar fines to be meted out to those failing to meet the regulator’s minimum data standards in this respect also.
The final notice for Toronto Dominion is available to view on the FSA website here.
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