Compliance Corner: Citigroup, UK Financial Conduct Authority, HSBC

Editorial Staff 24 May 2024

Compliance Corner: Citigroup, UK Financial Conduct Authority, HSBC

The latest compliance news: regulatory developments, punishments, guidance, permissions, new product and service offerings.

UK regulators have fined Citigroup Global Markets Limited (CGML), part of US-listed Citigroup, a total of £61.6 million (around $79 million) over failures that saw an employee erroneously sell far more equities than intended. This “fat finger” case caused a “flash crash” in European stocks in 2022.

The Financial Conduct Authority fined Citigroup Global Markets Limited £27.7662 million, while another UK watchdog, the Prudential Regulation Authority, fined CGML £33.88 million following its own probe into the affair.

The FCA said failures in the firm’s systems and controls led to $1.4 billion of equities being sold in European markets when they should not have been.

 “We are pleased to resolve this matter from more than two years ago, which arose from an individual error that was identified and corrected within minutes. We immediately took steps to strengthen our systems and controls, and remain committed to ensuring full regulatory compliance," Citigroup said in an emailed statement to this news service yesterday. 

On 2 May 2022, a CGML trader – who was not identified in the FCA statement – had intended to sell a basket of equities worth $58 million. The trader made an “inputting error” while entering the basket in an order management system. This resulted in a basket worth $444 billion being created.

CGML controls blocked $255 billion of the basket progressing, but they did not stop the remaining $189 billion being processed, which was sent to a trading algorithm. The algorithm selected was designed to place portions of this total order to be sold in the market over the rest of the day, the FCA said in a statement earlier this week.

In total, $1.4 billion of stocks were sold across European exchanges, before the trader cancelled the order. This coincided with a material short-term drop in some European indices which lasted a few minutes, the FCA said. 

The FCA said that although parts of CGML’s trading control framework operated as CGML expected, some primary controls were absent or deficient. In particular, there was no hard block that would have rejected this large erroneous basket of equities in its entirety and prevented any of it reaching the market. Due to poor design, the trader was also able to manually override a pop-up alert, without being required to scroll down and read all the alerts within it. The firm’s real-time monitoring was ineffective, which meant that it was too slow to escalate internal alerts about the erroneous trades.

“These failings led to over a billion pounds of erroneous orders being executed and risked creating a disorderly market. We expect firms to look at their own controls and ensure that they are appropriate given the speed and complexity of financial markets,” Steve Smart, joint executive director of enforcement and market oversight at the FCA, said.

CGML did not dispute the FCA’s findings and agreed to settle, which means it has qualified for a 30 per cent discount. Without this discount, the amount of financial penalty imposed by the FCA would have been £39.666 million.

The Financial Conduct Authority yesterday fined two HSBC entities: HSBC UK Bank, HSBC Bank plc and Marks and Spencer Financial Services (HSBC) £6.28 million ($7.98 million) for customer treatment failings.

The failures concerned how these business treated clients who were in arrears or experiencing financial difficulty, the regulator said in a statement on 23 May.

Between June 2017 and October 2018, HSBC “failed to properly consider people’s circumstances when they had missed payments”, the FCA said. The failings meant that the bank did not always do the right affordability assessments when entering arrangements with people to reduce or clear their arrears. 

“Sometimes it took disproportionate action when people fell behind with payments, which risked people getting into greater financial difficulty,” it continued. 

“The failings were caused by deficiencies in HSBC’s policies and procedures and the training of their staff, as well as inadequate measures to identify and address instances of unfair customer treatment,” the FCA continued. 

In 2018, HSBC identified that there were issues with its handling of customers in financial difficulty and notified the FCA. The bank invested £94 million in identifying the issues and putting them right. HSBC also issued redress payments totalling £185 million to over 1.5 million customers, the regulator said.

The FCA took HSBC’s remediation and redress programme into account when setting its fine. HSBC also agreed to settle the case and qualified for a 30 per cent discount to the financial penalty imposed, which would otherwise have been £8.971 million.? 

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