FINAL NOTICE

Individual Reference Number:
DSC01046

ACTION

1.
For the reasons given in this Notice, the Authority hereby:

(1)
imposes on David Caplin (“Mr Caplin”) a financial penalty of £210,000; and

(2)
makes an order prohibiting Mr Caplin from performing any significant
influence function in relation to any regulated activity carried on by any
authorised person, exempt person, or exempt professional firm. This order
takes effect from 22 January 2015.

2.
Mr Caplin agreed to settle at an early stage of the Authority’s investigation. Mr
Caplin therefore qualified for a 30 percent (stage 1) discount under the Authority’s
executive settlement procedures. Were it not for this discount, the Authority would
have imposed a financial penalty of £300,000 on Mr Caplin.

SUMMARY OF REASONS

3.
On 15 May 2014, the Authority issued Mr Caplin’s previous employer, Martins, with
a final notice disciplining the firm for its role in the manipulation of LIBOR. Martins’
misconduct included its inadequate systems and controls. Over the Relevant
Period, Mr Caplin was Martins’ chief executive, held a number of significant
influence functions at Martins and was the dominant personality at the firm. He had
oversight responsibility for ensuring that Martins’ systems and controls and the
operation of the business were adequate from a regulatory standpoint.
Furthermore, he assumed de facto responsibility for oversight and monitoring of
Broker conduct.

4.
Mr Caplin’s failings, described in this Notice, contributed to allowing Martins to
engage in the manipulation of LIBOR. In performing the CF3, CF1 and CF8
significant influence functions at Martins during the Relevant Period, Mr Caplin
breached Statement of Principle 7 by failing to take reasonable steps to ensure that
Martins complied with the relevant requirements and standards of the regulatory
regime. Specifically, he:

(1)
presided over a firm where the compliance culture was extremely weak;

(2)
failed
to
ensure
the
timely
and
adequate
implementation
of

recommendations made by the Compliance Consultancy, to carry out a risk
review;

(3)
failed to ensure the effective oversight of the firm’s compliance function;

(4)
failed to ensure the effective supervision and monitoring of Broker
conduct, for which he had assumed personal executive responsibility; and

(5)
failed to identify and remedy Martins’ lack of controls to prevent Brokers
making or receiving corrupt inducements.

5.
The Authority views Mr Caplin’s failures as serious because:

(1)
the Authority places great emphasis on the responsibilities of senior
management, because senior managers are responsible for the standards
and conduct of the businesses they run;

(2)
Mr Caplin was ultimately responsible for failing to address a culture at
Martins where compliance was seen as unimportant rather than as an
integral part of the running of the firm; and

(3)
Mr Caplin’s failings contributed to Martins’ misconduct in respect of LIBOR
and risked compromising the integrity of the financial market within which
Martins operated.

6.
The Authority has therefore decided to impose a financial penalty on Mr Caplin in
the amount of £210,000, pursuant to section 66 of the Act.

7.
Furthermore this conduct demonstrates that Mr Caplin paid insufficient regard to
material requirements of the regulatory regime, thereby demonstrating his lack of
competence and capability as an approved person. Overall, his conduct was well
below the standards reasonably expected of a significant influence function holder.
In all the circumstances, the Authority considers that Mr Caplin is not fit and proper
to perform any significant influence functions and that he should be prohibited from
doing so because he lacks sufficient competence and capability. Therefore, the
Authority has decided to make an order prohibiting Mr Caplin from performing any
significant influence function in relation to any regulated activity carried on by any
authorised person, exempt person, or exempt professional firm, pursuant to
section 56 of the Act.

DEFINITIONS

8.
The definitions below are used in this Notice.

“2005 Review” means a review of the compliance arrangements at Martins carried
out by the Compliance Consultancy in 2005;

“2006 Review” means a review of the compliance arrangements at Martins carried
out by the Compliance Consultancy in 2006;

“Act” means the Financial Services and Markets Act 2000;

“Audit Committee” means a sub-committee of the Board, which from May 2005,
was responsible for the reviewing the effectiveness of Martins’ internal control
policies and procedures for the identification, assessment and reporting of financial
risks;

“Authority” means the body corporate previously known as the Financial Services
Authority and renamed on 1 April 2013 as the Financial Conduct Authority;

“Board” means the Board of Directors of RP Martin Holdings;

“Broker(s)” means an interdealer broker employed by Martins acting as
intermediary in, amongst other things, deals for funding in the cash markets and
interest rate derivatives contracts;

“BBA” means the British Bankers Association, which until 31 January 2014 was the
administrator of LIBOR;

“Compliance Consultancy” means a firm of external compliance consultants
commissioned by Martins to carry out the 2005 Review and 2006 Review;

“DEPP” means the Authority’s Decisions Procedures and Penalties Guide;

“ENF” means the Authority’s Enforcement Manual;

“FIT” means the Authority’s Fit and Proper test for Approved Persons;

“IPC” means the Inter-professionals Code, part of the Authority’s handbook until 31
October 2007;

“JPY” mean Japanese Yen;

“LIBOR” means the London Interbank Offered Rate;

“Manager” means a Martins employee with direct line management responsibility
over Brokers during the Relevant Period;

“Martins” means Martin Brokers UK Ltd;

“Martins Group” means the group of companies of which Martins was a part;

“Martins Final Notice” means the Final Notice dated 15 May 2014 issued by the
Authority against Martins for misconduct relating to LIBOR;

“MBO” means the management buy-out in May 2005 in which the Martins Group
was taken from public to private ownership;

“NIPs Code” means the Non-Investment Products Code, for Principals and Broking
firms in the Wholesale Markets, as in force from time to time over the Relevant
Period;

“Operations Committee” means a sub-committee of the Board, which was
responsible for the day-to-day running of Martins;

“Panel Bank” means a bank with a place on the administrator of LIBOR’s panel (the
BBA’s panel during the Relevant Period) for contributing LIBOR submissions in one
or more currencies;

“Principle(s)” means the Authority’s Principles for Businesses;

“Relevant Period” means 2 June 2005 to 27 July 2011, inclusive;

“RP Martin Holdings” means RP Martin Holdings Ltd, the ultimate parent company
of the Martins Group;

“Statement of Principle(s)” means the Authority’s Statements of Principle for
Approved Persons;

“SUP” means the Supervision Sourcebook, part of the Authority’s handbook;

“SYSC” means the Senior Management Arrangements, Systems and Controls
Sourcebook rules, part of the Authority’s handbook;

“TED” means Trio Equity Derivatives, the other UK regulated entity within the
Martins Group and which operates as an executing broker in over the counter
equity options for its clients;

“Trader” means a person trading interest rate derivatives or trading in the money
markets;

“Tribunal” means the Upper Tribunal (Tax and Chancery Chamber); and

“UBS” means UBS AG.

FACTS AND MATTERS

9.
Martins is a voice broking firm, acting for institutional clients transacting in the
wholesale financial markets. The firm is organised into various “desks” of Brokers,
with each desk specialising in facilitating trades in different currencies and financial
products on behalf of its clients.

10.
Martins' main role is to bring together counterparties to execute trades in return
for commissions and where necessary to provide information to clients. The
information Martins provided to its clients included advice as to where it believed
the published LIBOR rates would be set on particular days.

11.
During the Relevant Period, all significant decisions concerning Martins were made
by the Board and a number of sub-committees, including the Audit Committee and
the Operations Committee. Legal and regulatory matters such as risk management
policies and internal control arrangements were reserved for consideration by the
full Board until the establishment of a Risk Committee in late 2010.

12.
Martins was by far the most profitable subsidiary within the Martins Group
generating an average of 61 percent of group turnover during the Relevant Period.

13.
The Martins Final Notice described Martins’ breaches of the Principles in relation to
LIBOR. Martins breached Principle 5 (Market Conduct) and Principle 3 (Systems
and Controls).

14.
In respect of Principle 5, the Martins Final Notice described how Brokers at Martins
colluded with a Trader at UBS as part of a coordinated attempt to influence JPY
LIBOR submissions made by Panel Banks. Martins entered into "wash trades" (i.e.
risk free trades that cancelled each other out and which had no legitimate
commercial rationale) with UBS, in order to facilitate corrupt brokerage payments
to Brokers as a reward for their attempts to influence the JPY LIBOR submissions at
Panel Banks. Three Brokers (one of whom was a manager) participated in this
manipulative scheme.

15.
In respect of Principle 3, the Martins Final Notice concluded that:

(1)
Martins had minimal policies and procedures in place to govern individual
Broker behaviour and those that were in place were inadequately designed
and easily circumvented;

(2)
Martins had no effective compliance function, with limited training for
Brokers and no effective compliance monitoring to detect Broker
misconduct. There was an absence of effective transaction monitoring
procedures, such as might reasonably have detected the wash trades; and

(3)
Martins’ reporting lines and responsibilities were unclear at every level,
including amongst senior management, meaning that responsibility for
compliance oversight of individual Brokers was unclear and effectively
uncontrolled as a result.

16.
Mr Caplin entered the wholesale broking industry in 1980 and worked for another
broking firm before joining Martins as a Manager in 1992. He was promoted to
Managing Director with overall responsibility for all brokerage activities at the firm
and was approved as a CF1 (Director) from 1 December 2001.

17.
Mr Caplin was a member of the MBO team which took the Martins Group from
public to private ownership in May 2005. Mr Caplin received a 19.65 percent
shareholding in the Martins Group. Following the MBO, Mr Caplin assumed the
position of Group CEO.

18.
From 2 June 2005 until the end of the Relevant Period, Mr Caplin was approved to
perform the CF3 (Chief Executive) function at Martins. From 2 June 2005 until 31
October 2007, Mr Caplin was approved to perform the CF8 (Apportionment and
Oversight) function. Mr Caplin was also approved as a CF1 (Director) throughout
the Relevant Period. Mr Caplin left the Martins Group in May 2013.

Mr Caplin’s influence on culture at Martins

19.
Mr Caplin was the dominant personality at the firm and his authority over the
broking floor was absolute. Mr Caplin was also intimately involved with all matters
on the broking floor such that “nothing could move without Mustard [Mr Caplin]
knowing”. Consequently, the culture on the broking desks was established and
overseen by Mr Caplin.

20.
Following his appointment as Group CEO, Mr Caplin had a distinct vision for
Martins, driven by the fact that it was small by industry standards and the threat of
competitors poaching staff was constant. Mr Caplin sought to engender loyalty
amongst the staff and operated an inclusive management style. Mr Caplin
proposed, and the firm accepted, the distribution of equity to the Brokers. Mr
Caplin believed that this would encourage compliant behaviour as it gave the
Brokers a direct interest in the long term health of the firm.

21.
Mr Caplin was keen to foster a friendlier, more paternalistic culture than at larger
competitors and Martins was sold to new employees as “You’re joining part of a
family. We’re working together as a family”. Mr Caplin also operated with an “open
door” policy so that Brokers were free to approach him directly at all times. Mr
Caplin thought this was part of Martins’ employee appeal and was reluctant to add
any unnecessary layers of management.

22.
Mr Caplin was generally resistant to any interference in the day-to-day activities of
the broking floor and was protective of the close personal relationships he had
cultivated with the Brokers. He considered that Martins’ business was low risk from
a compliance perspective and he resisted efforts by the firm’s compliance officer,
Jeremy Kraft (“Mr Kraft”), to involve himself directly in communicating with the
Brokers.

23.
Mr Caplin’s reasoning for resisting Mr Kraft’s involvement with the Brokers was that
he felt that Mr Kraft did not understand Martins’ business and told Mr Kraft that
any interventions from him may “destabilise” the desks. Mr Caplin thought that
compliance added little value to the business and saw it as unnecessary
administration. For example, a senior Manager stated that the compliance
department had: “nothing to do with that front office” and he said that any issue
with Broker conduct was sorted out amongst the Brokers themselves.

24.
Knowing that Martins was unable to compete with larger broking firms on salary,
Mr Caplin and the firm placed emphasis on ensuring Broker loyalty. The firm’s
incentive structure, including the equity referred to above, was designed
accordingly. In addition to their basic salary, Brokers were paid a bonus of 30
percent net of brokerage commission revenue, above a minimum threshold.

25.
When assessing Broker performance, Mr Caplin looked primarily at that Broker’s
commission and the strength of that Broker’s earning potential via his client
relationships. Mr Caplin judged a Manager primarily on the financial success of his
desk and Managers were appointed for their ability to maximise revenue.

26.
This culture focussed on revenue generation ultimately proved to be at the expense
of regulatory compliance. Brokers and Managers were incentivised to focus on
revenue and there were no rewards for adherence to internal controls or penalties
for non-compliance.

27.
The compliance culture at Martins was complacent and Mr Caplin did nothing to
address this complacency. Managers close to the broking business felt that: “good
common sense could apply and, as and when any issue arose, this would be raised
with the appropriate people.” Mr Caplin himself considered that experienced
Brokers would know what was required of them from a compliance perspective.

28.
In practice, by resisting any meaningful interaction between Martins’ broking desks
and its compliance function, Mr Caplin assumed personal responsibility for all
aspects of desk oversight, including monitoring for Broker misconduct.

Mr Caplin’s oversight of systems and controls at Martins

29.
Following the MBO in May 2005, the firm engaged the Compliance Consultancy to
provide it with outsourced compliance assistance, including implementing a training
programme for brokers and directors, conducting quarterly compliance monitoring
and devising procedures in order to ensure Martins’ compliance with the SYSC
rules.

30.
It was intended that this Compliance Consultancy would provide support to Mr
Kraft, who lacked previous compliance experience and was new to the wholesale
broking industry. Mr Kraft was also responsible for a range of other Martins Group
functions, notably finance and there were no other staff with any compliance
experience.

31.
Mr Caplin supported this arrangement and also suggested that the Compliance
Consultancy conduct a review of the compliance arrangements at Martins in order
to assess gaps in its compliance systems and controls. Mr Caplin, saw this review
as a “major plank in the evolution of the business post buyout”. Mr Kraft
subsequently instructed the Compliance Consultancy to undertake this work.

32.
In September 2005, the Compliance Consultancy conducted this review and
documented its findings in a memo dated 28 September 2005 (the 2005 Review).
The key findings were as follows:

(1)
no compliance manual existed;

(2)
no formal compliance monitoring programme existed;

(3)
there was no record of any formal training and competence process; and

(4)
there was no record of a compliance risk review having been conducted.
The firm was required to do this as a matter of urgency in order to comply
with SYSC. The firm’s CF8 (i.e. Mr Caplin) was then required to apportion
responsibilities to mitigate risks identified.

33.
The 2005 Review concluded that:

“Both Martins and TED are fully aware of their regulatory status and are
committed to conducting their business in a compliant manner. While this
commitment is evident in talking to individuals, it has not been supported by any
consistent documentation setting out policies and procedures required to inform
the process or addressing the various ongoing requirements in detail. It would be
difficult for either or both companies [i.e. Martins and/or TED] to demonstrate to
the [Authority] that the business is compliant in a number of areas. This is a
matter of concern currently and makes it difficult to convert to the new
requirements imposed by MiFid. Management should be setting out to put in
place a risk review and the processes necessary to demonstrate compliance with
the SYSC rules as a matter of urgency.”

34.
The 2005 Review was presented to the Board, which included Mr Caplin, on 24
October 2005. Mr Caplin and his fellow Board members did not challenge the
findings.

35.
In the months following the 2005 Review, Mr Caplin did not act on the
recommendation that the firm was required to undertake a risk review and

apportion responsibilities, even though the 2005 Review expressly stated that it
was his responsibility (as Martins’ CF8) to ensure that this was done.

36.
Mr Caplin also took no steps to ensure that the other findings of the 2005 Review
were actioned by Mr Kraft. This was despite Mr Caplin having suggested the 2005
Review, Mr Kraft’s inexperience and his own personal regulatory responsibilities as
the firm’s most senior executive.

37.
Prior to the firm’s external audit in December 2006, the Board agreed to engage
the same Compliance Consultancy to prepare a follow-up review of Martins’
systems and controls (the 2006 Review).

38.
The findings of the 2006 Review were less critical than those of the 2005 Review.
In large part, this was because Mr Kraft had agreed with the Compliance
Consultancy that a heavily critical early draft, which Mr Caplin did not see, be
softened. However, the 2006 Review, even in its final form, described weaknesses
in Martins’ systems and controls. Furthermore, Mr Caplin should have been aware
that, in fact, no significant improvements in Martins’ systems and controls had
been effected since the 2005 Review. In spite of this, Mr Caplin also took
insufficient steps to follow up on the 2006 Review to ensure that Mr Kraft
addressed the serious deficiencies identified by the Compliance Consultancy.

39.
Following the 2006 Review and until the end of the Relevant Period, Mr Caplin took
little interest in compliance matters at the firm. He failed to adequately question Mr
Kraft on his compliance activities and did not generally engage in compliance
matters. Instead, Mr Caplin thought it sufficient to rely upon quarterly board
updates presented by Mr Kraft, along with Mr Kraft’s updates at the Operations
Committee. However, these updates contained little or no discussion of potential
risks for Martins or consideration of appropriateness of Martins’ systems and
controls, focussing primarily on other issues relating to the Martins Group.

40.
Over the Relevant Period Mr Caplin also relied on the Audit Committee of Martins’
holding company for oversight of compliance at Martins. However, Martins’ holding
company was unregulated and, in practice, the members of its Audit Committee
had no experience in the oversight of a regulated financial services firm. The Audit
Committee believed at all times that it was Mr Caplin who was responsible for
monitoring Martins’ compliance officer and that Mr Caplin was ultimately
responsible for ensuring that the issues identified in the 2005 Review and 2006
Review were rectified.

Mr Caplin’s role in monitoring Brokers

41.
As described above, over the Relevant Period Mr Caplin assumed total de facto
responsibility for monitoring and oversight of Martins’ broking desks. The majority
of the firm’s Brokers had no interaction with Martins’ compliance function during
the Relevant Period. Having assumed responsibility for monitoring and overseeing
Martins’ Brokers, Mr Caplin should have taken steps to ensure that Brokers
complied with the firm’s own compliance policies, with the NIPs Code, which the
firm had adopted as its code of conduct and with regulatory requirements.
However, over the Relevant Period Mr Caplin took no steps to ensure that Brokers
and Managers were aware of, or complied with, their conduct responsibilities.

42.
During the Relevant Period, Martins had only a limited number of written
compliance policies. From February 2008, the firm did have a compliance manual.
However, Martins’ compliance manual was not distributed within Martins until, at

the earliest, September 2009, when it was added to Martins’ intranet site. The
compliance manual was not added to induction packs for Martins’ new joiners until
2011. Furthermore, there was no formal training for Brokers on market conduct
until after the end of the Relevant Period.

43.
As well as an absence of formal compliance policies, the practice at Martins, which
Mr Caplin had failed to address, prevented effective monitoring of Broker conduct.
The desk structure at Martins was effectively a franchise arrangement where each
desk was expected to work as its own independent business, with each desk,
ultimately and informally, reporting to Mr Caplin. In practice, oversight of Brokers
was left almost entirely to Managers.

44.
In the absence of any formal controls, the firm’s ability to detect misconduct
depended on Managers paying close attention to trading activities on the desks and
accordingly, on their physical presence on the desks. However, Mr Caplin failed to
properly oversee this. Neither Mr Caplin nor Martins’ compliance function provided
Martins’ Managers with any guidance as to what was expected of them in their
oversight capacity. They had no job descriptions, received no training and their
managerial performance was judged primarily on their success in maximising desk
revenue.

45.
As a result, a very weak compliance culture developed on Martins’ broking desks.
For example, over the Relevant Period at least one Manager was regularly absent
from his desk for large portions of the trading day. The management of that
particular desk was described as “shambolic” by a member of the senior
management team and Brokers were regularly left unsupervised. Mr Caplin was
aware of the issues with this Manager and attempted to address them informally
rather than invoke the firm’s formal disciplinary procedures. Mr Caplin’s actions
were ineffective as the issues with this Manager persisted even after Mr Caplin’s
intervention.

46.
The practical arrangements on the broking desks at Martins, and Mr Caplin’s lack of
oversight, allowed the misconduct described in the Martins’ Final Notice to flourish.
For example, Managers did not monitor their desks for particularly large
commissions such as the commission generated by the wash trades described at
paragraphs 4.63 to 4.71 of the Martins Final Notice.

47.
Furthermore, the system of desk oversight also took no account of the risk that
Managers would engage in misconduct. Therefore in circumstances where
Managers were themselves complicit in the misconduct, it went undetected. For
example, and as explained at paragraph 4.77 of the Martins Final Notice, at least
two Managers colluded in attempts to manipulate the published JPY LIBOR rate.

48.
Mr Caplin knew that, due to the commission-based nature of the industry, the
success of which depended on client relationships, there was a risk that Brokers
would offer or accept corrupt inducements to do business in the course of their
broking activities.

49.
Industry standards over the Relevant Period (the NIPs Code and the IPC) required
broking firms to adopt policies in respect of inducements and to ensure that they
had controls in place to detect inducements. These standards made clear that a
firm should have controls to ensure that its Brokers did not accept any fee or
commission from a Trader contrary to the best interests of its client banks.

50.
In practice, having effectively prevented Martins’ compliance function from
overseeing the broking desks, Mr Caplin personally assumed responsibility for
monitoring the risk of inducements being offered or received on Martins’ broking
desks. However, Mr Caplin took no steps to ensure that commission income was
monitored for spikes or irregularities. Such monitoring may have detected the
corrupt wash trades described at paragraph 4.63 to 4.71 of the Martins Final
Notice.

51.
Ultimately Martins did not introduce a coherent policy on inducements until 2011.

Entertainment

52.
Mr Caplin also knew that over the Relevant Period there was also a risk that, in
breach of industry guidance such as the NIPs Code, Brokers would provide
entertainment to clients by way of inducement to win or retain business. This
practice is prohibited by the NIPs Code.

53.
However, again, although he had assumed personal responsibility for oversight of
the broking desks, Mr Caplin took no steps to ensure that entertaining expenses
were adequately monitored for this risk. Monitoring of value of entertainment
expenses did not include any assessment of the propriety of those expenses. On
occasion Traders would repay Brokers on one particular desk for entertainment by
executing trades which those Traders would not otherwise have executed. One
Broker regularly engaged in this practice and in a 12 month period:

(1) entertained one particular client (the Trader identified as Trader B in the

Martins Final Notice) on an almost weekly basis to an average cost of
approximately £400 per week; and

(2) entertained the same client on three overseas trips to the United States and

Singapore for various sporting events.

54.
This practice also extended to Brokers paying for the personal entertaining
expenses of Trader clients, a practice that is expressly forbidden by the NIPs Code.
For example, a Broker, with the approval of his Manager, paid for a portion of his
client’s holiday expenses. Although Mr Caplin was not specifically aware of these
practices, he failed to ensure that adequate controls were in place to prevent such
breaches of the NIPs Code

55.
Managers were aware of these practices and condoned a culture at Martins
whereby lavish entertaining was allowed in exchange for the Trader client repaying
the entertaining in multiples of commission income. To the extent that he was
aware of such entertaining taking place, Mr Caplin took no steps in this regard.

56.
This practice featured in Martins’ LIBOR misconduct. As described at paragraphs
4.63 to 4.71 of the Martins Final Notice, Trader A entered into wash trades in
return for Brokers assisting him to manipulate JPY LIBOR. On occasion
counterparties to these wash trades were Traders at other banks who participated
in the trades upon the promise of entertainment funded by Martins, such as trips to
Las Vegas.

57.
However, Mr Caplin took insufficient steps to ensure that entertaining expenses
were adequately monitored for this risk.

Other compliance matters

58.
Despite the recommendations of the 2005 Review and 2006 Review, from 2007 to
2011 the following further gaps existed in Martins’ systems and controls:

(1)
the compliance manual was not finalised until February 2008 and was not
circulated internally until September 2009. Even when finalised, it did not
mention key guidance such as the NIPs Code or address key risks such as
inducements. Mr Caplin was aware that no timely steps had been taken to
finalise the compliance manual after the 2006 Review but did not
sufficiently challenge Mr Kraft on this matter;

(2)
the firm had no market conduct policies;

(3)
with the exception of the introduction of online AML training in late 2008,
the firm introduced no broker training after the 2006 Review. Mr Caplin
did not accept that any formal training was necessary as he thought that
Managers were sufficiently experienced to understand their regulatory
responsibilities and to embed these on their desks. As a consequence,
matters of Broker training were left to Managers to deal with on the job in
an ad hoc manner;

(4)
the firm had no formal assessment of the competence of Brokers and
Broker performance was judged on revenue alone. Mr Caplin was heavily
involved in the decision making process to decide Brokers’ bonuses and
pay increases and the firm reached decisions primarily on the basis of
revenue; and

(5)
there was no formal assessment of the competence of Martins’ approved
persons and there was no training or no job descriptions for approved
persons. As a consequence, many of those who held controlled functions at
Martins did so without properly understanding their responsibilities. This
was an issue identified in the 2005 Review and again in the 2006 Review
as an issue for the firm’s CF8. Despite holding the CF8 function for a
period, Mr Caplin failed to resolve this issue.

Compliance Improvements

59.
In late 2009, Mr Caplin was involved in a decision to recruit a dedicated compliance
professional who was eventually appointed in early 2010. Following this
appointment, certain compliance improvements were made at the firm including
the establishment of a risk committee in October 2010. However, these changes
were piecemeal and did not address the absence of Broker oversight.

60.
It was only when the firm experienced regulatory scrutiny in 2011 as a result of
suspected LIBOR misconduct that the approach to compliance at Martins changed.
From about July 2011, the new compliance professional was allowed to effect
improvements without significant restriction. Thereafter detailed controls were
introduced at Martins along with a compliance monitoring programme and a
compliance training programme for all Brokers and Managers at Martins. Mr Caplin
did not resist these changes.

61.
However, Martins lack of adequate compliance controls prior to July 2011 is
attributable, in part, to Mr Caplin’s failure to discharge his responsibility to ensure
that there were adequate compliance arrangements at the firm.

FAILINGS

62.
The regulatory provisions relevant to this Notice are referred to in Annex A.

63.
As the firm’s CEO and most senior member of staff, holding the CF3 and CF1
controlled functions, Mr Caplin was responsible for the conduct of the firm’s
regulated business. As the firm’s CF8 and person responsible for apportionment
and oversight until 31 October 2007, Mr Caplin was specifically responsible for:

(1)
ensuring that there was an appropriate apportionment of significant
responsibilities amongst Martin’s directors; and

(2)
establishing and maintaining systems and controls, including a clear
organisational structure with well defined, transparent and consistent lines
of responsibility and effective risk management.

64.
Mr Caplin was the most experienced member of Martins’ senior management team
and the only individual with prior experience as an approved person.

65.
However, despite his position of responsibility, Mr Caplin failed to take sufficient
steps to address issues of compliance that were his responsibility and ensure the
implementation of recommended improvements to Martins’ systems and controls
by the firm’s compliance function.

66.
Over the Relevant Period Mr Caplin presided over a firm with an extremely weak
compliance culture. Ultimately the compliance risks that he failed to address
crystallised in the firm’s collusion in the manipulation of LIBOR, as described in the
Martins Final Notice. His specific failings are set out below.

Breach of Statement of Principle 7

67.
Mr Caplin failed to take reasonable steps to ensure that Martins complied with the
relevant requirements and standards of the regulatory regime by, in general terms,
failing to identify and remedy seriously inadequate systems and controls at Martins
and, specifically:

(1)
despite being responsible for its engagement, failing to ensure that the
advice of the Compliance Consultancy was implemented in a timely
manner, or at all;

(2)
despite being responsible for oversight of the firm’s compliance officer, Mr
Kraft, failing to question him on his work and on the adequacy of
compliance resources at the firm;

(3)
despite being responsible for apportionment and oversight at Martins,
failing to ensure that the firm carried out an adequate compliance risk
review for Martins’ business;

(4)
despite having overall responsibility for Broker conduct, failing to ensure
that Brokers were aware of and complied with regulatory and industry
standards;

(5)
failing to identify and remedy improper client entertaining by Brokers; and

(6)
failing to identify and remedy the lack of controls to prevent the risk of
corrupt inducements being offered or accepted by Brokers in the course of
their broking activities.

Impact of Mr Caplin’s failings

68.
Mr Caplin’s failings contributed to a culture at Martins that permitted LIBOR
manipulation to take place and enabled the misconduct described in the Martins
Final Notice to go undetected and continue unabated over a prolonged period. For
example:

(1)
there were no controls that could detect unusual transactions, such as the
wash trades described at paragraphs 4.63 to 4.71 of the Martins Final
Notice;

(2)
the lack of a coherent inducements policy also created risks that
crystallised in the wash trades related to LIBOR. As described above and at
paragraphs 4.70 and 4.71 of the Martins Final Notice, counterparties to the
wash trades sometimes participated in those improper trades upon the
promise of entertainment funded by Martins; and

(3)
Brokers (and their Managers) were not trained in matters of market
conduct and their competence was not assessed. For most of the Relevant
Period Martins had no compliance manual and, even when it was
introduced, it did not cover key industry guidance on matters of market
conduct. This created a clear risk that Brokers would not follow legitimate
market practice and regulatory requirements in their day-to-day activities.

69.
The Authority’s regulatory objectives include protecting and enhancing the integrity
of the UK financial system. Mr Caplin’s breaches of Statement of Principle 7
jeopardise that objective. Having regard to the facts and matters, the Authority
considers it appropriate and proportionate in all the circumstances to take
disciplinary action against Mr Caplin.

Lack of fitness and propriety

70.
The relevant sections of FIT are set out in the Annex to this Notice. FIT 1.3.1G
states that the Authority will have regard to, among other things, a person’s
competence and capability when assessing the fitness and propriety of a person to
perform a particular controlled function. As result of the failings described above,
the Authority considers that Mr Caplin’s conduct has fallen short of minimum
regulatory standards. He is not a fit and proper person to carry out any significant
influence function.

SANCTION

Financial penalty

71.
The Authority imposes on Mr Caplin a financial penalty of £210,000.

72.
The Authority’s policy on the imposition of financial penalties and public censures is
set out in DEPP. The detailed provisions of DEPP are set out in Annex A.

73.
In determining the financial penalty, the Authority has had regard to this policy as
it was in force at the time of the misconduct. On 6 March 2010, the Authority
adopted a new penalty-setting regime. Since the gravamen of Mr Caplin’s failings
occurred before 6 March 2010, the Authority has applied the provisions that were
in place before that date. References to paragraphs of DEPP below are references
to DEPP as it stood between November 2007 and March 2010.

74.
The Authority has also had regard to the provisions of Chapter 7 of EG, and to
Chapter 13 of ENF relevant to the pre-28 August 2007 part of the Relevant Period.

75.
DEPP 6.5.2 lists factors which may be relevant when the Authority determines the
level of financial penalty for a person under the Act. Relevant factors are analysed
below. DEPP 6.5.1 provides that the list of criteria in DEPP 6.5.2 is not exhaustive
and all the relevant circumstances of the case will be taken into consideration.

76.
The Authority considers the following DEPP factors to be particularly important in
assessing the sanction.

Deterrence – DEPP 6.5.2G(1)

77.
DEPP 6.5.2(1) states that when determining the appropriate level of penalty, the
Authority will have regard to the principal purpose for which it imposes sanctions,
namely to promote high standards of regulatory and/or market conduct by
deterring persons who have committed breaches from committing further breaches
and helping to deter other persons from committing similar breaches, as well as
demonstrating generally the benefits of compliant business. The Authority
considers that the need for deterrence means that a significant financial penalty on
Mr Caplin is appropriate.

Nature, seriousness and impact of the breach – DEPP 6.5.2G(2)

78.
Mr Caplin’s breaches were extremely serious. His failure to discharge his
compliance responsibilities at Martins facilitated the manipulative behaviour
described in the Martins Final Notice which, in turn, risked undermining the
integrity of a key benchmark for the UK and international financial systems.

79.
Mr Caplin’s failures continued over a period of several years and created systemic
weaknesses in Martins’ internal controls. Furthermore, Mr Caplin held significant
influence functions and was a senior and experienced market professional.

Other DEPP factors

80.
In determining financial penalty, the Authority has also taken into account the
following factors listed in DEPP:

(1)
although Mr Caplin’s actions indicate poor judgement and serious
incompetence on his part, he did not act recklessly or deliberately (DEPP
6.5.2G(3));

(2)
Mr Caplin has co-operated fully with the Authority’s investigation (DEPP
6.5.2G(8));

(3)
penalties imposed by the Authority on other approved persons for similar
behaviour (DEPP 6.5.2G(10)).

81.
The Authority has had regard to the guidance in Chapter 9 of the Enforcement
Guide in imposing a prohibition order on Mr Caplin. The Authority has power to
prohibit individuals under section 56 of the Act. The Act states that the Authority
may make a prohibition order if it appears to the Authority that an individual is not
a fit and proper person to perform functions in relation to a regulated activity
carried on by an authorised person.

82.
Given the serious failures outlined above, the Authority considers that Mr Caplin’s
conduct demonstrates a serious lack of competence and capability for an individual
performing controlled functions involving the exercise of significant influence, and

that, if he performed such functions, he would pose a serious risk to confidence in
the financial system. The Authority therefore prohibits Mr Caplin from performing
any significant influence function.

PROCEDURAL MATTERS

83.
The decision which gave rise to the obligation to give this Notice was made by the
Settlement Decision Makers.

84.
This Final Notice is given under, and in accordance with section 390 of the Act.

Manner of and time for Payment

85.
The financial penalty must be paid in full by Mr Caplin to the Authority by no later
than 5 February 2015, 14 days from the date of the Final Notice.

If the financial penalty is not paid

86.
If all or any of the financial penalty is outstanding on 6 February 2015, the
Authority may recover the outstanding amount as a debt owed by Mr Caplin and
due to the Authority.

87.
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of
information about the matter to which this notice relates. Under those provisions,
the Authority must publish such information about the matter to which this notice
relates as the Authority considers appropriate. The information may be published
in such manner as the Authority considers appropriate. However, the Authority
may not publish information if such publication would, in the opinion of the
Authority, be unfair to you or prejudicial to the interests of consumers or
detrimental to the stability of the UK financial system.

88.
The Authority intends to publish such information about the matter to which this
Final Notice relates as it considers appropriate.

Authority contacts

89.
For more information concerning this matter generally, contact Patrick Meaney
(direct line: 020 7066 7420) or Maria O’Regan (direct line: 020 7066 7544) at the
Authority.

Therese Chambers
Project Sponsor
Financial Conduct Authority, Enforcement and Market Oversight Division

ANNEX A

GUIDANCE AND POLICY TO STATUTORY PROVISIONS AND RULES

RELEVANT STATUTORY PROVISIONS

1.
The Authority’s strategic objective, set out in section 1B(2) of the Act, is ensuring
that the relevant markets function well. The relevant markets include the financial
markets and the markets for regulated financial services (section 1F of the Act).
The Authority’s operational objectives are set out in section 1B(3) of the Act, and
include the integrity objective.

2.
Section 66 of the Act provides that the Authority may take action against a person
if it appears to the Authority that he is guilty of misconduct and the Authority is
satisfied that it is appropriate in all the circumstances to take action against him.
A person is guilty of misconduct if, while an approved person, he has failed to
comply with a statement of principle issued under section 64 of the Act, or has
been knowingly concerned in a contravention by a relevant authorised person of a
relevant requirement imposed on that authorised person.

3.
Section 56 of the Act provides that the Authority may make an order prohibiting an
individual from performing a specified function, any function falling within a
specified description or any function, if it appears to the Authority that that
individual is not a fit and proper person to perform functions in relation to a
regulated activity carried on by an authorised person, exempt person or a person
to whom, as a result of Part 20, the general prohibition does not apply in relation
to that activity. Such an order may relate to a specified regulated activity, any
regulated activity falling within a specified description, or all regulated activities.

RELEVANT REGULATORY PROVISIONS

4.
The Authority’s Statements of Principle and Code of Practice for Approved Persons
(“APER”) have been issued under section 64 of the Act.

5.
APER also contains descriptions of conduct which, in the opinion of the Authority,
fails to comply with a particular Statement of Principle to which that conduct
relates.

6.
APER 3.1.3G states that, when establishing compliance with, or breach of, a
Statement of Principle, account will be taken of the context in which a course of
conduct was undertaken, the circumstances of the individual case, the
characteristics of the particular controlled function and the behaviour expected in
that function.

7.
APER 3.1.4G states that an approved person will only be in breach of a Statement
of Principle when he is personally culpable. Personal culpability arises where an
approved person’s conduct was deliberate or where the approved person’s
standard of conduct was below that which would be reasonable in all the
circumstances.

8.
APER 3.1.6G provides that APER (and in particular the specific examples of
behaviour which may be in breach of a generic description of conduct in the code)
is not exhaustive of the kind of conduct that may contravene the Statements of
Principle.

9.
APER 3.2.1E states that in determining whether or not the particular conduct of an
approved person within his controlled function complies with the Statements of
Principle, the following are factors which, in the opinion of the Authority, are to be
taken into account:

(1)
whether that conduct relates to activities that are subject to other
provisions of the Handbook; and

(2)
whether that conduct is consistent with the requirements and standards of
the regulatory system relevant to his firm.

Statement of Principle 7

10.
Statement of Principle 7, states that an approved person performing a significant
influence function must take reasonable steps to ensure that the business of the
firm for which he is responsible in his controlled function complies with the relevant
requirements and standards of the regulatory system.

11.
APER 3.3.1 E provides that in determining whether or not the conduct of an
approved person performing a significant influence function complies with
Statements of Principle 5 to 7, the following are factors which, in the opinion of the
Authority, are to be taken into account:

(1)
whether he exercised reasonable care when considering the information
available to him;

(2)
whether he reached a reasonable conclusion which he acted on;

(3)
the nature, scale and complexity of the firm's business;

(4)
his role and responsibility as an approved person performing a significant
influence function; and

(5)
the knowledge he had, or should have had, of regulatory concerns, if any,
arising in the business under his control.

12.
The following evidential provisions and guidance in APER 4.7 are relevant to the
failure by an approved person to comply with Statement of Principle 7:

(1)
APER 4.7.3E - Failing to take reasonable steps to implement (either
personally or through a compliance department or other departments)
adequate and appropriate systems of control to comply with the relevant
requirements and standards of the regulatory system in respect of its
regulated activities, and failing to oversee the establishment and
maintenance of those systems and controls;

(2)
APER 4.7.4E – Failing to take reasonable steps to monitor (either
personally or through a compliance department or other departments)
compliance with the relevant requirements and standards of the
regulatory system in respect of its regulated activities;

(3)
APER 4.7.5E – Failing to take reasonable steps adequately to inform
himself about the reason why significant breaches (whether suspected or
actual) of the relevant requirements and standards of the regulatory
system in respect of its regulated activities may have arisen;

(4)
APER 4.7.7E - Failing to take reasonable steps to ensure that procedures
and systems of control are reviewed and, if appropriate, improved,
following the identification of significant breaches (whether suspected or
actual) of the relevant requirements and standards of the regulatory
system relating to its regulated activities;

(5)
APER 4.7.8E – Behaviour of the type referred to in APER 4.7.7E includes,
but
is
not
limited
to:
(1) unreasonably
failing
to
implement

recommendations
for
improvements
in
systems
and
procedures;

(2) unreasonably
failing
to
implement
recommendations
for

improvements to systems and procedures in a timely manner;

(6)
APER 4.7.10E - In the case of an approved person performing a
significant influence function responsible for compliance under SYSC 3.2.8
R3, failing to take reasonable steps to ensure that appropriate compliance
systems and procedures are in place falls within APER 4.7.2E;1

(7)
APER 4.7.11E - The Authority expects an approved person performing a
significant influence function to take reasonable steps both to ensure his
firm's compliance with the relevant requirements and standards of the
regulatory system and to ensure that all staff are aware of the need for
compliance;

(8)
APER 4.7.12G - An approved person performing a significant influence
function need not himself put in place the systems of control in his
business (APER 4.7.4E). Whether he does this depends on his role and
responsibilities. He should, however, take reasonable steps to ensure that
the business for which he is responsible has operating procedures and
systems which include well-defined steps for complying with the detail of
relevant requirements and standards of the regulatory system and for
ensuring that the business is run prudently. The nature and extent of the
systems of control that are required will depend upon the relevant
requirements and standards of the regulatory system, and the nature,
scale and complexity of the business;

(9)
APER 4.6.13G - Where the approved person performing a significant
influence function becomes aware of actual or suspected problems that
involve possible breaches of relevant requirements and standards of the
regulatory system falling within his area of responsibility, then he should
take reasonable steps to ensure that they are dealt with in a timely and
appropriate manner (APER 4.7.7E). This may involve an adequate
investigation to find out what systems or procedures may have failed and
why. He may need to obtain expert opinion on the adequacy and efficacy
of the systems and procedures; and

(10)
APER 4.7.14G - Where independent reviews of systems and procedures
have been undertaken and result in recommendations for improvement,
the approved person performing a significant influence function should
ensure that, unless there are good reasons not to, any reasonable
recommendations are implemented in a timely manner (APER 4.7.10E).
What is reasonable will depend on the nature of the inadequacy and the
cost of the improvement. It will be reasonable for the approved person

1 APER 4.7.2E provides that “In the opinion of the [Authority] conduct of the type described in APER 4.7.3 E,
APER 4.7.4 E, APER 4.7.5 E, APER 4.7.7 E, APER 4.7.9 E or APER 4.7.10 E, does not comply with Statement of
Principle 7 (APER 2.1.2 P).”

performing a significant influence function to carry out a cost benefit
analysis when assessing whether the recommendations are reasonable.

13.
FIT sets out the criteria that the Authority will consider when assessing the fitness
and propriety of a candidate for a controlled function. FIT is also relevant in
assessing the continuing fitness and propriety of an approved person.

14.
FIT 1.3.1G states that the Authority will have regard to a number of factors when
assessing the fitness and propriety of a person. The most important considerations
will be the person’s honesty, integrity and reputation, competence and capability
and financial soundness.

Prohibition order

15.
The Authority’s policy in relation to prohibition orders is set out in Chapter 9 of EG.
The provisions of EG set out below are those which have been in force since 1 April
2013.

16.
EG 9.1 sets out how the Authority’s power to make a prohibition order under
section 56 of the Act helps it work towards achieving its statutory objectives. The
Authority may exercise this power where it considers that, to achieve any of those
objectives, it is appropriate either to prevent an individual from performing any
functions in relation to regulated activities or to restrict the functions which he may
perform.

17.
EG 9.3 states:

“In deciding whether to make a prohibition order and/or, in the case of an
approved person, to withdraw its approval, the [Authority] will consider all the
relevant circumstances including whether other enforcement action should be
taken or has been taken already against that individual by the [Authority]. As is
noted below in some cases the [Authority] may take other enforcement action
against the individual in addition to seeking a prohibition order and/or
withdrawing its approval. The [Authority] will also consider whether enforcement
action has been taken against the individual by other enforcement agencies or
designated professional bodies.”


18.
EG 9.5 states:

“The scope of a prohibition order will depend on the range of functions which the
individual concerned performs in relation to regulated activities, the reasons why
he is not fit and proper and the severity of risk which he poses to consumers or
the market generally.”

19.
EG 9.8 to 9.14 set out guidance on the Authority’s approach to making prohibition
orders against approved persons.

20.
EG 9.8 states that, in deciding whether to make a prohibition order, the Authority
will consider whether its regulatory objectives can be achieved adequately by
imposing disciplinary sanctions.

21.
Specifically in relation to approved persons, EG 9.9 states that in deciding whether
to make a prohibition order, the Authority will consider all the relevant
circumstances of the case. These include, but are not limited to, the following:

(2) Whether the individual is fit and proper to perform functions in relation to
regulated activities. The criteria for assessing the fitness and propriety of
approved persons are set out in FIT 2.1 (Honesty, integrity and reputation); FIT
2.2 (Competence and capability) and FIT 2.3 (Financial soundness).

(5) The relevance and materiality of any matters indicating unfitness.

(6) The length of time since the occurrence of any matters indicating
unfitness.

(7) The particular controlled function the approved person is (or was)
performing, the nature and activities of the firm concerned and the markets in
which he operates.

22.
EG 9.10 states:

“The [Authority] may have regard to the cumulative effect of a number of factors
which, when considered in isolation, may not be sufficient to show that the
individual is not fit and proper to continue to perform a controlled function or
other function in relation to regulated activities. It may also take account of the
particular controlled function which an approved person is performing for a firm,
the nature and activities of the firm concerned and the markets within which it
operates.”

23.
EG 9.11 states:

“Due to the diverse nature of the activities and functions which the [Authority]
regulates, it is not possible to produce a definitive list of matters which the
[Authority] might take into account when considering whether an individual is not
a fit and proper person to perform a particular, or any, function in relation to a
particular, or any, firm.”

24.
EG 9.13 states:

“Certain matters that do not fit squarely, or at all, within the matters referred to
above may also fall to be considered. In these circumstances the [Authority] will
consider whether the conduct or matter in question is relevant to the individual's
fitness and propriety.”

25.
An example of the types of behaviour which have previously resulted in the
Authority deciding to issue a prohibition order or withdraw the approval of an
approved person, set out in EG 9.12, includes “[s]erious lack of competence” and
“[s]erious breaches of the Statements of Principle”.

26.
Before 28 August 2007, the Authority’s policy in relation to prohibition orders was
set out in Chapter 8 of ENF. The provisions in ENF are substantially the same as
those in EG.

Financial penalty

27.
The Authority’s policy on the imposition of financial penalties and public censures is
set out in DEPP. The provisions of DEPP set out below are those which were in
force from 28 August 2007 to 31 March 2010.

28.
DEPP 6.5.1(1) states that Authority will consider all the relevant circumstances of a
case when it determines the level of financial penalty (if any) that is appropriate
and in proportion to the breach concerned. The list of factors in DEPP 6.5.2 G is not
exhaustive: not all of these factors may be relevant in a particular case, and there
may be other factors, not included below, that are relevant.

29.
DEPP 6.5.2(1) states that when determining the appropriate level of penalty, the
Authority will have regard to the principal purpose for which it imposes sanctions,
namely to promote high standards of regulatory and/or market conduct by
deterring persons who have committed breaches from committing further breaches
and helping to deter other persons from committing similar breaches, as well as
demonstrating generally the benefits of compliant business.

30.
DEPP 6.5.2(2) states that the Authority will consider the seriousness of the breach
in relation to the nature of the rule, requirement or provision breached. DEPP
6.5.2(3) states that the Authority may take account of the extent to which the
breach was deliberate or reckless.

31.
Chapter 6 of DEPP sets out the Authority’s statement of policy with respect to the
imposition and amount of financial penalties under the Act.

32.
Before 28 August 2007, the Authority’s approach to deciding whether to impose a
financial penalty, and the factors to determine the level of that penalty, are listed
in chapter 13 of ENF.

33.
ENF 13.3.3 G stated: “The factors which may be relevant when the [Authority]
determines the amount of a financial penalty for a firm or approved person include
the following.” Some of the relevant factors are set out below.

34.
ENF 13.3.3 G (1) related to “the seriousness of the misconduct or contravention”
and stated: “In relation to the statutory requirement to have regard to the
seriousness of the misconduct or contravention, the [Authority] recognises the
need for a financial penalty to be proportionate to the nature and seriousness of
the misconduct or contravention in question. The following may be relevant:

(a)
in the case of an approved person, the [Authority] must have regard
to the seriousness of the misconduct in relation to the nature of the
Statement of Principle or requirement concerned;

(b)
the duration and frequency of the misconduct or contravention…;

(c)
…

(d)
the impact of the misconduct or contravention on the orderliness of
financial markets, including whether public confidence in those
markets has been damaged

(e)
the loss or risk of loss caused to consumers or other market users.”

35.
ENF 13.3.3 G (3) related to “Whether the person on whom the penalty is to be
imposed is an individual, and the size, financial resources and other circumstances

of the firm or individual” and stated: “This will include having regard to whether
the person is an individual, and to the size, financial resources and other
circumstances of the… approved person. The [Authority] may take into account
whether there is verifiable evidence of serious financial hardship or financial
difficulties if the… approved person were to pay the level of penalty associated with
the particular contravention or misconduct. The [Authority] regards these factors
as matters to be taken into account in determining the level of a penalty, but not
to the extent that there is a direct correlation between those factors and the level
of penalty. The size and financial resources of [an] approved person may be a
relevant consideration, because the purpose of a penalty is not to render [an]
approved person insolvent or to threaten [his] solvency. Where this would be a
material consideration, the [Authority] will consider, having regard to all other
factors, whether a lower penalty would be appropriate; this is most likely to be
relevant to… approved persons with lower financial resources; but if [an] individual
reduces [his] solvency with the purpose of reducing [his] ability to pay a financial
penalty, for example by transferring assets to third parties, the [Authority] will
take account of those assets when determining the amount of a penalty.”

36.
ENF 13.3.3 G (5) related to “conduct following the contravention” and stated:

“The [Authority] may take into account the conduct of the… approved
person in bringing (or failing to bring) quickly, effectively and completely the
contravention or misconduct to the [Authority]’s attention and:

(a)
the degree of cooperation the… approved person showed during the
investigation of the contravention or misconduct (where [an] approved
person has fully cooperated with the [Authority]’s investigation, this
will be a factor tending to reduce the level of financial penalty);

(b)
any remedial steps taken since the contravention or misconduct was
identified, including identifying whether consumers suffered loss,
compensating them, taking disciplinary action against staff involved (if
appropriate), and taking steps to ensure that similar problems cannot
arise in the future.”

ANNEX B

RELEVANT CODES OF CONDUCT

1.
Until being revoked on 31 October 2007, the Inter-Professionals Code (the “IPC”)
in the Authority’s Handbook outlined acceptable market conduct for brokers and
arrangers operating in the wholesale markets.

2.
The IPC contained the following provision in relation to inducements:

“A firm should take reasonable steps to ensure that it, or any person acting on its
behalf, does not offer, give, solicit or accept an inducement if it is likely to conflict
to a material extent with any duty which a recipient firm owes to another person.
Inducement can include entertainment".

3.
The Non-Investment Products Code (“NIPs Code”) sets out rules of good market
practice for market participants who trade in non-investment products in the
wholesale markets. This includes the forward foreign exchange market.

4.
While the products covered in the NIPs Code are not covered by the Authority’s
Handbook, the Authority expects firms to take due account of the NIPs code when
conducting business in products covered by the Code. Importantly, non-compliance
with the Code may raise issues such as the firm’s integrity or competence.

5.
The NIPs Code contains the following General Standards:

“II GENERAL STANDARDS

Firms and their employees should act in accordance with the spirit as well as the
letter of the Code when undertaking, arranging or advising on transactions in the
wholesale markets. Managers of firms should ensure that the obligations imposed
on them and their staff by the general law are observed. Management and staff
should also take account of any relevant rules and codes of practice of regulatory
bodies, such as section 3.4 of the IPC (MAR 3).

Responsibilities of the firm

1. All firms are expected to act in a manner consistent with the Code so as to
maintain the highest reputation for the wholesale markets in the United Kingdom.

2. Relevant staff should be familiar with the Code, conduct themselves at all
times in a thoroughly professional manner and undertake transactions in a way
that is consistent with the procedures set out in this code.

3. All firms are responsible for the actions of their staff. This responsibility
includes:

- ensuring that any individual who commits the firm to a transaction has the
necessary authority to do so;

- ensuring that employees are adequately trained in the practices of the markets
in which they deal/broke; and are aware of their own, and their firm’s
responsibilities. For example, inexperienced dealers should not rely on a broker

to fill gaps in their training or experience; to do so is clearly not the broker’s
responsibility;

- ensuring staff are made aware of and comply with any other relevant guidance
that may from time to time be issued, which supplements or replaces this code,
and;

- ensuring that employees comply with any regulatory requirements that may be
applicable or relevant to a firm’s activities in the wholesale markets.”

6.
Following the revocation of the IPC, the introduction to the General Standards was
updated to refer to the General Principles and SYSC in place of the IPC.

7.
In order to comply with these General Standards, firms are required to implement
policies and controls to ensure that staff are aware of and adhere to the NIPs Code
and other regulatory requirements such as the General Principles and SYSC.

8.
The NIPs Code contains the following provision in relation to inducements:

“A firm should establish a policy to ensure that neither it nor its employees should
offer, give, solicit or accept any inducement from third parties. Where
entertainment or gifts are offered in the ordinary course of business,
management should:

i.
establish a policy towards the giving/receiving of entertainments and gifts;

ii.
take reasonable steps to ensure that the policy is observed; and

iii.
deal with gifts judged to be excessive but which cannot be declined
without giving offence.

Management may wish to consider the following points in formulating a policy on
receiving and giving entertainment and gifts:

i.
policies should contain specific reference to the appropriate treatment for
gifts (given and received). This policy should specifically preclude the
giving (or receiving) of cash or gifts that are readily convertible into cash;

ii.
in determining whether the offer of a particular gift or form of
entertainment might be construed as excessive, management should bear
in mind whether it could be regarded as an improper inducement, either
by the employer of the recipient or the supervisory authorities. Any
uncertainty should be cleared in advance with management at the
recipient firms; and,

iii.
firms should not normally offer entertainment if a representative of the
host company will not be present at the event”.