‘Spin cycle’: UK finance watchdog finds rare area to act tough

The logo of the new Financial Conduct Authority (FCA) is seen at the agency’s headquarters in the Canary Wharf business district of London April 1, 2013. The Financial Services Authority (FSA) has been scrapped from April 1 amid reforms to fix a supervisory system criticised for failing to spot the financial crisis coming, forcing Britain to bail out banks. Two new bodies will replace it – the FCA and the Prudential Regulation Authority. REUTERS/Chris Helgren (BRITAIN – Tags: BUSINESS POLITICS LOGO)

Financial Conduct Authority Chief Executive Nikhil Rathi is belatedly deploying the UK watchdog’s biggest weapon in the fight against money laundering. Harsher measures are reassuring given signs of post-Brexit deregulation in other areas.

The FCA on Tuesday launched its first-ever criminal proceedings against a bank under a 2007 money-laundering law. Rathi’s enforcers allege that a division of 22 billion pound NatWest, formerly known as Royal Bank of Scotland, failed to adequately monitor suspicious transactions related to a corporate customer between 2011 and 2016. The watchdog reckons 365 million pounds went into the client’s accounts, of which about 264 million pounds was in cash. NatWest said it has been cooperating with the FCA’s investigation.

Though the maximum penalty under the 2007 law is an unlimited fine, it seems unlikely that NatWest will be hit with a U.S.-style multibillion-dollar penalty – even if found guilty. The bank, now led by Alison Rose, is still 62% taxpayer-owned. It’s hard to imagine a judge imposing further heavy losses on the government, which is already heavily underwater after bailing out the bank in 2008. NatWest’s shares were down almost 2% on Tuesday – equivalent to about 400 million pounds of lost equity value. That’s more than twice as much as the total value of FCA fines levied in 2020, but still only equivalent to 0.23 percentage points of NatWest’s common equity Tier 1 capital ratio.

Instead, the main deterrent effect could be the humiliation of being dragged through the courts. That’s a starkly different prospect to the FCA’s historic approach, where banks like Standard Chartered have in recent years been able to quietly settle and move on. It arguably heralds a change in strategy at the FCA under Rathi, with the focus more on taking high-profile money-laundering scalps rather than quick fines.

Stricter enforcement sends a reassuring message, given signs that Britain is moving towards financial deregulation in other areas. Finance minister Rishi Sunak has signalled that the United Kingdom could reform its public listing rules, responding to a government-backed review led by former European Commissioner Jonathan Hill. That could include looser public listing standards, and giving the FCA a mandate to consider Britain’s “attractiveness as a place to do business”. Money-laundering may be one of the increasingly few areas where Rathi can act tough.