The Prudential Regulation Authority (“PRA”) has fined Credit Suisse International (“CSI”) and Credit Suisse Securities (Europe) Ltd (“CSSEL”, together with CSI, the “Firms”) £87 million for significant failures in risk management and governance between 1 January 2020 and 31 March 2021, in connection with the Firms’ exposures to Archegos Capital Management (“Archegos"). This is the PRA’s highest fine and the only time a PRA enforcement investigation has established breaches of four PRA Fundamental Rules.
The PRA action is part of a co-ordinated global resolution, incorporating action by the Swiss Financial Market Supervisory Authority (“FINMA”) and the Federal Reserve Board, which provides for combined penalties in excess of $387.5 million being imposed by the PRA and Federal Reserve Board.
The Firms provided prime brokerage services and entered into equity total return swaps (“TRS”) with Archegos. All such TRS positions were remotely booked into the Firms in the UK via other entities in the Credit Suisse group. When Archegos defaulted in March 2021, around US$5.1 billion of losses were booked to the Firms. These losses for Credit Suisse resulted in significant financial and reputational damage. Credit Suisse was ultimately acquired by UBS Group AG (“UBS”) in 2023.
The Firms’ risk management oversight and practices fell well below the regulatory standards required. The failings were found to be symptomatic of an unsound risk culture within the business line that failed to balance considerations of risk against commercial reward appropriately. Broadly, this resulted in a failure by the Firms to address the risk arising from Archegos’ portfolio, a confusion of responsibilities and failures to adequately respond when limit breaches were exceeded. The Firms had failed to learn from past similar experiences and had insufficiently addressed concerns previously raised by the PRA.
Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of the PRA, said:
"Credit Suisse’s failures to manage risks effectively were extremely serious, and created a major threat to the safety and soundness of the firm. The seriousness and widespread nature of those failures has led to today’s fine, which is the largest ever imposed by the PRA."
As a result, the Firms breached Fundamental Rules 2, 3, 5 and 6 of the PRA Rulebook. Fundamental Rule 2 requires that a firm to conduct its business with due skill, care and diligence. Fundamental Rule 3 requires that a firm must act in a prudent manner. Fundamental Rule 5 requires that a firm must have effective risk strategies and risk management systems. Fundamental Rule 6 requires that a firm must organise and control its affairs responsibly and effectively. This all resulted in the Firms failing to:
- Instil a culture within the investment banking division that appropriately balanced the considerations of risk against commercial reward;
- Evaluate and take due account of the risks to the Firms, and the Credit Suisse group, arising from their exposures in relation to Archegos’ portfolio;
- Appropriately escalate the risks within Archegos’ portfolio with the result that there was inadequate oversight in the UK of risk remotely booked into the Firms;
- Take sufficient steps to implement an effective risk mitigation strategy in respect of Archegos’ portfolio. Including a failure to take reasonable steps to reduce risk when it would have been prudent to do so; and
- Have a governance framework that adequately scrutinised or discussed the risks posed to the Firms by Archegos’ portfolio
The Firms agreed to resolve this matter and therefore qualified for a 30% reduction in the fine imposed by the PRA. Without this discount, the fine imposed by the PRA would have been £124.4 million.
Notes to editors
- PRA Final Notice
- On 12 June 2023, UBS completed the acquisition of Credit Suisse. The PRA’s investigation does not relate to this acquisition, and solely concerns the actions and inactions of the Firms in their risk management and governance of counterparty portfolios during the period 1 January 2020 and 31 March 2021.
- FINMA notice
- The Federal Reserve Board separately imposed a fine of $268,494,109.20 on UBS Group AG, Credit Suisse AG, Credit Suisse Holdings, (USA) Inc., and Credit Suisse AG, New York Branch
- CSI and CSSEL were Category 1 PRA-authorised firms during the Relevant Period, meaning that they had the capacity to cause significant disruption to the UK financial system if they were to fail. On 12 June 2023, UBS Group AG acquired Credit Suisse
- The Firms have been fined £87,082,000 in accordance with the PRA’s Penalty Policy. The detailed basis for the financial penalty imposed is set out in Annex C of the Final Notice.
- Dear CEO letter Supervisory review of global equity finance businesses Dec 2021.
- The PRA’s statutory powers and enforcement.
- This enforcement action has been taken in accordance with the PRA’s existing statutory powers and approach to enforcement policy. The proposed new approach to enforcement set out in consultation paper CP9/23 is not yet in force and remains subject to consultation until 4 August 2023.