Out-Law / Your Daily Need-To-Know

Out-Law News 3 min. read

FSA defies industry resistance to higher fines


The Financial Services Authority (FSA) is pressing ahead with a new system for calculating fines, despite criticism that it could result in disproportionate penalties for individuals who break the rules.

The new regime, which comes into force on Saturday, could double or even triple the fines payable in some cases. Firms could be fined up to 20% of relevant income and individuals up to 40% of their total salary and benefits (including bonuses) for regulatory breaches.

Serious market abuse cases against individuals, such as insider trading, will attract a minimum penalty of £100,000.

Many of those who responded to the FSA's July consultation thought the proposals gave the regulator too much discretion at different stages of the calculation process and would result in more penalties being disputed.

And although some welcomed the tougher approach, many questioned whether higher fines would act as a deterrent, or merely damage firms' relationships with their regulator. Others thought the proposed fines for individuals were unreasonably high.

Announcing publication of the FSA's policy paper on 1st March, Margaret Cole, FSA director of enforcement and financial crime, said the FSA was committed to its philosophy of credible deterrence and would continue to focus on cases that make a real difference to consumers and markets.

"Despite industry opposition we have decided to implement these proposals as we believe enforcement penalties are a powerful tool to help change behaviour in the industry," said Cole. "We imposed record fines in 2009, but this new approach further amplifies the deterrent effect of our penalties and sends a powerful message to firms which makes it clear that non-compliant behaviour will not be tolerated".

Adjustments

The policy paper sets out a five-step system for calculating financial penalties for both firms and individuals. The detailed rules will now be included in the FSA's Decision Procedure and Policies manual (DEPP).

Under the first step, the FSA will deprive the firm or person of any benefit derived from the breach, such as a profit made or loss avoided. The second step imposes fixed fine levels according to the nature, impact and seriousness of the breach.

In cases against firms, this figure will be 0%, 5%, 10%, 15% or 20% of income earned from the product or business area to which the breach relates. Individuals will face fines of 0%, 10%, 20%, 30% or 40% of the gross benefits earned from relevant employment, including salary, bonus, pension contributions, share options and other benefits.

Despite suggestions that the levels should be the same for individuals and firms, the FSA has stuck to its original proposal to target individuals with higher penalties.

"We continue to consider this approach is justified because action against individuals has a significantly greater impact in terms of deterrence than action against firms, and this focus on individuals is a key part of our credible deterrence strategy," the policy paper states.

There have, however, been some adjustments to the rules for market abuse cases. The £100,000 minimum fine will now only apply to the most serious market abuse. In other cases, the FSA will use the same percentages of relevant income as for non-market abuse cases, or a multiple of profit made or loss avoided, whichever is the higher.

The final rules also allow the FSA additional discretion to decrease the level of penalty at the second stage if it would otherwise be disproportionate to the breach.

The third step in the process takes into account mitigating or aggravating circumstances. At the fourth stage, the FSA can increase the fine as a general deterrent, for instance if industry standards have failed to improve despite previous regulatory action. Lastly, under step five, the regulator will apply a discount of up to 30% for early settlement, as under the current regime.

Despite comments from some respondents that the regulator would have too much discretion at the third and fourth stages, the FSA maintains that flexibility is important, given the broad range of cases it has to deal with, even if it means more cases may be referred to the Regulatory Decisions Committee and the Financial Services and Markets Tribunal.

"While we recognise that more of our decisions may be challenged, we believe that any effects this may have on our resources will be outweighed by ongoing cost savings as a result of increased compliance," the policy paper states. "We consider that firms should now be used to our more intrusive supervisory approach; consequently we do not expect the new framework to damage our relationship with those we regulate".

The new framework comes into force on 6th March and will apply to any breaches occurring on or after that date.

Global Term
We are processing your request. \n Thank you for your patience. An error occurred. This could be due to inactivity on the page - please try again.