FSA ratchets up enforcement fines

Enforcement fines could treble under the Financial Services Authority’s new penalties policy unveiled today.

Under the framework, which the FSA says is more transparent, fines will be linked more closely to income and be based on:

• Up to 20% of a firm’s revenue from the product or business area linked to the breach over the relevant period;
• Up to 40% of an individual’s salary and benefits (including bonuses) from their job relating to the breach in non-market abuse cases; and
• A minimum starting point of £100,000 for individuals in serious cases of market abuse.

The City watchdog says the imposition of harder hitting financial penalties which better reflect the scale of a firm’s wrongdoing will become a feature of enforcement activity in the future.

The FSA’s Policy Statement, ‘Enforcement Financial Penalties’, creates a new five-step penalty-setting framework, which has been established following a consultation paper issued in July 2009.

These are:

1. Removing any profits made from the misconduct;

2. Setting a figure to reflect the seriousness of the breach;

3. Considering any aggravating and mitigating factors;

4. Achieving the appropriate deterrent effect; and

5. Applying any settlement discount.

The policy statement also sets out a new policy for when the FSA may reduce a fine because of its financial impact; and clarifies the situations in which the authority may publicise enforcement action in criminal cases thereby bringing its approach in line with that of other agencies.

Margaret Cole, the FSA’s director of enforcement and financial crime, defended the new get tough framework.

She said: “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. 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.

“We are committed to our enforcement philosophy of credible deterrence and will continue to focus on those cases that can make a real difference, both to consumers and markets. We have repeatedly seen breaches in particular areas where insufficient account has been taken of previous enforcement action. As well as delivering increased levels of fines, we believe that our new framework offers substantially more clarity and transparency around the penalty-setting process and will reap rewards in terms of an increase in compliant behaviour.”

The new regime will apply to any breaches which occur on or after 6 March 2010 when it comes into force.