Step 1

The Financial Services Authority (FSA) has published plans to bring in tougher measures against companies and individuals who breach regulations, even if this means putting people into financial hardship.

The FSA is allowed to impose a penalty on anyone who is carrying out a regulated activity in the UK and is exempt or unauthorised to do so. However, over the last 18 months the FSA has faced mounting pressure to demonstrate that it is regulating the financial sector effectively and taking "tough action" when financial institutions do not comply with appropriate regulatory standards, especially when compared to the action being taken in America.

The FSA is addressing the balance with their consultation paper on "Enforcement Financial Penalties" released in July 2009. The paper aims to make it easier to understand how the FSA decides what financial penalty to impose and improve consistency. It also takes the opportunity to substantially increase the level of financial penalties available in an attempt to achieve "credible deterrence". The FSA seeks to do this by concentrating on enforcement actions that make a real difference to consumers and markets and by using its powers to change behaviour in the industry as a whole.

Under the new system, firms could be fined up to 20% of relevant income and individuals up to 40% of their total salary and benefits for regulatory breaches. Individuals found guilty of market abuse, such as insider trading, would face a minimum penalty of £100,000. This approach will be achieved by a five step process based on three objectives:

• Disgorgement
• Discipline
• Deterrence

In cases where the FSA are able to identify a benefit directly derived from the breach or a loss avoided they will seek to deprive that person of that benefit.

Step 2

A figure will be determined that reflects the nature and seriousness of the breach. This will be determined differently depending whether the offender is a firm, an individual guilty of market abuse and an individual guilty of non-market abuse.

Firms will face penalties of up to 20% of the firm's pre-tax income over the period of the breach from the products or the business area to which the breach relates. In non-market abuse cases against individuals, the penalty will be up to 40% of the individual’s gross benefits from employment in connection with which the breach occurred, for the period of the breach. Where an individual has committed market abuse (an act which the FSA views more seriously as it is pre-meditated) they will be liable to a penalty which is the greater of:

• 40% of the gross amount of all benefits received from the individual’s employment in the 12 months proceeding the market abuse
• Twice the profit made or the loss avoided by the individual as a direct result of the abuse
• £100,000

Step 3

The FSA will make adjustments to the figure arrived at in step 2 for any mitigating or aggravating circumstances.

Step 4

Where the FSA is of the view that step 2 and step 3 have not been enough of a deterrent they will increase the financial penalty.

Step 5

The FSA will apply a discount if the case is settled.

The FSA believes that these proposals will significantly increase the financial penalty they impose on larger firms and higher earning individuals, but, they hope, this new approach will lead to smaller penalties for low income firms and individuals, producing a fairer and more balanced system.

The FSA maintain that the purpose of a penalty is to disgorge, discipline and deter and should not cause insolvency, or put a person into "serious financial hardship". However, they then go on to say that if a firm or individual, would be rendered insolvent, it is a factor to consider, if at all, only after the amount of the penalty is determined. This suggests that the FSA will not hesitate to make companies or individuals bankrupt in their quest to "get tough" on market abuse.

This tough new approach was seen this month when the FSA secured a bankruptcy order in the High Court, for the first time on an approved person, a former East London mortgage broker, for non-payment of a £129,000 financial penalty set last year.

This tough approach means that it is even more crucial for those individuals and/or firms who are under investigation by the FSA or suspect that they may be under a threat of investigation to seek expert legal advice as early as possible.

The FSA consultation paper can be found here.

If you have any questions regarding the issues raised in the article please contact Sarah Wallace on 0370 1500 100 or 020 7421 3883.