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New FSA Enforcement Rules For Fines And Financial Penalties

Financial Services Authority (FSA) Publishes New Penalties Policy


The Financial Services Authority (FSA) published on 1 March its new penalties policy.  The FSA say the new regime establishes a consistent and more transparent framework for the calculation of financial penalties, and which could see enforcement fines treble in size.

Under the new framework, 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 market abuse cases

The new fines policy supports the FSA's ongoing commitment to the agenda of credible deterrence and a desire to see an improvement of standards within firms in relation to market misconduct and their dealings with customers. The FSA believe that the imposition of more draconian fines and financial penalties will be a better marker to reflect the scale of a firm's wrongdoing and will become a feature of FSA Enforcement activity in the future.

The FSA's Policy Statement, 'Enforcement Financial Penalties', creates a new and structured five-step penalty-setting framework. This has been established following a period of consultation with the industry subsequent to the publication of a Consultation Paper in July 2009. The new framework is based on the three principles of disgorgement, discipline and deterrence and consists of the following steps:

  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 in relation to the circumstances when the FSA may reduce a fine because of its financial impact; and
  • Clarifies the situations in which the FSA may publicise enforcement action in criminal cases bringing the FSA's approach in line with other agencies

Margaret Cole, FSA director of enforcement and financial crime, 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 penalty regime will come into force on 6 March 2010 and will apply to any breaches which occur on or after this date.

More information on the FSA Enforcement Financial Penalties can be found at this link:   http://www.fsa.gov.uk/pages/Library/Policy/Policy/2010/10_04.shtml

Sarah Wallace, FSA investigations lawyer at Irwin Mitchell commented, "Once the new FSA fines policy is embedded, the overall level fines against firms and individuals are likely to increase.

"However, this is in line with the current trend. It remains to be seen how much discretion will remain in the setting of penalties.  The effect however is likely to be that firms and particularly individuals may be less likely to want to engage in settlement discussions with the FSA Enforcement team and more cases, in relation to the appropriate level of sanction’ will be contested at the RDC and/or referred to the Tribunal, and in certain cases the may be a challenge by way of a judicial review.

"The FSA believe that the increased cost of challenges will be outweighed by the deterrent effect of increased compliance by approved persons and firms".

If you or your firm have any questions regarding the issues raised in the article regarding FSA Enforcement investigations, market abuse or FSA Enforcement fines, please contact Sarah Wallace on 0370 1500 100 or 020 7421 3883.