Some brokers believe the regulator has got it wrong with the imbalance of penalties for firms and individuals
Despite criticism from the broker market that new measures for calculating fines could result in disproportionate penalties for individuals who break the rules, the Financial Services Authority appears to be pressing ahead.
The new policy is aimed at supporting the FSA’s commitment to the principle of credible deterrence and the improvement of standards in relation to firms’ dealings with customers.
The regulator says hard-hitting financial penalties which better reflect the scale of a firm’s wrongdoing will become a feature of enforcement activity in the future.
For regulatory breaches the new regime, which came into force on March 6, 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.
Serious market abuse cases against individuals, such as insider trading, will invite 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.
Although some welcomed the tougher approach, many questioned whether higher fines would act as a deterrent or merely damage firms’ relationships with the regulator. Others thought the proposed fines for individuals were unreasonably high.
The FSA’s Policy Statement Enforcement Financial Penalties creates a structured five-step framework for calculating financial penalties for firms and individuals. The detailed rules will be included in its Decision Procedure and Policies manual.
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 fines 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.
Hard-hitting financial penalties will become a feature of enforcement activity in the future
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 of higher penalties for individuals.
The third step takes into account mitigating 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.
Under step five, the regulator will apply a discount of up to 30% for early settlement, as under the current regime.
Obviously there are lines in the sand that the FSA needs to draw but it is vital the prospect of such forceful regulatory action doesn’t deter potential entrants to the financial services arena.
There is a raft of information available for firms already in the market. Brokers must remember they are not alone and compliance support services can help play an integral role in their business and keeping the FSA at bay.