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That’s the way the money goes

According to City law firm Reynolds Porter Chamberlain the Financial Services Authority smashed the previous year’s record fines by 21% as it handed out £33.1m in penalties in 2009/10 but you’ve seen nothing yet.


On March1 the FSA announced that it will treble the costs of fines with new rules that will see the penalties it imposes more closely linked to a company’s income.

Certainly, with a week and a half still to go, April has been a bumper month for Financial Services Authority penalties.

The biggest bundle of fines, amounting to an eye-watering £4.2m, was announced on April 8 when Credit Suisse was fined £1.75m, Getco Europe £1.4m and Instinet Europe £1.05m for failing to provide accurate and timely transaction reports to the FSA.

Then on April 12 came news that the FSA had fined Kensington Mortgage Company £1.225m for poor treatment of some customers facing mortgage arrears and on the following day it hit the pockets of individuals with David Baker, formerly chief executive of Northern Rock, being fined £504,000 and Richard Barclay, formerly managing credit director of NR’s Debt Management Unit fined £140,000.

Their sins were pretty serious (*see below) but if you annualize the April figures FSA fines should generate an income stream of around £60m for 2010/11 begging the questions, where does the money go and who benefits?

Well the consumer doesn’t benefit, at least not directly, but the FSA argues that financial service companies do because all the money goes to the FSA, so helping to offset its overhead and reducing contributions to the regulator.

Is this good news? Perhaps but it does leave the FSA open to the suggestion that it is using fines as an income stream as well as a deterrent or punishment and given its current rate of job creation, it is unlikely to become self-financing.

Indeed the facts are stark and it’s hard to see how the income stream from fines feeds into the system, especially for general insurance firms which have seen their fees hiked by 45% and deposit takers like banks and building societies which have experienced a 12% increase.  

Between them they will pay for almost £170m of the FSA annual costs but the watchdog’s running costs for the current financial year have risen by an inflation-busting 9.9% to £454.7m which it has justified “to deliver intensive and intrusive supervision”.

Most of that cost is said to be attributable to taking on an extra 280 staff in its supervisory enhancement programme, an obvious necessity at a time when the financial service sector is shrinking.


Bottom of Form

Despite becoming aware in January 2007 that there were 1,917 loans omitted from the mortgage arrears figures, David Baker failed to escalate the information internally and agreed a course of action which resulted in the loans not being reported.

He also made misleading statements regarding these impaired loans to external stakeholders, including market analysts, quoting inaccurate figures. If the 1,917 loans had been reported as being in arrears, the figures would have increased by approximately 50%.

Alternatively if the loans had been reported as in possession, the number would have increased from 662 to 2,579 cases.

As managing credit director of NR’s Debt Management Unit, Richard Barclay was directly responsible for the provision of accurate management information concerning loan arrears and property possessions.

He knew that the firm’s arrears position enabled senior management within NR, analysts and the FSA to form a view of NR’s asset quality, but failed to ensure that the management information reported by the DMU was accurate despite warning signs at an early stage.   




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