Noticeboard
The FSA Implements its new Financial Penalty Regime
In a consultation paper (CP09/19) dated 6 July 2009, the FSA set out its proposals for changing its policy for determining the level of financial penalties in enforcement cases.
By implementing such a change to its policy, it is the intention of the FSA to provide greater transparency in its decision making process when setting the level of a financial penalty. The FSA considers that, in turn, this will aid consistency and achieve “credible deterrence”. It has long been a concern of the FSA that insufficient notice has been taken within the industry of previous enforcement actions. It is the view of the FSA that greater compliance is likely to be achieved if there is an increase in the overall level of penalties imposed.
The New Framework
The new framework came into effect on 6 March 2010 and applies only to conduct which takes place on or after 6 March 2010. When a breach occurs before 6 March 2010 and continues after that date, the new penalty framework will apply to the part of the breach which occurred on or after 6 March 2010.
The FSA will use a five step framework based on the following three key objectives:
- Disgorgement: to ensure that those in breach do not retain any benefit from their misconduct.
- Discipline: a firm or individual should be penalised for wrong doing.
- Deterrence; the level of the financial penalty should be such that it deters firms and individuals from repeating breaches or committing breaches in the first place.
The framework differentiates between firms, individuals and individuals in market abuse cases.
The FSA has also clarified its position when imposing financial penalties in cases of serious financial hardship.
Financial penalties will now be determined based on the following steps:
Step 1 - Disgorgement of any benefit
The FSA will deprive a firm or individual of any profit made or loss avoided as a direct result of the breach. An appropriate rate of interest will be applied. The figure for disgorgement will take into account any redress programme the FSA has agreed with a firm.
Step 2 - A further figure to reflect the nature, impact and seriousness of the breach.
Firms
The figure will be 0%, 5%, 10%, 15% or 20% of the firm’s relevant pre-tax income over the period of the breach from the product or business area to which the breach relates.
Individuals in non-market abuse cases
The figure will be 0%, 10%, 20%, 30% or 40% of the individual’s gross relevant benefits from the employment in connection with which the breach occurred. Benefits will include salary, bonus, pension contributions and share options.
Individuals in market abuse cases
Where the abuse is referable to the individual’s employment the figure will be the greater of:
- Up to 40% of relevant income from the individual’s employment in the 12 months preceding the market abuse;
- A multiple of 0 - 4 times the profit made or loss avoided by the individual for his benefit or the benefit of others; and
- £100,000.00 in cases which the FSA assess to fall within levels 4 or 5 of seriousness.
Where the market abuse is not referable to the individual’s employment the figure will be the greater of:
- A multiple of 0 - 4 times the profit made or loss avoided by the individual for his benefit or the benefit of others; and
- £100,000.00 in cases which the FSA assess to fall within levels 4 or 5 of seriousness.
In deciding which percentage and multiple rate to apply, the FSA will consider the impact and nature of the breach, and whether or not the breach was deliberate or reckless. The levels of seriousness are graded from 1 to 5.
Step 3 - Mitigating or aggravating factors
Any figure arrived at in Step 2 may be increased or decreased in accordance with any mitigating or aggravating features. However, any mitigating factors cannot reduce the disgorgement figure determined at Step 1. Mitigating factors will include bringing the breach to the attention of the FSA, co-operating with the FSA during the investigation and seeking to remedy the breach.
In individual market abuse cases an additional mitigating factor would be whether the individual assisted the FSA in action taken against other individuals for market abuse.
Step 4 - Deterrence
Step 4 will be invoked where the FSA are of the view that the Step 3 figure is insufficient to deter the firm or individual from committing further or similar breaches. Any increase will allow the FSA to achieve its enforcement strategy of “credible deterrence”.
Step 5 - Settlement discount
The FSA will still apply its settlement discount policy as follows;
- 30% where settlement is reached at an early stage, usually a reasonable period after having received a draft warning notice
- 20% where settlement is reached within the period for responding to the actual notice, usually 28 days after service
- 10% where settlement is reached before a final notice is served.
However, the settlement discount is not applicable to the disgorgement figure calculated at Step 1.
Serious financial hardship
Where an individual or firm asserts that paying the penalty will result in serious financial hardship then the individual or firm must provide the FSA with full, frank and timely evidence of the same.
In the case of an individual, the FSA will only consider they have suffered severe financial hardship if their net annual income falls below £14,000.00 and their capital will fall below £16,000.00. Capital includes the equity an individual has in the home in which he lives.
In the case of a firm, the FSA will consider serious financial hardship if the penalty would threaten the firm’s solvency or render it insolvent.
Comment
It is the aim of the FSA, by introducing this new financial penalty framework, to increase transparency and consistency when determining financial penalties. However, critics of the regime argue that it allows the FSA to retain significant discretion when assessing the scope of the appropriate penalty thereby undermining this objective.
The FSA clearly anticipates that this new regime will lead to an increase in the level of penalties imposed, consistent with the higher levels of fines seen within the last twelve months. In the period 2009/2010 the FSA issued 46 fines totalling £33.6 million. So far this year, the FSA have exceeded this figure. The FSA hopes that this increase will act as a “credible deterrent”. Moreover, since penalties will now be calculated by reference to a firm’s income during the period of the breach it is anticipated that this will lead to increased reporting of any compliance failures.
If you would like further information in relation to any FSA matter, please contact Samantha Moore (smoore@bcl.com), Richard Sallybanks (rsallybanks@bcl.com ) or Shaul Brazil (sbrazil@bcl.com). Samantha regularly represents individuals and firms under investigation by the Supervision and Enforcement Divisions of the FSA. She also assists individuals in obtaining authorisation with the FSA. Richard and Shaul are experienced in dealing with FSA investigations involving insider dealing and market abuse and issues relating to whether an authorised person is “fit and proper”.
