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Home > Regulation > UK Regulation

Why 2011 is the year to beware of the FSA’s fines

The Financial Services Authority (FSA) bared its teeth during 2010 by issuing an unprecedented volume of fines, proving to many industry observers that it is certainly no ‘toothless tiger’.

By Gabby Stephenson is compliance analyst at Wolters Kluwer Financial Services-Europe | Published Feb 28, 2011 | comments

TDuring the 2010 calendar year, the FSA levied fines totalling a staggering £89.3m compared to £35m imposed during 2009, a year-on-year increase of 155 per cent. Not only are these figures staggering, but this figure of £89m represents almost 40 per cent of the £225.8m in total fines the FSA has imposed between 2002 and 2010.

The prize for the two largest fines, which at just shy of £51m, represents 57 per cent of the annual total, went to the investment bank sector with £33.3m dished out for major failings in protection and appropriate segregation of client money to one such firm.

Another international firm was forced to shell out £17.5m in September 2010 for breaching the City watchdog’s Principles for Businesses and failing to ensure that it had adequate systems and controls in place to enable it to comply with its UK regulatory reporting obligations.

Commenting on the fine imposed, Margaret Cole, the FSA’s director of enforcement and financial crime, stated that the firm had “committed a serious breach of our client money rules by failing to segregate billions of dollars of its clients’ money for nearly seven years. The penalty reflects the amount of client money involved in this breach”.

The 2010 fines data indicates that the FSA appeared to focus its efforts and resources on particular sectors of the industry. For example, the £1.4m in fines paid by the independent financial adviser sector in 2010 dwarfs the £219k the sector paid during 2009, an increase of 540 per cent.

Failings

Fifteen firms and individuals from the IFA sector faced total fines of £1.4m. The largest of which was £700,000, imposed on one firm for significant failings in its advice and sales processes relating to Lehman-backed structured products. The FSA’s investigations found that the firm had poor systems and controls to prevent unsuitable advice in its structured product and pension switching business; and in relation to sales, the firm had failed to treat some of its customers fairly.

“Firms giving investment advice must ensure they fully assess clients’ needs and make suitable recommendations – they must also have the necessary systems and controls in place to demonstrate this,” according to a statement issued by the FSA. “We take failure in this area very seriously and the fine and other actions... demonstrate our commitment to credible deterrence. We will continue to take tough action where we find evidence that firms are giving unsuitable advice to investors.”

Continuing in the vein of 2009, when the mortgage sector was penalised with fines of £3.6m, the regulator has stuck to its credible deterrence strategy in 2010 in order to eradicate fraud in the mortgage market. During 2010, 13 brokers and firms in the sector were hit with fines totalling £2.69m.

In June, John Charalambous, director of a Kent-based mortgage and general insurance intermediary, was banned from working in the industry and fined £294,500 for committing serious mortgage fraud which resulted in significant customer detriment.

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