FSA’s framework for fine-setting
The FSA is seeking to establish a consistent and more transparent framework for the calculation of financial penalties.
During the last few years, the FSA’s announcements of its imposition of enforcement fines on industry firms and their senior managers for various misdemeanours have come to our attention with increasing regularity. Some of the fines have been at eye watering levels.
Financial penalties are just one of several forms of sanction that the FSA can inflict upon those who are guilty of misconduct. Although the regulator has received considerable sums by way of financial penalty revenue over the years, it uses that revenue to reduce FSA fees for the industry.
The FSA introduced its new framework for financial penalty-setting in 2010 (PS 10/04) and sought to establish a consistent and more transparent framework for the calculation of financial penalties, which envisaged the possibility of enforcement fines trebling in size.
The regulators penalty-setting regime is based on: 1) disgorgement: a firm or individual should not benefit from any breach; 2) discipline: a firm or individual should be penalised for wrongdoing; and 3) deterrence from committing further or similar breaches.
The FSA’s five-step framework to determine the appropriate level of financial penalty is set out in its Decision Procedure and Penalties Manual.
The five steps are: 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.
Although the FSA states that it recognises that a penalty must be proportionate to the breach, the framework enables it to exercise considerable discretion. For example, an individual can claim that a particular financial penalty will cause him/her serious financial hardship, but the FSA may still consider the breach to be so serious that it is not appropriate to reduce the penalty. Appropriate circumstances would include directly derived financial benefit or fraudulent/dishonest conduct with a view to personal gain.
But does this framework actually reap rewards in terms of an increase in compliant behaviour? Who knows.