Don't cross the fine line
Gabby Stephenson, compliance analyst at Wolters Kluwer Financial Services-Europe, says last year saw soaring fines from the FSA and IFA businesses were hit hard
In 2010, the FSA levied fines totalling a staggering £89,334,421.50 compared with £35,005,523.34 in 2009, an increase of 155 per cent.
Not only are these figures staggering but the £89m represents almost 40 per cent of the £225,790,113.95 in total fines the FSA has imposed between 2002 and 2010.
The prize for the two biggest fines, which, at just shy of £51m represents 57 per cent of the annual total, went to investment banks JP Morgan Securities and Goldman Sachs International.
JP Morgan was fined £33.32m for major failings in protection and appropriate segregation of client money to one such firm.
Goldman Sachs was forced to shell out £17.5m in September 2010 for breaching the FSA’s principles for businesses and failing to ensure that it had adequate systems controls to comply with its UK regulatory reporting obligations.
The 2010 fine data indicates the FSA appeared to focus its efforts and resources on particular sectors. For example, the £1.4m in fines paid by the IFA sector in 2010 dwarfs the £219,00 the sector paid during 2009, an increase of around 540 per cent.
Fifteen firms and individuals from the IFA sector faced fines, with the biggest being £700,000, imposed on RSM Tenon for significant failings in its advice and sales processes relating to Lehman-backed structured products. The FSA’s investigations found 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, highlighting a main area of concern to the regulator.
The FSA said: “Firms giving investment advice must ensure they fully assess clients’ needs and make suitable recommendations - they must also have the necessary systems and controls to demonstrate this.
“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.”
Firms and individuals need to ensure all business is conducted in strict compliance with the FSA’s principles for businesses and statement of principles for approved persons.
In September last year, a partner and an adviser at South Yorkshire IFA firm Pace Financial Management were fined a total of £414,683, for knowingly submitting false and misleading information to secure mortgages for themselves and their customers. The bigger fine, at £264,683, imposed on Mark Bates, one of the firm’s partners, included a £74,683 disgorgement of profit - monies which were due to the firm - but which the individuals retained for themselves. Both Bates and Alan Hill, an adviser at Pace, were banned by the FSA from working in the industry.
In addition to action by the regulator, a case brought by South Yorkshire Police in February 2010, saw Bates and Hill found guilty of offences relating to financial crime and they received custodial sentences of four years and five and a half years respectively.
During its investigations, the FSA found the firm had no involvement in the misconduct committed by its employees but the regulator did not hesitate in meting out three further fines totalling £49,000 to partners of the firm for regulatory failures which led to the firm being used to facilitate financial crime.
The FSA is clear on its stance with regard to fraudulent activity and said: “We take any failings that put customers or lenders at risk very seriously… the fines will send a message to other intermediaries that they must adhere to our rules and act with integrity at all times, or face the consequences.”
Firms in the industry must ensure they have adequate systems and controls to meet the FSA’s standards.
Pension-switching advice appears to be yet another area where the IFA sector needs to raise its game. In 2010, two firms and two senior individuals were fined £143,000.
It is unclear to many why the fines in the IFA sector appear to have soared during 2010 but it may just be an effect of the FSA’s determination to demonstrate to the industry as a whole that it is a force to be reckoned with. The huge volume of fines levied during 2010 is testament that the FSA is sticking to its policy of credible deterrence and it will not hesitate to penalise firms or individuals who fail to comply with its rules. It will however, be interesting to observe the level of fines under the new regulatory regime.
The regulator acknowledges that 2010 was a particularly busy year for its enforcement and financial crime division, with managing director, enforcement Margaret Cole commenting: “We have published 177 outcomes from our investigations, with fines totalling nearly £90m, and have banned 60 individuals. The next couple of years are going to see great change in the regulatory environment but we are committed to keeping the markets clean and trustworthy and we will also keep a sharp focus on consumer protection.”