The press response has focused on the proposed increase in penalties for market abuse.
However, the wider impact is likely to be in relation to the penalties that the FSA will now seek to impose on authorised firms and individuals who fail to discharge their regulatory obligations. And it is the proposals for fining individuals for serious regulatory failings that are likely to be the most controversial.
The example that the FSA uses is a person holding an SIF at a large financial institution who, as a result of a serious lack of competence, but without acting dishonestly or recklessly, fails to ensure proper oversight of the sale of a particular investment product, thus putting customers at risk. In such a case, based on the individual’s gross annual income of £135,000 (comprising salary, bonus and benefits) the FSA says it would look to impose a financial penalty of in excess of £25,000. (This is in addition to any fine imposed on the firm itself and the cost of remediation).
The calculation of the penalty assumes full cooperation by the individual (which earns a derisory 3 per cent discount) and a further 30 per cent reduction for early settlement. The FSA has also made it clear that it would only reduce the level of penalty for “serious financial hardship” where payment would reduce the individuals annual net income and total capital below £14,000 and £16,000 respectively.
There are some serious issues that arise from all of this. For example, what happens if the firm wants to admit to breaches but the individual denies culpability – or at least the extent of his/her responsibility? The FSA has also said that it will increasingly use its powers to remove people from the industry where issues of competence (and not just integrity) arise. If so, is it fair to both ban and fine someone for incompetence? On a holistic level, are the proposals likely to encourage good people to take on SIFs?
The FSA’s proposals also assume that those on the end of enforcement action will be willing to agree to reach settlements based on penalties of the range being proposed. If settlements are not agreed, then matters are referred to the Tribunal as the ultimate arbiter. The inevitable consequence of a system which is seen as operating unduly harshly is that it will be challenged and so referrals to the Tribunal are likely to increase. That being the case it is debatable whether the FSA’s new policy (assuming it does not change during the consultation process) will survive review by the Tribunal.
It is to be hoped that the FSA will take these issues into account as part of the consultation process. The fact that the FSA wants to bring more transparency and consistency to the process of setting penalties is laudable. But it is debatable whether a regulatory system based on fear of the consequences of getting things wrong is what we should aspire to.