July 7, 2009
Patrick Hosking, Financial Editor
Under the new tariff system, which is intended to apply to rule breaches committed after February 2010, insider dealers will face minimum fines of £100,000, and misbehaving companies could be hit with penalties of £50 million.
The £7 million fine imposed on Alliance & Leicester (A&L) last year for failings that led to insurance misselling would have been a £21 million penalty under the new rules, the FSA, which regulates all UK financial institutions and listed companies, said.
We believe our penalties need to be increased, the regulator said in a consultation paper, which highlighted the depth of its irritation at what many perceive as its lack of strength in the area of punishing wrongdoers. We have repeatedly seen breaches in particular areas where insufficient account has been taken of previous enforcement action. It cited payment protection insurance, where A&L fell down, and market misconduct as areas in which fines in the past had had the least deterrent effect.
Individuals in market abuse cases, such as insider dealing, could be fined a minimum of £100,000 or twice their illegal profits, or 40 per cent of their total pay package, whichever was the greatest. Companies guilty of abuses could be fined up to 20 per cent of revenues from the area linked to the breaches a policy change that, in theory, could lead to vast fines.
Neil Mirchandani, a partner at Lovells, suggested that the City would see much bigger fines over the next few years, of as much as £50 million, in exceptional cases.
Most importantly, this will get senior managements attention, he said, and would thus lead it to rein in questionable activity that could catch the eye of the regulator.
Mr Mirchandani said that the 20 per cent of revenues rule would create a large grey area. There are going to be a lot of arguments, I suspect, over what is the true income from any product or business area.
Margaret Cole, the head of enforcement for the FSA, said: By hitting companies and individuals in the pocket where it hurts, the fines will be a stark warning to others on what they can expect to pay for flouting our rules.
The biggest fine was £17 million paid by Shell in 2004 after it misled shareholders about the size of its oil and gas reserves. Citigroup was fined £13.9 million in 2005 after manipulating the government bond market.
In scandals such as the widespread mis-selling of payment protection insurance, many companies made far more in profit by flouting the rules than they stood to lose from the relatively modest fines that they risked.
FSA fines have already been rising in size and frequency. The regulator levied 55 fines worth £27.3 million last year, up from 21 fines worth £4.4 million in the previous year and 32 fines worth £14.4 million in 2006-07.
Fines are used to offset the levies the FSA charges all participants in the financial services industry to finance itself. But with total levies due to rise by 30 per cent this year to £412 million to finance a tougher new regulatory regime, the impact is likely to be modest.
The FSA is proposing substantial fines for individuals who breach their regulatory obligations. An example put forward by the FSA includes a fine of 25 per cent of salary for failings in the discharge of oversight functions, even where the failings are not deliberate or reckless, if they raise issues of competence.
Neil Blundell, a partner at Eversheds, described the new regime as draconian, and Andrew Hart, co-head of financial institutions disputes at Freshfields, said: Were effectively seeing the FSA moving closer in approach to the US Securities and Exchange Commission by placing much more emphasis on enforcement.
Companies in America routinely pay much larger fines or settle with prosecuting authorities, without admitting culpability, for hundreds of millions of dollars.
A bargain at these prices
Biggest FSA fines
£17 million Shell: reserves-reporting scandal
£13.9 million Citigroup: Dr Evil market manipulation
£7 million Alliance & Leicester: insurance-selling failings
£6.4 million Deutsche Bank: market abuse during share issues
£5.6 million Credit Suisse: failure to control traders
£5.3 million Aon: anti-corruption failings
£4 million CSFB: attempting to mislead tax authority
£2.3 million Abbey National: money-laundering rule breaches
£1.9 million Lloyds TSB: mis-selling precipice bonds
£1.4 million Morgan Stanley: failings over trader controls
Source: FSA, Times research