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Financial Times: Penalties: FSA flexes its muscles with tougher action

By Phil Manchester
The Financial Services Authority, the UK regulator, is flexing its muscles. Since 2001, when it assumed new powers under the Financial Services and Markets Act 2000, the FSA’s Enforcement Division has handed out increasingly high penalties.
In 2001-02, its first full year of operation under the new regulations, the FSA imposed fines of just over £10m. Fines rose slightly in 2002-03 and reached £12.5m in 2003-04. In 2004-05 – the latest complete year – total fines hit £22.2m and by February 2006, with two months still to go, fines for the current year stand at £16.2m.
Although the 2004-05 total was skewed by the £17m fine on oil company Shell for mis-stating its oil reserves, the trend in penalties is definitely upwards.
The increased level of fines is not, however, reflected in the number of cases the FSA has pursued.
The FSA has completed only 13 cases so far in the current year. In 2004-05, it completed 31, while in its first two years the FSA’s caseload was more than 70.
The change is the result of a deliberate policy by the FSA to pursue fewer cases – but impose higher fines. Margaret Cole, director of enforcement at the FSA, re-emphasised the change in a speech to the Securities and Investment Institute Compliance Forum in January this year.
“We will focus our enforcement activities on those areas which pose the greatest risk to our statutory objectives. We will be working very closely with the business units to ensure that our enforcement resources are deployed strategically to address cases and issues which are priorities for the FSA,” she said.
She added that this does not exclude investigation of transgressions that might lie outside the “priority strategic areas”.
The FSA has a wide brief to supervise financial dealings of companies operating in the UK, from high street financial advisers to giant corporations. Enforcement is only part of its activities, employing about 8 per cent of its 2,600 total headcount.
It is generally acknowledged that the FSA’s approach to enforcement has been successful. Headline-catching high-profile cases over the past two years such as Shell, Citigroup, Lloyds TSB and Credit Suisse First Boston International have shown the FSA to be tough on those that misbehave.
“It is certainly working – as those regulated firms and individuals who have broken the rules have found out,” says Gary Dixon, group chief executive of specialist Compliance Solutions. He goes on to say that the FSA’s broad approach to compliance means that penalties are often a last resort: “The FSA has a number of different ways of achieving its goals. If the first one does not work, then it can move on to the next one.”
Peter Bevan, a partner in the financial markets group at law firm Linklaters, says the FSA’s increased enforcement activity has led to quantifiable improvements in corporate governance:
“We have done a lot of work reviewing risk management controls and we have seen a huge amount of movement towards best practice. It is incorporating enforcement as part of its broader activities.
“Increasingly, the FSA sends in an enforcement officer as part of the team in its regular visiting programme.”
The relatively small number of penalties is, says Mr Bevan, a reflection of the industry’s positive response to compliance:
“When the FSA started in 2001, it began with a strong enforcement regime and it was assumed that it would take a lot of scalps. Although there have been some high profile cases, there have not been as many as expected.”
He goes on to say that the FSA has a unique relationship with those it supervises:
“ It is not like normal litigation because there is a continuing relationship between the FSA and the companies it supervises.”
Tim Kendal, a fraud and regulatory specialist at 2 Bedford Row, a London barristers’ chambers, agrees: “In these sort of investigations where the FSA is prosecutor and judge, they would rather deal with it administratively,” he says.
“They want to avoid legal action because, if they don’t win, the costs and the negative publicity would be destructive. There are, of course, exceptions where there could be a public interest in bringing it to court.”
Mr Kendal suggests the penalties for non-compliance could be higher – although the bad publicity is likely to be more effective in the long term.
“Although the Shell fine, for example, seems large, it’s piffling compared to those handed out in the US. Its effect on Shell is not going to amount to much. But what large corporations don’t like is the bad publicity that they are not compliant or that they may be abusing market rules.”
After only five years in its enhanced role as a “super regulator”, the FSA has shown that it can be tough on villains – whether corporate or individual.
The continued expansion of the financial sector and the prospect of further innovation in financial instruments means the FSA will face yet more challenges – and may well have to get tougher.

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