An Excerpt From:
K&L Gates Global Government Solutions ® 2012: Annual Outlook
January 2012
Anti-corruption and Enforcement
United Kingdom: FSA Enforcement–Record Fines, Original Thinking, and Imminent Reform
In recent years, the UK’s Financial Services Authority (FSA) has sought to achieve
“credible deterrence” in order to “change behavior” and promote better “outcomes”
for financial services customers, the market and its integrity, and the fight against
financial crime. These efforts reflect a conclusion by the FSA that such deterrence
requires the imposition of harsher sanctions—meaning, among other things,
larger fines; the bringing of criminal charges, especially for insider trading;, and
enforcement action against not only firms, but also individuals, particularly senior
managers who can be held responsible for a firm’s behavior.
The FSA is delivering on these initiatives.
A new regime of increased penalties was
adopted in May 2010, and the FSA has
brought a multitude of criminal charges
for insider trading, achieving several
convictions and prison sentences.
All of this is taking place amidst a
reconstruction of the UK’s landscape for
the regulation of financial services. The
FSA is set to be abolished by 2013 and
replaced by three separate entities—an
independent Financial Policy Committee
within the Bank of England; a prudential
regulator for systemically important firms,
the Prudential Regulation Authority; and
a conduct of business regulator, the
Financial Conduct Authority (FCA). The
FCA will be acutely aware, as is the
FSA, of dissatisfaction with the FSA’s
former “light touch regulation” following
the financial crisis and will be similarly
committed to credible deterrence.
The FCA will also have new powers
not available to the FSA, in particular
the power to intervene in product
development and promotion. Current FSA
activity suggests that the FCA will not be
shy to use such early intervention tools.
The FSA has a number of weapons in its
enforcement armory, the most powerful of
which are fines and criminal sanctions.
The criminal offenses which the FSA may
prosecute include insider dealing and
market misconduct under the Criminal
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Justice Act 1993 and breaches of the
Money Laundering Regulations 2007.
The imposition of fines has developed as
the most common, high profile sanction,
and the FSA’s increasingly aggressive
approach (evidenced from the level of
recent fines and the escalation in total
annual fines levied in recent years) is
expressly intended to warn and deter as
much as to punish. “Credible deterrence”
is now written into the formula for setting
financial penalties.
Penalty Setting
Since May 2010, the FSA has been
following a specified formula for setting
penalties in enforcement cases:
Step 1: The FSA looks to order the
wrongdoer to disgorge a benefit, which
is directly derived from the breach. The
penalty is in addition to that disgorgement
(and any restitution to customers or
counterparties who have lost money).
Step 2: In assessing the starting point for
the penalty, the FSA examines the general
seriousness, nature, and impact of the
breach. The penalty element is based on
a percentage of the firm’s or a regulated
individual’s “relevant income.” The
maximum for a firm is 20 percent and
for individuals 40 percent in non-market
abuse cases. In market abuse cases,
individuals can be fined the greater of
a multiple of up to four times the profit
K&L Gates Global Government Solutions ® 2012 Annual Outlook
made/loss avoided or £100,000 if the
abuse took place outside employment or
if either figure would exceed the relevant
percentage of relevant income.
Step 3: The FSA has the discretion to
vary the amount determined under Step
2 depending on whether there are any
mitigating or aggravating circumstances.
Step 4: The FSA then has further
discretion to increase the penalty
if it believes that the penalty so far
determined would be inadequate as a
deterrent.
Step 5: As was already the case, the
penalty is discounted where the party is
cooperative and settles at early stages of
the process (by 30 percent 20 percent or
10 percent depending on the timing).
Four substantial fines, ranging from
£5.95 million to £10.5 million, were
imposed in 2011 for failing to ensure the
suitability of investments sold to customers.
The latter is the highest fine imposed in
respect of retail activity, overtaking a
£7.7 million penalty set in January. These
fines were assessed without reference to
the new penalty regime since they related
principally to events occurring before its
introduction in May 2010.
The FSA also imposed in 2011 its highest
ever financial penalties on individuals,
one of £2 million and another of
approximately £4 million, the larger of
the two having been assessed under
the new penalty regime and reflecting a
significant punitive element, consonant
with the FSA’s recent declaration that the
“degree of deterrence increases with the
level of the penalty.”
Anti-corruption and Enforcement
The FCA will have explicit product
intervention powers to take this type of
regulatory action, which can be expected
to continue in other contexts.
The message from the regulator is clear:
It has an impressive set of weapons and
it is not afraid to deploy them, and with
increased flexibility and creativity.
The FSA has recently announced that it
has budgeted for an increase in litigation
since the inauguration of its new penalty
structure. The FSA recognizes that more
firms may be willing to fight over higher,
more punitive penalties. Total fines
levied by the FSA through December
2011—about £50 million—are in fact
significantly less than 2010’s total of
nearly £90 million (which included the
highest single fine of £33.32 million).
Both figures, though, represent an
extraordinary increase on the total figure
of just over £5.34 million for 2007, and
the sharp upward trend can be expected
to continue.
The FSA has also on several occasions
obtained injunctive relief against parties
accused of market abuse. The FSA has
always had such power under Section
381 of the Financial Services and
Markets Act 2000, but it had not done
so before this year. One of these cases
also reflects a further new FSA tactic—that
of publicizing allegations of wrongdoing
where the disciplinary process has not yet
run its full course. It has been proposed
that restrictions on early publication of
disciplinary action should be relaxed
further for the new FCA.
A final illustration of the expansion of the
range of the FSA’s activity is provided
by its approach to traded life policy
investments (TLPIs), which are funds that
invest in life assurance policies, often of
U.S. citizens. The FSA has decided that
it does not approve of these products
being sold to retail investors. It first raised
its concerns with the industry in February
2010. On November 28, 2011, it
issued draft guidance on TLPI sales for
consultation, announcing that it proposed
to issue such guidance as an interim
measure because the consultation process
for changing the rules to introduce a
ban on marketing TLPIs to retail investors
would take longer. The FSA’s “key issues”
addressed by the draft guidance are
headed “TLPIs should not reach retail
investors in the UK.” On the same day,
it issued a press release entitled “FSA
warns against ‘toxic’ traded life policy
investments,” announcing that these
“toxic” products pose significant risks to
retail investors, that they aim to ban their
marketing to retail investor, and that the
industry now had a strong warning that it
should not do so from now on.
Robert Hadley (London)
robert.hadley@klgates.com
K&L Gates Global Government Solutions ® 2012 Annual Outlook
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