FSA Publishes List of 2009 Fines

by Karl Hindle - London, UK

The Financial Services Authority (FSA) has published a summary of the fines it has imposed throughout 2009.

The full list may be found here.

Major Fines Levied

The size of the fines has increased compared to prior years but so has the number of heavy hitting fines across the regulated.

Most of the major fines have been levied upon the investment arms of banks operating in London (though GMAC and HSBC are notable exceptions).

It is clear from the reasons given by the FSA for the fines that the regulator has focused upon systems and controls failures.  Something which is going to remain the focus of FSA compliance investigations for 2010, however, this will not be the sole headline from the sanction-imposing regulator.  

Fines are Not the Only Fruit

The FSA opened 2010 with an announcement that criminal proceedings have been instituted against an IT solution provider, iSoft in connection with share pricing and valuations.  This case is not directly banking related, though it revolves around market manipulation, however, it is the fact that the FSA is moving towards criminal prosecution as a solution for misbehaviour.

The FSA is buoyed by the recent successes it has enjoyed with criminal prosecutions of a handful of individuals and inparticular, the upholding of convictions at the Appeal Court.  A raft of criminal hearings are scheduled to be heard shortly, but it is apparent the FSA is moving towards criminal sanction rather than simple fine levies as a mechanism for gaining compliance.

With passing aftermath of the financial crisis, we are well and truly into the "investigation" and "Let's put something in place so this does not happen again" stage.  Part of this process will inevitably lead to greater regulatory action, especially with the increased scope for what Stephen Hester of Royal Bank of Scotland noted as "politicisation" (though he was referring to RBS' ownership by the Government).

In this light, I anticipate criminal prosecutions to be announced with major banks and financial institutions along with a whopping fine at some point in 2010.

Are Fines Enough?

Margaret Cole is the Head of Enforcement at the FSA, and she addressed the issues of fines and prosecutions in the context of fraud;

"We are the lead agency for prosecuting insider dealing and we are the lead agency for prosecuting those who carry on regulated activities without authorisation. But we aren’t, and we don’t seek to be, responsible for prosecuting fraud in its wider or conventional sense. When we see wider mainstream fraud, we will refer the case to the appropriate agency to prosecute, while also taking steps to exclude those concerned from the authorised community."

The lesson learned from tackling fraudulent abuses is that no matter what the size of the fine, it does not act as a sufficiently strong deterrent to curb behaviour.  As Cole points out:

"One way to change behaviour is by making examples of wrongdoers, by publicly demonstrating that crime doesn’t pay. Where a crime has been committed, the evidence supports a prosecution, and the public interest test is engaged, we will prosecute."

The issue confronting the FSA is whether to seek an extension of their prosecutorial remit beyond fraud or is there an argument which runs along the lines of, "Bank X failed to impose a proper systems and controls which led to Individual Y committing a series to take advantage of said bank's  deliberate negligence such that gains occurred to Individual Y which may be viewed as the proceeds of a fraud."

This may be too farfetched as fraud is notably difficult to demonstrate, however if the FSA is seeing that criminal prosecution combined with financial penalty is having an effect on curbing negative behaviour, why not seek to make certain acts which are not criminal at this time become criminal offences through new legislation?

Referring to Cole once more:

"We began telegraphing our increased appetite for criminal prosecutions back in 2007. We’d been very active in imposing civil fines against firms and individuals for market misconduct. In 2004, we fined Shell £17m for committing market abuse and for breaking the listings rules. In 2006, we fined Philippe Jabre and his firm GLG Partners £750,000 each for market abuse. But we recognised that civil fines and the threat of them, however large, hadn’t made enough of an impact. We recognised that the threat of a criminal sanction – a criminal conviction and a custodial sentence – was much more powerful."

If the current raft of criminal prosecutions continue to go the way of the FSA, there will be a powerful argument for adopting this dual civil fine and criminal prosecution elsewhere within the FSA's regulatory remit.

The link to the speech by Margaret Cole to the FSA's Fraud Advisory Panel general meeting of 10th September 2009 is here.