REED SMITH LLP
LAST year the FSA began talking the talk, with a number of policy speeches about the need for enforcement to “deliver credible deterrence”. Indeed, 2009 was a record year for bank fines. FSA rules for the registration of directors and senior managers – persons holding significant influence functions – for individual accountability are being tightened. Yet the numbers of cases and criminal prosecutions remain small. Last year there were two insider dealer trials and four convictions. There were no prosecutions of organised insider dealing rings. There were no FSA rule breach cases against senior bankers or managers of large institutions. Fixing responsibility on an individual for a culture of profit-seeking without proper regard to risk is undoubtedly difficult.
More worrying is that the FSA has largely relied on ever increasing fines against large institutions. Last year saw £34.7m of fines, up from £23m in 2008, much of it the result of cases involving employee fraud and traders concealing losses by mis-marking trading positions. But there were also cases like the £2.45m fine on Barclays Capital for inaccurate transaction reporting and £3.2m of fines on HSBC companies for poor security of customer personal data. The regulator looks set to continue with this tactic.
But is this reliance on escalating fines the way to achieve the market discipline the FSA seeks? There is a risk that if tougher enforcement policy simply means high fines against banks for the generality of rule breaches (as opposed to matters directly connected with banks going bust and the credit crunch) then bank shareholders may suffer financial detriment without a commensurate increase in market discipline in those areas of most concern. The FSA has not as yet brought cases where some banks have been found wanting, such as having enough capital, liquidity management and derivatives trading exposures.
FSA proposals to further increase the scale of fines are on the table, based on up to 20 per cent of a firm’s pre-tax earnings from the relevant part of the business during the period of breach. This is a serious statement, but it is not at all certain that in the absence of disciplinary actions against senior managers, fining firms more will effectively deter wrongdoing. With a solid enough enforcement record in 2009 FSA enforcement may be walking the walk but it is rather more difficult to know whether it will achieve market discipline where it matters.