SENIOR CONSULTANT, NORTON ROSE LLP
THIS week there has been a quantum shift in risk exposure for those who work in the financial services industry and perform controlled functions. With effect from 6 March, if anything goes wrong on their watch, there is a real risk of being faced with the prospect of unaffordable financial penalties imposed by the regulator.
Last week the FSA introduced new guidance on the way in which financial penalties will be imposed both in relation to institutions and individuals. The stated purpose of these measures is not only to introduce transparency and consistency to the process but also to increase the level of penalties in order to achieve “credible deterrence” (with the effect of doubling or trebling enforcement fines).
Whether it will achieve the former is debatable, given the extent of discretion afforded to the regulator. But it is inevitable that it will give rise to “eye wateringly” high financial penalties. These will now be based on a percentage of a minimum of a year’s revenue (for firms) or income (for individuals), and where the conduct continues for longer than a year, for the period of the breach.
The percentage used will depend on the seriousness, nature and impact of the misconduct. In the case of firms, the percentage of “relevant revenue” for a particular product or business area will range between 0-20 per cent. In the case of individuals, the percentage used will apply to gross income and benefits (including salary, bonus, pension contributions, share options and share schemes and regardless of whether any part of their role relates to unregulated activities or activities unconnected to the breach) and will range between 0-40 per cent.
So far as individuals are concerned, therefore, and bearing in mind that the Revenue will have already taken its cut, the size of any such financial penalty, even at the lower end of the scale relative to their net income, could be ruinous. In cases of proven serious financial hardship, the FSA has said it may consider a reduction in the penalty. However this comes as no comfort when one learns that, in the FSA’s view, an individual will only suffer serious financial hardship when his net annual income falls below £14,000 or his capital falls below £16,000.
Furthermore, the calculation of affordability will be made on a forward looking basis: the FSA has stated that a person earning annual net income of £50,000 would be able to pay £36,000 from income in three consecutive years and, in terms of capital, time will be allowed for the realisation of assets, including a person’s home.
Bear in mind it is the FSA which decides how serious is the misconduct alleged. Experience has shown such decisions can be difficult to predict and reliant on inference rather than solid, corroborated evidence. Although such regulatory decisions are subject to independent review, the process of getting there can be painfully slow, emotionally debilitating, very costly and often more than the individual or the most patient and supportive employer can endure.
Will this have a negative impact on ensuring we get the right people into positions of responsibility? The FSA says not, but didn’t give its reasons. Time will tell but it would be unfortunate if the stated objective of “credible deterrence” served to deter good people from assuming responsibility.