Thursday 12 May 2016 1:49 pm

Credible deterrence: What is the real cost of FCA Enforcement proceedings?

I'm a reporter at City A.M., mainly covering law, professional services and banking

I'm a reporter at City A.M., mainly covering law, professional services and banking

Follow Hayley Kirton

The financial services industry faces ever-more intrusive regulatory scrutiny and tougher penalties. Financial Conduct Authority (FCA) fines reached £1.4bn in 2014. This compares with just over £89m in 2010 and only £7.5 million in 2002.

However, fines are not the only cost of an FCA enforcement intervention – reputation damage can be far more painful. In fact, this is a core element of the FCA’s aggressive credible deterrence strategy that sees publicity and the media as legitimate tools for Enforcement.

A recent study by John Armour, Hogan Lovells professor of Law and Finance at the University of Oxford, compared cost of damage to reputation following publication of a Financial Services Authority (FSA) Final Notice with the size of fine imposed. Covering cases concluded up to the demise of the FSA in 2013, the study found that the cost of damage to reputation was, on average, nine times greater than financial penalties.

Although the nine times statistic might not stand in the post-FSA climate, where the size of fines has increased dramatically, evidence would suggest that reputational cost continues to exceed the direct cost of FCA intervention.

Read more: How the City watchdog cracked down on insider trading

How can financial services firms protect their future in this context?

Barclays took the strategic decision that an early admission of misconduct in the Libor scandal would result in a lower financial penalty and perhaps, a more forgiving public. Barclays called it wrong and took the brunt of the ensuing media storm. Chief executive Bob Diamond resigned in 2012, stating that external pressure on the bank risked "damaging the franchise”.

Read more: New FCA boss: Time to end banker-bashing

This highlights the difficult decisions firms have to make, ranging from legal to commercial to pure strategic communications. The international dimension to reputation risk must be considered too, as proceedings are rarely limited to the UK regulator. The FCA and international regulators, such as the Swiss Financial Market Supervisory Authority and the Department of Justice along with the US Securities and Exchange Commission, are showing increasing co-operation and co-ordination.

A good communications strategy should perfectly complement the legal strategy, with communications advisers working closely with the legal team throughout. A communications campaign may start with developing a positive narrative about the firm, the matter in question, steps taken and hope for the future.

Read more: There's still more to come from the Panama Papers

The City currently waits to see whether Andrew Bailey will implement the same aggressive momentum as his predecessor. Mark Steward, the recently appointed head of enforcement and markets oversight has hinted that he will maintain Enforcement’s tough stance. Moreover, in its 2016 business plan the FCA stressed that it will prioritise a crackdown on money-laundering – a timely strategy given the Panama Papers revelations.

Whatever course the FCA takes in the coming year, firms and individuals in the financial services sector still have every reason to fear for their reputations.

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