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Status: You are viewing the version of the handbook as on 2009-03-31.

DEPP 6.5 Determining the appropriate level of financial penalty

DEPP 6.5.1GRP

  1. (1)

    The FSA will consider all the relevant circumstances of a case when it determines the level of financial penalty (if any) that is appropriate and in proportion to the breach concerned. The list of factors in DEPP 6.5.2 G is not exhaustive: not all of these factors may be relevant in a particular case, and there may be other factors, not included below, that are relevant.

  2. (2)

    The FSA does not apply a tariff of penalties for different kinds of breach. This is because there will be very few cases in which all the circumstances of the case are essentially the same and because of the wide range of different breaches in respect of which the FSA may take action. The FSA considers that, in general, the use of a tariff for particular kinds of breach would inhibit the flexible and proportionate policy which it adopts in this area.

DEPP 6.5.2GRP

The following factors may be relevant to determining the appropriate level of financial penalty to be imposed on a person under the Act:

  1. (1)

    Deterrence

    When determining the appropriate level of penalty, the FSA will have regard to the principal purpose for which it imposes sanctions, namely to promote high standards of regulatory and/or market conduct by deterring persons who have committed breaches from committing further breaches and helping to deter other persons from committing similar breaches, as well as demonstrating generally the benefits of compliant business.

  2. (2)

    The nature, seriousness and impact of the breach in question

    The FSA will consider the seriousness of the breach in relation to the nature of the rule, requirement or provision breached. The following considerations are among those that may be relevant:

    1. (a)

      the duration and frequency of the breach;

    2. (b)

      whether the breach revealed serious or systemic weaknesses in the person's procedures or of the management systems or internal controls relating to all or part of a person's business;

    3. (c)

      in market abuse cases, the FSA will consider whether the breach had an adverse effect on markets and, if it did, how serious that effect was, which may include having regard to whether the orderliness of, or confidence in, the markets in question has been damaged or put at risk. This factor may also be relevant in other types of case;

    4. (d)

      the loss or risk of loss caused to consumers, investors or other market users;

    5. (e)

      the nature and extent of any financial crime facilitated, occasioned or otherwise attributable to the breach; and

    6. (f)

      in the context of contraventions of Part VI of the Act, the extent to which the behaviour which constitutes the contravention departs from current market practice.

  3. (3)

    The extent to which the breach was deliberate or reckless

    The FSA will regard as more serious a breach which is deliberately or recklessly committed. The matters to which the FSA may have regard in determining whether a breach was deliberate or reckless include, but are not limited to, the following:

    1. (a)

      whether the breach was intentional, in that the person intended or foresaw the potential or actual consequences of its actions;

    2. (b)

      where the person has not followed a firm's internal procedures and/or FSA guidance, the reasons for not doing so;

    3. (c)

      where the person has taken decisions beyond its or his field of competence, the reasons for the decisions and for them being taken by that person;

    4. (d)

      whether the person has given no apparent consideration to the consequences of the behaviour that constitutes the breach;

    5. (e)

      in the context of a contravention of any rule or requirement imposed by or under Part VI of the Act, whether the person sought any professional advice before the contravention occurred and whether the person followed that professional advice. Seeking professional advice does not remove a person's responsibility for compliance with applicable rules and requirements.

    If the FSA decides that the breach was deliberate or reckless, it is more likely to impose a higher penalty on a person than would otherwise be the case.

  4. (4)

    Whether the person on whom the penalty is to be imposed is an individual

    When determining the amount of a penalty to be imposed on an individual, the FSA will take into account that individuals will not always have the resources of a body corporate, that enforcement action may have a greater impact on an individual, and further, that it may be possible to achieve effective deterrence by imposing a smaller penalty on an individual than on a body corporate. The FSA will also consider whether the status, position and/or responsibilities of the individual are such as to make a breach committed by the individual more serious and whether the penalty should therefore be set at a higher level.

  5. (5)

    The size, financial resources and other circumstances of the person on whom the penalty is to be imposed

    1. (a)

      The FSA may take into account whether there is verifiable evidence of serious financial hardship or financial difficulties if the person were to pay the level of penalty appropriate for the particular breach. The FSA regards these factors as matters to be taken into account in determining the level of a penalty, but not to the extent that there is a direct correlation between those factors and the level of penalty.

    2. (b)

      The purpose of a penalty is not to render a person insolvent or to threaten the person's solvency. Where this would be a material consideration, the FSA will consider, having regard to all other factors, whether a lower penalty would be appropriate. This is most likely to be relevant to a person with lower financial resources; but if a person reduces its solvency with the purpose of reducing its ability to pay a financial penalty, for example by transferring assets to third parties, the FSA will take account of those assets when determining the amount of a penalty.

    3. (c)

      The degree of seriousness of a breach may be linked to the size of the firm. For example, a systemic failure in a large firm could damage or threaten to damage a much larger number of consumers or investors than would be the case with a small firm: breaches in firms with a high volume of business over a protracted period may be more serious than breaches over similar periods in firms with a smaller volume of business.

    4. (d)

      The size and resources of a person may also be relevant in relation to mitigation, in particular what steps the person took after the breach had been identified; the FSA will take into account what it is reasonable to expect from a person in relation to its size and resources, and factors such as what proportion of a person's resources were used to resolve a problem.

    5. (e)

      The FSA may decide to impose a financial penalty on a mutual (such as a building society), even though this may have a direct impact on that mutual's customers. This reflects the fact that a significant proportion of a mutual's customers are shareholder-members; to that extent, their position involves an assumption of risk that is not assumed by customers of a firm that is not a mutual. Whether a firm is a mutual will not, by itself, increase or decrease the level of a financial penalty.

  6. (6)

    The amount of benefit gained or loss avoided

    The FSA may have regard to the amount of benefit gained or loss avoided as a result of the breach, for example:

    1. (a)

      the FSA will propose a penalty which is consistent with the principle that a person should not benefit from the breach; and

    2. (b)

      the penalty should also act as an incentive to the person (and others) to comply with regulatory standards and required standards of market conduct.

  7. (7)

    Difficulty of detecting the breach

    A person's incentive to commit a breach may be greater where the breach is, by its nature, harder to detect. The FSA may, therefore, impose a higher penalty where it considers that a person committed a breach in such a way as to avoid or reduce the risk that the breach would be discovered, or that the difficulty of detection (whether actual or perceived) may have affected the behaviour in question.

  8. (8)

    Conduct following the breach

    The FSA may take the following factors into account:

    1. (a)

      the conduct of the person in bringing (or failing to bring) quickly, effectively and completely the breach to the FSA's attention (or the attention of other regulatory authorities, where relevant);

    2. (b)

      the degree of co-operation the person showed during the investigation of the breach by the FSA, or any other regulatory authority allowed to share information with the FSA, such as an RIE or the Takeover Panel. Where a person has fully co-operated with the FSA's investigation, this will be a factor tending to reduce the level of financial penalty;

    3. (c)

      any remedial steps taken since the breach was identified, including whether these were taken on the person's own initiative or that of the FSA or another regulatory authority; for example, identifying whether consumers or investors or other market users suffered loss and compensating them where they have; correcting any misleading statement or impression; taking disciplinary action against staff involved (if appropriate); and taking steps to ensure that similar problems cannot arise in the future; and

    4. (d)

      whether the person concerned has complied with any requirements or rulings of another regulatory authority relating to the breach (for example, where relevant, those of the Takeover Panel).

  9. (9)

    Disciplinary record and compliance history

    The FSA may take the previous disciplinary record and general compliance history of the person into account. This will include:

    1. (a)

      whether the FSA (or any previous regulator) has taken any previous disciplinary action against the person;

    2. (b)

      whether the person has previously undertaken not to do a particular act or engage in particular behaviour;

    3. (c)

      whether the FSA (or any previous regulator) has previously taken protective action in respect of a firm using its own initiative powers, by means of a variation of a firm's Part IV permission, or has previously requested the firm to take remedial action and the extent to which that action has been taken.

    4. (d)

      the general compliance history of the person, including whether the FSA (or any previous regulator) has previously brought to the person's attention, including by way of a private warning, issues similar or related to the conduct that constitutes the breach in respect of which the penalty is imposed.

    A person's disciplinary record could lead to the FSA imposing a higher penalty, for example where the person has committed similar breaches in the past.

    In assessing the relevance of a person's disciplinary record and compliance history, the age of a particular matter will be taken into account, although a long-standing matter may still be relevant.

  10. (10)

    Other action taken by the FSA (or a previous regulator)

    Action that the FSA (or a previous regulator) has taken in relation to similar breaches by other persons may be taken into account. This includes previous actions in which the FSA (whether acting by the RDC or the settlement decision makers) and a person on whom a penalty is to be imposed have reached agreement as to the amount of the penalty. As stated at DEPP 6.5.1G (2), the FSA does not operate a tariff system. However, the FSA will seek to apply a consistent approach to determining the appropriate level of penalty.

  11. (11)

    Action taken by other domestic or international regulatory authorities

    Considerations could include, for example:

    1. (a)

      action taken or to be taken against a person by other regulatory authorities which may be relevant where that action relates to the breach in question;

    2. (b)

      the degree to which any remedial or compensatory steps required by other regulatory authorities have been taken (and whether taken promptly).

  12. (12)

    FSA guidance and other published materials

    1. (a)

      A person does not commit a breach by not following FSA guidance or other published examples of compliant behaviour. However, where a breach has otherwise been established, the fact that guidance or other published materials had raised relevant concerns may inform the seriousness with which the breach is to be regarded by the FSA when determining the level of penalty.

    2. (b)

      The FSA will consider the nature and accessibility of the guidance or other published materials when deciding whether they are relevant to the level of penalty and, if they are, what weight to give them in relation to other relevant factors.

  13. (13)

    The timing of any agreement as to the amount of the penalty

    The FSA and the person on whom a penalty is to be imposed may seek to agree the amount of any financial penalty and other terms. In recognition of the benefits of such agreements, DEPP 6.7 provides that the amount of the penalty which might otherwise have been payable will be reduced to reflect the stage at which the FSA and the person concerned reach an agreement.

DEPP 6.5.2AG

1The factors to which the FSA will have regard when determining the appropriate level of financial penalty to be imposed under regulation 34 of the RCB Regulations are set out in RCB 4.2.5 G.

DEPP 6.5.3GRP

Part III (Penalties and fees) of Schedule 1 to the Act specifically provides that the FSA may not, in determining its policy with respect to the amount of penalties, take account of expenses which it incurs, or expects to incur, in discharging its functions.