In early March, the UK Financial Services Authority (FSA) issued policy statement PS10/04 entitled Enforcement Financial Penalties. PS10/04 confirms the creation of a new framework for calculating financial penalties in enforcement cases. The new regime has been brought into force with immediate effect.

Financial penalties are to be based on three principles: disgorgement, discipline and deterrence, under a five-step framework:

  • removing any profits made from the misconduct;
  • setting a figure to reflect the seriousness of the misconduct;
  • considering any aggravating or mitigating factors;
  • achieving the appropriate deterrent effect; and
  • applying any settlement discount.

Under the new framework, fines will be linked more closely to firms’ revenues and individuals’ incomes and will be based on the following amounts:

  • up to 20% of a firm’s revenue over the period during which the misconduct took place from the business area linked to the misconduct;
  • up to 40% of an individual’s salary and benefits (including bonuses) from their job relating to the misconduct (except in serious market abuse cases); and
  • for individuals in serious market abuse cases: the starting point for fines to be £100,000 (approximately $150,000).

Margaret Cole, the FSA Director of Enforcement and Financial Crime, noted that there had been industry opposition to the FSA’s proposals and said that the FSA had nonetheless decided to implement them as the FSA believed that the proposed enforcement penalty framework could serve as a powerful tool to help change behavior. Ms. Cole said, “We imposed record fines in 2009, but this new approach further amplifies the deterrent effect of our penalties and sends a powerful message to firms which makes it clear that non-compliant behaviour will not be tolerated.”

To read PS10/04, click here.