ENF 13.3 Factors relevant to determining the appropriate level of financial penalty

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 contravention in question.

2. (2)

   With the exception of contraventions involving the submission of returns no more than 28 business days late (see ENF 13.5), the FSA does not propose to adopt a tariff of penalties for different kinds of contravention. This is because there will be very few other cases in which all the circumstances of the case are essentially the same, and the FSA considers that, in general, the use of a tariff for particular kinds of contravention would inhibit the flexible and proportionate policy which it intends to adopt in this area.

1. (1)

   Section 69 of the Act (Statement of policy) requires that the FSA's policy in determining the amount of a penalty in relation to approved persons must include having regard to:

   1. (a)

      the seriousness of the misconduct in question in relation to the nature of the principle or requirement concerned;

   2. (b)

      the extent to which that misconduct was deliberate or reckless;

   3. (c)

      whether the person on whom the penalty is to be imposed is an individual.

2. (2)

   Section 210(2) of the Act (Statements of policy) contains similar requirements for the FSA's policy in determining the amount of a penalty in relation to contraventions by firms.

The factors which may be relevant when the FSA determines the amount of a financial penalty for a firm or approved person include the following.

1. (1)

   The seriousness of the misconduct or contravention.In relation to the statutory requirement to have regard to the seriousness of the misconduct or contravention, the FSA recognises the need for a financial penalty to be proportionate to the nature and seriousness of the misconduct or contravention in question. The following may be relevant:

   1. (a)

      in the case of an approved person, the FSA must have regard to the seriousness of the misconduct in relation to the nature of the Statement of Principle or requirement concerned. Similarly, in the case of a firm, the FSA must have regard to the seriousness of the contravention in relation to the nature of the requirement contravened.

   2. (b)

      the duration and frequency of the misconduct or contravention (including, in relation to a firm, when the contravention was identified by persons exercising significant influence functions at the firm);

   3. (c)

      whether the misconduct or contravention revealed serious or systemic weaknesses of the management systems or internal controls relating to all or part of a firm's business;

   4. (d)

      the impact of the misconduct or contravention on the orderliness of financial markets, including whether public confidence in those markets has been damaged;

   5. (e)

      the loss or risk of loss caused to consumers or other market users. If a contravention has caused loss to another firm, that firm may be able to take its own action against the firm which has committed the contravention; however, the FSA generally expects firms to comply with regulatory requirements, regardless of the nature of the counterparty; for example, persistent departures from MAR 3 (Inter-professional conduct) may have implications for the FSA's assessment of a firm's continued fitness and propriety.

2. (2)

   The extent to which the contravention or misconduct was deliberate or reckless. In determining whether a contravention or misconduct was deliberate, the FSA may have regard to whether the firm's or approved person'sbehaviour was intentional, in that they intended or foresaw the consequences of their actions. The matters to which the FSA may have regard in determining whether a contravention was reckless include, but are not limited to, the following:

   1. (a)

      whether the firm or approved person has failed to comply with the firm's procedures;

   2. (b)

      whether the firm or approved person has taken decisions beyond its or his field of competence;

   3. (c)

      whether the firm or approved person has given no apparent consideration to the consequences of the behaviour that constitutes the contravention.

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

3. (3)

   Whether the person on whom the penalty is to be imposed is an individual, and the size, financial resources and other circumstances of the firm or individual. This will include having regard to whether the person is an individual, and to the size, financial resources and other circumstances of the firm or approved person. The FSA may take into account whether there is verifiable evidence of serious financial hardship or financial difficulties if the firm or approved person were to pay the level of penalty associated with the particular contravention or misconduct. 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. The size and financial resources of a firm or approved person may be a relevant consideration, because the purpose of a penalty is not to render a firm or approved person insolvent or to threaten its 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 smaller firms or groups of firms or approved persons with lower financial resources; but if a firm or individual 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. The size of the firm may also be a relevant consideration for the following reasons:

   1. (a)

      the degree of seriousness of a contravention 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 than would be the case with a small firm: contraventions in firms with a high volume of business over a protracted period may therefore be more serious than contraventions over similar periods in firms with a smaller volume of business; and

   2. (b)

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

4. (4)

   The amount of profits accrued or loss avoided. The FSA may have regard to the amount of profits accrued or loss avoided as a result of the contravention or misconduct, for example:

   1. (a)

      the FSA will propose a penalty which is consistent with the principle that a firm or approved person should not benefit from the contravention or misconduct; and

   2. (b)

      the penalty should also act as an incentive to the firm or approved person (and others) to comply with regulatory standards.

5. (5)

   Conduct following the contravention. The FSA may take into account the conduct of the firm or approved person in bringing (or failing to bring) quickly, effectively and completely the contravention or misconduct to the FSA's attention and:

   1. (a)

      the degree of cooperation the firm or approved person showed during the investigation of the contravention or misconduct (where a firm or approved person has fully cooperated with the FSA's investigation, this will be a factor tending to reduce the level of financial penalty);

   2. (b)

      any remedial steps taken since the contravention or misconduct was identified, including identifying whether consumers suffered loss, compensating them, taking disciplinary action against staff involved (if appropriate), and taking steps to ensure that similar problems cannot arise in the future.

6. (6)

   Disciplinary record and compliance history. The previous disciplinary record and general compliance history of the firm or approved person may be taken into account. This will include whether the FSA (or any previous regulator) has taken any previous formal disciplinary action, resulting in adverse findings, against the firm or approved person, or whether the FSA has previously required the firm to take remedial action by means of a variation of Part IV permission (see ENF 3), or has previously requested the firm to take remedial action, and the extent to which that action has been taken. For example, the disciplinary record of a firm or approved person could lead to the FSA increasing the penalty, where the firm or approved person has committed similar contraventions or misconduct in the past. In assessing the relevance of a firm's or approved 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. However, in undertaking this assessment, private warnings will not be taken into account.

7. (7)

   Previous action taken by the FSA.The action that the FSA has taken previously in relation to similar behaviour by other firms or approved persons may be taken into account. The FSA will seek to ensure consistency when it determines the appropriate level of penalty. If it has taken disciplinary action previously in relation to a similar contravention or misconduct, this will clearly be a relevant factor. However, as stated at ENF 13.3.1 G, with the exception of the specific circumstances described at ENF 13.5, the FSA does not intend to adopt a tariff system, and there may be other relevant factors which could increase or decrease the seriousness of the contravention or misconduct.

8. (8)

   Action taken by other regulatory authorities. This could include for example:

   1. (a)

      action taken or to be taken against a firm or approved person by other regulatory authorities which may be relevant where it relates to the contravention or misconduct in question;

   2. (b)

      action taken by any previous regulator regarding the general level of penalties.

9. (9)

   The timing of any agreement as to the amount of the disciplinary penalty. The FSA and the person subject to disciplinary action may seek to agree the amount of any financial penalty and other terms. In recognition of the benefits of such agreements, ENF 13.7 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.2

The list of criteria in ENF 13.3.3 G above is not exhaustive, and all the relevant circumstances of the case will be taken into consideration.

Part III, Schedule 1 to the Act (Penalties and fees) 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.

1A firm (or approved person) may ask the FSA to permit the firm (or approved person) to pay a financial penalty by instalments. However, the FSA will consider agreeing to payment of a financial penalty by instalments only where there is verifiable evidence of serious financial hardship or financial difficulties if the firm or approved person were required to pay the full payment in a single instalment. This reflects the fact that the purpose of a penalty is not to render a firm or approved person insolvent or to threaten solvency. The FSA will determine the appropriate level and number of instalments having regard to the overall circumstances of the case. However, the period within which the full payment of the penalty must be made will not generally exceed one year from the date of the final notice.