This chapter applies to any person on whom a financial penalty may be imposed. The Act empowers the FSA to impose a financial penalty in the following circumstances:

1. (1)

   on a firm, where the FSA considers that the firm has contravened a requirement imposed on it by or under section 206 of the Act (Financial penalties);

2. (2)

   on an approved person, where the FSA considers that he is guilty of misconduct; this is defined in the Act as failure to comply with a Statement of Principle issued by the FSA under section 64 (Conduct: statements and codes), or being knowingly concerned in a contravention by the relevant firm of a requirement imposed on that firm by or under section 66 of the Act (Disciplinary powers);

3. (3)

   on any person, where the FSA is satisfied that the person is or has engaged in market abuse or, by taking or refraining from taking any action, has required or encouraged another person to engage in market abuse; the power to impose penalties for market abuse under section 123 of the Act is considered separately in ENF 14;

4. (4)

   where there has been a contravention of the Part 6 rules2 (section 91 of the Act (Penalties for breach of Part 6 rules2)). The FSA's powers in this regard are dealt with separately in ENF 212.

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Financial penalties are one of a variety of regulatory tools the FSA may employ to help it to achieve its regulatory objectives. The principal purpose of financial penalties is to promote high standards of regulatory conduct by deterring firms and approved persons who have breached regulatory requirements from committing further contraventions, helping to deter other firms and approved persons from committing contraventions, and demonstrating generally to firms and approved persons the benefits of compliant behaviour.

1To help the FSA to achieve this purpose (as set out in ENF 13.1.2 G), GEN 6 contains rules prohibiting a firm or member from entering into, arranging, claiming on or making a payment under a contract of insurance that is intended to have, or has, the effect of indemnifying any person against a financial penalty.

Sections 69 and 210 of the Act require the FSA to issue statements of policy about the imposition of financial penalties on firms and approved persons. The material in this chapter constitutes the FSA's statements of policy and guidance under those provisions. The FSA may at any time alter or replace these statements of policy after consultation.

The FSA is required to have regard to these statements of policy in exercising, or deciding whether to exercise, its powers under sections 66 (Disciplinary powers) and 206 (Financial penalties) of the Act.

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.

The Act requires the FSA to issue a warning notice, decision notice and final notice before imposing a financial penalty. More information on the procedure the FSA will follow in these circumstances is contained in DEC.

The FSA will consider the circumstances of each case, but ordinarily will publicise the financial penalty by issuing a press release, giving details of the behaviour and the penalty imposed. However, the Act provides (section 391(6) (Consultation)) that the FSA may not publish information in these circumstances where it would be unfair to the person on whom the financial penalty is imposed, or prejudicial to the interests of consumers.

This section sets out the FSA's3 policy and procedures in relation to financial penalties for late submission of reports. It applies to reporting by firms required under all rules (not including the Part 6 rules6) which require firms to report to the FSA on a periodic basis. It also applies to periodic reporting by firms required by the provisions specified in (6) and (7). The following is a list of the main periodic reporting rules (the list may not be comprehensive) and those other provisions:1

1. (1)

   the rules set out in SUP 16 (Reporting requirements);

   85
2. (2)

   IPRU(INS) 9.37(4), IPRU(INS) 9.38R, IPRU(INS) 9.6(1) R, IPRU(INS) 9.6 (6) (Financial reporting) and IPRU(INS) 10.2 (Information to be provided to the FSA);4

3. (3)

   IPRU(FSOC) 3.1(7) R (Management and control), IPRU(FSOC) 5.1(2)R, IPRU(FSOC) 5.2(2) R, IPRU(FSOC) 5.2(3)R (Prudential reporting) and IPRU(FSOC) 6.3(1) (Statistical information relating to EEA branches and services operations);41

4. (4)

   DISP 1.5.4 R to DISP 1.5.7 R(Reporting complaints to the FSA) and DISP 5.5.1 R (Information requirement);1

5. (5)

   LLD 3.3.1 R to LLD 3.3.2 R (The Central Fund), and LLD 4.3.1 R to LLD 4.3.2 R

   (Capacity transfer market) and the rules set out in LLD 15.2.1 R and LLD 15.10.2 R (Reporting by the Society)101;

6. (6)

   1the reporting requirements in the pensions review provisions and FSAVC review provisions; that is, the provisions of the deemed scheme under the Financial Services and Markets Act 2000 (Transitional Provisions) (Review of Pensions Business) Order 2001 (SI 2001/2512); 2

7. (7)

   1IPRU(INV) 4.4.2D to IPRU(INV) 4.4.5D (Financial resource requirements); and2

8. (8)

   2CRED 14.10.10 R (Audited accounts of credit unions) and3CRED 17.6.3 R to CRED 17.6.7 R (Complaint handling procedures for credit unions).

References in ENF 13.5 to 'reports' include all the various types of reports and other documents, including annual controllers reports, annual close links reports, compliance reports, financial reports, persistency reports, accounts and balance sheets, and actuary and auditor reports that must be submitted to the FSA in accordance with the rules and other provisions specified in (1) to (8).21

The FSA attaches considerable importance to the timely submission by firms of the reports referred to in ENF 13.5.1 G. This is because the information that they contain is essential to the FSA's assessment of whether a firm is complying with the requirements and standards of the regulatory system and to the FSA's understanding of that firm's business.

1. (1)

   In general, the FSA's approach to disciplinary action arising from the late submission of a report will depend upon the length of time after the due date that the report in question is submitted. Where the period of delay is no more than 28 business days, the FSA considers that in the majority of cases it will be appropriate to limit the sanction imposed on the firm concerned to a financial penalty fixed by reference to the indicative scale of penalties at ENF 13 Annex 1 G.

2. (2)

   There may, however, be exceptional circumstances in which the FSA considers that it is appropriate not to seek a penalty, or to impose a lower penalty than the one indicated by the scale. This may be appropriate if the firm is an individual. If the person concerned is an individual, it is open to him to make representations to the FSA as to why he should not be the subject of a financial penalty, or why a lower penalty should be imposed. If he does so, the matters to which the FSA will have regard will include the matters set out in ENF 13.3.3 G (3)1.It should be noted that an administrative difficulty such as pressure of work does not, in itself, constitute an exceptional circumstance for this purpose.

3. (3)

   Equally, the FSA may impose a higher penalty than the one indicated by the scale at ENF 13 Annex 1 G having regard to the seriousness of the contravention and the extent to which the contravention was deliberate or reckless. This may include, for example, a case where a firm repeatedly fails to submit its reports on time or where there is information that suggests that such a delay was deliberate.

4. (4)

   The FSA will also have regard to the submission frequency of the late report when assessing the seriousness of the contravention. For example, a short delay in submitting a weekly or monthly report can have serious implications for the supervision of the firm inquestion. Such a delay may therefore be subject to a higher penalty than the one suggested by the indicative scale.

Reference to an indicative scale of penalties for breaches of this nature represents an exception to the FSA's general policy described in ENF 13.3.1 G. The FSA considers that it is appropriate to treat this type of breach differently from other regulatory breaches on the basis that the nature of the facts establishing the breach is likely to be similar in each case and that the scale will ensure consistency in the treatment of the firms in question.

1. (1)

   Where a report is submitted more than 28 business days after the due date, and there are no exceptional circumstances justifying the failure to submit on time, the financial penalty imposed is likely to exceed the amount indicated by the scale at ENF 13 Annex 1 G for 21 to 28 business days delay. The FSA will determine the precise level of the financial penalty to be imposed in accordance with the approach discussed in ENF 13.3.3 G.

2. (2)

   In addition, in appropriate cases, the FSA may bring disciplinary action against the approved person or persons within the firm's management who are ultimately responsible for ensuring that the firm's reports are completed and returned to the FSA (see ENF 11.5 (Action against approved persons)).

1In applying the guidance in ENF 13.5, the FSA may treat a report which is materially incomplete or inaccurate as not received until it has been submitted in a form which is materially complete and accurate. For the purposes of the guidance, the FSA may also treat a report as not received where the method by which it is submitted to the FSA does not comply with the prescribed method of submission.

In most late reporting cases, it will not be necessary for the FSA to appoint an investigator under its powers discussed in ENF 2since the fact of the breach will be clear. It follows that the FSA will not usually send the firm concerned a preliminary findings letter (see ENF 2.5.12 G)) for late-reporting disciplinary action.

A failure by a firm to submit a report by the due date may indicate wider problems within the firm, for which more serious disciplinary sanctions or other enforcement action (see ENF 11.2.3 G) or both, may be appropriate.

The FSA will use the decision making procedure set out in DEC 4.5.2 G to DEC 4.5.6 G to decide whether to impose a financial penalty for the late submission of a report. It will use this procedure whether the period of delay is more than or less than 28 business days, including if no submission has been made at all.1

1. (1)

   Once a final notice has been issued relating to a financial penalty and any other relevant sanction for a late report, the FSA will consider whether it is unfair to the firm or prejudicial to the interests of consumers to publish information relating to the decision. The FSA anticipates that in most cases where reports have been submitted late, no such unfairness or prejudice will exist. If so, it will enter details of the decision in the FSA Register.

2. (2)

   The FSA may also publicise the sanctions on a wider basis where the contravention is considered to be particularly serious. Examples of situations that may result in wider publicity include where the period of delay exceeds 28 business days and/or where the firm in question has previously failed to submit its reports on time to the FSA or to any previous regulator.

5 ENF 13.3.6 G contains guidance concerning requests for permission to pay financial penalties by instalments. That guidance also applies to penalties for late submission of reports.

7The settlement discount scheme set out in ENF 13.7 does not apply to financial penalties for late submission of reports.

Where a firm has breached prudential requirements (for example, rules relating to the adequacy of financial resources), the FSA will consider all the relevant circumstances of a case (including the factors listed in ENF 13.3.3 G) in determining whether to impose a financial penalty.

In considering whether to impose a financial penalty on a mutual (such as a building society), the FSA will take into account the impact that a penalty may have on a firm's customers, as the FSA would with any firm. However, the FSA may decide to impose a financial penalty on a mutual, taking into account all the circumstances of the case (including the factors listed in ENF 13.3.3 G), 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 incorporated as a company. Whether a firm is a mutual will not, by itself, increase or decrease the level of a financial penalty.

PRU 7.6.33 R2 prohibits a long-term insurer (including a firm qualifying for authorisation under Schedule 3 or 4 to the Act), which is not a mutual, from paying a financial penalty from a long-term insurance fund.

Persons subject to disciplinary action may be prepared to agree the amount of any financial penalty and other conditions which the FSA seeks to impose by way of disciplinary action. Such conditions might include, for example, the amount or mechanism for the payment of compensation to consumers. The FSA recognises the benefits of such agreements, in that they offer the potential for securing earlier redress or protection for consumers and the saving of cost to the person concerned and the FSA itself in contesting the financial penalty. The penalty that might otherwise be payable in respect of misconduct or contravention by the person concerned will therefore be reduced to reflect the timing of any settlement agreement.

In appropriate cases the FSA's approach will be to negotiate with the person concerned to agree in principle the amount of a financial penalty having regard to the factors set out in ENF 13.3. (This starting figure will take no account of the existence of the settlement discount scheme described in this section.) Such amount ("A") will then be reduced by a percentage of A according to the stage in the process at which agreement is reached. The resulting figure ("B") will be the amount actually payable by the person concerned in respect of the misconduct or contravention. However, where part of a proposed financial penalty specifically equates to the disgorgement of profit accrued or loss avoided then the percentage reduction will not apply to that part of the penalty.

1. (1)

   Any settlement agreement between the FSA and the person concerned will therefore need to include a statement as to the appropriate penalty discount in accordance with this procedure.

2. (2)

   In certain circumstances the person concerned may consider that it would have been possible to reach a settlement at an earlier stage in the action, and argue that it should be entitled to a greater percentage reduction in penalty than is suggested by the table at ENF 13.7.3 G (3). It may be, for example, that the FSA no longer wishes to pursue disciplinary action in respect of all of the acts or omissions previously alleged to give rise to the contravention of a requirement. In such cases, the person concerned might argue that it would have been prepared to agree an appropriate penalty at an earlier stage and should therefore benefit from the discount which would have been available at that time. Equally, FSA staff may consider that greater openness from the person concerned could have resulted in an earlier settlement.

3. (3)

   Arguments of this nature risk compromising the goals of greater clarity and transparency in respect of the benefits of early settlement, and invite dispute in each case as to when an agreement might have been possible. It will not usually be appropriate therefore to argue for a greater reduction in the amount of penalty on the basis that settlement could have been achieved earlier.

4. (4)

   However, in exceptional cases FSA may accept that there has been a substantial change in the nature or seriousness of the disciplinary action being taken against the person concerned, and that an agreement would have been possible at an earlier stage if the action had commenced on a different footing. In such cases the FSA and person concerned may agree that the amount of the reduction in penalty should reflect the stage at which a settlement might otherwise have been possible.