ENF 21.7 Financial penalties in Part VI cases

The Act provides further that if in such a case the FSA considers that another person, who was at the material time a director of a person referred to in section 91(1)(a), (1)(b)(i) or (1A) of the Act, was knowingly concerned in the contravention, it may impose on him a penalty of such amount as it considers appropriate (section 91(2)).

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. The FSA does not use a tariff of penalties for different kinds of breach. This is because there are very few cases in which the circumstances are essentially the same and the FSA considers that, in general, the use of a tariff for particular kinds of breach would inhibit the flexible and proportionate approach it takes in this area.

The FSA will consider any of the following factors that may be relevant to the circumstances of a case when it determines the amount of a penalty to be imposed on a person. The following list is not exhaustive; not all of these factors may be relevant in a particular case, and there may be other factors that are relevant:

1. (1)

   (The seriousness of the misconduct) The FSA recognises the need for a financial penalty to be proportionate to the nature and seriousness of the breach in question and that, by their nature, some breaches may be more serious than others. The following 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;

   3. (c)

      the impact of the breach on the orderliness of capital markets, including whether public confidence in those markets has been damaged;

   4. (d)

      the loss or risk of loss caused to investors or other market participants; and

   5. (e)

      the extent to which the breach departs from current market practice.

2. (2)

   (The extent to which the breach was deliberate or reckless) In determining whether a breach was deliberate, the FSA may have regard to whether the behaviour of the person was intentional; that is, whether the person intended or foresaw the consequences of their behaviour. The matters to which the FSA may have regard in determining whether a breach was reckless include, but are not limited to, whether the person:

   1. (a)

      failed to comply with the issuer's or applicant's procedures and/or FSA guidance;

   2. (b)

      took decisions beyond their field of competence; and

   3. (c)

      gave consideration to the consequences of the behaviour that constitutes the breach.

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

3. (3)

   (Whether the person on whom the penalty is to be imposed is an individual) Individuals will not always have the resources of a body corporate and this will be taken into account when determining the amount of a penalty. This will be of particular relevance when assessing any verifiable evidence of serious financial hardship or financial difficulties if the individual were to pay the level of penalty decided on in respect of the particular breach.

4. (4)

   (The circumstances of the person on whom the penalty is to be imposed) The FSA will have regard to the size, financial resources and other circumstances of the person, and may take into account verifiable evidence of serious financial hardship or financial difficulties if the person were to pay the level of penalty associated with the particular breach. Size and resources may be relevant considerations for the following reasons:

   1. (a)

      the degree of seriousness of a breach may be linked to the size of the issuer or of the applicant. For example, a systemic failure in a large issuer or large applicant could damage or threaten to damage a much larger number of investors than would be the case with a small issuer or small applicant. In considering seriousness, the FSA will have regard to the length of time over which the breach occurred;

   2. (b)

      the size and resources of the 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 the 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; and

   3. (c)

      the purpose of a penalty is not to render a person insolvent or threaten their 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 persons with less financial resource. However, if a person reduces their net worth with the purpose of reducing its ability to pay a financial penalty, for example by transferring assets to group companies or third parties, the FSA will take account of those transferred assets when determining the amount of a penalty.

5. (5)

   (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 breach. For example:

   1. (a)

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

   2. (b)

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

6. (6)

   (Conduct before the breach) The FSA may have regard to any professional advice that was sought by the person before the breach occurred and whether the person followed that professional advice.

7. (7)

   (Conduct following the breach) The FSA may also take into account the conduct of the person in bringing the breach to the FSA's attention, including:

   1. (a)

      whether the person brought the breach to the attention of the FSA;

   2. (b)

      how quickly, effectively and completely the person brought the breach to the FSA's attention;

   3. (c)

      the degree of co-operation the person showed during the investigation of the breach; and

   4. (d)

      any remedial steps the person has taken since the breach was identified, including: identifying whether investors suffered loss, compensating them, taking disciplinary action against staff involved (if appropriate) and ensuring that similar problems cannot arise in the future.

8. (8)

   (Disciplinary record and compliance history) The FSA may take into account the previous disciplinary record and general compliance history of the person, including whether the FSA has taken any previous formal disciplinary action against the person. For example, the disciplinary record of the person could lead to the FSA increasing the penalty where that person has committed similar breaches in the past.

9. (9)

   (Previous action taken by the FSA) 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 breach, this will clearly be a relevant factor.

10. (10)

    (Action by other regulatory authorities) Where action by other regulatory authorities relates to the person in question, this may be taken into consideration.

11. (11)

    (The timing of any agreement as to the amount of the penalty for the particular breach) 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 in disciplinary actions, 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. The same regime is to apply to agreements as to the amount of the penalty in Part VI cases.1