The FSA proposes stringent enforcement framework, some fines expected to treble

The FSA, which these days seems like the sanest regulator out there, proposed a much more stringent regulatory framework in order to create a consistent and more transparent structure for calculating financial penalties which could mean some fines treble in size.

The FSA is the UK’s SEC, CFTC and NFA combined therefore its requirements are more down to earth and its actions are much better coordinated.

The new framework will probably reduce the high pressure sale techniques employed by many forex firms. Ever since you enter your details on a landing page or in the process of demo registration you are constantly bombarded with calls and emails asking you to deposit funds and start trading (losing) in live environment. It will also link the fine more directly to the perpetrator’s regular income and unfairly gained profits.

Being the sane alternative to the NFA other regulators the FSA is also keen to hear any comments actually BEFORE deciding what the final framework is. The consultation will close on 21 October 2009 and any new policy is likely to apply to breaches committed after February 2010.

Summary of the proposed framework:

The new plans reflect the FSA’s determination to change behaviour and address concerns that firms are repeatedly failing to improve standards (e.g. in relation to mis-selling to consumers and market misconduct). They will also ensure that fines better reflect the scale of the wrongdoing and that any profits made from the breaches are clawed back.

Under the new proposals, fines will be linked more closely to income and be based on:

Up to 20% of the company’s income from the product or business area linked to the breach over the relevant period;

Up to 40% of an individual’s salary and benefits (including bonuses) from their job relating to the breach in non-market abuse cases;

A minimum starting point of £100,000 for individuals in market abuse cases.

The total fine imposed will also take into account other factors, such as the desired deterrent effect and any settlement discount.

Margaret Cole, director of enforcement at the FSA, said:

“These proposals are an important step in pushing forward our ethos of credible deterrence. By hitting companies and individuals in the pocket where it hurts, the fines will be a stark warning to others on what they can expect to pay for flouting our rules. Moving to this new framework will enable our enforcement policy to continue making a real difference to consumers and to changing behaviour in the financial services sector.”

The full framework will consist of the following steps:

Removing any profits made;

Setting a figure to reflect the nature, impact and seriousness of the breach;

Considering any aggravating and mitigating factors;

Achieving the appropriate deterrent effect;

Applying any settlement discount.

This approach is the latest stage of the FSA’s credible deterrence strategy and will apply to all enforcement actions including against firms, individuals and listed companies.

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Examples of how the new framework will work for firms and individuals in market abuse and non-market abuse cases:

fsa penalties framework –