Being made an example of: FSA penalties and the need for consistency
Analyses the recent trends in FSA penalties.
2010 is on course for becoming a record year for record fines. In May, the FSA fined former stockbroker Simon Eagle £2.8 million for market abuse. In June, JP Morgan received a record £33 million fine for failing to properly segregate large sums of client money. In August, Zurich was fined £2.3 million for data security failings, again the largest fine of its kind. In September, Goldman Sachs was fined £17.5m for failing to comply with its regulatory reporting obligations.
Record fines are a useful tool in a regulator’s arsenal to send a clear message to those that they regulate. Indeed, following the Zurich case, the FSA advised firms "across the financial sector… to look at the details of this case and learn from the mistakes that Zurich UK made."
For those that have been made an example of, there may well be past cases in which very similar conduct has attracted a much lower fine. Indeed, it is when a particular violation of the regulatory framework persists (say data handling), that a regulator is most likely to take the view that past sanctions have been insufficiently severe. In the financial services context, where the FSA’s statutory objectives include the reduction of financial crime as well as consumer protection, there will inevitably be pressure to increase fines as far as is necessary to make them an effective deterrent.
That a regulatory failing at the end of a year can attract a far larger fine than an identical regulatory failing at the start of it fits awkwardly with the sentencing framework found in much of the criminal law, where consistency between cases is an essential feature. Especially for fines in the tens of millions, the penalty may well feel very much like a criminal sanction. What can an aggrieved company do in such circumstances?
The answer is probably very little, the rationale being found in the unique objectives of regulatory oversight. Even where the criminal law overlaps with regulatory oversight, namely in health and safety law, regulatory objectives have tended to triumph over more familiar sentencing principles. For example, the objective of health and safety prosecutions being to achieve a safe environment for workers, a "fine needs to be large enough to bring that message home where the Defendant is a company not only to those who manage it but also to its shareholders" (R v F Howe and Sons (Engineers) Ltd (1999) 2 Crim App Rep (S) 37 at 44).
As the Court then recognised in Jarvis  EWCA Crim 1409 (para 7):
"It will be seen at once that this gives rise to real difficulty both in achieving consistency of sentence and in ensuring that some proportion is maintained between the quantum of the fine and the gravity of the specific case given that offending companies may have vast disparities of economic strength. A fine that may hardly touch a multi-national might put a small company out of business yet their offence may have been the same. Consistency of level of fine may not therefore be a primary aim of sentencing in these cases."
It is likely that companies will have no more luck in the civil law context before the Upper Tribunal, to whom there is an appeal against FSA decisions. One reason that it is difficult to know, however, is that companies who accept liability at an early stage receive a 30% deduction in their fine. With the issue of liability settled, and having regard to the above principles, appealing the level of fine to the Tribunal will rarely prove cost effective or worth the risk of jeopardising the discount achieved. Indeed, so successful has the early settlement mechanism proven that virtually no case law has been generated at all. This may change now the FSA has stated expressly
its approach to calculating financial penalties by amending the Decision Procedure and Penalties Manual (changes that took effect on 6 March 2010, see the FSA’s Policy Statement 10/4). It must, however, be an open question as to whether the Tribunal will endorse and then follow the somewhat mechanistic new procedure sufficiently slavishly and in enough cases to generate meaningful guidance on the application of the potentially highly subjective stages
of the new process.
For those that do wish to challenge inconsistency in fines, a glimmer of hope can be found in the test approved by Lawton LJ in R v Fawcett (1983) 5 Crim App Rep (S) 158 at 161, namely would "right-thinking members of the public, with knowledge of the relevant facts and circumstances, learning of this sentence consider that something had gone wrong with the administration of justice?" Such a test may provide more assistance to an individual facing an unusually large fine than to a multi-national corporation with substantial turnover.