FCA consults on proposals to strengthen deterrence and penalties

The Financial Conduct Authority (FCA) has revealed proposals to revamp its decision-making and penalty processes (33-page / 541KB PDF), which would update some of the financial thresholds in the policy for the first time since 2010. It aims to increase deterrence, including for wealthier individuals, and extend its penalty framework to the crypto markets.

Among the changes planned are clarifying that increased penalties can apply where the penalty level may not otherwise be a deterrent factor given the individual’s income or net assets, and a higher fine for market abuse breaches – proposing to raise the minimum fine for individuals from £100,000 to £150,000 for the most serious market abuse misconduct, to account for inflation in the last decade and a half. The figure would also be adjusted every two years to keep pace with inflation.

The regulator’s proposals clarify that benefits individuals earned during the misconduct period but received after it will be included as income whereas benefits received during periods of rule breaches but earned prior to that will not. Similarly, bonuses the regulator knows by the time it calculates the penalty will not be paid will not be included as income.

Anthony Harrison, a financial services regulation expert with Pinsent Masons, said the proposals – which include baking in an inflation-linked adjustment to the new market abuse minimum penalty – show the regulator’s focus on alignment with the wider market.

"The FCA is looking to increase the deterrent effect of its market abuse penalties, by revisiting a threshold last set in 2010 and increasing it, proposing to do so on the basis of the CPIH measure of inflation,” he said.

“If the proposals go ahead, the FCA would then for the most egregious market abuse cases set the minimum initial disciplinary penalty for individuals at £150,000, a not insubstantial uplift from the current minimum of £100,000.

“The focus of the regulator is very much on deterrence, with these penalties calibrated to be more in line with today’s market and with built in inflation linking. Inflation-driven changes would be automatically applied and would not require further consultation, a nod at regulatory efficiency, if the process goes ahead as consulted on.”

Also included are plans to expand the scope of the FCA’s market abuse penalty framework to clarify it includes crypto market abuse, in line with the FCA’s new powers under recent crypto assets legislation.

To reflect increases in living costs, the FCA is also proposing to raise the serious financial hardship thresholds for net income and capital for individuals paying penalties.

Jonathan Cavill, a financial services regulation expert with Pinsent Masons, said the proposals would bring welcome clarification of how penalties would impact individuals.

“In parallel to changes proposed to the minimum penalty for serious market abuse misconduct, the regulator is proposing the same approach for the levels for thresholds for income and capital for cases of severe financial hardship. So those too would rise by 50% from the 2010 level, and the FCA is proposing to adjust them automatically in line with inflation as well, showing an even-handed regulatory approach,” he said.

“There is also welcome clarification of how penalties apply in cases of income which is deferred, and clarification that crypto asset market abuse also falls within scope of the FCA’s market abuse penalty framework.”

The FCA said the proposed changes would enable it to act faster, deter misconduct and increase confidence in the UK financial markets. The consultation over the proposals will close on 10 August.