Senior managers in the firing line

"Credible deterrence" is the Financial Services Authority's current enforcement mantra and firms landing on the wrong side of the regulator are likely to experience effects in two ways: increased emphasis on the personal culpability of senior management and, in future, fines that may be up to three times higher than current levels.

In December 2008, the FSA promised that it would hold more senior managers personally accountable for the poor conduct of their firms. According to its 2008-9 annual report, the regulator tripled the number of senior managers under investigation over the last year, fining four of them a total of over £200,000.

Early in July, Richard Holmes, a director at insurance broker AIF, was fined £20,000 for failing to meet regulatory obligations relating to the appointment and monitoring of an appointed representative.

The FSA held that Holmes had carried out inadequate checks before making the decision to appoint the AR and failed to monitor its activities properly following the appointment. Even when he became aware that the AR was not passing premiums to insurers, he failed to address the problem promptly, leaving more than 270 clients at risk of being uninsured.

Holmes' actions were not deliberate and he fully cooperated with the investigation, earning a 30% reduction in the penalty handed down, yet the decision demonstrates the FSA's increased determination to hold senior managers personally responsible for the standards and conduct of the businesses they run.

If the watchdog goes ahead with proposals for a new five-step penalty framework, managers found responsible for regulatory breaches could soon face fines of up to 40% of their total salary and benefits.

Five-step plan

The first step under the new system would be to deprive the firm or person of any quantifiable benefit derived from the breach, such as profits made or losses avoided. The second imposes fixed fine levels according to the nature, impact and severity of the breach.

For firms, these will be no further fine or 5%, 10%, 15% or 20% of the firm's relevant pre-tax income earned from the product or business area to which the breach relates. For individuals, fine levels will be higher, rising in increments of 10% up to 40% of gross benefits earned from relevant employment. The total will include salary, bonus, pension contributions, share options and other benefits for the previous year or the period of the breach, whichever is longer.

At the third stage, the FSA can adjust the figure to take into account mitigating or aggravating circumstances. Step four allows it to increase the penalty if the amount is not a credible deterrent. Lastly, under step five, it can apply a discount of up to 30% for early settlement as under the current system. No reduction will be applied to the step one figure.

The FSA hopes to publish its feedback and final rules early next year, though whether it will be around to administer its tough new penalties is likely to depend on which party wins the next general election.

The Conservative Party's policy is to abolish the FSA and hand over enforcement to what it terms the Consumer Protection Agency. The party says that it will wait on the outcome of the current consultation but that it would want the CPA to impose fines "significantly larger than those that have historically been levied by the FSA".