Financial Services Authority
Examples of how the proposed framework will apply to firms and individuals
1. Firm
Case facts Firm X is an investment firm selling one product over the telephone and via the internet. In relation to the period from 1 July 2010 to 30 June 2011, we have identified significant failings in the systems and controls operating in relation to Firm X’s telephone sales of this product. In addition to the firm’s failure to ensure that customers were provided with all required information before a sale, customers who were sold the product over the telephone were subjected to unreasonable pressure to purchase the product. We have not identified any concerns regarding the firm’s sales of this product over the internet. During this period, Firm X derived pre-tax commission income of £50,000,000 from the sale of this product by telephone. Step 1 – Disgorgement In this case, Firm X agreed to undertake a remediation programme to identify and compensate any consumers who had suffered a loss as a result of the firm’s breaches. This will remove all benefits to the firm so we will not seek disgorgement in addition to the penalty. Step 2 – Figure reflecting the nature, impact and seriousness of the Breach We considered the following factors: • • • • • we identified instances in which consumers were sold a product that was not suitable for them; we identified instances in which consumers were subjected to unreasonable pressure to purchase the product; the firm’s breaches resulted in a substantial number of customers being exposed to a potential risk of significant financial loss; the breaches revealed widespread and systemic weaknesses in the firm’s internal controls in relation to telephone sales; and the firm did not appear to have behaved deliberately or recklessly.
Seriousness of breach Firms Level 1 Level 2 Level 3 Level 4 Level 5
Percentage of relevant income 0% 5% 10% 15% 20%
Viewing all of the factors in the round and using the table above, we consider that the breach in this case should be classified as level 5. The figure arrived at in Step 2 is therefore 20% of Firm X’s relevant income. Relevant income in this case is the firm’s commission income i.e. £50,000,000, so the Step 2 figure is £10,000,000. Step 3 – Aggravating and mitigating factors The following aggravating factor was taken into account: • the firm failed to identify and subsequently act upon circumstances that should have alerted them to the breaches.
The following mitigating factors were taken into account: • • on commencement of our investigation, the firm engaged an external compliance consultant to review its sales procedures, and promptly adopted the recommendations arising from that review; and the firm was proactive in developing a remediation programme.
In view of these factors, we consider that the penalty arrived at in Step 2 should be reduced by 4%. The adjusted penalty is therefore 16%, or £8,000,000. Step 4 – Deterrence In the circumstances of this case, we conclude that the penalty reached in Steps 2 and 3 is sufficient, both to deter Firm X from further breaches and to deter other firms in a similar position from such breaches. Step 5 – Settlement discount Firm X settles during Stage 1 of our investigation. As a result, the firm receives a 30% discount on the financial penalty, reducing the amount payable to £5,600,000.
Examples of how the proposed framework will apply to firms and individuals
2. Individual (non-market abuse)
Case facts
Between 1 July 2010 and 30 June 2011, Mr A held a Significant Influence Function at Firm X, a large financial institution selling a range of financial products to consumers. His responsibilities included oversight of the firm’s systems and controls for the sale of these products. We have identified significant failings in Mr A’s performance of his responsibilities in relation to one investment product. Mr A earned a gross salary of £100,000 in the relevant period, with a bonus of £25,000 and benefits of £10,000. His relevant income for the purposes of calculating the penalty is therefore £135,000.
Step 1 – Disgorgement
Mr A has not benefited directly from his failure to perform his duties to the requisite standard. We will not therefore impose a disgorgement element in addition to the financial penalty in this case.
Step 2 – Figure reflecting the nature, impact and seriousness of the breach
In considering the nature, impact and seriousness of the breach, we considered the following factors: • • • the nature of the product in question was such that a substantial number of consumers were placed at risk of suffering a significant financial loss; Mr A’s breaches were numerous and widespread; and Mr A displayed a serious lack of competence, but did not, in our view, act recklessly or dishonestly. Seriousness of breach Individuals abuse) (non-market Level 1 Level 2 Level 3 Level 4 Level 5 Percentage of relevant income 0% 10% 20% 30% 40%
Viewing all of the factors in the round and using the table above, we consider that the breach in this case should be classified as level 4. The Step 2 figure for the penalty would therefore be 30% of Mr A’s gross employment benefits for the relevant period, which equals £40,500.
Step 3 – Aggravating and mitigating factors
The following mitigating factor was taken into account: • Mr A engaged proactively with our investigation, providing additional relevant information and documents beyond what was requested, and readily accepting his failings at an early stage of the investigation.
In view of this factor and using the table above, we consider that the percentage determined as appropriate in Step 2 should be reduced by 3%. The adjusted penalty is therefore 27%, or £36,450.
Step 4 – Deterrence
In the circumstances of this case, we conclude that the penalty reached in Steps 2 and 3 is sufficient, both to deter Mr A from further breaches and to deter other individuals in a similar position from such breaches. No adjustment is therefore required.
Step 5 – Settlement discount
Mr A settles during Stage 1 of our investigation. As a result, he receives a 30% discount on the financial penalty of £36,450, reducing the amount payable to £25,515.
Examples of how the proposed framework will apply to firms and individuals
3. Individual (market abuse)
Mr A is a director of a listed company, B Ltd. He has used his position as a director to commit market abuse by trading in B Ltd’s shares on the basis of inside information. In the 12 months leading up to the market abuse, Mr A earned a gross salary of £120,000 and a bonus of £40,000 from B Ltd. Mr A also acts as a non executive director of an unrelated company, C Ltd. Step 1 – Disgorgement As a result of his market abuse, Mr A made a profit from the sale of shares of £30,000. Step 2 – Figure reflecting the nature, impact and seriousness of the Breach Market abuse referable to an individual’s job The greater of: • 40% of the pre tax amount of all benefits received from the individual’s job in the 12 months before the market abuse; • Twice the profit gained or loss avoided by the individual: and • Starting minimum of £100,000 The greater of: • Twice the profit gained or loss avoided by the individual: and • Starting minimum of £100,000
Market abuse not referable to the individual’s job
Using the table above, the Step 2 figure is the greater of: i. 40% of the individual’s total gross employment benefits in the 12 months preceding the market abuse (which in this case is 40% of Mr A’s benefits from B Ltd, being £64,000; Mr A’s benefits from C Ltd are not relevant as the market abuse was not referable to Mr A’s employment with C Ltd); ii. twice the benefit gained as a result of the market abuse (£60,000); and iii. £100,000. The Step 2 figure in this case would therefore be the minimum level of £100,000. Step 3 – Aggravating and mitigating factors In this case the following aggravating factors were taken into account: • • • • Mr A purchased shares in breach of his firm’s rules, thereby indicating that his conduct was deliberate; Mr A attempted to conceal his market abuse by requiring his wife to purchase the shares on his behalf; and • Mr A was a director of the firm in whose shares he traded. As a consequence, Mr A’s behaviour may be expected to act as an example to other employees of the firm.
The following mitigating factor was taken into account: • although Mr A did not bring his market abuse to our attention voluntarily, once questioned, he made a full and frank admission of his misconduct and fully cooperated with our investigation.
In view of these factors, we consider that the penalty arrived at in Step 2 should be increased by 10%. The adjusted penalty is therefore £110,000. Step 4 – Deterrence In the circumstances of this case, we conclude that the penalty reached in Steps 2 and 3 is sufficient, both to deter Mr A from committing further acts of market abuse and to deter other individuals in a similar position from committing market abuse. No adjustment is therefore required. Step 5 – Settlement Discount Mr A settles during Stage 1 of our investigation. As a result, he receives a 30% discount on the financial penalty of £110,000 determined in Steps 2-4, reducing the amount payable to £77,000. The disgorgement of £30,000 and a penalty of £77,000.