Complete list of FCA since 2013 mapped into areas and concern
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How does the FCA determine financial penalties?
A five-step framework for determining financial penalties
- Disgorgement of benefits,
- Seriousness assessment,
- Aggravating/mitigating factors,
- Deterrence adjustments, and
- Settlement discounts. This approach ensures penalties are proportionate, effective, and dissuasive.
The Five-Step Penalty Framework
Step 1: Disgorgement of Benefits (Gain-based Adjustment)
The initial step is to deprive the entity of any economic benefits derived directly from the breach or contravention. This ensures the penalty removes profit made through non-compliance.
Step 2: Assessment of Seriousness (Seriousness of Breach) A figure is determined based on the nature, impact, and seriousness of the breach. For firms, this often involves a percentage of annual turnover or revenue, reflecting the potential impact on the market.
Step 3: Aggravating and Mitigating Factors The penalty is adjusted based on surrounding circumstances. Aggravating factors: Include prior failures, deliberate actions, or attempts to conceal the breach. Mitigating factors: Include cooperation with authorities, self-reporting, or remedial action taken.
Step 4: Adjustment for Deterrence The penalty may be increased to ensure it effectively deters the subject and others from committing similar breaches in the future.
Step 5: Settlement Discount A reduction is applied if the entity settles early, which reflects the reduced cost of enforcement for the regulator.
Key Considerations
Proportionality: The final amount should be proportionate to the breach and the entity's financial circumstances.
Firm Type: For individuals, this may involve profit multiples (e.g., levels 1-5) based on the severity.
Industry Standards: Previous failures, the nature of the business (e.g., leveraged trading), and relevant guidance are considered