Penalties

Part

DEPP Decision Procedure and Penalties Manual

Chapter

Penalties

Printed on: 28/11/2024

Rulebook at: 01/11/2009

DEPP 6

Penalties

DEPP 6.1

Introduction

28/08/2007

DEPP 6.1.1

DEPP 6 includes the FSA's statement of policy with respect to the imposition and amount of penalties under the Act, as required by sections 69(1), 93(1), 124(1), and 210(1) of the Act.

28/08/2007

DEPP 6.1.2

The principal purpose of imposing a financial penalty or issuing a public censure is to promote high standards of regulatory and/or market conduct by deterring persons who have committed breaches from committing further breaches, helping to deter other persons from committing similar breaches, and demonstrating generally the benefits of compliant behaviour. Financial penalties and public censures are therefore tools that the FSA may employ to help it to achieve its regulatory objectives .

28/08/2007

DEPP 6.2

Deciding whether to take action

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DEPP 6.2.1

The FSA will consider the full circumstances of each case when determining whether or not to take action for a financial penalty or public censure. Set out below is a list of factors that may be relevant for this purpose. The list is not exhaustive: not all of these factors may be applicable in a particular case, and there may be other factors, not listed, that are relevant.

(1) The nature, seriousness and impact of the suspected breach, including:

(a) whether the breach was deliberate or reckless;

(b) the duration and frequency of the breach;

(d) whether the breach reveals serious or systemic weaknesses of the management systems or internal controls relating to all or part of a person's business;

(e) the impact or potential impact of the breach on the orderliness of markets including whether confidence in those markets has been damaged or put at risk;

(f) the loss or risk of loss caused to consumers or other market users;

(g) the nature and extent of any financial crime facilitated, occasioned or otherwise attributable to the breach; and

(h) whether there are a number of smaller issues, which individually may not justify disciplinary action, but which do so when taken collectively.

(2) The conduct of the person after the breach, including the following:

(a) how quickly, effectively and completely the person brought the breach to the attention of the FSA or another relevant regulatory authority;

(b) the degree of co-operation the person showed during the investigation of the breach;

(d) the likelihood that the same type of breach (whether on the part of the person under investigation or others) will recur if no action is taken;

(e) whether the person concerned has complied with any requirements or rulings of another regulatory authority relating to his behaviour (for example, where relevant, those of the Takeover Panel or an RIE); and

(f) the nature and extent of any false or inaccurate information given by the person and whether the information appears to have been given in an attempt to knowingly mislead the FSA .

(3) The previous disciplinary record and compliance history of the person including:

(a) whether the FSA (or any previous regulator) has taken any previous disciplinary action resulting in adverse findings against the person;

(b) whether the person has previously undertaken not to do a particular act or engage in particular behaviour;

(c) whether the FSA (or any previous regulator) has previously taken protective action in respect of a firm, using its own initiative powers, by means of a variation of a Part IV permission or otherwise, or has previously requested the firm to take remedial action, and the extent to which such action has been taken; and

(d) the general compliance history of the person, including whether the FSA (or any previous regulator) has previously issued the person with a private warning.

(4) FSA guidance and other published materials:

The FSA will not take action against a person for behaviour that it considers to be in line with guidance, other materials published by the FSA in support of the Handbook or FSA -confirmed Industry Guidance which were current at the time of the behaviour in question. (The manner in which guidance and other published materials may otherwise be relevant to an enforcement case is described in EG 2.)

(5) Action taken by the FSA in previous similar cases.

(6) Action taken by other domestic or international regulatory authorities:

Where other regulatory authorities propose to take action in respect of the breach which is under consideration by the FSA , or one similar to it, the FSA will consider whether the other authority's action would be adequate to address the FSA's concerns, or whether it would be appropriate for the FSA to take its own action.

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DEPP 6.2.2

When deciding whether to take action for market abuse or requiring or encouraging, the FSA may consider the following additional factors:

(1) The degree of sophistication of the users of the market in question, the size and liquidity of the market, and the susceptibility of the market to market abuse.

(2) The impact, having regard to the nature of the behaviour, that any financial penalty or public censure may have on the financial markets or on the interests of consumers:

(a) a penalty may show that high standards of market conduct are being enforced in the financial markets, and may bolster market confidence;

(b) a penalty may protect the interests of consumers by deterring future market abuse and improving standards of conduct in a market;

(c) in the context of a takeover bid, the FSA may consider that the impact of the use of its powers is likely to have an adverse effect on the timing or outcome of that bid, and therefore it would not be in the interests of financial markets or consumers to take action for market abuse during the takeover bid. If the FSA considers that the proposed use of its powers may have that effect, it will consult the Takeover Panel and give due weight to its views.

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DEPP 6.2.2A

The factors to which the FSA will have regard when deciding whether to impose a penalty under regulation 34 of the RCB Regulations are set out in RCB 4.2.3 G.

11/12/2008

Discipline for breaches of FSA rules on systems and controls against money laundering

DEPP 6.2.3

The FSA's rules on systems and controls against money laundering are set out in SYSC 3.2 and SYSC 6.3. The FSA , when considering whether to take action for a financial penalty or censure in respect of a breach of those rules, will have regard to whether a firm has followed relevant provisions in the Guidance for the UK financial sector issued by the Joint Money Laundering Steering Group.

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Action against approved persons under section 66 of the Act

DEPP 6.2.4

The primary responsibility for ensuring compliance with a firm's regulatory obligations rests with the firm itself. However, the FSA may take disciplinary action against an approved person where there is evidence of personal culpability on the part of that approved person. Personal culpability arises where the behaviour was deliberate or where the approved person's standard of behaviour was below that which would be reasonable in all the circumstances at the time of the conduct concerned.

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DEPP 6.2.5

In some cases it may not be appropriate to take disciplinary measures against a firm for the actions of an approved person (an example might be where the firm can show that it took all reasonable steps to prevent the breach). In other cases, it may be appropriate for the FSA to take action against both the firm and the approved person. For example, a firm may have breached the rule requiring it to take reasonable care to establish and maintain such systems and controls as are appropriate to its business (SYSC 3.1.1 R or SYSC 4.1.10 R), and an approved person may have taken advantage of those deficiencies to front run orders or misappropriate assets.

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DEPP 6.2.6

In addition to the general factors outlined in DEPP 6.2.1 G, there are some additional considerations that may be relevant when deciding whether to take action against an approved person pursuant to section 66 of the Act. This list of those considerations is non-exhaustive. Not all considerations below may be relevant in every case, and there may be other considerations, not listed, that are relevant.

(1) The approved person's position and responsibilities. The FSA may take into account the responsibility of those exercising significant influence functions in the firm for the conduct of the firm. The more senior the approved person responsible for the misconduct, the more seriously the FSA is likely to view the misconduct, and therefore the more likely it is to take action against the approved person.

(2) Whether disciplinary action against the firm rather than the approved person would be a more appropriate regulatory response.

(3) Whether disciplinary action would be a proportionate response to the nature and seriousness of the breach by the approved person.

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DEPP 6.2.7

The FSA will not discipline approved persons on the basis of vicarious liability (that is, holding them responsible for the acts of others), provided appropriate delegation and supervision has taken place (see APER 4.6.13 G and APER 4.6.14 G). In particular, disciplinary action will not be taken against an approved person performing a significant influence function simply because a regulatory failure has occurred in an area of business for which he is responsible. The FSA will consider that an approved person performing a significant influence function may have breached Statements of Principle 5 to 7 only if his conduct was below the standard which would be reasonable in all the circumstances at the time of the conduct concerned (see also APER 3.1.8 G).

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DEPP 6.2.8

An approved person will not be in breach if he has exercised due and reasonable care when assessing information, has reached a reasonable conclusion and has acted on it.

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DEPP 6.2.9

Where disciplinary action is taken against an approved person the onus will be on the FSA to show that the approved person has been guilty of misconduct.

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Action against directors, former directors and persons discharging managerial responsibilities for breaches under Part VI of the Act

DEPP 6.2.10

The primary responsibility for ensuring compliance with Part VI of the Act, the Part 6 rules, the prospectus rules or a provision otherwise made in accordance with the Prospectus Directive or a requirement imposed under such provision rests with the persons identified in section 91(1) and section 91(1A) (Penalties for breach of Part 6 rules) of the Act respectively. Normally therefore, any disciplinary action taken by the FSA for contraventions of these obligations will in the first instance be against those persons.

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DEPP 6.2.11

However, in the case of a contravention by a person referred to in section 91(1)(a) or section 91(1)(b)(i) or section 91(1A) of the Act ("P"), where the FSA considers that another person who was at the material time a director of P was knowingly concerned in the contravention, the FSA may take disciplinary action against that person. In circumstances where the FSA does not consider it appropriate to seek a disciplinary sanction against P (notwithstanding a breach of relevant requirements by such person), the FSA may nonetheless seek a disciplinary sanction against any other person who was at the material time a director of P and was knowingly concerned in the contravention.

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DEPP 6.2.12

Persons discharging managerial responsibilities within an issuer and their connected persons, who have requested or approved the admission of a financial instrument to trading on a regulated market, and connected persons have their own responsibilities under the disclosure rules, as set out in DTR 3, for which they are primarily responsible. Accordingly, disciplinary action for a breach of the disclosure rules will not necessarily involve the issuer.

[Note: In paragraph 6.2.12, 'connected person' has the meaning in relation to a person discharging managerial responsibilities within an issuer attributed to it in subsection (5) of the definition of 'connected person' in the Handbook Glossary.]

28/08/2007

DEPP 6.2.13

In deciding whether to take action, the FSA will consider the full circumstances of each case. Factors that may be relevant for this purpose include, but are not limited to, the factors at DEPP 6.2.1 G.

28/08/2007

Discipline for breaches of the Principles for Businesses

DEPP 6.2.14

The Principles are set out in PRIN 2.1.1 R. The Principles are a general statement of the fundamental obligations of firms under the regulatory system. The Principles derive their authority from the FSA's rule-making powers set out in section 138(General rule-making power) of the Act. A breach of a Principle will make a firm liable to disciplinary action. Where the FSA considers this is appropriate, it will discipline a firm on the basis of the Principles alone.

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DEPP 6.2.15

In determining whether a Principle has been breached, it is necessary to look to the standard of conduct required by the Principle in question at the time. Under each of the Principles, the onus will be on the FSA to show that a firm has been at fault in some way.

28/08/2007

Discipline for breaches of the Listing Principles

DEPP 6.2.16

The Listing Principles are set out in LR 7. The Listing Principles are a general statement of the fundamental obligations of listed companies. The Listing Principles derive their authority from the FSA's rule making powers set out in section 73A(1) (Part 6 Rules) of the Act. A breach of a Listing Principle will make a listed company liable to disciplinary action by the FSA .

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DEPP 6.2.17

In determining whether a Listing Principle has been broken, it is necessary to look to the standard of conduct required by the Listing Principle in question. Under each of the Listing Principles, the onus will be on the FSA to show that a listed company has been at fault in some way. This requirement will differ depending upon the Listing Principle.

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DEPP 6.2.18

In certain cases, it may be appropriate to discipline a listed company on the basis of the Listing Principles alone. Examples include the following:

(1) where there is no detailed listing rule which prohibits the behaviour in question, but the behaviour clearly contravenes a Listing Principle;

(2) where a listed company has committed a number of breaches of detailed rules which individually may not merit disciplinary action, but the cumulative effect of which indicates the breach of a Listing Principle.

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Action involving other regulatory authorities or enforcement agencies

DEPP 6.2.19

Some types of breach may potentially result not only in action by the FSA , but also action by other domestic or overseas regulatory authorities or enforcement agencies.

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DEPP 6.2.20

When deciding how to proceed in such cases, the FSA will examine the circumstances of the case, and consider, in the light of the relevant investigation, disciplinary and enforcement powers, whether it is appropriate for the FSA or another authority to take action to address the breach. The FSA will have regard to all the circumstances of the case including whether the other authority has adequate powers to address the breach in question.

28/08/2007

DEPP 6.2.21

In some cases, it may be appropriate for both the FSA and another authority to be involved, and for both to take action in a particular case arising from the same facts. For example, a breach of RIE rules may be so serious as to justify the FSA varying or cancelling the firm's Part IV permission, or withdrawing approval from approved persons, as well as action taken by the RIE. In such cases, the FSA will work with the relevant authority to ensure that cases are dealt with efficiently and fairly, under operating arrangements in place (if any) between the FSA and the relevant authority.

28/08/2007

DEPP 6.2.22

In relation to behaviour which may have happened or be happening in the context of a takeover bid, the FSA will refer to the Takeover Panel and give due weight to its views. Where the Takeover Code has procedures for complaint about any behaviour, the FSA expects parties to exhaust those procedures. The FSA will not, save in exceptional circumstances, take action under any of section 123 (FSA'spower to impose penalties), section 129 (Power of court to impose penalties), section 381 (Injunctions), sections 383 or 384 (Restitution) in respect of behaviour to which the Takeover Code is relevant before the conclusion of the procedures available under the Takeover Code.

28/09/2007

DEPP 6.2.23

The FSA will not take action against a person over behaviour which (a) conforms with the Takeover Code or rules of an RIE and (b) falls within the terms of any provision of the Code of Market Conduct which states that behaviour so conforming does not amount to market abuse. The FSA will seek the Takeover Panel's or relevant RIE's views on whether behaviour complies with the Takeover Code or RIE rules and will attach considerable weight to its views.

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DEPP 6.2.24

If any of the circumstances in DEPP 6.2.26 G apply, and the FSA considers that the use of its disciplinary powers under section 123 or section 129, or of its injunctive powers under section 381 or of its powers relating to restitution under section 383 or 384 is appropriate, it will not take action during an offer to which the Takeover Code applies except in the circumstances set out in DEPP 6.2.27 G.

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DEPP 6.2.25

In any case where the FSA considers that the use of its powers under any of sections 123, 129, 381, 383 or 384 of the Act may be appropriate, if that use may affect the timetable or outcome of a takeover bid or where it is appropriate in the context of any exercise by the Takeover Panel of its powers and authority, the FSA will consult the Takeover Panel before using any of those powers.

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DEPP 6.2.26

Where the behaviour of a person which amounts to market abuse is behaviour to which the Takeover Code is relevant, the use of the Takeover Panel's powers will often be sufficient to address the relevant concerns. In cases where this is not so, the FSA will need to consider whether it is appropriate to use any of its own powers under the market abuse regime. The principal circumstances in which the FSA is likely to consider such exercise are:

(1) where the behaviour falls within sections 118(2), 118(3) or 118(4) of the Act;

(2) where the FSA's approach in previous similar cases (which may have happened otherwise than in the context of a takeover bid) suggests that a financial penalty should be imposed;

(3) where the behaviour extends to securities or a class of securities which may be outside the Takeover Panel's jurisdiction;

(4) where the behaviour threatens or has threatened the stability of the financial system; and

(5) where for any other reason the Takeover Panel asks the FSA to consider the use of any of its powers referred to in DEPP 6.2.22 G.

[Note: In this section, 'securities' has the same meaning given in subsection (1) of the definition of 'security' in the Handbook Glossary]

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DEPP 6.2.27

The exceptional circumstances in which the FSA will consider the use of powers during a takeover bid are listed in DEPP 6.2.26G (1), DEPP 6.2.26G (3) and DEPP 6.2.26G (4), and, depending on the circumstances, DEPP 6.2.26G (5).

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DEPP 6.3

Penalties for market abuse

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DEPP 6.3.1

Section 123(2) of the Act states that the FSA may not impose a penalty on a person if there are reasonable grounds to be satisfied that:

(1) the person concerned believed, on reasonable grounds, that his behaviour did not amount to market abuse or requiring or encouraging; or

(2) the person concerned took all reasonable precautions and exercised all due diligence to avoid engaging in market abuse or requiring or encouraging.

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DEPP 6.3.2

The factors which the FSA may take into account when deciding whether either of the two conditions in DEPP 6.3.1 G are met include, but are not limited to:

(1) whether, and if so to what extent, the behaviour in question was or was not analogous to behaviour described in the Code of Market Conduct (see MAR 1) as amounting or not amounting to market abuse or requiring or encouraging;

(2) whether the FSA has published any guidance or other materials on the behaviour in question and if so, the extent to which the person sought to follow that guidance or take account of those materials (see the Reader's Guide to the Handbook regarding the status of guidance.) The FSA will consider the nature and accessibility of any guidance or other published materials when deciding whether it is relevant in this context and, if so, what weight it should be given;

(3) whether, and if so to what extent, the behaviour complied with the rules of any relevant prescribed market or any other relevant market or other regulatory requirements (including the Takeover Code) or any relevant codes of conduct or best practice;

(4) the level of knowledge, skill and experience to be expected of the person concerned;

(5) whether, and if so to what extent, the person can demonstrate that the behaviour was engaged in for a legitimate purpose and in a proper way;

(6) whether, and if so to what extent, the person followed internal consultation and escalation procedures in relation to the behaviour (for example, did the person discuss the behaviour with internal line management and/or internal legal or compliance departments);

(7) whether, and if so the extent to which, the person sought any appropriate expert legal or other expert professional advice and followed that advice; and

(8) whether, and if so to what extent, the person sought advice from the market authorities of any relevant prescribed market or, where relevant, consulted the Takeover Panel, and followed the advice received.

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DEPP 6.4

Financial penalty or public censure

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DEPP 6.4.1

The FSA will consider all the relevant circumstances of the case when deciding whether to impose a penalty or issue a public censure. As such, the factors set out in DEPP 6.4.2 G are not exhaustive. Not all of the factors may be relevant in a particular case and there may be other factors, not listed, that are relevant.

28/08/2007

DEPP 6.4.2

The criteria for determining whether it is appropriate to issue a public censure rather than impose a financial penalty are similar to those for determining the amount of penalty set out in DEPP 6.5. Some particular considerations that may be relevant when the FSA determines whether to issue a public censure rather than impose a financial penalty are:

(1) whether or not deterrence may be effectively achieved by issuing a public censure;

(2) if the person has made a profit or avoided a loss as a result of the breach, this may be a factor in favour of a financial penalty, on the basis that a person should not be permitted to benefit from its breach;

(3) if the breach is more serious in nature or degree, this may be a factor in favour of a financial penalty, on the basis that the sanction should reflect the seriousness of the breach; other things being equal, the more serious the breach, the more likely the FSA is to impose a financial penalty;

(4) if the person has brought the breach to the attention of the FSA , this may be a factor in favour of a public censure, depending upon the nature and seriousness of the breach;

(5) if the person has admitted the breach and provides full and immediate co-operation to the FSA , and takes steps to ensure that those who have suffered loss due to the breach are fully compensated for those losses, this may be a factor in favour of a public censure, rather than a financial penalty, depending upon the nature and seriousness of the breach;

(6) if the person has a poor disciplinary record or compliance history (for example, where the FSA has previously brought disciplinary action resulting in adverse findings in relation to the same or similar behaviour), this may be a factor in favour of a financial penalty, on the basis that it may be particularly important to deter future cases;

(7) the FSA's approach in similar previous cases: the FSA will seek to achieve a consistent approach to its decisions on whether to impose a financial penalty or issue a public censure; and

(8) the impact on the person concerned. In exceptional circumstances, if the person has inadequate means (excluding any manipulation or attempted manipulation of their assets) to pay the level of financial penalty which their breach would otherwise attract, this may be a factor in favour of a lower level of penalty or a public statement. However, it would only be in an exceptional case that the FSA would be prepared to agree to issue a public censure rather than impose a financial penalty if a financial penalty would otherwise be the appropriate sanction. Examples of such exceptional cases could include where there is:

(a) verifiable evidence that a person would suffer serious financial hardship if the FSA imposed a financial penalty;

(b) verifiable evidence that the person would be unable to meet other regulatory requirements, particularly financial resource requirements, if the FSA imposed a financial penalty at an appropriate level; or

(c) in Part VI cases in which the FSA may impose a financial penalty, where there is the likelihood of a severe adverse impact on a person's shareholders or a consequential impact on market confidence or market stability if a financial penalty was imposed. However, this does not exclude the imposition of a financial penalty even though this may have an impact on a person's shareholders.

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DEPP 6.5

Determining the appropriate level of financial penalty

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DEPP 6.5.1

(1) The FSA will consider all the relevant circumstances of a case when it determines the level of financial penalty (if any) that is appropriate and in proportion to the breach concerned. The list of factors in DEPP 6.5.2 G is not exhaustive: not all of these factors may be relevant in a particular case, and there may be other factors, not included below, that are relevant.

(2) The FSA does not apply a tariff of penalties for different kinds of breach. This is because there will be very few cases in which all the circumstances of the case are essentially the same and because of the wide range of different breaches in respect of which the FSA may take action. The FSA considers that, in general, the use of a tariff for particular kinds of breach would inhibit the flexible and proportionate policy which it adopts in this area.

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DEPP 6.5.2

The following factors may be relevant to determining the appropriate level of financial penalty to be imposed on a person under the Act:

(1) Deterrence

When determining the appropriate level of penalty, the FSA will have regard to the principal purpose for which it imposes sanctions, namely to promote high standards of regulatory and/or market conduct by deterring persons who have committed breaches from committing further breaches and helping to deter other persons from committing similar breaches, as well as demonstrating generally the benefits of compliant business.

(2) The nature, seriousness and impact of the breach in question

The FSA will consider the seriousness of the breach in relation to the nature of the rule, requirement or provision breached. The following considerations are among those that may be relevant:

(a) the duration and frequency of the breach;

(b) whether the breach revealed serious or systemic weaknesses in the person's procedures or of the management systems or internal controls relating to all or part of a person's business;

(c) in market abuse cases, the FSA will consider whether the breach had an adverse effect on markets and, if it did, how serious that effect was, which may include having regard to whether the orderliness of, or confidence in, the markets in question has been damaged or put at risk. This factor may also be relevant in other types of case;

(d) the loss or risk of loss caused to consumers, investors or other market users;

(e) the nature and extent of any financial crime facilitated, occasioned or otherwise attributable to the breach; and

(f) in the context of contraventions of Part VI of the Act, the extent to which the behaviour which constitutes the contravention departs from current market practice.

(3) The extent to which the breach was deliberate or reckless

The FSA will regard as more serious a breach which is deliberately or recklessly committed. The matters to which the FSA may have regard in determining whether a breach was deliberate or reckless include, but are not limited to, the following:

(a) whether the breach was intentional, in that the person intended or foresaw the potential or actual consequences of its actions;

(b) where the person has not followed a firm's internal procedures and/or FSA guidance, the reasons for not doing so;

(c) where the person has taken decisions beyond its or his field of competence, the reasons for the decisions and for them being taken by that person;

(d) whether the person has given no apparent consideration to the consequences of the behaviour that constitutes the breach;

(e) in the context of a contravention of any rule or requirement imposed by or under Part VI of the Act, whether the person sought any professional advice before the contravention occurred and whether the person followed that professional advice. Seeking professional advice does not remove a person's responsibility for compliance with applicable rules and requirements.

If the FSA decides that the breach was deliberate or reckless, it is more likely to impose a higher penalty on a person than would otherwise be the case.

(4) Whether the person on whom the penalty is to be imposed is an individual

When determining the amount of a penalty to be imposed on an individual, the FSA will take into account that individuals will not always have the resources of a body corporate, that enforcement action may have a greater impact on an individual, and further, that it may be possible to achieve effective deterrence by imposing a smaller penalty on an individual than on a body corporate. The FSA will also consider whether the status, position and/or responsibilities of the individual are such as to make a breach committed by the individual more serious and whether the penalty should therefore be set at a higher level.

(5) The size, financial resources and other circumstances of the person on whom the penalty is to be imposed

(a) The FSA may take into account whether there is verifiable evidence of serious financial hardship or financial difficulties if the person were to pay the level of penalty appropriate for the particular breach. The FSA regards these factors as matters to be taken into account in determining the level of a penalty, but not to the extent that there is a direct correlation between those factors and the level of penalty.

(b) The purpose of a penalty is not to render a person insolvent or to threaten the person's solvency. Where this would be a material consideration, the FSA will consider, having regard to all other factors, whether a lower penalty would be appropriate. This is most likely to be relevant to a person with lower financial resources; but if a person reduces its solvency with the purpose of reducing its ability to pay a financial penalty, for example by transferring assets to third parties, the FSA will take account of those assets when determining the amount of a penalty.

(c) The degree of seriousness of a breach may be linked to the size of the firm. For example, a systemic failure in a large firm could damage or threaten to damage a much larger number of consumers or investors than would be the case with a small firm: breaches in firms with a high volume of business over a protracted period may be more serious than breaches over similar periods in firms with a smaller volume of business.

(d) The size and resources of a person may also be relevant in relation to mitigation, in particular what steps the person took after the breach had been identified; the FSA will take into account what it is reasonable to expect from a person in relation to its size and resources, and factors such as what proportion of a person's resources were used to resolve a problem.

(e) The FSA may decide to impose a financial penalty on a mutual (such as a building society), even though this may have a direct impact on that mutual's customers. This reflects the fact that a significant proportion of a mutual's customers are shareholder-members; to that extent, their position involves an assumption of risk that is not assumed by customers of a firm that is not a mutual. Whether a firm is a mutual will not, by itself, increase or decrease the level of a financial penalty.

(6) The amount of benefit gained or loss avoided

The FSA may have regard to the amount of benefit gained or loss avoided as a result of the breach, for example:

(a) the FSA will propose a penalty which is consistent with the principle that a person should not benefit from the breach; and

(b) the penalty should also act as an incentive to the person (and others) to comply with regulatory standards and required standards of market conduct.

(7) Difficulty of detecting the breach

A person's incentive to commit a breach may be greater where the breach is, by its nature, harder to detect. The FSA may, therefore, impose a higher penalty where it considers that a person committed a breach in such a way as to avoid or reduce the risk that the breach would be discovered, or that the difficulty of detection (whether actual or perceived) may have affected the behaviour in question.

(8) Conduct following the breach

The FSA may take the following factors into account:

(a) the conduct of the person in bringing (or failing to bring) quickly, effectively and completely the breach to the FSA's attention (or the attention of other regulatory authorities, where relevant);

(b) the degree of co-operation the person showed during the investigation of the breach by the FSA, or any other regulatory authority allowed to share information with the FSA, such as an RIE or the Takeover Panel. Where a person has fully co-operated with the FSA's investigation, this will be a factor tending to reduce the level of financial penalty;

(c) any remedial steps taken since the breach was identified, including whether these were taken on the person's own initiative or that of the FSA or another regulatory authority; for example, identifying whether consumers or investors or other market users suffered loss and compensating them where they have; correcting any misleading statement or impression; taking disciplinary action against staff involved (if appropriate); and taking steps to ensure that similar problems cannot arise in the future; and

(d) whether the person concerned has complied with any requirements or rulings of another regulatory authority relating to the breach (for example, where relevant, those of the Takeover Panel).

(9) Disciplinary record and compliance history

The FSA may take the previous disciplinary record and general compliance history of the person into account. This will include:

(a) whether the FSA (or any previous regulator) has taken any previous disciplinary action against the person;

(b) whether the person has previously undertaken not to do a particular act or engage in particular behaviour;

(c) whether the FSA (or any previous regulator) has previously taken protective action in respect of a firm using its own initiative powers, by means of a variation of a firm's Part IV permission, or has previously requested the firm to take remedial action and the extent to which that action has been taken.

(d) the general compliance history of the person, including whether the FSA (or any previous regulator) has previously brought to the person's attention, including by way of a private warning, issues similar or related to the conduct that constitutes the breach in respect of which the penalty is imposed.

A person's disciplinary record could lead to the FSA imposing a higher penalty, for example where the person has committed similar breaches in the past.

In assessing the relevance of a person's disciplinary record and compliance history, the age of a particular matter will be taken into account, although a long-standing matter may still be relevant.

(10) Other action taken by the FSA (or a previous regulator)

Action that the FSA (or a previous regulator) has taken in relation to similar breaches by other persons may be taken into account. This includes previous actions in which the FSA (whether acting by the RDC or the settlement decision makers) and a person on whom a penalty is to be imposed have reached agreement as to the amount of the penalty. As stated at DEPP 6.5.1G (2), the FSA does not operate a tariff system. However, the FSA will seek to apply a consistent approach to determining the appropriate level of penalty.

(11) Action taken by other domestic or international regulatory authorities

Considerations could include, for example:

(a) action taken or to be taken against a person by other regulatory authorities which may be relevant where that action relates to the breach in question;

(b) the degree to which any remedial or compensatory steps required by other regulatory authorities have been taken (and whether taken promptly).

(12) FSA guidance and other published materials

(a) A person does not commit a breach by not following FSA guidance or other published examples of compliant behaviour. However, where a breach has otherwise been established, the fact that guidance or other published materials had raised relevant concerns may inform the seriousness with which the breach is to be regarded by the FSA when determining the level of penalty.

(b) The FSA will consider the nature and accessibility of the guidance or other published materials when deciding whether they are relevant to the level of penalty and, if they are, what weight to give them in relation to other relevant factors.

(13) The timing of any agreement as to the amount of the penalty

The FSA and the person on whom a penalty is to be imposed may seek to agree the amount of any financial penalty and other terms. In recognition of the benefits of such agreements, DEPP 6.7 provides that the amount of the penalty which might otherwise have been payable will be reduced to reflect the stage at which the FSA and the person concerned reach an agreement.

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DEPP 6.5.2A

The factors to which the FSA will have regard when determining the appropriate level of financial penalty to be imposed under regulation 34 of the RCB Regulations are set out in RCB 4.2.5 G.

11/12/2008

DEPP 6.5.3

Part III (Penalties and fees) of Schedule 1 to the Act specifically provides that the FSA may not, in determining its policy with respect to the amount of penalties, take account of expenses which it incurs, or expects to incur, in discharging its functions.

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DEPP 6.6

Financial penalties for late and incomplete submission of reports

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DEPP 6.6.1

(1) The FSA attaches considerable importance to the timely submission by firms of reports. This is because the information that they contain is essential to the FSA's assessment of whether a firm is complying with the requirements and standards of the regulatory system and to the FSA's understanding of that firm's business.

(2) DEPP 6.6.1 G to DEPP 6.6.5 G set out the FSA's policy in relation to financial penalties for late submission of reports and is in addition to the FSA's policy relating to financial penalties including the factors relevant to determining their appropriate level (see DEPP 6.5.2 G).

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DEPP 6.6.2

In addition to the factors relevant to determining the appropriate level of financial penalty (see DEPP 6.5.2 G), the following considerations are relevant.

(1) In general, the FSA's approach to disciplinary action arising from the late submission of a report will depend upon the length of time after the due date that the report in question is submitted.

(2) If the person concerned is an individual, it is open to him to make representations to the FSA as to why he should not be the subject of a financial penalty, or why a lower penalty should be imposed. If he does so, the matters to which the FSA will have regard will include the matters set out in DEPP 6.5.2G (4) and DEPP 6.5.2G (5). It should be noted that an administrative difficulty such as pressure of work does not, in itself, constitute a relevant circumstance for this purpose.

(3) The FSA will have regard to repeated failures to submit reports on time. In the majority of cases involving such repeated failure, the FSA considers that it will be appropriate to seek more serious disciplinary sanctions or other enforcement action, including seeking to apply for the cancellation of the firm's permission.

(4) The FSA will also have regard to the submission frequency of the late report when assessing the seriousness of the contravention. For example, a short delay in submitting a weekly or monthly report can have serious implications for the supervision of the firm in question. Such a delay may therefore be subject to a higher penalty than might otherwise be the case.

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DEPP 6.6.3

In addition, in appropriate cases, the FSA may bring disciplinary action against the approved persons within the firm's management who are ultimately responsible for ensuring that the firm's reports are completed and returned to the FSA .

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DEPP 6.6.4

In applying the guidance in this section, the FSA may treat a report which is materially incomplete or inaccurate as not received until it has been submitted in a form which is materially complete and accurate. For the purposes of the guidance, the FSA may also treat a report as not received where the method by which it is submitted to the FSA does not comply with the prescribed method of submission.

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DEPP 6.6.5

In most late reporting cases, it will not be necessary for the FSA to appoint an investigator since the fact of the breach will be clear. It follows that the FSA will not usually send the firm concerned a preliminary findings letter for late-reporting disciplinary action.

28/08/2007

DEPP 6.7

Discount for early settlement

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DEPP 6.7.1

Persons subject to enforcement action may be prepared to agree the amount of any financial penalty and other conditions which the FSA seeks to impose by way of such action. Such conditions might include, for example, the amount or mechanism for the payment of compensation to consumers. The FSA recognises the benefits of such agreements, in that they offer the potential for securing earlier redress or protection for consumers and the saving of cost to the person concerned and the FSA itself in contesting the financial penalty. The penalty that might otherwise be payable in respect of a breach by the person concerned will therefore be reduced to reflect the timing of any settlement agreement.

28/08/2007

DEPP 6.7.2

In appropriate cases the FSA's approach will be to negotiate with the person concerned to agree in principle the amount of a financial penalty having regard to the factors set out in DEPP 6.5.2 G. (This starting figure will take no account of the existence of the settlement discount scheme described in this section.) Such amount ("A") will then be reduced by a percentage of A according to the stage in the process at which agreement is reached. The resulting figure ("B") will be the amount actually payable by the person concerned in respect of the breach. However, where part of a proposed financial penalty specifically equates to the disgorgement of profit accrued or loss avoided then the percentage reduction will not apply to that part of the penalty.

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DEPP 6.7.3

(1) The FSA has identified four stages of an action for these purposes:

(a) the period from commencement of an investigation until the FSA has:

(i) a sufficient understanding of the nature and gravity of the breach to make a reasonable assessment of the appropriate penalty; and

(ii) communicated that assessment to the person concerned and allowed a reasonable opportunity to reach agreement as to the amount of the penalty ("stage 1");

(b) the period from the end of stage 1 until the expiry of the period for making written representations or, if sooner, the date on which the written representations are sent in response to the giving of a warning notice ("stage 2");

(d) the period after the end of stage 3, including proceedings before the Tribunal and any subsequent appeals ("stage 4").

(2) The communication of the FSA's assessment of the appropriate penalty for the purposes of DEPP 6.7.3G (1)(a) need not be in a prescribed form but will include an indication of the breaches alleged by the FSA . It may include the provision of a draft warning notice.

(3) The reductions in penalty will be as follows:

Stage at which agreement reached

Percentage reduction

Stage 1

Stage 2

Stage 3

Stage 4

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DEPP 6.7.4

(1) Any settlement agreement between the FSA and the person concerned will therefore need to include a statement as to the appropriate penalty discount in accordance with this procedure.

(2) In certain circumstances the person concerned may consider that it would have been possible to reach a settlement at an earlier stage in the action, and argue that it should be entitled to a greater percentage reduction in penalty than is suggested by the table at DEPP 6.7.3G (3). It may be, for example, that the FSA no longer wishes to pursue its action in respect of all of the acts or omissions previously alleged to give rise to the breach. In such cases, the person concerned might argue that it would have been prepared to agree an appropriate penalty at an earlier stage and should therefore benefit from the discount which would have been available at that time. Equally, FSA staff may consider that greater openness from the person concerned could have resulted in an earlier settlement.

(3) Arguments of this nature risk compromising the goals of greater clarity and transparency in respect of the benefits of early settlement, and invite dispute in each case as to when an agreement might have been possible. It will not usually be appropriate therefore to argue for a greater reduction in the amount of penalty on the basis that settlement could have been achieved earlier.

(4) However, in exceptional cases the FSA may accept that there has been a substantial change in the nature or seriousness of the action being taken against the person concerned, and that an agreement would have been possible at an earlier stage if the action had commenced on a different footing. In such cases the FSA and person concerned may agree that the amount of the reduction in penalty should reflect the stage at which a settlement might otherwise have been possible.

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DEPP 6.7.5

In cases in which the settlement discount scheme is applied, the fact of settlement and the level of the discount to the financial penalty imposed by the FSA will be set out in the final notice.

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