FSA: the final judgment

January’s double-whammy of multimillion-pound FSA fines – £7.7m for Barclays and £2.8m for The Royal Bank of Scotland and NatWest – made one thing abundantly clear: it’s open season on the financial services in Canary Wharf.

So far this month the FSA has doled out fines of more than £11m – more than double the £5.3m for the whole of 2007. “It is pretty amazing,” Beachcroft partner Mathew Rutter says.

And a fine is often just the tip of the iceberg. Barclays has to pay a further £60m in compensation and lawyers say the costs of dealing with an FSA investigation will often be at least as much as the fine itself. Even a final notice from the FSA is more often than not a career wrecker, costing individuals hundreds of thousands of pounds in lost earnings.

Brokers have, so far, come off fairly lightly. Since Aon’s £5.25m fine in January 2009, only HSBC Insurance Brokers has come close, with a £700,000 fine in June of the same year.

But individual brokers have increasingly come under the FSA’s unflattering spotlight, with broker Barry Williams making the headlines as the latest scalp this month.

Many initial fines against individuals are not followed through by the FSA because those investigated are already bankrupt.

But not everyone is sympathetic.

“I wouldn’t call them brokers; I’d call them criminals,” Biba chief executive Eric Galbraith says. “And we don’t want people who are criminals among our members.”

Galbraith argues that the FSA’s new-found vigilance is welcome. “From an enforcement point of view, it focuses the minds of people in the business,” he says.

In private, many insurers and brokers suspect the FSA is motivated as much by politics as by the need to improve financial services provision. After the financial crisis, the FSA came under heavy criticism for a perceived laissez-faire attitude that earned it the nickname the Fundamentally Supine Authority.

“Two or three years ago, the FSA wasn’t doing its job properly,” regulation and compliance consultant Branko Bjelobaba says.

“More is now being done to show policy makers that something is being done.”

With the FSA facing the knacker’s yard, observers say regulators are keen to show their passion and efficacy to secure a place in its successor, the CPMA.

“Individuals at the FSA will want to steer the new regulator,” Bjelobaba says. “What better way to demonstrate your street cred than by duffing up a few companies.”

Poor judgment?

Brokers and insurers are understandably reticent about publicly criticising the almighty FSA, but some will break ranks.

“We thought the fine was unreasonable,” Knowlden Titlow Financial Services director Deborah Evans says. The company, now part of NW Brown Financial Services, was fined £35,000 in 2008 for failures in selling geared traded endowment policies, but incurred costs of more than £100,000. “There wasn’t any fraudulence or wrongdoing. We thought we were doing the right thing,” she adds.

Even official statements by brokers after investigations sometimes betray an ambivalence about the judgments. “While this is a serious matter, no customer reported any loss from these failures,” stated HSBC after it was fined £700,000 and forced to retrain more than 30,000 staff.

No one doubts that the FSA has beefed up since the crisis, hiring hundreds of new staff and spending millions on investigations. Its budget for this year is £458m.

The depth of the authority’s pockets was revealed this month with the news that it forked out for £7.6m for an investigation into RBS that never resulted in a report.

The question on everyone’s lips is: how long will it last? When the eager beavers at the FSA are comfortably settling into their expense accounts at the CPMA and the storm over the financial crisis has blown over, will regulation return to the laissez-faire norm of the early noughties? Not any time soon.

“There’s a bit of grandstanding and the FSA hasn’t been blind to the political advantages of some of these fines,” Rutter says. “But the main difference has been the FSA policy of credible deterrence.”

The credible deterrence approach, introduced when Margaret Cole took over the FSA in 2007, was a marked departure from the FSA’s original commitment not to be an enforcement lead regulator. “They said they wouldn’t enforce for the sake of enforcing,” Rutter says. “But with £89m in fines last year, they clearly are.”

And as last year’s rules linking fines to profits kick in, the fines are likely to rise.

Tough enforcement is fine if the regulations are clear, but the FSA’s approach is not known for its simplicity. “The regulatory regime is getting more complicated and for small businesses it’s sometimes harder to comply,” Rutter says.

Galbraith adds: “The FSA’s regulations are unnecessarily intrusive.”

Hot topics

How can smaller brokers hope to keep up with a regulator willing to splash out £7.6m on a single investigation? “The FSA has hot topics,” solicitor Hogan Lovells partner Lawson Caisley says. “It makes it clear what these are and then takes a few good scalps to show the industry they’re serious about it.”

Caisley identifies the current hot topics as the protection of client assets, misselling, market abuse and complaints.

Bjelobaba says there’s no excuse for falling foul of FSA rules. “The FSA makes this information readily available. If you can’t be arsed to look at the information, it’s not the FSA’s fault,” he says.

The biggest challenge is to directors, particularly in smaller independent brokerages where the brokers are often also directors. The approved persons system, set up in 2000, put more emphasis on directors’ responsibilities. Since the financial crisis, the FSA has started to take it more seriously.

“The FSA wants to make people afraid that if there’s a failure, their necks will be on the block,” Rutter says. “Ignorance isn’t a defence. If you’re on the board of a regulated company you are under a positive duty to lift stones and look under them, to police what’s going on.”

But directors need not panic. “When selecting scalps, the FSA tends to go for cases that are hard to defend,” Caisley says. “For example, most of the actions against individuals have been based on a lack of integrity.”

Integrity can, warns Bjelobaba, cover a variety of sins, from wilfulness to apathy, misunderstanding and non-engagement. Neither the FSA’s new-found rigour on approved persons nor credible deterrence rules look likely to relax under Margaret Cole’s watch.

Directors will have to make sure they can keep pace with the FSA’s newfound zeal. IT

Top five individual fines for brokers since the crash

John Charalambous of the Financial Associates (TFA): £294,500

Charalambous, an authorised mortgage and general insurance intermediary, was banned and fined £294,500 in June 2010 for taking part of a customer’s mortgage advance and for attempting to defraud life insurance companies.

Andrew Jeffery, ex-director of Jeffery Flanders (Consulting): £150,000

Jeffery was banned and fined £150,000 in August 2010 for recklessly failing to put in place insurance policies appropriately, or in some cases at all, despite collecting payments from customers.

Delwyn Way of Shield Insurance Consultancy (Shield): £77,957

Way was banned and fined £77,957 in June 2010 for putting clients at risk by failing to ensure their insurance premiums were passed onto insurers.

Paul Willment, Orion Direct and Peppercom: £50,000

Willment was banned and fined £50,000 in August 2010 for his failure to demonstrate competence and capability as director and non-executive director of Orion and Peppercom.

Barry Williams, former director of Surety Guarantee Consultants: £25,000

Williams was banned and fined £25,000 in January 2011. The fine was reduced from the original £50,000 fine issued in February 2010, due to Williams’ financial circumstances. Williams deliberately ignored his responsibilities as an approved person, turning a blind eye to fraud. See 'Banned and fined: a broker's story'.