Financial Times: FSA to impose harsher penalties on rule breakers: “Ms Cole's speech comes after the FSA was forced to overhaul its regulatory decisions committee, which reviews enforcement actions, after widespread criticism…”: “Last year the FSA also dropped its case against Sir Philip Watts, the former chairman of Shell, even though it had previously fined the oil group £17m for mis-stating its oil and gas reserves.”

Thursday 19 January 2006

By Peter Thal Larsen, Banking Editor

Published: January 19 2006

The Financial Services Authority is preparing to hand out higher fines to companies and people that break its rules, amid suggestions that the watchdog's penalties are being viewed as a "cost of doing business".

Margaret Cole, the FSA's new head of enforcement, said the regulator had reviewed the level of penalties following comments from some market participants about their effectiveness.

Her comments, made in a speech to the Securities and Investment Institute's Compliance Forum, suggest the FSA will continue to take a tough line with those who have broken its rules, despite several high-profile setbacks last year.

Ms Cole's speech comes after the FSA was forced to overhaul its regulatory decisions committee, which reviews enforcement actions, after widespread criticism of its handling of a mis-selling case against Legal & General, the life assurer.

Last year the FSA also dropped its case against Sir Philip Watts, the former chairman of Shell, even though it had previously fined the oil group £17m for mis-stating its oil and gas reserves.

"In appropriate cases we will seek to impose higher financial penalties," Ms Cole said. "Fines for this type of behaviour should not be, and should not be seen to be, just another cost of doing business."

In recent years, the average level of fines handed out by the FSA has increased, even though the number of penalties has declined. These figures include the £13.9m fine given to Citigroup last year over the investment bank's controversial "Dr Evil" eurobond trade.

But Martyn Hopper, a partner at Herbert Smith, the law firm, said most companies were more concerned about the damage an FSA enforcement action would do to their reputation.

"I haven't encountered any clients who think the threat of FSA action is not an effective deterrent, regardless of the levels of the fines," he said.

In her speech, Ms Cole suggested the FSA would reduce fines for companies that dealt decisively with people who had broken the rules.

"Serious regulatory misconduct should be a ground for summary dismissal," she said. "Not doing so will be seen as a sign that you are not taking your obligation to ensure the highest standards of behaviour in your business seriously enough."

Citigroup has faced criticism because it allowed the bond traders responsible for the "Dr Evil" trade to come back to work.

Robert Turner, a partner at Simmons & Simmons, said: "There's a recommitment here to holding senior managers to account which has been oft-repeated but not always seen."

Ms Cole, a former high-flying litigator at White & Case, the international law firm, joined the FSA last summer after her predecessor left for Deutsche Bank, the global investment bank. She is the first head of enforcement to wield new powers under the European Union's Market Abuse Directive, which was passed into law last year.

Lawyers believe the directive, known as MAD, will have relatively little effect on enforcement cases be-cause it has merely been added to the current legislation rather than replacing it.

ROYAL DUTCH SHELL PLC DOTCOM HOME PAGE