Some of the money raised by UK financial services fines should be used to help blameless firms absorb the rising cost of regulation
A recent study* has revealed that the global cost to banks and the financial services industry of their misconduct since 2010 has passed £200bn, with UK-based financial institutions bearing a significant share of that amount. Considering that UK regulatory fines mushroomed from £16.9m in 2005 to £1.5bn in 2014, with 2015 looking on course to maintain that level, one might be forgiven for wondering where all this money might be going. The regulator? Schools and hospitals? You and me?
Gone are the days when fines were used to reduce the regulatory levy on regulated firms. Fines from the Financial Conduct Authority (FCA) now go to Treasury coffers as a result of rule changes imposed by the Chancellor of the Exchequer, George Osborne, in the wake of the LIBOR rigging crisis, to prevent the proceeds of misdeeds going to the City regulator as they had done in the past.
Fee reductions
In the first distribution from this quasihypothecation, in November 2013 the Government pledged £35m raised from Financial Services Authority (FSA) fines to support the armed services, veterans and their families, with Prime Minister David Cameron saying that it was not fair that fine money goes back to the banking industry in the form of fee reductions. In the preceding year, some £70m from FSA fines was used to reduce industry fees, which had a significant impact in lowering the fees levied on financial advisers.
More recently, in April 2015 the Chancellor of the Exchequer announced that £200m of the fines imposed on Deutsche Bank for its part in the FX rigging scandal would be used to fund 50,000 new apprenticeships, and July’s Summer Budget stated that “the Government has committed nearly £70m of banking fines over the next five years to support military charities and other good causes”.
However, the Budget figures showed that the £70m also included an amount of £50m to fund an increase in the activities of the army cadet force in state schools, which one might reasonably argue is an activity that should be funded from the public purse, suggesting that the Treasury’s view of ‘good causes’ is fairly elastic. No surprise there! But bearing in mind that the regulator has collected some £3bn since 2012, that still leaves an awful lot of cash in George Osborne’s back pocket, for which one might reasonably expect to be accounted for.
At the same time as the use to which these large sums are put remains unclear, the basis for calculation of the fines imposed also remains less than transparent.
While the rulebook indicates that fines are calculated using the 3D formula of Disgorgement – removal of any benefit; Discipline – to reflect the seriousness of the breach; and Deterrence – allowing upward adjustment of the figure to ensure that the penalty has an appropriate deterrent effect, actually applying this seems more of an art than a science.
Although the UK does not have the overtly political nature of the various regulatory authorities in the US, so that the level of fines levied by the FCA may, in comparison, seem almost bearable, the absence of any accounting for the fines by the Treasury is unsatisfactory.
It is also unsatisfactory that the Treasury, and the regulatory authorities, in their enthusiasm to inflict punishment upon banks for their misdeeds, appear to have abandoned the ‘regulatory dividend’, whereby blameless firms which have not been subject to any form of censure should see their regulatory levies reducing. This is as a result of the fines imposed being used, at least in part, to fund the operating costs of the regulator.
Valuable incentiveWhile we certainly do not argue that offenders should benefit in any way, it surely is only equitable that a portion of the monies raised from fines is retained by the FCA to enable this valuable incentive to be maintained, as was originally the case. Instead, we see the cost of regulation increasing relentlessly, with the increase being passed on to all firms both large and small, where this is becoming a significant part of their costs.
As Edward, Prince of Wales said: “Something must be done.”
*2015 CCP Research Foundation
The original version of this article was published in the September 2015 print edition of the Review.