Finance firms given 30% off fines after being found guilty of breaking the rules

'IoS' research reveals Financial Services Authority has granted £4m in discounts over past year in return for co-operating with inquiries.
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The Independent Online

The Financial Services Authority (FSA), the City regulator, has discounted fines imposed on major banks, building societies, mortgage firms and stockbrokers by nearly £4m over the past year, Independent on Sunday research has found.

The firms – including household names such as Nationwide, Capital One and Norwich Union – have been found guilty of serious rule breaches ranging from mis-selling of payment protection insurance (PPI) to failing to adequately safeguard the personal details of customers.

Despite these verdicts, firms have been routinely offered a 30 per cent discount on any fine imposed by the regulator in return for promising to co-operate and not exercising their right to challenge the FSA's findings at tribunal.

The watchdog has been making such arrangements because it fears lengthy legal disputes. However, the routine offer of a discount to firms that have been found guilty of wrongdoing is condemned by Which?. The consumer group accuses the FSA of "putting the interests of the [banking] industry over those of consumers".

Only last week, the regulator discounted two fines for serious wrongdoing. HFC Bank, which speciali-ses in lending, was found guilty of mis-selling PPI polices but had its fine discounted by £465,000 from £1.55m to £1.085m because it agreed at an early stage of the probe to enter what is known as the "settlement process" – in other words, admit it was wrong.

Meanwhile, as we report on page 23, stockbroker Square Mile had its £1.5m fine for misleading custo- mers and using high-pressure sales tactics cut to just £250,000 after the firm said it could not afford to pay the full amount.

"We reduced the [Square Mile] fine due to unusual circumstances because we are not about putting firms out of business," says Georgina Philippou, head of retail enforcement at the FSA.

The regulator decided to offer firms a discount on its fines as a result of the battering it took in the Legal & General endowments mis-selling case in 2005.

Back then, the insurer successfully appealed against the size of the fine imposed on it. This caused a good deal of soul searching at the FSA, and a full review of how it carried out its investigations and imposed fines followed.

Out of this review came something called "executive settlement procedures", a clause in which allows the regulator's enforcement unit to offer firms a discount if they co-operate and give up the right to contest a fine.

"We tell companies we have evidence that they have done wrong," explains Ms Philippou. "We then ask them if they want to engage in a settlement process. If they say yes, they can qualify for a discount."

Firms have 28 days after being confronted with the evidence of their wrongdoing to agree to enter into a settlement. Those missing this deadline can still get a discount, but this is on a "sliding scale", according to Ms Philippou.

"The idea is to get a quick and simple settlement. We have finite resources and it is in consumers' interests that we end these investigations and move on somewhere else," she adds.

It seems that as long as there is no evidence of criminal activity, companies are almost automatically offered a discount – regardless of the size of the fine or how serious their breach of FSA rules. According to its own website, in the past year, out of 25 firms and individuals fined by the regulator, 21 have received a discount of at least 30 per cent. Of the other four that didn't get 30 per cent off, one firm, financial adviser Sesame, was told its £330,000 penalty for complaints-handling failures would have been "substantially higher" if it hadn't co-operated.

The scale and routine nature of the discounting regime has drawn fire from consumer groups.

"Offering the occasional small discount when merited to firms that admit culpability could be OK, but 30 per cent, frequently given, is a very large percentage," says Dominic Lindley, policy officer at Which?.

"The truth is that the FSA is putting the interests of the industry over those of the consumers. Fines need to be much higher, not lower, to properly incentivise firms to behave. It is telling that the Office of Fair Trading, by fining British Airways more than £100m last year, dwarfed all the fines imposed by the FSA in the past five years."

Likewise, Carl Belgrove, economist at the National Consumer Council, says the NCC is "concerned that routinely giving large discounts on fines could dilute the disincentive effect".'

But John Tattersall, the chairman of the financial services regulatory practice at accountants PricewaterhouseCoopers, says the discount regime does have its merits. "Without it, firms could appeal against FSA fines at the financial services tribunal, which would mean legal fees on both sides. The amount of money the FSA saves may not be quite as much as the discount they are giving, but is still substantial.

"By getting the co-operation of the firm at an early stage of its probe, the FSA can help push through real changes in practice. As a result," adds Mr Tattersall, "the firm learns from its mistakes and consumers get redress and hopefully a better deal in future."

However, he admits that few firms would be temp-ted to go to tribunal.

"The problem is that at tribunal, dirty linen is aired. By agreeing to the FSA's settlement process, not only do they get a discount but they also cut down on negative publicity."