Step 1 (disgorgement)
Where the FSA is able to identify the benefit derived from the breach, in the form of profit made or loss avoided, and the benefit can be quantified, the person will be deprived of that benefit.
The amount of interest applied, together with the date from which it will apply, will be determined on a case-by-case basis, having regard to the interest rates applied by the Financial Ombudsman Service and the civil courts.
Step 2 (discipline)
The starting point will be to set the penalty based on a percentage of a minimum of a year’s revenue (for firms) or income (for individuals), or where the conduct continues for longer that a year, for the period of the breach. In the case of a one-off event, the relevant revenue or income will be that derived during the twelve months preceding the end of the breach. The percentage used will depend on the seriousness, nature and impact of the misconduct, adopting a sliding scale from levels 1 to 5 on the basis that the more serious the misconduct, the higher the percentage applied. Amongst the factors which are likely to be considered to be more serious and so fall within level 4 or 5, is whether the conduct is intentional or reckless, whereas negligent or unintentional conduct is likely to fall within levels 1-3.
In the case of firms, the percentage of “relevant revenue” for a particular product or business area will range between 0-20%, at fixed levels of level 1 - 0%, level 2 - 5%, level 3 - 10%, level 4 -15% and level 5 - 20%. Relevant revenue is not intended to be a ‘term of art’ or to reflect a precise accounting definition and will depend on the facts of each case. Where revenue is not an appropriate indicator of the harm caused (e.g. in information security cases), the FSA will us an “appropriate alternative”.
In the case of individuals, the percentage of gross income and benefits (including salary, bonus, pension contributions, share options and share schemes) will range between 0-40%, at fixed levels of level 1 - 0%, level 2 - 10%, level 3 - 20%, level 4 - 30% and level 5 - 40%.
In respect of market abuse cases referable to the individual’s employment, the FSA will select the greater of: (i) 0-40% of income (as above); (ii) a multiple of the profit made or loss avoided for the individual’s benefit or the benefit of others arising as a direct result of market abuse (zero to four times); and (iii) in the most serious cases (levels 4 or 5), £100,000.
In respect of market abuse cases which are not referable to the individual’s employment, the FSA will select the greater of: (i) a multiple of the profit made or loss avoided for the individual’s benefit or the benefit of others arising as a direct result of market abuse (zero to four times); and (ii) in the most serious cases (levels 4 or 5), £100,000.
Step 3 (mitigating or aggravating circumstances)
The FSA may increase or decrease the amount derived from Step 2 as a result of any aggravating and mitigating factors. For example, if a person has arranged his resources in such a way as to avoid disgorgement or payment of a financial penalty this would be an aggravating factor which may justify an increase in the penalty.
Step 4 (deterrence)
The FSA may increase the amount arrived at from Step 3 if it considers it to be insufficient to deter the person who committed the breach and others from committing further breaches. For example, an increase may be necessary where previous FSA action in respect of similar breaches has failed to improve industry standards.
Step 5 (settlement discount)
As is currently the case, the FSA will then apply a discount to the penalty if a settlement occurs within prescribed “stages” (see DEPP 6.7).