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The Effectiveness of US and UK Regulatory Approach to Enforcement in 2012

by: (UK Head of Governance, Risk and Compliance) on

As 2012 drew to a close the Great British public was subjected to the usual rush of end of year reviews from the great British media.  The Financial Services sector was as guilty/enthusiastic* as any other sector of the media in providing us with these articles. (*Delete depending upon your current tolerance level).

One area that has attracted considerable comment is enforcement.  Much has been made in a number of articles on the record £312m in fines being handed down by the Financial Services Authority in 2012.  However the total number of fines was down on 2011, and if you remove the outlying Barclays and UBS LIBOR/EURIBOR fines from the equation, so too is the average fiscal amount for each case.  So apart from the headline grabbing figure (‘FSA Triples Fines’) the enforcement activity does not in reality seem to back up the regulator’s assertion of taking a tougher stance on non-compliance.

Compare that with the current trend in the US for what appear to be eye-wateringly punitive figures.  The only reason that the record $1.9B HSBC settlement for anti-money laundering failures did not come as a shock is because the industry had been primed for a billion pound fine for the past couple of years.  But this figure should be considered in context of HSBC’s revenue, i.e. pre-tax profits of $12.7bn reported for the first six months of 2012.  The fine therefore equates to approximately one month’s profits.  Is that really a strong enough deterrent?  Wait I hear you cry (if you are in the habit of exclaiming out load whilst reading blogs) the fine is only the beginning of the total cost of enforcement action.  The costs of business review, retraining, implementing new procedures and controls, compensating customers, etc… generally adds up to considerably more than the actual fine.  Whilst this may well be true, if the fine is only one month’s profit then the total cost of the action is unlikely to be significant enough to bring about a swift culture change in the offending organisation.

The difference in the absolute size of fines on each side of the Atlantic has led some to suggest that the UK is lighter tough with respect to enforcement activities than the US, but unless you properly analyse the complete picture this cannot be proven one way or the other.  The actual monetary value of the fine is far too simplistic an indicator of the effectiveness it has as both punishment and deterrent.  Regulators need to provide more information regarding the rational for how the actual fine figures are arrived at, in addition to the true cost of the enforcement action taken for the organisation concerned.  Only then can the industry (and media) properly judge the effectiveness of the current system. 

And one final thought.  Let us not forget who, in reality, is paying these fines and the associated costs.  The costs must be paid from the organisations own revenue, and where in turn does this revenue come from?  Here’s to 2013…

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