Study: Penalties Levied by Financial Watchdogs Spiked in 2014

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Financial regulators in the United States, United Kingdom, and Hong Kong have decreased their agency expenditures but increased the penalties they've levied, according to a new report by regulatory, compliance, and risk consultancy Kinetic Partners.

The study, Global Enforcement Review 2015, evaluated public data from financial regulators in the United States, United Kingdom, and Hong Kong for the 2013-14 fiscal year. Kinetic Partners examined data from the following agencies:

  • US Securities and Exchange Commission (SEC)
  • US Commodity Futures Trading Commission (CFTC)
  • Financial Industry Regulatory Authority (FINRA)
  • Financial Conduct Authority (FCA)
  • Securities and Futures Commission (SFC)

“2014 saw a significant spike in the severity of financial penalties virtually across the board, as regulators have been getting tougher on both firms and individuals,” Monique Melis, managing director and global head of regulatory consulting at Kinetic Partners, said in a prepared statement.

She noted, however, that the averages have been increased by a relatively small number of historic fines, mainly relating to the cases involving Libor and Forex manipulation.

“We are now entering an era of regulatory enforcement in which the 'new normal' consists of exceptionally severe penalties and a growing focus on individual bad actors, the aim of which is to impact and change the culture of firms,” Melis added.

The report's key findings include:

  • The value of disgorgements and penalties by the SEC in 2014 was more than $4.6 billion, a 35 percent increase over 2013.
  • The average value of fines more than doubled from 2013 to 2014 at the CFTC and FINRA – to $48.8 million and $0.1 million per penalty, respectively.
  • The total value of fines issued by the United Kingdom's FCA in 2014 increased 68 percent from about £474.3 million in 2013.
  • In Hong Kong, the SFC's HK$62.8 million in fines in 2014 was a 50 percent increase over 2013's HK$40.7 million.

Actions against individual players increased notably in the United States, according to the report. The SEC sanctioned 449 people – more than half of its overall actions – compared to 306 financial institutions. FINRA's ban of 481 individuals from the securities industry in 2014 was up from 429 in 2013 and 294 in 2012. And almost half of the CFTC's actions were against individuals.

Overseas, the SFC sanctioned 26 individuals in its last fiscal year – the most since 2010. Of the FCA's cases last year, 29 percent were against individuals.

Targeting individuals packs a particularly powerful punch because such penalties can't be written off as business costs, said Julian Korek, head of compliance and regulatory consulting at Kinetic Partners.

“Regulatory leadership recognizes that an organization's senior management is not necessarily able to police staff at all levels, so holding the bad actors themselves accountable is a step toward influencing institutional culture in the right direction,” Korek said in a prepared statement.

On the other hand, there's a risk that regulators have to consider. Sanctioning individuals could make a career in financial fields unattractive, Korek added.

Meanwhile, at least some of the agencies have cut expenditures. At the SFC, expenditures dropped from 31 percent to 13 percent; at the SEC, from 11 percent to 8 percent; CFTC's dropped 1 percent; and the FCA, 17 percent.

In comparison, the SEC, FCA, and SFC increased expenditures from 2006 to 2013 by 62 percent, 48 percent, and 120 percent, respectively.

The cutbacks could be the result of 20/20 hindsight and better understanding of what led to the 2008 financial crash that would allow regulators to more efficiently use resources, the report states.

The takeaway? Firms must realize their vulnerability to enforcement risks “and take steps to manage their regulatory burdens beyond mere compliance,” the report states. “Enforcement is no longer something that can be considered a ‘cost of doing business.'”

About Terry Sheridan

Terry Sheridan

Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.

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