Financial regulators in the United Kingdom have decreased their enforcement actions in recent years, but increased the size of penalties, according to a study released recently.

Kinetic Partners's Global Enforcement Review 2014 analyzed enforcement data for the past five years from the U.K. Financial Conduct Authority (FCA), the U.S. Securities and Exchange Commission, and the Securities & Futures Commission of Hong Kong.

The FCA only came into existence in 2013, when its forerunner Financial Services Authority was split into two new agencies, the FCA and the Prudential Regulation Authority. The Kinetic report focuses on the FCA and enforcement actions of the FSA prior to last year.

The London-based consulting firm's report found that roughly 12 percent fewer enforcement cases were opened each year since 2008, with a similar 10 percent annual decline in the number of cases closed in the U.K. However, the size of fines climbed higher during that period. The average penalty size rose from US$0.75M to US$2.06M between fiscal 2008/2009 and fiscal 2011/2012, the report said. But from fiscal 2011/2012 to fiscal 2012/2013, U.K. penalties saw a huge 511 percent increase, which Kinetic Partners attributed to major fines relating to the LIBOR rate rigging scandal. Since 2009, the average penalty value in the U.K. rose by 1590 percent.

“Although 2012/2013 may be an outlier as far as regulatory activity, this spike nevertheless reinforces the trend that regulators are increasingly looking to bring severe action against big-ticket violations,” the report said.

The report noted that individuals accounted for 44 percent of the enforcement cases in 2013, yet individuals received only slightly over 1 percent of the total fines imposed by the FCA. While the burden fell largely on companies rather than individuals, the FCA has indicated individuals will become a greater enforcement priority, buoyed by legislation like the Banking Reform Act of 2013 that places greater responsibility on CEOs, Kinetic Partners said.

Historically, the FCA has focused on control functions, the report said. During calendar year 2013, more than half of the FCA's cases against individuals stemmed from misconduct of a controlled function, or lack of adequate oversight or controls. The firm predicts regulators will take a more “intrusive” approach going forward and look to name individuals in a growing number of cases.

Overall, the report found several trends linking the different regulators. Kinetic cited increased funding and resources for the regulators, including both technical resources like IT-based surveillance systems and human resources like highly specialized personnel. All three regulators also increased the amount of fines imposed in recent years, in addition to an increasing trend “towards action against individuals,” the report said. The third trend identified by Kinetic was a common focus on market abuse and market conduct.

“In recent years, global regulators have demonstrated a more focused commitment to combatting industry misconduct and pre-empting abusive behavior. As financial services firms look to the future, it is vital that they understand regulatory agendas and priorities in order to prepare and respond effectively,” Julian Korek, CEO of Kinetic Partners, said in the report. “Equally, embedding an organizational culture of compliance is paramount.”

The review said the FCA in fiscal 2014 was trying to be more forward-looking and pre-emptive regarding potential challenges facing the industry. It said its focus was on “root causes of problems” rather than symptoms of those problems.

From 2006 to 2013, staffing levels for the FCA (and its predecessor) increased by 53 percent while overall expenditures increased by 48 percent, the report showed. The FCA's staff in 2012-2013 was 3,992 employees with expenditures of US$870.3M. Growth at the FCA and other regulators examined seemed to outpace growth in the financial services industry, the report said, noting the ratio of regulators to regulated persons is narrowing.

The report found a greater focus on technologically skilled personnel, with experience to handle challenges like high-frequency trading. With new monitoring technology, including the FCA's licensing of the NASDAQ OMX SMART market surveillance tool, regulators are likely to identify more candidates for examination, Kinetic Partners said.

The report also predicts more cross-jurisdiction cooperation between regulators, similar to the 2012 joint U.K.-U.S. enforcement action against brokerage firm Blue Index.

Korek said the FCA has made gains in tackling market abuse, with enforcement actions resulting in fines and prison sentences. “The regulator has clearly taken action and won a number of landmark cases and is gaining a reputation for being a strong regulator,” Korek said in the report.

As regulators look toward establishing control function regimes, companies need a strong IT infrastructure, effective compliance controls and monitoring, advanced responsiveness, and technical knowledge among its staff, especially compliance officers, the report said.

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