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Over recent months we have seen the FSA in the UK, as well as regulators in other geographies, hit the record books with larger and more numerous fines for misconduct – e.g. for poor reporting, or handling of customer data. These fines are supposed to be
a deterrent and to change the behavior of market participants. However, the increased size and continued frequency of these fines would suggest that this strategy is not succeeding. If they were working then surely at least the frequency of new fines would
decrease, or are they not yet at a sufficient level to change behaviour?
On analysis, the evidence is mixed. Those who believe in the effectiveness of fines, e.g. the regulators, will no doubt say that, like other policing functions, the more effective their detection becomes, the more transgressions will be discovered and hence
the reported level of misconduct seems to rise when it may just be that the detection rate is rising. Also as Lord Turner of the UK FSA has stated recently, the fines that are being reported now are the result of investigations that may have started several
years ago. Hence there is a lag between the original behavior and the time the full deterrent effect kicks in. And so the logic goes, the perceived level of offences will get worse before it gets better even if fines are effective. However, those that argue
that the fines are ineffective will also point out that a fine levied on an institution is less effective as it is less connected to the individuals that are at fault. Also they will say that the higher frequency means that it becomes too blunt an instrument
as most firms will be fined at some point in the recent past. Also the reputational risk impact is shorter as there will be another fine for another institution in a short while that will deflect the public spotlight onto the next firm. Hence fines may be
viewed as a necessary cost of operating in complex regulated financial markets. So unless these issues are addressed there is the distinct possibility that fines are good for making headlines, but bad for changing behaviour?
I think your last sentence says it all. Fines look good to the public but most firms will carry a contingency fund to pay fines as and when they arise, based on the premise that they will be hit occassionally. Firms also work on percentages based around
how many times they can get away with a dubious trade for example, before taking a hit. The likelihood is they will make money in the end.
As for fining the individual, well this could make a trader so cautious that there may be a possiblity of a market not being a fair one. Remember, ultimately the market objective is to take risk. Would you stick your neck out if you knew that the firm was
not ptoviding support?
Regulations need to be clarified not increased so that firms know where they are and the regulator can pick on misdemeanours quickly and impose fines, sanctions or suspensions almost immediately rather than the time it takes now. We also need to change the
culture but I fear that is a long way off.
MPI Europe Ltd
06 Jul 2004
13 Nov 2019
This post is from a series of posts in the group:
A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.