On 14 August 2024, the FCA published two unconnected decisions in which it accepted arguments from the subjects of enforcement actions — a firm and an individual — that they would suffer serious financial hardship if the FCA imposed the penalties it had deemed appropriate for each case.
The first case involved Forex TB Limited ("FXTB"), a Cypriot firm that markets contracts for differences ("CFDs") through an online platform. FXTB marketed its services in the UK from 23 December 2015 to 31 December 2020, utilising an EEA passport. Following Brexit, the firm operated in the UK under the Temporary Permissions Regime from 1 January 2021 until the FCA intervened and agreed a voluntary variation of permission on 12 April 2021.
The FCA found that FXTB had provided advice to customers without the requisite permission, had wrongly categorised customers as elective professionals and had pressured customers to trade. The FCA determined that FXTB had breached Principle 6 during the Relevant Period by failing to pay due regards to the interests of its customers and treat them fairly, and by carrying on the regulated activity of advising otherwise than in accordance with permission.
In calculating the penalty, the FCA applied its usual five-step approach. In the first step, it considered that although FXTB had earned revenue from UK customers as a result of its failings, the firm itself had paid compensation to customers which exceeded the revenue. Accordingly, there was no net financial benefit to disgorge.
The FCA then applied its formulaic approach to calculating the penalty by calculating a percentage of the annual revenue. This amounted to 20% of £1,972,732, providing a figure of £395,546.
The FCA then stated that it would have applied an aggravating factor uplift of 10% to bring the fine to £434,000. However, the FCA made it clear that FXTB had "provided verifiable evidence that payment of a sum greater than that reached after Step 2 (and taking account of the settlement discount applied at Step 5) would result in serious financial hardship. As a result, the Authority has decided not to increase the penalty at Step 3."
The FCA further stated that it did not consider even that sum to be a sufficient deterrent and stated that it would have increased that sum by a further multiplier of four, which would have resulted in a Step 4 figure of £1,736,000. However, because FXTB provided verifiable evidence of financial hardship, the FCA agreed not to increase the penalty.
The result was that FXTB was fined a total of £276,182 after a 30% settlement discount, which, absent financial hardship, would have been £1,215,200.
The second case involved Martin Christopher Sarl, the sole director of a small independent insurance broker. The broker fell into financial difficulty and on 15 June 2016, agreed to a company voluntary arrangement to meet its debts through monthly instalments. Following customer and insurer complaints, the FCA investigated and ascertained that Mr Sarl had been using customer monies from the client account to pay debts. In at least 20 "but likely many more" cases, Mr Sarl failed to pass on customer premiums to insurers, leaving those customers uninsured. The FCA intervened on 13 September 2019, varying the firm's permission so that it could no longer undertake regulated activity. Nevertheless, the FCA ascertained that on at least one occasion, Mr Sarl continued to do business. Unsurprisingly, the FCA determined that Mr Sarl was not fit and proper and prohibited him from undertaking any function in relation to any regulated activity. In determining the financial penalty, the FCA ascertained that Mr Sarl had transferred £3,650 from the firm's client account to his personal account. Interest at 8% was applied, which increased the figure to £5,021. Note that the disgorgement only applied to monies which Mr Sarl had received personally from the client account; it did not apply to monies misappropriated by the broker firm.
The FCA then applied its formulaic approach to determining the penalty. Based on Mr Sarl's admittedly low income from the business, the penalty (calculated as a percentage of income) was initially set at £11,723 after applying a 15% aggravating factor uplift. However, the FCA stated that this amount was an insufficient deterrence and applied an uplift multiplier of five, bringing the penalty to £58,616 (£46,000 after settlement discount).
However, the FCA accepted that the payment of that penalty would cause Mr Sarl serious financial hardship and therefore reduced the penalty to £5,021, which represented the financial benefit received by Mr Sarl. The FCA pointed out that it did not consider it appropriate to allow Mr Sarl to retain the financial benefit derived directly from his breaches.
Comment
These two cases demonstrate that the FCA is generally willing to reduce penalties in the presence of verifiable serious financial hardship in appropriate cases. It is interesting that in both cases, the FCA considered it appropriate to record in detail how the penalties would have been calculated, absent the financial hardship, including the indication that a multiplier should be applied to the nominal penalty for deterrence purposes. This is despite the FCA's recognition that even the nominal penalties were not affordable by the subjects.
The cases also demonstrate a number of principles that the FCA will apply when considering whether to reduce a financial penalty due to serious financial hardship. Firstly, such a reduction is not automatic; it is incumbent upon the subject to claim financial hardship and provide verifiable evidence of their finances. Furthermore, even if the FCA is satisfied that payment of a financial penalty would cause serious financial hardship, there may be cases where the breach is so serious that the FCA will not reduce the penalty. Secondly, while the FCA may reduce a penalty (including to zero in appropriate cases), it will not apply a discount to any element of disgorgement.