FCA applies large adjustments to challenger bank fines

The Financial Conduct Authority (FCA) has applied large step two adjustments when calculating Starling Bank and Metro Bank’s recent fines for financial crime systems and control failures. The challenger banks’ fines were adjusted downwards 72% and 92.5% respectively because they were disproportionate to the breaches, said the FCA final notices.

The final notices did not explain how the FCA arrived at the step two adjustments. Enforcement penalties, however, take into account the relevant revenue in a case, which in anti-money laundering cases (AML) cases can be all or a large part of a firm’s revenue.

This could result in disproportionately high fines. “Therefore, our approach to the calculation of penalties provides for proportionality overrides to be applied and can mean that the penalty is reduced from the initial figure generated from relevant revenue alone,” said a FCA spokesperson.

The exact reduction will always depend on the specific circumstances of the case, they said.

Therese Chambers, FCA joint executive director of enforcement and market oversight, called Starling’s financial sanction screening controls “shockingly lax”. The bank “left the financial system wide open to criminals and those subject to sanctions”, she said, in a statement accompanying the £29 million fine.

“Metro’s failings risked a gap being left in our defence against the criminal misuse of our financial system. Those failings went on for too long,” Chambers said, in an FCA release announcing Metro’s £16 million penalty.

Both banks also received a further 30% discount at step five for early settlement at stage one.

This year, the FCA has pushed to wrap up long-running enforcement cases, of which these are two recent examples. Last week, it came to a settlement with Barclays, which dropped its Upper Tribunal appeal against FCA decisions published in 2022. The regulator announced it would scale back a £50 million penalty, fining Barclays £40 million for its failure to disclose certain arrangements with Qatari entities in 2008.

This fine was subject to an older penalty regime and did not follow the current five steps.  

Discount scheme

Settling enforcement cases early is “sometimes” in the public interest, the FCA website says. The discount scheme for early settlement is available on a sliding scale, depending on the time of the settlement.

The early settlement stage usually takes place within 28 days of state one starting and comes with a 30% discount. Stage two is up to the expiry period for making representations to the Regulatory Decisions Committee, and allows a 20% discount.

Stage three, up to the decision notice being issued, carries a 10% discount. This discount is applied at step five of the FCA’s penalty calculation.

There is concern, however, the discount at step five at the 30% level is applied too frequently, a practice that may be out of step with its purpose.

Transparency needed

“There needs to be a more transparent discussion about fines, what goes into final notices and the conflicting incentives between the regulators and firms when it comes to financial penalties,” said Gavin Stewart, an independent regulatory commentator and former UK regulator.

“Giving a discount feels as if it has become almost automatic — the result of negotiation between lawyers rather than in return for something meaningful, such as genuinely early settlement that would save resources and produce more timely justice. If so, this feels like the wrong answer,” he added.

The FCA’s push to close enforcement cases and the government drive for more economic growth could be affecting the fines levied on financial services firms.

“I would be surprised if there weren’t different layers of conversation going on, including with the Treasury, not least after the chancellor’s Mansion House speech about the primacy of growth and regulation having supposedly gone too far,” said Stewart said.

“The general lack of transparency doesn’t feel particularly healthy to me and is unlikely to improve the system’s credibility with the public. And it’s not hard to imagine the political rhetoric having a chilling effect on how regulators approach enforcement.”