Over the past three years 93% of firms have decided to settle Financial Conduct Authority (FCA) fines in advance, instead of challenging the financial watchdog in court, according to analysis by UK law firm Freshfields.
The FCA offers a strong incentive to settle early. If a firm reaches an agreement with the FCA in stage one of the process, then it receives a 30% discount; stage two settlement earns a 20% reduction; and stage three gets just 10% off. If the firm decides dispute the fine in front of the Regulatory Decisions Committee, which is a semi-independent governance committee, or at a tribunal, then it doesn’t receive any rebate.
While penalties relating to alleged manipulation of the FX markets have yet to be applied, an FCA spokesperson indicates the discount method will be similar, as it is for all fines.
Between the beginning of 2010 and the end of 2013, firms operating within the UK jurisdiction paid out a total of £905 million. Ninety-nine out of 107 firms accused of malpractice chose to pay in the initial stages of the process rather than facing the potential consequences and expense of disputing penalties meted out by the FCA. Ninety-one chose to pay in stage one to obtain the greatest discount.
UBS paid out the highest amount with fines totalling £198 million, £160 million of which was as a result of London interbank offered rate (Libor) and euro interbank offered rate (Euribor) manipulation. The Swiss bank qualified for a 20% discount because it agreed to settle at stage two.
Similarly, Rabobank was fined £150 million for Libor manipulation. But as a result of cooperating with the FCA’s investigation and agreeing to settle early, the Dutch bank qualified for a 30% discount, meaning it paid £105 million in total.
Despite declining to comment specifically on the FCA’s FX investigations, the spokesperson provides insight as to the FCA’s logic in applying an early-settlement discount: “Investigations themselves are a costly businesses. Therefore, it is in everyone’s best interest to come to a conclusion on a case early on rather than have it dragged through the courts, which becomes extremely costly for everyone concerned.”