Up go the fines, down goes the revenue. The reverse economics of the FCA


Despite having issued £696.6 million in fines to major financial institutions in relation to FX benchmark and LIBOR transgressions over the last few months, the Financial Conduct Authority (FCA)’s revenue from fiscal penalties to companies is set to fall short of a record for the first time since 2011.

For the last four years, the British financial markets regulator has achieved record annual revenues which it has channeled into certain projects, most recently consisting of donations to the Air Ambulance in London, as well as the funding of 50,000 extra apprenticeships for young people, which was paid from the Deutsche Bank fine.

Despite the vast and unprecedented penalties issued to banks for their part in the recent bout of FX rate manipulation among bank trading desks, including a record £284.4 million penalty imposed on Barclays PLC (LON:BARC) for its part in the foreign exchange rate rigging scandal, and a £226.8 million fine on Deutsche Bank AG (FRA:DBK), the third-biggest fine to be imposed by the FCA and a record for a penalty related to the LIBOR rate fixing scandal, revenues generated by the FCA could dwindle in the near future.

The combined penalties issued to Barclays and Deutsche Bank, at £511 million, make up the lion’s share of the £696.6 million total for the year to date, representing nearly half of the £1.4 billion reaped last year, however the FCA considers it very unlikely that it will be able to match that in the second half of the year.

The revenue generated from fines by the FCA has increased exponentially over the last four years, a matter which has caused controversy and as a result, current Chancellor of the Exchequer George Osborne amended the rules so that the money was returned to the taxpayer, bar a small amount which equates to approximately £40 million a year, which is retained by the regulator to cover investigation costs.

The remainder of the revenue has been appropriated toward projects for the greater good of industrial and social causes such as the aforementioned sponsorship of apprenticeships and specialist healthcare services.

Since the Conservative government was elected in the British General Election recently, one of the main areas to concentrate on is the size of the nation’s vast welfare bill.

Chancellor Osborne may channel some of the funds which were generated by the FCA’s fines into mitigating the effects of cuts to the social security spending that the government considers necessary to bring the British economy back to an even keel.

According to a report by The Independent, in 2011, the last year that a financial markets regulatory authority did not break a record for the total collected in fines, the now-defunct Financial Services Authority levied £66.1 million in total, a significant decline compared to the £89.1 million recorded in 2010.

In 2007, as the global financial crisis was just beginning to take hold across Britain, the FCA’s predecessor imposed penalties totalling an extremely small £5.3 million despite the misconduct later revealed by institutions which ranged from false certification of mortgages to very little due diligence when lending to retail customers for consumer purchases.

A year later, with the financial system teetering on the brink of collapse and several of the scandals that have since rocked the industry brewing, the total still reached only £22.7 million.

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Up go the fines, down goes the revenue. The reverse economics of the FCA

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