Financial Regulator `Radically' Changed Approach as Fines Climb to Record

The Financial Services Authority said it “radically changed” its approach to supervision of banks in a year the regulator issued a record 33.6 million pounds ($49 million) in fines.

The FSA increased penalties and filed more insider-trading cases to develop a policy of “credible deterrence,” the regulator said in a statement accompanying its annual report today. Still, the level of “abnormal” price movements made before U.K. takeovers rose to 30.6 percent in 2009 from 29.3 percent a year earlier, according to FSA data.

“In order to secure attention, fines, like medicine, have to be administered in ever larger doses,” said Simon Morris, a regulatory lawyer at London-based CMS Cameron McKenna. The “FSA’s eternal fine-inflation is increasingly aimed at the directors and management of firms in breach of the rules. The threat of a personal fine, reprimand and ban will always be a far more effective deterrent than the risk of a corporate fine.”

The FSA, which may be split up or made to report to the Bank of England by the U.K. coalition government, has beefed up regulation following complaints it did little to detect the financial crisis. The regulator has brought four insider trading prosecutions to trial, winning three before losing a case against two lawyers and a finance director earlier this month.

Mansion House Speech

U.K. Chancellor of the Exchequer George Osborne may say he plans to reduce the FSA’s powers in his Mansion House speech this month, the Guardian reported, citing unidentified people with knowledge of the matter.

“In advance of next week’s Mansion House speech, where George Osborne is expected to strip the FSA of most of its powers, the regulator’s annual Report is politically fortuitous,” Morris said. “The record fines are excellent political capital, demonstrating strength and a commitment to credible deterrence.”

The FSA said it has created an “intense” supervisory approach, hiring 537 more employees and developing comprehensive stress testing program for major banks, building societies and insurers.

“The measure of the effectiveness of our new regulatory and supervisory approaches will be whether in five or 10 years’ time potential problems are prevented,” FSA Chairman Adair Turner said in the statement.

Compensation

Turner, who became chairman in September 2008, received 482,442 pounds in compensation for the fiscal year that ended in March. Hector Sants, who’s stepping down as chief executive officer this year, received a 19 percent rise to 742,011 pounds, including salary, bonus and other benefits, the annual report said.

The regulator’s salaries were paid out of fees paid by regulated banks and not by taxpayers. A spokeswoman for the FSA said that the agency had to be competitive with salaries in the financial services industry.

Bank of England Governor Mervyn King, the highest-paid among the world’s top central bankers last year, was paid 305,368 pounds including benefits on July 1 2009, according to the bank’s annual report.

U.K. civil servants, such as John Fingleton, CEO of the Office of Fair Trading, earned just over 275,000 pounds last year and David Nicholson, head of the state’s National Health Service, was paid 255,000 pounds, the Times of London reported.

To contact the reporters on this story: Nandini Sukumar in London at nsukumar@bloomberg.net.

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