UK financial watchdog bites back with record fines

* UK financial sector fined record 34.8 mln stg in 2009

* FSA launches first successful criminal prosecutions

* FSA has yet to prosecute employees at large institutions

* Fines set to rise under new rules

By Kirstin Ridley

LONDON, Dec 17 (Reuters) - Britain’s financial industry was fined a record 34.8 million pounds ($57 million) this year for fraud, market abuse and poor systems and controls, heralding an era of heavier curbs on a sector that sparked the credit crisis.

The Financial Services Authority (FSA), accused of failing to erase a culture of heady risk-taking that helped bring banks to their knees, also banned more than 50 people from working in financial services, launched its first two successful criminal prosecutions and jailed four.

On Thursday, the regulator handed a 7 million pound penalty -- its fourth-biggest -- to Canada's Toronto Dominion Bank TD.TO, for failing to scrutinise traders. [ID:nLDE5BF29I]

Some critics have accused the FSA, which has hired a bevy of specialist staff, lawyers and city grandees to help tackle the industry, of donning the mantle of criminal prosecutor without public debate and with questionable credentials and funding.

But the FSA notes that its remit is enshrined in statute -- although it has only recently started using its powers to prosecute for insider dealing -- and the fact it is funded by industry means it is not subject to public sector spending cuts.

“Your credentials get established by bringing and trying cases,” Margaret Cole, the FSA’s director of enforcement, told Reuters. “You can’t always win cases, of course, but fortunately for us, we have won the first two.”

Nevertheless, industry experts say the FSA has had less success recently in its quest to prosecute employees at large institutions for market abuse such as insider trading.

“I’ve noticed a marked increase in quality of the people in enforcement,” said Arnondo Chakrabarti, a partner at law firm Allen & Overy. “They’ve also extracted some pretty big fines and had some notable successes on insider dealing and market abuse cases.

“(But) whether prosecuting the kind of insider dealing cases they have is a real deterrent to the kind of abuse they say goes on -- and which the FSA say is the real problem in the market -- is questionable.”


This year's fines -- including an 8 million pound hit for Swiss bank UBS UBSN.VX for allowing rogue traders to run riot with customer cash and 2.8 million for home loan firm GMAC-RFC, for treating customers in arrears unfairly -- top a 2004 record.

And that took some beating, for the 2004 tally was inflated by an unprecedented 17 million pound levy against Royal Dutch Shell RDSa.L for overstating oil and gas reserves.

But after next February, fines could treble as the FSA attempts to create a greater deterrent to those who flout rules by hitting them where it hurts -- their pockets.

Under proposals outlined in July, firms will forfeit up to 20 percent of income from products or businesses linked to breached regulations, and individuals will see fines of up to 40 percent of salaries and benefits in non-market abuse cases.

Those involved in market abuse cases can be fined at least 100,000 pounds.

“We are expecting the new way of setting penalties to drive higher fines by a factor of two or three times and in some cases more,” Cole said.

Regulators, politicians and the banking industry, vilified since receiving 850 billion pounds in taxpayer-funded bailouts, state credit, insurance and guarantees, are keen to restore public faith in financial services, which contributed roughly 60 billion pounds in tax during 2008/09. ($1=.6156 Pound) (Editing by Rupert Winchester)