The Financial Conduct Authority (FCA) published its consultation paper CP 26/19 on June 15, proposing a series of targeted amendments to its Decision Procedure and Penalties Manual (DEPP). The FCA’s stated aim of these proposals is to update its penalties policy in market abuse cases involving individuals, improve transparency and consistency, and help deliver what it describes as “impactful deterrence."
How is the FCA proposing to change its penalties policy?
The FCA’s headline proposal is to increase its minimum disciplinary penalty for serious market abuse committed by individuals. For cases which are assessed at the most serious levels (4 or 5), the minimum penalty would increase from £100,000 to £150,000. The FCA considers the existing figure to have become outdated due to inflation and, in addition to increasing the minimum now, it is proposing inflation (CPIH)-linked adjustments every two years from 1 May 2028, with adjustments rounded to the nearest £10,000.
The consultation also proposes amendments intended to clarify the FCA’s ability to impose higher penalties on wealthier individuals. The FCA proposes to amend the wording in existing DEPP 6.5B.4 to make it clearer that, across all cases (and not just market abuse cases), it may increase a penalty where it considers the amount produced by the usual calculation method would not provide adequate deterrence given an individual’s income or net assets.
CP 26/19 also seeks to provide greater clarity regarding the calculation of an individual’s “relevant income”, one of the key variables in the penalty calculation, where the individual has complex or deferred income. Drawing on two 2025 Upper Tribunal decisions, the FCA proposes to clarify its penalty policy in DEPP 6 so that (i) benefits earned during the misconduct period but received later, such as deferred remuneration, will still be treated as “relevant income”; as will (ii) income that is uncertain when calculating the penalty, but may be estimated or adjusted for likelihood of receipt. Conversely, benefits earned prior to the misconduct period, even if received during it, will not be treated as “relevant income” and neither will benefits that the FCA knows, by the time the penalty is calculated, will never be received. The FCA also proposes that it may increase a penalty for deterrence purposes if the penalty calculated by reference to relevant income was reduced by the firm as a result of the misconduct. Such changes are intended to reflect the Upper Tribunal’s approach towards the calculation of relevant income and improve consistency and predictability in the FCA’s approach to calculating penalties.
Further proposals relate to serious financial hardship (SFH). The FCA proposes to increase the SFH thresholds – the levels below which it believes a person will suffer SFH as a result of paying the penalty over a reasonable period – by 50%, from £14,000 currently to £21,000 for income, and from £16,000 (currently) to £24,000 for capital, with automatic CPIH-linked adjustments every two years thereafter. These limits, in our view, remain low; the income threshold in particular effectively represents an amount which the FCA considers an individual should be able to live off and still be able to pay some form of financial penalty. There are numerous areas of the UK where this could, in our view, lead to serious hardship even with the revised thresholds.
The FCA is also proposing greater flexibility for individuals seeking to make representations regarding the effect of selling a property occupied by others, removing the current requirement that the impact be “exceptionally severe.” At the same time, the FCA proposes expressly stating that the disgorgement element of a penalty will not be reduced, even where payment would cause SFH.
The consultation also proposes procedural changes to settlement decision-making so that in investigations referred by Market Oversight, a Director or Head of Department from that division could be a Settlement Decision Maker alongside an Enforcement Director.
Finally, CP 26/19 proposes consequential amendments to extend the FCA’s penalty framework to cryptoasset market abuse, ensuring that DEPP is aligned with the forthcoming Market Abuse Regime for Cryptoassets (MARC) and the FCA’s new enforcement powers in that area.
Will the FCA’s proposals affect how counsel advise individuals in market abuse cases?
Many of the proposed changes seem technical and designed to update the FCA’s existing policy rather than to change it radically. If, however, the FCA’s proposals are adopted (as seems likely), we believe that practitioners will need to adapt their approaches.
First, we believe that increasing the minimum penalty will, from an individual’s perspective, create an even greater incentive to defend the FCA’s allegations through the enforcement process, in the hope of persuading the FCA (RDC and/or Upper Tribunal) that the relevant conduct was not abusive of the market, so avoiding any penalty at all. The proposals could potentially make the enforcement process, particularly in cases where there is some credible alternative explanation for the activity, more heavily contested. Further, although the ‘percentage range of seriousness’ (in DEPP 6.5C.2) is already a focus of defence counsel representations to the FCA, the proposed policy change may create an even greater incentive to persuade the FCA that the seriousness was level 3 or below.
The prospect of increased minimum penalties may also affect tactical considerations of whether to settle at an early stage, continue to make representations to the RDC, or to refer a matter to the Upper Tribunal. The merits of the underlying case, as well as costs, are likely to remain the key considerations here. Where the evidence strongly supports the FCA’s allegations, the benefit of settlement discounts may continue to outweigh the potential advantages of prolonged challenge.
Secondly, although the FCA’s proposed changes in relation to individuals with deferred and more complex income do bring some welcome clarity, they make it even more important that defence counsel scrutinise the FCA’s proposed penalty calculations. Despite the proposed changes, it appears the starting point for “relevant income” will remain the “gross amount of all benefits received by the individual from the employment” (DEPP 6.5C.2(4)). Such benefits can take many forms, raising legitimate questions of valuation, timing and the likelihood of receipt. These are matters on which an individual will need to take a considered position in order to negotiate effectively.
Thirdly, the FCA’s proposals are likely to increase the importance of representations concerning ‘deterrence’. The ‘adjustment for deterrence’ (step 4) in the FCA’s penalty policy already gives it very wide discretion. The view that a penalty calculated in the usual way will not be sufficient to deter misconduct, given an individual’s income or net assets, is an inherently subjective one. There is likely to be material disagreement both over whether such a penalty would be sufficient, and if not, over the extent of any adjustment. Experience suggests that this is already often a hard-fought area, and we expect it to remain so.
Finally, the FCA’s various proposed penalty policy revisions underline the importance of defence counsel assembling solid financial evidence at an early stage. This is needed not just to meet the inevitable FCA information requests on the way into Stage One, but more importantly to establish what a reasonable starting point should be for any settlement negotiations. This can be a challenging evidential exercise. Typically, where a case has reached the stage where draft penalty calculations are being performed, years will have elapsed since the allegedly abusive activity took place. Individuals are likely to have changed roles. Establishing precisely what income an individual received and in respect of what activity, particularly where the individual was senior and had a complex performance-related pay and benefits structure, is not always evidentially straightforward.
Careful examination of the evidence is likely to be needed, including a review of remuneration in employment contracts and bonus arrangements, particularly where the FCA has compelled some of the evidence on which it is relying from the individual’s (former) employer, rather than from the individual themselves. Experience suggests there can be material differences of view or recollection.
Similar considerations arise in relation to SFH. On one view, the proposed increase in SFH thresholds is a welcome recognition that the existing policy no longer reflects economic reality. Practitioners should not, however, assume that higher thresholds will make successful SFH arguments easier. The FCA is likely to continue to require extensive supporting evidence regarding an individual’s income, assets, liabilities and expenditure before it will reach the view that imposing a penalty would result in SFH.
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