Guidance on the SRA's approach to financial penalties

 

13 August 2013

This guidance should be read in conjunction with the SRA's Enforcement Strategy ("the strategy") and the SRA Disciplinary Procedure Rules 2011 ("the disciplinary rules"), in particular appendix 1 of the rules, the Financial Penalty Criteria.

Financial penalties provide a flexible method of deterring misconduct by those who are directed to pay them but also to others who may be considering similar conduct. The disciplinary rules set out the criteria for when a fine is appropriate following a finding of misconduct by a regulated person, including that a fine must be a proportionate outcome in the public interest. The Financial Penalty Criteria in the disciplinary rules sets out the key principles which determine what level of fine will be appropriate.

This guidance sits underneath the rules and criteria and is intended to provide a practical approach for decision makers to determine financial penalties which fulfil the requirements of the Financial Penalty Criteria. This is broad guidance and should not be interpreted strictly as if it were legislation.

Decision makers ultimately retain discretion to determine an appropriate penalty in any individual case having regard to all of the circumstances and in particular in order to achieve the objectives of the Financial Penalty Criteria. This may mean that in some cases, for example, a penalty will be higher than indicated by this guidance because of aggravating factors.

This guidance applies to fines imposed upon individuals and firms (recognised bodies and licensed bodies), though consideration may be given by decision makers to the means of the paying party in accordance with the Financial Penalty Criteria. Action may be taken against the firm only, individuals or both. This guidance should be read together with our guidance on how we determine the focus of our investigations and how we deal with multiple allegations arising in one "case".

A three-step fining process

To maximise consistency and transparency, there is an indicative three-step process for the practical determination of a financial penalty:

  • Step 1 – determining a basic penalty taking into account the seriousness of the conduct;
  • Step 2 – adjusting the penalty to account for mitigating factors;
  • Step 3 – eliminating financial gain or other benefit obtained by the regulated person as a result of the conduct.

The three-step process is informed by the principles set out in the Financial Penalty Criteria and is concerned only with the level of the penalty. It follows that the decision maker is already satisfied that the conduct of the regulated person is appropriate to be dealt with by way of a fine1. This guidance should be interpreted accordingly. References to "serious" conduct and causing a "high" level of harm are in the context of matters appropriate for a fine rather than more broadly.

All fines are subject to the limits placed on the SRA's fining powers in law from time to time.

Step 1 – Determining the basic penalty

Step 1(a) – assessing the seriousness of the misconduct

The first step is to determine the basic penalty which is appropriate taking into account the seriousness of the misconduct. This is done firstly by assessing the nature of the conduct as either standard or serious and its impact as low, medium or high:

Nature of the conduct by the regulated person Nature score

Standard – the regulated person will have cooperated fully in the investigation(s) and the conduct or omission will have not

  • been intentional or arisen as a result of recklessness or gross negligence,
  • continued after it was known to be improper, and
  • formed, or formed part of, a pattern of misconduct.
 
1

Serious – including circumstances where the regulated person has failed to cooperate in the investigation(s) or where the conduct

  • had been intentional or arisen as a result of recklessness or gross negligence,
  • continued after it was known to be improper, or
  • formed (or formed part of) a pattern of misconduct.
 
3
Harm2 or risk of harm Impact score

Low – including:

  • causing inconvenience but no loss and having no other direct material impact, and
  • causing minimal loss or having a minimal impact.
 
2

Medium – including:

  • causing a moderate loss; having a moderate impact;
  • having the potential to cause moderate loss or to have a moderate impact;
 
4

High – including:

  • causing a significant loss or having a significant impact,
  • causing significant loss or harm to a vulnerable person, and
  • having the potential to cause significant loss or to have a significant impact.
 
6

Step 1(b) – arriving at a broad penalty bracket for the matter

The decision maker will now have a score for both the "nature" of the conduct and also its "impact" or potential impact. The decision maker should add these scores together to arrive at an overall band for the seriousness of the matter and a broad penalty bracket using the table below.

Fines imposed upon individuals will generally be assessed as a fixed monetary sum. If a fine is to be imposed upon a firm with annual domestic turnover of £2 million or more ("a firm of greater means") then the decision maker is guided to determine the penalty as a percentage of annual domestic turnover3.

Conduct band Penalty bracket
A. The nature and impact scores add up to 3
  • £500 or £1,000 (in all cases)
 
B. The nature and impact scores add up to 5
  • £1,001 to £5,000; or
  • if the regulated person is a firm of greater means, up to 0.5% of annual domestic turnover
 
C. The nature and impact scores add up to 7
  • £5,001 to £25,000; or
  • if the regulated person is a firm of greater means, up to 1.3% of annual domestic turnover
 
D. The nature and impacts scores add up to 9
  • £25,001 to £50,000; or
  • if the regulated person is a firm of greater means, up to 2.5% of annual domestic turnover
 

For example:

ABC & Co have set procedures for managing, supervising and monitoring staff and financial transactions but the firm discovers that in some areas of the firm, the procedures are not being followed (contrary to regulatory requirements). Upon investigating further the firm discovers that a new member of staff in the Probate department has overcharged a number of clients large sums of money and that this would have been discovered much sooner had appropriate procedures been consistently applied. The firm contacts the SRA, explain that the partner who had previously been in charge of Probate had left the firm some months earlier and volunteer that it had taken too long to re-establish the required controls in that area. The firm immediately repay the monies to clients upon discovering the problem4.

12. In the hypothetical scenario of ABC & Co a decision maker might reasonably conclude that the character of the conduct by the firm falls short of being serious (a "nature score" of 1) but that the errors nonetheless had a high impact (an "impact score" of 6). By adding the nature score of 1 to the impact score of 6 the decision maker will arrive at an assessment of the overall seriousness of the matter: misconduct band C. The decision maker is therefore guided that an appropriate penalty bracket for the basic fine is between £5,001 and £25,000. If annual turnover of ABC and Co is in excess of £2 million then the decision maker should consider whether a fine determined as a percentage of the firm's UK turnover is more appropriate as otherwise the fines in this bracket may not have the desired deterrent effect.

Step 1(c) – arriving at a specific figure for the basic penalty

13. Once the misconduct grade has been ascertained and the decision maker has arrived at a broad penalty bracket (such as £5,000 – £25,000), the decision maker should determine a specific basic penalty within that bracket. In order to maximise consistency and fairness, decision makers are encouraged to select a specific basic penalty in accordance with the simple figures below.

Penalty band Penalty bracket (£) Basic penalty (£) Basic penalty as a % of annual domestic turnover if appropriate Basic penalty scale
A 500 or 1,000 500.00 - A1
1,000.00 - A2
B 1,000 to 5,000 2,000.00 - B1
3,500.00 - B2
5,000.00 0.50% B3
C 5,000 to 25,000 7,500.00 0.60% C1
10,000.00 0.70% C2
15,000.00 0.90% C3
20,000.00 1.10% C4
25,000.00 1.30% C5
D 25,000 to 50,000 30,000.00 1.5%1.75% D1
35,000.00 2% D2
40,000.00 2.25% D3
45,000.00 2.50% D4
50,000.00   D5

In determining whether conduct is appropriate for a fine towards the lower, mid or upper part of a penalty bracket, decision makers should be guided by the principles set out in the Financial Penalty Criteria in the disciplinary rules. In particular the decision maker should consider:

  • the culpability of the regulated person – deliberate or grossly reckless conduct will, for example, be liable to fines at the higher end of a penalty bracket;
  • the impact of the conduct and any harm caused – similarly the greater the impact or harm caused (to clients or to others) the more likely it is that a fine at the higher end of a penalty bracket would be appropriate;
  • proportionality to the means of the paying party5 – if a regulated person is of low means then a lower than usual basic penalty may be appropriate. This should be balanced however with the desire for a penalty to act as a credible deterrent against misconduct by others and should not be interpreted as meaning that the regulated person must have the means readily available to pay a penalty; and
  • achieving credible deterrence – penalties should be of such an amount that they are capable of deterring future misconduct by the person directed to pay and by others who may be engaged in similar conduct.

In the case of ABC and Co, a decision maker on the full facts may conclude that a basic penalty of £15,000.00, for example, is appropriate (assuming that ABC and Co is not a "firm of higher means").

Step 2 – Adjusting the penalty to account for mitigating factors

Having determined a basic penalty (which includes consideration of aggravating factors), the decision maker is encouraged to assess all of the circumstances to decide whether it is appropriate to reduce this sum to take account of mitigating factors. The decision maker will not generally discount a basic penalty by a sum of more than 40% or to an extent which, on the facts of the case, would otherwise be contrary to the objectives of the Financial Penalty Criteria. For example, a heavily discounted penalty may not be a proportionate outcome in the public interest where significant harm and distress has been caused to clients or where the proper administration of justice has been put at risk.

Some examples of mitigating factors and guidelines for discounts if such factors are present are set out below.

Discounting the basic penalty for an early admission of the misconduct

The decision maker may discount the basic penalty for early admission as follows6:

  • up to 25% where the misconduct is fully and frankly reported by the regulated person to the SRA before any investigation has been disclosed and the misconduct is expressly admitted by that regulated person at the time of reporting or immediately afterwards;
  • up to 20% where the misconduct is expressly admitted by the regulated person within 6 weeks of the issue coming (formally or informally) to their attention;
  • up to 15% where the misconduct is expressly admitted by the regulated person before the matter is referred to the decision maker.

Discounting the basic penalty for remedying harm caused

The decision maker may discount the basic penalty by the amounts specified below where the harm is corrected by the regulated person or, a scheme satisfactory to the SRA is implemented to do so, within the period specified below7:

  • within 6 weeks of the harm coming to the attention of the regulated person (formally or informally) or sooner – up to 25%;
  • before the matter is referred for adjudication – up to 20%.

In the hypothetical scenario of ABC and Co, the decision maker might conclude on the facts that the basic penalty of £15,000 arrived at by following step 1 should be reduced by 40% (the maximum discount recommended in this guidance) to account for the fact that the firm self-reported the problem and admitted the misconduct to the SRA and promptly remedied the harm caused to clients. After step 2, the basic penalty would be adjusted to £9,000.

Step 3 – removing benefit arising from the misconduct

The final step is to consider whether the penalty arrived at in steps 1 and 2 will adequately eliminate financial gain or other benefit obtained as a direct or indirect consequence of the misconduct. If not, the decision maker should consider increasing the penalty to such a level which also achieves this. This approach is consistent with the requirements of the Financial Penalty Criteria and the principles of better regulation.

The decision maker is not required to calculate an exact sum in respect of the financial gain or benefit obtained if one is not available or easily assessed from the available information. In the absence of an exact sum the decision maker may adjust the penalty broadly as felt appropriate taking into account

  • the principle set out in the Financial Penalty Criteria that a financial penalty should so far as practicable eliminate any financial gain or other benefit obtained as a direct or indirect consequence of the misconduct; and
  • the information available at the time the decision is made, including the completeness and reliability of the information. The greater the difficulty in quantifying the gain or benefit from the information available the greater the caution which should be exercised in adjusting the penalty.

This step is intentionally placed at the end of the process to ensure that the principle of removing the benefit arising from misconduct is not diluted by any discounts which may be applied for mitigating factors, such as prompt admission.

In the hypothetical scenario of ABC & Co, the firm have already repaid the monies (which they might otherwise have benefited from) to clients. As such the three-step fining process would be complete and a penalty of £9,000 would be imposed.

Notes

1. In accordance with the test set out in Rule 3(1) of the SRA Disciplinary Rules 2011

2. "Harm" should be construed broadly and may include impact (financial or otherwise) upon clients, the public interest and public confidence in the provision of legal services.

3. The suggested approach for firms with an annual domestic turnover of £2 million or more is intended to assist the decision maker in determining a penalty which (in accordance with the Financial Penalty Criteria annexed to the SRA Disciplinary Procedure Rules 2011) will

  • (i) as far as practicable be of an amount that is likely to deter the repetition of the misconduct by the person directed to pay the penalty and to deter the misconduct by others and
  • (ii) be proportionate to the means of the person directed to pay the penalty.

The term "annual domestic turnover" is intended to refer to the most recent figure which the SRA holds prior to the matter being submitted to the first instance decision maker as to the turnover in England and Wales of the body. This figure will generally be a good indicator as to the financial means of the firm in question. However, this will not always be the case and the decision maker may consider other data and other means of determining the basic penalty in step 1 if there is a risk that the approach outlined in this guidance will not achieve the objectives of the Financial Penalty Criteria. For example, assets, global turnover, average turnover over a number of years, yearly expenditure and the turnover of any parent undertaking may indicate that a firm is of quite different means to that which is indicated by reference only to the firm's most recent annual domestic turnover. Ultimately the decision maker may deviate from the three step approach if to do so would better achieve the aims of the Financial Penalty Criteria.

4. This is a hypothetical scenario only and it is assumed firstly that on the full facts the decision maker is satisfied that the matter is appropriate for a financial penalty. For the purposes of this guidance consideration is only given to the conduct of the firm ABC & Co. In the scenario provided the member of staff would also be investigated by the SRA.

5. Failure by a regulated person to provide information as to financial means where the process for doing so under the SRA Disciplinary Rules is followed may also be taken into account more generally – see paragraph 6 of the Financial Penalty Criteria.

6. The discounts outlined in the bullet points which immediately follow are not cumulative and the recommended maximum discount of the basic penalty for early admission alone is 25%.

7. The discounts outlined in the bullet points which immediately follow are not cumulative and the recommended maximum discount of the basic penalty for remedying harm caused alone is 25%.


To link to this page, use www.sra.org.uk/financialpenalties

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