Remembering Neil Woodford’s warning of “fine inflation”

CautionA string of bank fines lately, the latest being Merrill Lynch International, recalls the stance on bank stocks made by Neil Woodford last year who said he would not be investing in banks due to the risk of “fine inflation”.

Merrill Lynch International joins the growing number of financial institutions to face the wrath of the Financial Conduct Authority (FCA). The regulator has fined the investment bank £13.3 million (€18.5 million) for reporting failures.

The bank incorrectly reported over 35 million transactions and failed to report another 121,387 between November 2007 and November 2014.

The size of the fine was increased due the FCA’s frustration that the bank had not heeded previous sanctions, saying “past fines have not been high enough to achieve credible deterrence”.

Georgina Philippou, FCA acting director of enforcement and market oversight, said the bank had been issued with a private warning. She noted the bank had also been fined in the past for similar failings, and that it had received extensive FCA guidance and enforcement action in this area.

“The size of the fine sends a clear message that we expect to be heard and understood across the industry,” she says.

So will a £13.3 million fine really change the way Merrill Lynch International operates?

Considering that US regulators’ fines against financial institutions tend to run into the billions, it is not likely. This point was not lost on the FCA, which added an extra 50 pence for every pound it would usually impose.

Given that Deutsche Bank, Royal Bank of Scotland, Barclays and Credit Suisse have all faced sanctions for similar breaches, it remains to be seen whether financial institutions will heed this latest warning.

It is not just the prospect of banks being fined that concerns some investors; it is also the huge bonuses paid to bosses rather than larger dividends to shareholders. The main issue seems to be banks paying themselves bonuses on the basis of core earnings, not statutory profit, although this process is not limited to the financial sectors.

However, some banks, including Standard Chartered and HSBC take into account fines when awarding bonuses. But the fear for investors is that all banks take fines into account when paying out dividends.

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