UK: Fines cost companies in reputational loss

Research from Britain's Oxford University has offered warnings to companies that being fined by a government regulator may cost them far more than the amount of the financial penalty.

The study by John Armour of Oxford's law faculty and Colin Mayer, dean of the university's Saïd Business School, plus Andrea Polo, a Saïd doctoral student, assessed the impact on businesses of fines from the UK's Financial Services Authority.

Their Regulatory Sanctions and Reputational Damage in Financial Markets stressed companies may be paying more than fines when reprimanded, suffering further financial loss because of damaged reputations.

Released on 16 September with the support of the Oxford University Centre for Corporate Reputation, the report actually argues regulatory bodies pay insufficient attention to further penalties that arise from paying fines.

Speaking to University World News Armour said the penalties levied "may not capture the full extent of the costs to the firm of having enforcement action taken against [them]."

Armour noted that reputational damages, in terms of stock decline, may be much larger than the original fine, although he agreed that some analysts contest this position.

"The true penalty is approximately 10 times the size of the financial payment firms are required to make and if the regulator is not aware of that then they could easily be setting fines that are on the wrong level," Armour said.

The authors found that the level of the true loss depended on the type of wrongdoing.

"If the firm has harmed its customers or investors, that's where we see this 10 times effect, because it's harming people who are trading with it and will be thinking about trading with it in the future," he explained.

According to Armour the reputational affects continue into the future when potential investors investigate the firm. If a firm is known to have harmed its customers, people will be less likely to invest.

The report argues that sanctions need to be set at a level that will encourage the penalised parties to devote an appropriate amount of money and time to awareness and prevention of any future trouble.

"If the regulator is setting a penalty to try and deter people, they need to know how much the true penalty is in order to be able to set it appropriately," Armour said.

Furthermore Armour said regulatory bodies should increase fines for companies that harm third parties.

"Ideally regulators should be distinguishing between the types of wrongs and setting their penalties according to that. So they should give higher penalties for wrongs that harm third parties and they don't need to worry so much about setting higher penalties for firms that have harmed their own customers and investors," Armour added.

Now that the report has been published, Armour said the researchers planned to write a follow-up report that would investigate the impact of these types of fines on board members of certain companies. Until then he hopes that the Financial Services Authority will take their report into consideration when setting fines.