MLR1PP9160 - Penalties guidance: the penalty cap: continued

This approach may initially appear inappropriate but it is important to remember that the penalty is never determined by the level of gross profit. The gross profit figure simply acts as a taper to ensure that any penalty (in excess of the fixed starting penalty in the case of HVDs/MSBs) can not exceed 10% of the business’s gross profit.

If, for example, a money service business has a gross profit of £7,000,000 but the turnover from regulated activity is only £10,000 the gross profit is irrelevant because any penalty will be based on 20% of the culpable turnover. In this example, even if the entire turnover from regulated activity is culpable the maximum penalty will be 20% of £10,000 or £2,000, plus the fixed starting penalty of £5,000. This is a total of £7,000. This is only 0.1% of the gross profit of the business and appropriate relative to the size of the business.

The exception to this will be where the gross profit from non-regulated activity is completely distant from the regulated activity. For example where a business operates from three sets of premises, but only one provides MSB services, and only one is registered for MLR purposes. If the business is able to provide evidence of the gross profit arising solely from the registered premises, then this can be used to determine the penalty cap. In practice this is likely to make little or no difference to the size of the starting penalty. If the business in the above example was able to demonstrate that only £500,000 in gross profit was generated by the registered premises, the penalty cap would still be £50,000, which is still well in excess of the calculated starting penalty of £7,000.

If the fixed starting penalty plus any additional penalty is less than the capped penalty this will be the maximum penalty.

This means that the maximum penalty will always be the lower of:

• 10% of gross profit in the preceding 12 months, (subject to a fixed starting sum of £5000 in the case of HVDs/MSBs) or
• the fixed starting penalty plus the additional penalty

The penalty cap effectively functions as an automatic taper within the penalty framework, restricting any additional penalty to an appropriate level, according to the relative size of the business.