Britain’s new coalition government is pushing ahead with its promise to dismantle the country’s Financial Services Authority and create a new agency to fight white-collar crime. But already concerns are emerging that the move could stall enforcement efforts, especially against insider trading.
Chancellor George Osborne used a June 16 speech in London to pledge that the FSA would be history by 2012. His main aim is to shift responsibility for oversight of financial firms back to the Bank of England, so that regulation of individual firms and of the financial system overall sits in one place. But Osborne said efforts to tackle financial crime must be overhauled too, and he was “determined to simplify the confusing and overlapping responsibilities … to improve detection and enforcement.”
Currently, at least three different agencies prosecute white-collar crime in Britain. The FSA tackles insider dealing, money laundering, and abuse of market listing rules; the Serious Fraud Office prosecutes corporate frauds and bribery; and the Office of Fair Trading enforces competition law. Some specialist police units handle a small number of corruption cases as well.
Osborne
Osborne’s solution is to create an Economic Crime Agency, which would take over the SFO and handle the white-collar crime work currently led by the FSA and the OFT. Exactly when the transformation might take place remains unclear; Osborne has only said he wants to complete the change by the end of 2012. The government has not yet even said how much legislation might be required—which will dictate how much opportunity members of Parliament have to tinker with the plan—or how much could be done solely through reshuffling in the executive branch.
Lawyers specializing in compliance and regulation have questioned the need for the reorganization, and whether it will be a step backwards rather than forwards. Only recently has the FSA finally pulled its crime-fighting act together, they argue, and there are doubts about how the ECA could be made to work in practice.
The OFT and the SFO, in contrast, have had a tough time over the last year, with various setbacks in court; the case for their demise is easier to make.
The OFT, for example, lost a massive cartel prosecution involving British Airways in May. The case collapsed during trial in embarrassing circumstances: new evidence emerged at the 11th hour, which led to criticism of the agency’s treatment of whistleblowers and claims that it wasn’t up to the task of prosecuting complex cases.
“We need to keep up the strong momentum we have built. The simple answer to what we need to do [in the future] is ‘more of the same.’”
—Margaret Cole,
Director of Enforcement,
Financial Services Authority
The SFO also suffered two highly critical court rulings this spring—the Innospec and DePuy cases—that have severely damaged its strategy of fighting fraud through corporate self-reporting and plea bargaining, with claims that it is too soft on offenders.
The FSA, however, has started to establish a reputation as an enforcement agency to be reckoned with. In 2007 it changed its approach fundamentally, making imprisonment and criminal penalties for rule-breakers its priority—and offering civil remedies and leniency for those who cooperate. The agency also hired the top-level staff needed to take on sophisticated operators in “the City,” London’s equivalent to Wall Street.
Last year the FSA took action against 56 firms and individuals and levied 46 fines, with a record value of £33.6 million ($50.3 million). It has already exceeded that total in the first two months of the current fiscal year, with fines totalling £40 million ($60.4 million) since April, including record amounts for both a firm and an individual.
On insider dealing—an area where the FSA once had a lamentable record—the agency has secured prison sentences for five people since it changed tack three years ago. It has another four other cases underway, involving 12 people. One of those will come to trial this year, the others next year. And it recently arrested 14 people as part of another enquiry.
Çole
In a June 22 speech, Margaret Cole, director of enforcement and financial crime at the FSA, said she welcomed the creation of the ECA. But she went out of her way to state how the FSA’s track record had improved.
KEY BANKING REFORM OBJECTIVES
The following excerpt from “The Coalition: Our Program for Government” outlines some of the United Kingdom’s regulatory reform objectives:
Wewillreformthebankingsystemtoavoid
arepeatofthefinancialcrisis,topromotea
competitiveeconomy,tosustaintherecovery
andtoprotectandsustainjobs.
Wewillintroduceabankinglevyandseeka
detailedagreementonimplementation.
Wewillbringforwarddetailedproposalsfor
robustactiontotackleunacceptablebonuses
inthefinancialservicessector;indeveloping
theseproposals,wewillensuretheyare
effectiveinreducingrisk.
Wewantthebankingsystemtoserve
business,nottheotherwayround.Wewill
bringforwarddetailedproposalstofoster
diversityinfinancialservices,promote
mutualsandcreateamorecompetitive
bankingindustry.
Wewilldevelopeffectiveproposalstoensure
theflowofcredittoviableSMEs.Thiswill
includeconsiderationofbothamajorloan
guaranteeschemeandtheuseofnetlending
targetsforthenationalizedbanks.
Wewilltakestepstoreducesystemicrisk
inthebankingsystemandwillestablishan
independentcommissiontoinvestigate
thecomplexissueofseparatingretailand
investmentbankinginasustainableway;while
recognizing thatthiswilltaketimetogetright,
thecommissionwillbegivenaninitialtime
frameofoneyeartoreport.
Wewillreformtheregulatorysystemtoavoid
arepeatofthefinancialcrisis.Wewillbring
forwardproposalstogivetheBankofEngland
controlofmacro-prudentialregulationand
oversightofmicro-prudentialregulation.
Weruleoutjoiningorpreparingtojointhe
EuropeanSingleCurrencyforthedurationof
thisagreement.
WewillworkwiththeBankofEnglandto
investigatehowtheprocessofincluding
housingcostsintheCPImeasureofinflation
canbeaccelerated.
WewillcreateBritain’sfirstfreenational
financialadviceservice,whichwillbefunded
infullfromanewsocialresponsibilitylevyon
thefinancialservicessector.
Wetakewhite-collar crimeasseriouslyas
othercrime,sowewillcreateasingleagency
totakeontheworkoftacklingserious
economiccrimethatiscurrentlydoneby,
amongothers,theSeriousFraudOffice,
FinancialServicesAuthorityandOfficeofFair
Trading.
Source
The Coalition: Our Program for Government
“Our pipeline of insider-dealing and market abuse cases is flowing very freely. This strong pipeline has taken several years to build. It’s important, if we are to continue to get results, that [it] is not disrupted,” she said. “We need to keep up the strong momentum we have built. The simple answer to what we need to do [in the future] is ‘more of the same.’”
The new government must get the creation of the ECA right, said Cole, adding: “We have established a strong track record as a heavyweight criminal prosecutor in the area of our special remit. We must build on this progress, not lose it.”
But Will It Work?
Lawyers who specialize in regulatory and compliance affairs see few benefits in dismantling the FSA’s enforcement division.
Dorian Drew, partner at law firm Norton Rose, says a new agency might make prosecution of some financial-industry offenses easier, such as money laundering, because the FSA currently has limited powers in this area. But, he adds, “I am skeptical that it will provide a significant benefit in relation to prosecutions of insider dealers.”
Richard Sims, a former senior lawyer in the FSA’s enforcement division, now with law firm Simmons & Simmons, also wonders how the new agency would tackle insider dealing.
Sims
“The FSA currently has both criminal prosecution powers and the power to take disciplinary proceedings under the civil market abuse regime. It would be a shame if that flexibility, which has seen a number of high-profile successes for the FSA in both fields over the last year, were to be lost,” he says.
Drew also had concerns about how the agency would be funded. The government is currently making drastic spending cuts to curb Britain’s mammoth national deficit. The SFO is funded by the government, while the FSA is funded by the financial services industry. So if the FSA is relocated under the Bank of England, government-funded institution, “Where will the budget come from?” Drew asks.
Sallybanks
Richard Sallybanks, a partner at law firm BCL Burton Copeland, says bringing FSA staff—who technically work for a private company, with its own ability to raise revenue—into the public sector will also create tensions over salary levels.
“One of the factors to which the FSA attributes its recent successes in enforcement has been its ability to attract high-quality and experienced staff,” he says. If its enforcement division is broken up, “there is a real possibility that the effectiveness of the new agency in policing the financial markets would suffer a setback.”
Cole said as much in her speech last week. Top-quality people “don’t come cheaply,” she warned, adding: “Our industry funding model has enabled us to make real changes in the quality of our staff and to develop the infrastructure necessary to investigate and prosecute complex cases. And the progress we have made has come at no cost to the taxpayer.”
While the government works outs its plans for white-collar crime, Sallybanks warns compliance professionals that all of the threatened agencies will want to show the government how tough they can be.
“The inevitable jostling for position as the dominant force within the new agency may well mean that we see the various authorities, notably the FSA and SFO, each trying to demonstrate that they are the most effective investigator and regulator through increased levels of enforcement activity and tougher penalties,” he says.
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