Facing Extinction, FSA Enforcement Shifts Into Overdrive

by Bruce Carton

Oh, what a difference a financial crisis and an election can have on the entire philosophy and future of financial regulation in a country!

It was less than four years ago, in October 2006, that Margaret Cole, director of enforcement at Britain’s Financial Services Authority, delivered a speech at Fordham University that in hindsight now seems quite remarkable. In her speech (entitled, “The UK FSA: Nobody does it better?”) Cole argued that London’s philosophy of “light touch,” principle-based regulation had led it to become the world’s leading center for mobile capital. She emphasized that the FSA was simply not an “enforcement-led regulator,” and boasted that it resorted to enforcement measures only “strategically, for the most egregious cases.” Enforcement, she said, was just “one of a range of tools available to deal with non-compliant behavior,” and not even the most widely used.

In her speech, which seemed to be squarely directed at companies seeking less regulation, Cole made a point to note that the FSA had used its criminal powers against someone who had committed market abuse only once in its history. She said that cultural and environmental differences between Britain and the United States helped explain the nations’ “different appetite for prosecution of major corporate and financial scandals;” she seemed to take pride in the fact that her team of 280 enforcement staffers were just 8 percent of the total staff at the FSA, while the Division of Enforcement makes up more than half the personnel at the U.S. Securities and Exchange Commission. Cole’s overall message to regulated entities seemed clear: Don’t worry—unlike the SEC, we’ll leave you alone unless you go way across the line.

By March 2009, however, under intense scrutiny stemming from the financial crisis, the FSA’s CEO, Hector Sants, acknowledged that his agency’s light-touch philosophy needed dramatic change, well beyond merely asserting principles to the market and expecting adherence. As Sants put it: “I continue to believe the majority of market participants are decent people; however, a principles-based approach does not work with individuals who have no principles.”

Sants said the FSA would immediately introduce a more “intrusive” and “direct” style of supervision, coupled with an aggressive approach to enforcement that he labeled a “credible deterrence philosophy.” “There is a view that people are not frightened of the FSA,” he said. “I can assure you that this is a view I am determined to correct. People should be very frightened of the FSA.”

The FSA’s decision to stop comforting people and start frightening people coincided with a campaign promise made by the British Conservative party that if it prevailed in the 2010 elections (to be held on May 6), it would move to abolish the FSA altogether. In a July 2009 white paper titled, “From Crisis to Confidence: Plan for Sound Banking,” the Tories laid out their plan for “sound banking that will lead the British economy.”

Chief among the Conservatives’ complaints was that Britain’s triumvirate of regulators (the FSA, the Bank of England, and the Treasury) failed to maintain financial stability during the financial crisis, in part because the three roles were ill defined and failed to specify who, if anyone, was in charge. In addition, the Conservatives aimed at the FSA’s weak-by-design stance on enforcement, which the Conservatives said was inadequate and led to infrequent criminal prosecutions and insignificant fines. They argued for a much tougher approach to financial crime, where the FSA and the Serious Fraud Office were encouraged by the government to follow up on every lead and suspect transaction.

Whether it was that sudden change in philosophy of the FSA or the threat of being eliminated (or both), the FSA since March 2009 bears little resemblance to the agency described in Cole’s 2006 speech. Consider the flurry of activity that the FSA has launched since that time, and how these cases have escalated to capture the public’s attention:

  • On March 27, 2009, less than three weeks after Sants warned an understandably skeptical Britain to “be frightened” of the FSA, the agency took the unprecedented step of pursuing a criminal insider-trading case all the way to trial. Two men were found guilty of “insider dealing,” the first criminal conviction for insider trading the FSA ever obtained.
  • On March 31, 2009, the FSA arrested two people as part of an investigation into insider dealing. The arrests were accompanied by an FSA “swoop” where 25 agency staff, assisted by 11 London police officers, went into London businesses to execute the arrests and search warrants. This was the first time that the FSA had ever arrested an “authorized person” at his or her place of work.
  • On May 27, 2009, the FSA struck again, arresting five men and a woman on suspicion of insider trading after raids in London and Essex, England.
  • On November 4, 2009, the FSA obtained its second-ever criminal conviction for insider trading, when dentist Neel Uberoi and his son, Matthew, were found guilty of 12 counts of insider dealing.

This barrage of 2009 cases proved to be a mere warm-up to March 2010, however, when the FSA took its crusade against insider trading to an even higher level:

  • On March 1, the FSA adopted a new penalty policy for insider dealing and other financial wrongdoing under which fines will triple, with a minimum fine of £100,000 ($152,284) in serious cases of market abuse.
  • On March 17, the FSA announced that it would hire 460 new staff members in 2010 as part of its commitment to tougher regulatory practices. Sants explained that the FSA’s new “proactive approach to supervision requires significantly more people than the old reactive model … If society wants a more proactive approach, it must accept that it will have a larger and more expensive regulator.
  • On March 18, news broke of an FSA proposal that traders’ mobile phones used for business would no longer be exempt from rules requiring banks and brokerages to record employees’ calls. The FSA explained that this would allow it to listen to the taped mobile phone calls as part of its effort to crack down on insider trading.
  • On March 23, the FSA carried out its largest-ever insider trading “swoop” jointly with the Serious Organized Crime Agency (SOCA, the British version of the FBI) in which it searched 16 separate addresses in London, the South East and Oxfordshire. The massive swoop involved no fewer than 143 FSA personnel, and led to the arrests of seven senior professionals at “leading city institutions” and a hedge fund.
  • On March 31, the FSA arrested seven people in connection with an alleged insider-trading ring that made about $3.8 million in profits from information obtained at the print shops of UBS and JPMorgan Chase & Co.’s Cazenove unit. The case is reportedly, at least for the moment, the largest FSA insider-dealing prosecution to date.

The new-look FSA has also begun to employ new tactics in its criminal cases. The agency made its first extradition request in an insider-trading case in March, and also worked with SOCA for the first time. Notably, the FSA also secured a conviction in March 2010 using, for the first time, a plea bargain.

What explains the surge in high-profile FSA enforcement? A senior FSA official told the Financial Times in late March that the acceleration of certain investigations was at least partially motivated by the Conservatives’ plans to abolish the FSA should they win power. “This comes all the way from the chairman,” the official was quoted as saying. “It’s clear that if we can make waves now, if we can make a lot of noise, then post-election a Tory government would find it difficult to disband a successful organization.”

The FSA’s Cole, however, says it is “complete and utter nonsense” to say that the election is driving the FSA’s actions. “What you are seeing now is the fulfillment of work that began in 2007,” she says.

In London, the FSA’s recent moves have been met with a degree of “skepticism and concern in the legal community,” according to Werner Kranenburg, a London lawyer who focuses on securities litigation issues. He observes that with the Tories calling for an end to the FSA should the party win, “it seems the FSA wants to affirm its role.”

British elections, by the way, are coming on May 6. So keep an eye on our friends in London; they have an interesting summer ahead of them.

Originally published in Compliance Week. Reprinted with permission. ©2010 Haymarket Media, Inc. All Rights Reserved. Compliance Week can be found at http://www.complianceweek.com. Call (888) 519-9200 for more information.

Chief among the Conservatives’ complaints was that Britain’s triumvirate of regulators (the FSA, the Bank of England, and the Treasury) failed to maintain financial stability during the financial crisis, in part because the three roles were ill defined and failed to specify who, if anyone, was in charge. In addition, the Conservatives aimed at the FSA’s weak-by-design stance on enforcement, which the Conservatives said was inadequate and led to infrequent criminal prosecutions and insignificant fines. They argued for a much tougher approach to financial crime, where the FSA and the Serious Fraud Office were encouraged by the government to follow up on every lead and suspect transaction.

Whether it was that sudden change in philosophy of the FSA or the threat of being eliminated (or both), the FSA since March 2009 bears little resemblance to the agency described in Cole’s 2006 speech. Consider the flurry of activity that the FSA has launched since that time, and how these cases have escalated to capture the public’s attention:

    • On March 27, 2009, less than three weeks after Sants warned an understandably skeptical Britain to “be frightened” of the FSA, the agency took the unprecedented step of pursuing a criminal insider-trading case all the way to trial. Two men were found guilty of “insider dealing,” the first criminal conviction for insider trading the FSA ever obtained.
    • On March 31, 2009, the FSA arrested two people as part of an investigation into insider dealing. The arrests were accompanied by an FSA “swoop” where 25 agency staff, assisted by 11 London police officers, went into London businesses to execute the arrests and search warrants. This was the first time that the FSA had ever arrested an “authorized person” at his or her place of work.
    • On May 27, 2009, the FSA struck again, arresting five men and a woman on suspicion of insider trading after raids in London and Essex, England.
    • On November 4, 2009, the FSA obtained its second-ever criminal conviction for insider trading, when dentist Neel Uberoi and his son, Matthew, were found guilty of 12 counts of insider dealing.

This barrage of 2009 cases proved to be a mere warm-up to March 2010, however, when the FSA took its crusade against insider trading to an even higher level:

    • On March 1, the FSA adopted a new penalty policy for insider dealing and other financial wrongdoing under which fines will triple, with a minimum fine of £100,000 ($152,284) in serious cases of market abuse.
    • On March 17, the FSA announced that it would hire 460 new staff members in 2010 as part of its commitment to tougher regulatory practices. Sants explained that the FSA’s new “proactive approach to supervision requires significantly more people than the old reactive model … If society wants a more proactive approach, it must accept that it will have a larger and more expensive regulator.”
    • On March 18, news broke of an FSA proposal that traders’ mobile phones used for business would no longer be exempt from rules requiring banks and brokerages to record employees’ calls. The FSA explained that this would allow it to listen to the taped mobile phone calls as part of its effort to crack down on insider trading.
    • On March 23, the FSA carried out its largest-ever insider trading “swoop” jointly with the Serious Organized Crime Agency (SOCA, the British version of the FBI) in which it searched 16 separate addresses in London, the South East and Oxfordshire. The massive swoop involved no fewer than 143 FSA personnel, and led to the arrests of seven senior professionals at “leading city institutions” and a hedge fund.
    • On March 31, the FSA arrested seven people in connection with an alleged insider-trading ring that made about $3.8 million in profits from information obtained at the print shops of UBS and JPMorgan Chase & Co.’s Cazenove unit. The case is reportedly, at least for the moment, the largest FSA insider-dealing prosecution to date.

The new-look FSA has also begun to employ new tactics in its criminal cases. The agency made its first extradition request in an insider-trading case in March, and also worked with SOCA for the first time. Notably, the FSA also secured a conviction in March 2010 using, for the first time, a plea bargain.

What explains the surge in high-profile FSA enforcement? A senior FSA official told the Financial Times in late March that the acceleration of certain investigations was at least partially motivated by the Conservatives’ plans to abolish the FSA should they win power. “This comes all the way from the chairman,” the official was quoted as saying. “It’s clear that if we can make waves now, if we can make a lot of noise, then post-election a Tory government would find it difficult to disband a successful organization.”

The FSA’s Cole, however, says it is “complete and utter nonsense” to say that the election is driving the FSA’s actions. “What you are seeing now is the fulfillment of work that began in 2007,” she says.

In London, the FSA’s recent moves have been met with a degree of “skepticism and concern in the legal community,” according to Werner Kranenburg, a London lawyer who focuses on securities litigation issues. He observes that with the Tories calling for an end to the FSA should the party win, “it seems the FSA wants to affirm its role.”

British elections, by the way, are coming on May 6. So keep an eye on our friends in London; they have an interesting summer ahead of them.