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An update on the FSA’s investigations and enforcement regime
4 years ago at 16:29

Speech by Tracey McDermott, acting director of the Enforcement and Financial Crime Division (EFCD) at the City and Financial Conference



This is billed as an update on the FSA’s investigations and enforcement regime.  It is traditional in these speeches to reflect on the past year and look forward to the future – and this morning will be no exception to that practice.  


But, this year, the question of the future has, of course, a heightened importance.  

2012/13 is likely to be the last year of the FSA.  We expect that 2013 will see the finalisation of the new regulatory structure and the split of responsibilities between the two new regulators – the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).  The legislation to provide for this is now on its way through Parliament.


As the FCA will take on the FSA’s Enforcement responsibilities I will focus my comments today on that body.

The FCA will be responsible for the regulation of conduct across the financial services sector – in firms and markets of all sizes and in all sectors of the industry.  It will also have responsibility for prudential regulation of some 24,000 firms.  Its responsibility will span wholesale and retail conduct, market integrity, protection of client assets and prevention of financial crime.   


This is a wide-ranging and significant agenda and it is clear that the government, and society generally, are expecting to see a different and more effective approach to conduct regulation, particularly in the retail area, than we have seen in the past.  So what does that mean for the FCA?  And what does it mean for Enforcement?


The creation of the FCA presents an opportunity for the regulator and the industry to approach things differently.  Confidence in the financial services industry is at an all time low.  Mis-selling scandals, abuse in the wholesale markets and the financial crisis have all played their part in creating this breakdown of trust and confidence.  If it is to be rebuilt something needs to change.  The reputation of the financial services industry will not recover unless the public believe that they will be dealt with fairly and professionally by those in the industry.  


Everyone – inside and outside the industry – wants this – so why doesn’t it happen?  The past few years have seen ever-increasing penalties for retail failings.  Redress to customers from enforcement cases in 2011 alone exceeded £200m.  And that is not to mention the significant sums which are being paid out in relation to the mis-selling of PPI.


Yet, despite this, we continue to see failings which indicate that the industry is not learning the lessons.  It is not properly fulfilling its mandate of giving good advice to those who need it, ensuring markets are fair and that, where risks are being taken, they are understood.  Just thinking of some examples from recent cases:  


How could any adviser ever have thought that selling a 94 year old with a three-year life expectancy a five-year product was fair?

How could any adviser have thought that investing large proportions – or even all – of a customer’s retirement fund into high risk Unregulated Collective Investment Schemes was suitable advice?

Why did advisers tell clients to invest in products they themselves did not understand?

How could any firm have thought it was a good outcome for consumers, to sell them an insurance product they were unable to claim on?

Why, in the face of high profile publicity about the risks of corruption, do firms still fail to check the source of their customers’ wealth?

Why do we see yet another ‘rogue trader’ incident at yet another bank?


I could go on, but you get the message.  It really is no wonder that confidence is low and the industry, frankly, has no-one but itself to blame.


So, one of the FCA’s challenges will be to play our part in helping restore that confidence, in part through effective implementation of the RDR and increasing professionalism primarily. And also by ensuring that the regulator is, and is seen to be, taking action to protect consumers or the markets – by doing whatever it takes to change behaviour in the industry – even where that means making unpopular and risky decisions.


So, what will the FCA do differently, and what will be the same?


Credible deterrence

The first point to note is that credible deterrence is here to stay.  The FCA will carry forward the Enforcement work of the FSA, maintaining and  strengthening our outcomes.  Where we do not see improvements from our actions, we will be willing to take tougher action – just as we have done in prosecuting insider dealing, in increasingly using our powers to prohibit individuals from the industry and in our continuing focus on senior management responsibility.


The FCA will continue to build on the foundation the FSA has laid over the past few years.


To remind you of some of these foundations, I will highlight some of our more recent outcomes.  


In 2011 we published notices imposing total fines of £66m.  These included the highest fine on an individual to date – Rameshkumar Goenka – a Dubai-based private investor was fined £6m for market manipulation.  


We also issued the highest fine to date against a firm for retail failings – £10.5m – against HSBC.  


We imposed our highest penalty for failures to maintain financial crime systems and controls when we imposed a sanction of almost £7m on Willis for failures relating to its controls over third party payments.


We took action against five firms and 12 individuals for failures in the sale of Unregulated Collective Investment Schemes.  


Five more firms were fined a total of £5m for client money failings and we also fined and banned an individual for his failings to oversee client money controls and risk management appropriately.


We also banned 39 people from the industry and cancelled the permissions of 55 firms.  


We closed down a number of unauthorised business schemes – landbanks, Ponzi schemes and the like – and secured £27m as potential compensation for the victims of such scams.


Four people were also imprisoned as a result of the FSA’s work to tackle unauthorised business, including three members of the Wilmot family who controlled a boiler room syndicate that defrauded an estimated 1,700 investors of £27.5m.  The Wilmots received a total of 19 years in prison.  


We continued to devote significant resource to our work to keep markets clean and maintained our focus on market abuse and insider dealing. We used our power to obtain interim and final injunctions from the High Court to restrain market manipulation and to impose penalties through that route.  Our focus on criminal work continued, 2011 saw four more people convicted and sent to prison for insider dealing, taking the total number of people successfully prosecuted by the FSA for insider dealing to 11.  


Notably three of these four pleaded guilty – an outcome that would have been almost unthinkable when we first started focusing on this area.  And, in case anyone needs a reminder of the benefits of doing so, a salutary lesson comes from the case of Rupinder Sidhu, the fourth conviction of the year.  Sidhu received a sentence of two years in prison.  Compare that with his co-conspirator Anjam Ahmad who, once he recognised the game was up, pleaded guilty and cooperated with us and received a suspended sentence of ten months.   


We currently have 20 defendants awaiting trial (16 for insider dealing; four for misleading the market).  Those trials, most of which are expected to commence in the first half of this year, will be among the largest and most complex we have brought and include our priority areas of organised insider dealers and market professionals.


And 2012 has continued in the same vein as 2011.  Already in the first two months of the year we have seen penalties of over £14m imposed on firms and individuals for a wide range of failings.


And we continue to have a challenging pipeline of important investigations keeping our team busy.  In addition to the usual diet of market abuse and retail conduct issues, these include significant cross-border investigations in relation to alleged misconduct in relation to LIBOR as well as a number of cases arising from our thematic work into AML controls at banks.


The future

So – that is what remains the same – but what will be different?

The government expects stronger intervention in financial services markets and better outcomes for retail consumers.   And, as I have already explained, there is considerable work to be done in this area, Enforcement will have a key role to play in this.  The FCA will be pre-emptive, bold and tough, using the full range of tools provided to it to achieve better outcomes for consumers and markets.


The FCA will be clear on expectations: consumers can expect it to be more accessible and to communicate proactively, so they understand what they can expect from firms and the regulatory system.  The FCA will seek to view issues through the eyes of consumers and understand the drivers of their behaviour as well as that of firms. Firms can expect more challenge from the FCA and more willingness to intervene.


Indeed, central to the FCA’s approach will be a focus on early intervention, looking to take action before risk crystallises – what will that look like?


Early intervention can take many different forms.  The area which has attracted most attention – and which is likely to be the most controversial – is the proposed power for the FCA to ban products where we consider the risk of mis-selling those products significantly outweighs any benefit.  We will, of course, also be able to prevent individual firms from selling products that seem perfectly useful, where that firm’s sales processes look likely to lead to significant mis-selling. 


But it may also include a willingness to take action – supervisory or enforcement – earlier in the cycle.  So you might expect to see the FCA taking action, including Enforcement action, where our judgement is that a particular aspect of the firm’s business model – its product selection, its remuneration practices, its training or recruitment, for instance – is likely to give rise to poor consumer outcomes. We won’t wait to see if those outcomes occur.


And you can also expect to see a lower tolerance for firms bumping along the bottom – firms that only fix things when the FCA tells them to, and them do only enough to fix the specific problem. The FCA will be swifter and more willing to take action to restrict, or even prevent, such firms from doing business. Obviously, early intervention comes with risks, and with potential downsides for the regulator, the industry and, most importantly, for consumers.  So the FCA will need to be targeted and proportionate in when, how and why we intervene. We will also need to be prepared to be much more transparent – within the bounds of statute – about what we are concerned about and why.


The role of the industry

But we are not just sitting back and waiting for the FCA.  The FSA still has a job to do – and we are committed to doing it to the full, alongside our preparation for the new world.


And, it is, therefore, worthwhile reminding you of one of the things we have said many times before and which I have referred to earlier.  Good regulation should not be a battle between the industry and the regulator.  We have a mutual benefit in curbing wrongdoing and ensuring the best operation of the financial services industry.   We do see good examples of this regularly – people blowing the whistle or providing market intelligence which enables us to join the dots to take further action.


Unfortunately we also see some cases where, to paraphrase Arthur Conan Doyle in the Memoirs of Sherlock Holmes, the most curious thing is the dog that did not bark.  The recent Greenlight market abuse case is a good example of a situation where a series of approved persons failed to meet their obligations.


Most of you will be familiar with the facts.  The case concerned insider dealing by David Einhorn and Greenlight Capital in the shares of Punch Taverns.  This trading followed hot on the heels of a call with Punch and its brokers where inside information was passed about a proposed equity issuance by Punch.  This information was passed despite Greenlight and Einhorn having said they did not want to be ‘wall crossed’ about the transaction.  Immediately after the call, Greenlight’s UK trader and Compliance Officer, Alexander Ten-Holter, was instructed to sell significant proportions of Greenlight’s holding in Punch.  These sales were executed by a trader, Caspar Agnew at JP Morgan, in the days immediately before the issuance was announced.  


In addition to imposing fines of £7.2m on Einhorn and Greenlight Capital for market abuse, we also took action against corporate broker Andrew Osborne (former MD at Merrill Lynch), fining him £350,000 for improperly disclosing inside information during the call.


We fined Ten-Holter £130,000 and banned him from holding compliance functions for his failure to identify, and act on, the clear risk that inside information had been disclosed to Greenlight and that that was the reasons for the trade.


And we fined Agnew, the trader at JP Morgan who executed the sales but failed to report them as suspicious.


Any one of these market professionals could, and should, have identified the clear and obvious risk of market abuse and perhaps even prevented it – but all failed to do so.


Similarly, earlier in the year, we fined and banned Sandradee Joseph – former compliance officer at a hedge fund for her failure to question or challenge a particular investment in the face of numerous concerns having been raised. She said her job was to set up systems not to investigate or question such transactions. Which brings us nicely back to Holmes who explained the importance of the dog …


‘I had grasped the significance of the silence of the dog…The Simpson incident had shown me that a dog was kept in the stables, and yet, though someone had been in and fetched out a horse, he had not barked enough to arouse the two lads in the loft.  Obviously the midnight visitor was someone whom the dog knew well.’


The key message is the same in our cases – where people put their relationships with colleagues, employers, sources of income, etc, above their obligations as approved persons we will take action. Because of your relationship to the wrongdoer you become the dog that doesn’t bark, and we will pursue you.



I trust this whistle-stop tour has given an idea of what the present, and the future, holds for Enforcement.  It is an exciting time for regulation. The change in regulatory structure is an opportunity we should all seize to do things differently.  I hope that we can, collectively, grasp the challenge of delivering a better, fairer financial services marketplace.


Source: Financial Services Authority (FSA)

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