After Quiet Years, British Regulator Gets Tough on Abuses
BY MARK SCOTTFinancial Services AuthorityTracey McDermott, acting director of enforcement and financial crime at the Financial Services Authority.
LONDON — Britain’s securities regulator once had a reputation for taking a light-touch approach to regulation.
No longer. The regulator, the Financial Services Authority, is acting instead more and more like a heavy, conducting predawn raids and bringing a rising number of cases for insider trading and other market abuses.
The efforts have begun to snare some big names. This month, Ian Hannam, JPMorgan Chase’s global chairman of equity capital markets in London, resigned after the regulator fined him £450,000 ($725,000) over disclosing inside information. Mr. Hannam is appealing the decision.
In January, the prominent money manager David Einhorn and his hedge fund, Greenlight Capital, also were fined a combined £7.3 million over using confidential information to trade in the stock of a British pub chain. Mr. Einhorn denied any wrongdoing, but decided to settle the case rather than fight it.
More prosecutions and fines are likely to follow.
Since the financial crisis, British politicians and financial regulators have taken a harder line on everything from bankers’ bonuses to insider trading. The agency now carries out as many as 15 cases a year related to market abuses, compared with just a handful before 2007. More than 10 people have been sentenced over insider trading in the last four years, and an additional 16 people are currently being prosecuted. Fines totaling £214 million have been levied over the same period.
“Our view on enforcement has changed radically,” Tracey McDermott, the regulator’s interim director of enforcement and financial crime, said in London. “People need to be worried about being caught. They need to think that the sanctions will be meaningful.”
Peter Foley/Bloomberg NewsDavid Einhorn and his firm, Greenlight Capital, were fined £7.3 million over using confidential information.
Lawyers say the harder line is a recognition that tough financial and criminal punishments are needed to root out the market abuse that has been widespread in Britain’s financial services industry for decades. A lack of stiff penalties meant traders often shared insider information, knowing the financial rewards far outweighed the potential consequences. Politicians also have given the regulator new enforcement powers, such the ability to bar financial professionals from working in the industry if they break the law.
The agency’s tougher approach comes as the clock ticks down on its existence. The regulator will be disbanded in early 2013, and its functions will be transferred into the Financial Conduct Authority, a new consumer protection watchdog. Oversight of the country’s financial institutions will be given to the Bank of England, the central bank.
Under the current proposals, the Financial Conduct Authority will be Britain’s main enforcer against insider trading, as well as tackling broader financial crime. The new regulator also will monitor activity on the country’s financial exchanges and supervise over-the-counter trading.
Not everyone, though, has embraced the current regulator’s new role.
A number of individuals who have come under its scrutiny are challenging the agency’s tougher stance. Along with Mr. Hannam of JPMorgan, two former traders from the financial firm Cantor Fitzgerald also are appealing their fines and bans, saying the rulings were too severe.
Analysts say the outcome of those appeals, which could take up to two years, may hamper the British regulator’s ability to police the country’s finance industry.
Marc SchlossmanIan Hannam, who recently resigned as a global chairman of JPMorgan Chase, was fined £450,000 ($725,000) over disclosing inside information.
Questions also have been raised about what constitutes insider information, particularly in civil cases where the burden of proof is less than in criminal cases.
The securities laws in Britain, for instance, have a broader definition of improper conduct than those in the United States. That includes unintentionally sharing information that later turns about to be market-moving. Lawyers say this difference has created ambiguity and left financial professionals unsure about what they are able to share with clients.
The Financial Services Authority “is not talking about the specifics about what is and what isn’t allowed,” said David Scott, a financial services litigation partner in London at the law firm Freshfields Bruckhaus Deringer. “The rules are not clear.”
What is clear is that the rejuvenated agency is starting to have an effect. Before the recent prominent prosecutions and fines, market participants had rarely been charged with insider trading, so they had little to fear about sharing information.
In 2009, for example, the agency said unusual share price movements occurred before 30 percent of British-based mergers and acquisitions, a sign that information might have been illegally shared before official announcements. That figure, however, fell to 20 percent last year, as the rising number of convictions and penalties started to be felt through the wider financial industry.
“After the credit crunch, we’re living in a new regulatory world,” said Barnabas W. B. Reynolds, global head of the financial regulatory group at the law firm Shearman & Sterling in London. “If you start catching the bad guys, it generally stops others from trying” to behave illegally.
In 2011, the British authorities fined Rameshkumar Goenka, a private investor based in Dubai, $9.6 million for manipulating the closing price of the Indian infrastructure company Reliance Industries on the London Stock Exchange.
And earlier this year, Ravi Sinha, a former top executive at the London office of theprivate equity firm J. C. Flowers & Company, was fined £2.87 million for using a fraudulent invoicing scheme to pocket £1.36 million for himself.
The crackdown has followed an increase in the Financial Services Authority’s resources. Since the regulator stepped up its actions, its enforcement division has doubled in size to roughly 400 people, and now includes former police officers and intelligence officers, as well as forensic accountants.
Jason Alden/Bloomberg NewsThe headquarters of the Financial Services Authority in London.
The expanded unit’s budget also has increased to £67 million ($108 million) in 2011, compared with £32 million in 2007. The authority is still overshadowed financially by the Securities and Exchange Commission, which spent $391 million on enforcement last year.
And despite the agency’s pending disbandment, Ms. McDermott of the Financial Services Authority said the push to clean up the industry would continue at pace.
“Maintaining credible deterrence is an important part of the regulator’s job going forward,” said Ms. McDermott. “It’s part of a long-term plan.” When the Financial Conduct Authority begins its work, she added, “it will be business as usual.”
