BRAMSHILL HOUSE, HAMPSHIRE, WEDNESDAY 14 OCTOBER 1998
SPEECH BY HOWARD DAVIES
CHAIRMAN, FINANCIAL SERVICES AUTHORITY

Pleased to be back at Bramshill, and to be back helping police with their enquiries. Since I left the Audit Commission in 1992, I have had relatively little to do with the police (in my public and private lives, I should say for the sake of any misunderstanding). Of course when at the Audit Commission, with my duty to investigate the economy, efficiency and effectiveness of the police force, it was more a case of the police helping me with my enquiries, than me helping them with theirs.

But in this job, I am entirely convinced that there is no conceivable scope for any "us and them" attitudes. It is very apparent that, if we at the FSA are to deliver on the new objectives Ministers have set out for us, we can only do so in the closest possible collaboration with the police service, and indeed with the other law enforcement agencies. So I am delighted to have been asked to join you here this afternoon.

For those happy people among you who do not spend your lives worrying about the structure of financial regulation, I should just quickly explain where we are in the Government’s reform programme.

Two acts of Parliament needed: Bank of England Act and Financial Services and Markets Reform Act. First through in June. Second published in draft at the end of July and will go into the House in the next session. Not sure precisely when it will emerge, but a lot of political commitment behind it.

But we regulators, impatient, headstrong folk that we are, have not waited for the legislation to make change. In fact we decided to merge the staffs of the various investment regulators into the FSA on 1 June when the banking people came across. So for the moment we have the formal responsibilities of the old SIB, plus those of the Bank of England. And in addition we employ all the staff of the SFA, IMRO etc, though their Boards remain in existence for disciplinary purposes, in particular.

This somewhat complex position will be rationalised by the new legislation and that legislation, furthermore, will considerably strengthen our powers in areas relevant to your concerns. It is quite clear that the Government want financial regulators to do more to combat financial crime. The format of the new legislation makes that very clear. They do not like what they think they see on the domestic scene. And they are also strongly in favour of enhanced international collaboration against money laundering, whether drug-related or not.

So in pursuit of that enhanced activity by regulators, Ministers have decided to make two major changes to our powers and responsibilities in the legislation.

The first is at the level of our statutory objectives.

Unlike the Bank of England in the past, or indeed the police service at present, we shall have legislation which begins by placing four explicit statutory duties on us, which need to be pursued simultaneously, and which link with each other in a variety of ways.

The four are:

First, to maintain confidence in the UK financial system. (From day to day that should have little to do with financial crime though, at the limit, confidence in the financial system can be severely dented by the perception that it is riddled by fraud – perhaps the case in Russia today, for example);

Second, to protect consumers of financial services, bearing in mind their responsibility for their own decisions. This will require some difficult judgments, as you can readily see. Deciding just when caveat emptor applies, and when it does not, will be tricky. And indeed how to deploy our limited resources to best effect. Problems with which police are familiar.

Third, to promote consumer understanding of the costs and benefits of financial services; and

Fourth, to seek to reduce the extent to which authorised businesses are used for the purposes of financial crime.

This last is a new objective, one which will guide in various ways the work of all our departments in the FSA from the authorisation teams who deal with licensing of firms and individuals, through the supervision teams who monitor those licensed institutions and individuals, to the enforcement people who come on the scene when something has gone wrong, or seems to have gone wrong.

I will say a little more in a moment about the way in which we plan to interpret this objective – though I should emphasise that these are early days as yet. And we have not so far seen a great deal of reaction in response to the Government’s consultation process which helps to enlighten us.

But before I talk further about the financial crime objective, let me refer to the other big proposed change in our legislation, in other words the proposal that we should do considerably more than has been possible by regulators in the past, to tackle market abuse.

The proposed change in the law related to insider dealing and market manipulation will, if passed, do three main things:

It will add the FSA as a prosecuting authority for "market" criminal offences, such as insider dealing or what are excitingly known as abusive squeezes. (Sadly, a long time since I was subjected to one of those). Of course the DTI, CPS and SFO powers will continue to exist, but there will certainly be circumstances in which it is more appropriate for the FSA to use its powers;

It will re-write the powers of investigation into suspected misconduct in financial services and markets, giving us broader powers to secure information and interrogate individuals, whether or not they are authorised persons; and

It will empower us to introduce a code of market conduct to bolster the basic specifications in the Bill of the criminal offences. This code will be part of a non-criminal regime for which the FSA’s enforcement powers will include the power to levy fines and, of course, to suspend authorisation.

We have already, in fact, published a consultation paper setting out a first draft of such a code of market conduct. The initial reaction from many market participants has been reasonably positive, though we are beginning to see responses from law firms which raise some very interesting, and some very boring issues in response.

These changes on the market abuse side will make a significant contribution not only to our financial crime objective, but also to our objectives of market confidence and consumer protection, we think. It is in the nature of market frauds, abuses and misconducts generally that, in the early stages of a case, none of the authorities concerned are typically able to tell what the eventual appropriate disposition of a case will turn out to be. These changes are designed to ensure that the FSA, as the specialist financial services and markets authority, can promote and enforce higher standards of market conduct over and above what the criminal law requires. That we can investigate in full where there is suspected misconduct. And that we can prosecute where investigation shows that is called for and that a specialist financial services and markets criminal offence has been committed. We shall be able to bring civil proceedings where we think that is likely to be more appropriate and successful than the criminal route.

So how will this double change – a new statutory objective, and some new market abuse powers – change the involvement of financial regulators in the fight against financial crime?

Of course the existing regulators have done quite a lot in this area. The SIB already, in the past, sought to exclude fraudsters and gangsters from financial services by fit and proper licensing and vigorous perimeter patrols. In the last ten years almost 300 individuals have been convicted – about 90% of those brought to trial, and in more than 80% of these cases the defendant was imprisoned. This has already represented, in our view, a significant deterrent factor in the fight against investment business fraud.

We have also, of course, organised and resourced the Financial Fraud Information Network to pool intelligence between the various agencies involved, and to secure the earliest possible detection of fraud, whether inside or outside the licensing perimeter. We have co-operated with the police and other agencies for investigation and prosecution. And in the banking area, in particular, supervisors have done a lot of work to promote money laundering disciplines in authorised institutions. Banking supervisors require all their institutions to have suspicious transactions reporting systems, which have furnished a lot of useful data to the authorities already.

But it is inherent in the Government’s approach, and the decision to elevate the fight against financial crime to the level of one of our top four objectives, that in future we must do more.

In the case of money laundering, we shall be working to expand our activities across all areas covered by the FSA. We believe there is evidence that non-bank financial institutions are increasingly targeted by money launderers, which argues for an upgrading of our effort outside the banking sector.

In future we shall ourselves regulate money laundering, by criminal and non-criminal sanctions, aimed to secure compliance by our regulated banks, brokers, insurance companies and fund managers with their anti-money laundering obligations. The focus will continue to be on ensuring that financial institutions themselves have appropriate systems in place.

But to make appropriate use of our new responsibilities and powers, two further things are needed. First, a more focused internal resource and, second, enhanced collaboration with our bodies.

So we decided last winter, well ahead of the passage of our new legislation, to establish a financial Crime Liaison Unit under Jeremy Orme, but including people from other parts of the regulatory forest, including the Bank of England. The mission of that Unit is, first, to ensure that we are at the forefront of expertise and developments in the fight against money laundering. That means collaboration with overseas jursidictions, as well as other agencies in the UK. For example, the Bank of England’s expert on off-shore centres is part of that Unit. We believe we have as good relations as any other developed country regulators with those centres. I could not say that we always get the co-operation and collaboration we want, but I believe we do as well as can be done in the light of the attitudes of the authorities in those centres.

Second, the Unit is charged with monitoring developments outside the FSA in the fight against financial crime. And, thirdly, it must ensure that the reality of our co-operation and liaison, wherever carried out across our organisation, matches our aspirations and our new statutory objectives.

This will not be easy since there are, of course, many other agencies with which we need to have relationships. Regional police forces and the specialist forces. The SFO, NCS, NCIS. Customs and Excise and the DTI. The various exchanges on our patch. The professional bodies, Lloyd’s, the Takeover Panel, OPRA and the Charities Commission.

The list of these different agencies, and of course I might add another enormous list of international bodies, who are often absolutely crucial to an effective investigation, makes it appear that successful outcomes are almost impossible. But, in practice, as long as we are all pulling in the same direction, it should not be impossible to make progress. What is required, though, is not just the legal power to co-operate by the exchange of information, etc. But we also need a culture of co-operation, encouraged from the top, and policies which push people to look to make the most positive use of the co-operation powers they have.

Within the FSA the Crime Liaison Unit we will try to promote that culture. We will need to do so across the different organisational functions in the Authority. Each of our key functions will have its direct contacts with the police on appropriate cases: the pattern or flow will reflect the logic of the work.

There is a permanent background need for intelligence about companies and about individuals, both for us as regulators and for police fraud squad work. Our intelligence and records department already has extensive experience of co-operating with the police and they are represented here today.

When public complaints, market information or other sources of intelligence give rise to suspicions that a company or individual is involved in an actual offence or misconduct, then co-operative disclosure of that may flow over through a money laundering report to NCIS, or by referral to the Financial Fraud Information Network. Those will both involve our Liaison Unit, who are also here today.

First enquiries into complaints, suspicions and concerns may be informal, rather than by exercise of statutory powers, and statutory investigations will be instituted when necessary. At each of these stages we have our specialists, who will co-operate with the police and others where the circumstances go beyond our own powers and concerns.

Likewise, when we get to the stage of using information obtained through investigations to stop abuse, seek remedies for victims and punishment for the guilty, we have further specialist teams which also have their own links to their counterparts in the SFO, the CPS and the DTI.

Not surprisingly, both we and the police, and the prosecution agencies for their various functions recognise the complexities of such multiple linkages. So as well as the simple edict to our people of "if in doubt, ask the Financial Crime Liaison Unit" we are at work on Memoranda of Understanding. We want especially to ensure that we work out in advance how we will need to co-operate when the new law gives us our new criminal law enforcement powers.

And as well as writing down the theory or principles of co-operation in MOUs, we share with the police a strong sense of the value of secondments. I am pleased to announce that we have just appointed a first FSA (ex Bank) person to be assigned on secondment to work in the Economic Crime Unit at NCIS. And we are looking forward early in 1999 to the arrival with us, in our new Canary Wharf offices, of a seconded police officer from the City of London force. I am sure that will help a lot to ensure that our people are aware of how they can best make sure that their work is compatible with police requirements when it comes to prosecutions.

All of these practical steps are underway. We also work on trying to enhance our relationships with overseas authorities. And that is somewhere where I believe that we do, collectively, have a competitive edge. The Bank of England’s contacts with international banking supervisors are second to none, and we inherit at the FSA all the people who have been involved in developing and maintaining those connections over the years. The old SIB also worked very hard on its links with securities commissions and other agencies in the investment field. Cases like the Sumitomo affair helped enormously to deepen those links with the Japanese and the Americans, for example. It is very likely that a huge proportion of our cases in future will have an international dimension. As many of you will know the Financial Times publishes an FT fraud report journal. In the latest edition there are 29 news stories, only five of which are UK only stories and 23 other overseas jurisdictions are represented. One way or another we have links with all of those jurisdictions, and I think we can often help in establishing connections for other agencies, as well as for our own purposes.

I am aware that much of what I have said today has been aspirational, organisational and procedural. But, in reality, that is where we are. We are in the construction phase of a new regulatory system. It is a phase in which we have many priorities, but beefing up our financial crime effort is right near the top of them. The new legislation requires us to put it there, even if we were not convinced of the need ourselves. So I hope that today’s encounter will be the first of many, and congratulate the police service on putting together such a comprehensive and focused programme over the next three days. My people here will report back. Sure will help with work.

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