6th September 2004
Speech by John Tiner

It is my great pleasure to welcome you to this the second Annual Enforcement Conference. Given that this is only the second Enforcement Conference we have run it is perhaps stretching the use of English rather, to say it is now a regular feature in the conference calendar. But it is clear that the FSA’s enforcement activities attract a great deal of interest in many quarters and I am delighted to welcome you, our guests from far and wide, including from outside of the United Kingdom. It is our intention to keep the Enforcement Conference on the FSA conference calendar. It is perhaps not surprising that given the amount of work we have been doing in focussing our enforcement strategy, improving the efficiency and transparency of the investigation process and with our growing experience of conducting complex investigations, that this conference should be focused on enforcement investigations following last year’s successful conference, which focused on the legal aspects of enforcement. And so I hope you will use today as an opportunity to discuss the key areas of our enforcement policies and practices which are of most interest to you.

It is just under a year since I became Chief Executive of the FSA. One of the first issues I discussed with my Board was a wide ranging restructuring of the FSA around three strategic business units, Retail Markets; Wholesale and Institutional Markets; and Regulatory Services and a number of functions which apply across the whole organisation. As a consequence, the enforcement division led by Andrew Procter, now reports directly to me. I believe that this provides enforcement with the status it should have in a financial regulator and, by having reporting lines outside of the Managing Directors who have oversight for the regulatory and supervision divisions, creates an important check and balance within the system in respect cases being considered by supervisors for enforcement action. But this is not to suggest that we are an enforcement led regulator. We are not. The very great majority of the firms we regulate do, we believe, run their businesses in a proper way. For those that stray off track, intervention by supervisors is usually sufficient to deal with any issues which have arisen. But it is clear that some firms do not operate in ways which ensures markets are efficient, orderly and clean and that the retail consumer gets a fair deal and/or do not respond positively to the promptings or requests of supervisors. So enforcement action is an essential component of our regulatory tool kit.

During the conference today you will hear from both FSA people and external speakers about case selection, senior management responsibilities, penalties, publicity, settlement mediation, skilled persons’ reports, IT and investigations and efficient and fair investigations. In a few minutes you will also hear from Martin Dickson, the FT''s very own Lombard, to give an informed external overview of the FSA's enforcement activities. First, by way of introduction and overview I would like to say a word or two on some of these items.

At the same time as announcing the FSA reorganisation last Autumn, I also commissioned an end to end review of the enforcement referral, investigation and decision making process. That review was completed in the early part of this summer and, as I announced at the FSA Annual Meeting in July, I expect the findings of the review to lead to at least a 30% reduction in the average case time over the next 12 months. In fact, if we look at the average duration of cases closed over the last two years we see that the average age has reduced from just over 16 months to just over 11 months, a reduction of 30% in two years. And so I’m sure that building on this momentum and the changes arising out of the end to end review we can cut another 30% off the investigation time. If we achieve this we will have more than halved the average investigation time over a three to four year period. It is often said that justice delayed is justice denied, and I am clear that we have a responsibility to both firms and consumers to be as speedy and as effective as possible in our enforcement work. The changes we are making as a result of the interim review broadly fall into 6 categories; simplifying documentation, streamlining decision making, improving project management methodology and use of technology, better planning of investigations and formal interviews, encouraging earlier settlement of cases and more flexible use of preliminary findings letters. I think this last point illustrates the general theme of the end to end review; which is that we need to be flexible in our approach and our enforcement staff need to think creatively about how best to conduct an investigation - of course ensuring they are conducted fairly and properly.

We are asked increasingly whether we are conducting an investigation into a particular company or person, particularly in the markets and listing area. Our approach to publicity has generally been not to announce the existence of an investigation unless it is absolutely necessary to secure market confidence or to protect consumers. One area where making public our investigations is key to protecting consumers is where we are investigating unauthorised activity; so, in these cases we have announced the names of the individuals or the firms we are investigating in order to warn consumers about the risks of dealing with firms who are not regulated by the FSA. We will continue to follow this line for these cases.

We are taking a hard look at our policy towards publicity in all other investigations. We have a general preference for greater transparency about the cases we are investigating. But this must be done in a way which does not affect market confidence and does not unfairly damage firms or individuals. If we decide to increase the publicity given to our investigations, we also need to consider when is the right moment to make an announcement. In our normal course of work we are conducting enquiries everyday into market or listing issues and authorised firm issues, but the vast majority of these are resolved without further enquiry or investigation. And so, three key questions we are thinking about are:

(1) are there categories or types of investigation which warrant publicity as a matter of normal practice, with the exception being not to announce and are there categories or types where the presumption would be to keep the matter confidential. This is not to over-simplify what is a complex and important public policy matter on which practitioners and consumer representatives have strong views. But if we are to adopt a new policy it needs to be clear and simple so the market can trust that it is being applied consistently and properly;

(2) at what stage is an announcement justified? Is the trigger a referral from supervision to enforcement or is an earlier announcement of serious enquiries appropriate; and

(3) what information do we provide. Of course, we must act within the confines of the statutory confidentiality regime and so there are limits on what we can say. If we do consider that greater publicity is warranted, details would be brief at the point of announcement and no progress reports would be posted, except to announce the end of an investigation if no further action is proposed or the outcome of an RDC decision. We will be discussing this difficult area with our Board and we will of course consult on any changes we plan to make to our publicity policy.

Turning now to the question of Penalties. The fine we imposed on Shell recently, being four times the previous highest fine we had imposed on a Firm, has attracted some discussion and debate about the purpose of penalties and who should bear them. It is not our intention in setting the level of penalties to hit hard the shareholders in the company by the financial impact of the penalty itself. It is, however, reasonable that where the management of the company fail in their duties that the shareholders suffer to some extent, just like they suffer if the management make bad business decisions. This may well encourage shareholders and non-executives to recognise their responsibilities, put pressure on senior management to perform and to run their businesses properly and, perhaps, ultimately if the matter is so serious or is a repetition of previous problems, to leave. But the bottom line of our policy on the level of penalties is not to hit hard into the pockets of shareholders who may have already seen their share price fall as a consequence of the events subject to enforcement. We have three objectives in establishing the level of penalties we impose:

(1) sending a strong message to the Board and senior management of the Firm that the behaviour which has led to the fine was not appropriate and should not be repeated:

(2) to attract publicity about the fine and so adversely affect the brand value and reputation of the company in the marketplace, and

(3) to act as a general deterrent to the market more generally. So the overriding purpose of our fining policy is to change behaviour. Where we find that senior management had worked hard to do the right thing in putting right the problems, then it is appropriate to take this into account in setting the level of the penalty. In cases where senior management have clearly failed and have made no attempt to then correct the position, we are much more likely to impose higher fines and look to the individual members of senior management concerned for individual actions. So for example, we have announced two cases during the last few months of listing breaches where we considered that the senior management of companies concerned had clearly failed to act properly and so the individuals have suffered personally. This brings me onto the responsibilities of senior management. Enforcement action against senior management is a powerful regulatory tool and a strong deterrent. However, we must clearly strike a balance between not sending messages which might deter responsible, experienced and qualified people from entering into or remaining in the industry at a senior level and penalising individuals where there is clear evidence of personal culpability. Andrew will have more to say about this in his remarks.

We have set out our stall as a risk based regulator. This applies to all aspects of our business, including enforcement. During the last four years we have reduced significantly the number of cases we take on each year. From six hundred cases in the year 2000 falling to three hundred and fifty cases in 2002 and an estimated one hundred and seventy cases this year. We are now resolving many more issues through day to day supervisory discussion and action rather than enforcement. We are selecting cases for enforcement which are either the most egregious or where we believe it is important to send messages to a particular sector or to the market as a whole. This does not mean that all of the cases we take into enforcement will be house-hold names or big city firms. I believe the recent threshold conditions project illustrates this point where we have shut down nineteen small firms. In summary we are ready to take enforcement action against firms of all shapes and sizes where justified.

Finally, a few words on the Tribunal. Much of what I read about the Tribunal in the media appears to misunderstand the FSA's position in what would be a busy month of the Tribunal and I think it might be useful if I set out today our views.

First, I would like to be quite clear that we welcome the scrutiny of the Tribunal. It is an essential component of a fair and transparent regulatory process and acts as an important check on the FSA's administrative decision making is also important that the market has confidence in the whole of the regulatory process.

Of course we were disappointed when the Tribunal hearing the Paul Davidson case had to stand aside, but we were absolutely clear that it was our responsibility to act quickly in bringing the relevant facts to the attention of the Tribunal so that it could consider its position and the public confidence in the process could be protected.

I have said that I think the Tribunal is an important check on the FSA's administrative decision making and I do not agree with those who suggest that some Firms have been afraid to challenge the regulator and through referring cases to the Tribunal. I think such suggestions show a misunderstanding of the RDC process but, more importantly, they are unfair to the senior management of companies who are under investigation and they are inconsistent with our experience.

Take, for example, endowment mis-selling. In all but one of the enforcement cases for endowment mis-selling, the company involved accepted that they had been mis-selling, accepted that there were systems control failings and got on with the business of complaint handling and compensation. But the Firms in those investigations did not simply give in or surrender under pressure. The senior management of those firms will understand their responsibilities and their need to act in the best interests of their shareholders or their members. One Firm investigated for endowment mis-selling has decided to refer its case to the Tribunal. The Firm clearly feels that the FSA's administrative process has delivered an incorrect decision and is exercising its right to challenge that decision. That is what the Tribunal is there to hear and as I say we value the Tribunal's role. But I think it will be a mistake to give that particular referral a symbolic importance that I do not believe it has. It is not a case of one Firm standing up to the regulator on behalf of other Firms. Those other Firms were well able to look after themselves.

Of course, the Tribunal is a judicial process and while I expect that we shall continue to win most of our cases, it is inevitable that from time to time we will lose before the Tribunal. Again, I would not find that a failure of the regulatory system. Indeed on the contrary, if we never lost a case before the Tribunal that would suggest to me that we were failing in our public responsibilities because we were not taking on some of the hard cases and complex cases that we have a responsibility to investigate.

So I hope I have been able to give you a flavour of some of the issues we will be discussing in more detail today. Some of them are significant public policy issues which, if mishandled, could have an adverse affect on both the confidence in the markets and confidence in the regulator. It is for this reason that we will be careful and measured in our deliberations and we very much welcome the input we hope you will be able to give us during the course of the day.

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