Crime in the Financial Markets
Speech by Philip Robinson, Financial Crime & Intelligence Division Director
Keynote Address at the 2007 Cambridge Symposium
5th September 2007
I would like to start by thanking Professor Barry Rider and the organising committee for inviting me today. To those of us involved in the fight against economic and financial crime, the symposium offers a unique opportunity to catch up with old friends, meet new colleagues as well as sharing our thoughts and experiences. I am delighted to have been asked to speak at this event, and since I now talk to you as the Director of the FSA's newly created Financial Crime and Intelligence Division, perhaps I can talk about the recently established financial crime related outcomes the FSA is trying to achieve in the UK financial markets.
It is important first to set the context - although the FSA is the regulator for the UK financial services industry, that does not mean that our efforts to the protect the UK financial system are restricted to the UK – after all, the UK is one of the world's leading financial centres, financial crime is often international in its reach and criminals do not respect international borders. So it is by working with the broader international framework of standard setters, regulators and law enforcement agencies to extend the risk-based approach, and effectively share intelligence, nationally and internationally , that we hope to make a real difference in the fight against financial crime.
The FSA's has a statutory objective to reduce financial crime, one of 4 statutory objectives given to us by Parliament. It complements the 3 other financial sector objectives, namely maintaining market confidence, protecting consumers, and increasing public understanding. And I will return to our objective to maintain market confidence in a few moments.
The financial crime objective has a very broad scope. It encompasses not only fraud and money-laundering (which includes terrorist finance) but also market misconduct and other crimes such as corruption and contravention of UN, EU and UK sanctions. The legislation places the focus of our financial crime objective firmly on firms’ risk management, systems & controls, so that:
- regulated persons need to be aware of the risk of their business being used in connection with financial crime;
- regulated persons should take appropriate measures (in relation to their administration and employment practices, the conduct of transactions by them and otherwise) to prevent financial crime, facilitate its detection and monitor its incidence; and
- regulated persons should devote adequate resources to addressing the financial crime risks they face.
But our powers and duties as a regulator do not stop there. We notably also have powers to:
- prosecute breaches of the Money-Laundering Regulations;
- co-operate with others on prevention & detection of crime
- make suspicious activity reports to SOCA.
FSA’s Financial Crime Outcomes
The FSA's Financial Crime and Intelligence Division was created at the beginning of 2007 to increase FSA's effectiveness in tackling Financial Crime. My new division brings together the financial crime expertise that had previously been distributed around the FSA in order to sharpen our focus and increase the speed with which we act. We provide the specialist leadership, tools and expertise the FSA increasingly needs to achieve the outcome of reducing crime in the financial markets. I want to show you something of the FSA wide thinking we have been doing to ensure we raise our game: The six outcomes we believe it is necessary to achieve, how we organise ourselves to improve our capability to achieve them and a glimpse at our current key priorities.
We have in fact six financial crime outcomes that we assess we need to achieve in order to successfully reduce crime in the financial markets:
- FSA is satisfied that persons of questionable integrity do not manage, own or control firms operating in the UK Financial Sector
- Firms in the UK financial sector act proportionately to prevent financial crime - fewer commit financial crime themselves and firms manage the risk of being used by others to do so with appropriate skill and care
- Consumers are better equipped to protect themselves from financial crime
- The international and UK financial crime policy frameworks are more risk-based and proportionate, and FSA delivers what is required of it within those frameworks
- FSA’s Financial Crime risk mitigation is increasingly effective, economic and efficient
- FSA co-operates effectively with the right partners, both domestically and internationally , to achieve these outcomes
Market Confidence and Market Abuse
As well as these financial crime intended outcomes, combating market abuse is one of the FSA's top priorities. It is important that the financial services industry should play its part in this work - combating market abuse should not be seen as a job for the regulator alone. So we place a lot of emphasis on working in partnership with the industry, including the Recognised Investment Exchanges. This means we expect that firms should have strong anti-market abuse systems and controls. For example, we published earlier this year findings on best practice for systems and controls for dealing with inside information about mergers and acquisitions. It also means that we expect firms to inform us of suspicious transactions by their clients in the same way that we would expect them to notify us of fraud or misconduct.
Working in concert under the new Financial Crime and Intelligence Division
For the FSA to achieve our financial crime and market confidence objectives a number of different areas of FSA have to work in collaboration. Our Authorisation, and Change in Control and Passporting teams play the crucial role of gatekeepers, aiming to keep the criminals out of the market. Our Markets and Supervision teams have crucial roles to play in overseeing those who are subject to our regulation and in carrying out surveillance. We are currently making a major investment in our IT systems to increase our capabilities to identify potential cases of market abuse. And our Enforcement Division has powers to bring both civil and criminal cases – the FSA is one of the very few financial regulators who have this dual role.
Within our new Financial Crime and Intelligence Division, we have an operations team, significantly increasing our capacity to undertake more thematic and case work on financial crime issues. So if firms and law enforcement alert us of an urgent matter, we will be able to tackle the problem more rapidly than we have in the past.
I want to emphasise that our structure does not put all responsibilities for fighting financial crime in the hands of my new division. The tables I have shown here lay out which areas of FSA have the lead accountability for achieving our financial crime outcomes. Our new Financial Crime and Intelligence division provides specialist tools and expertise to assist those lead areas. But what all of us in my division have to do it provide leadership of FSA's efforts. Our experience is that supervisory, policy and enforcement colleagues are experts in Prudential and Conduct of Business matters, but not always in financial crime. Perhaps we see a new Supervisory approach developing; Integrity supervision. If Conduct of Business supervision asks the question "Do honest firms treat customers fairly?" and Prudential supervision asks the question "Do honest firms have enough capital and controls?". Then Integrity supervision has perhaps to ask the question "Are they honest firm acting honestly?". The Dutch Central Bank has led the way in this area.
'Measuring' financial crime
We have heard a lot about measurement in the last couple of days. Whatever you measure you change. Measuring the degree of financial crime is, as you are all aware, no easy task. For market abuse, where we are in the lead, we have published a methodology for measuring "market cleanliness". This looks at the extent to which share prices move ahead of significant announcements that firms are required to make to the market and, in particular, announcements of mergers or takeover bids. Our analysis indicates that the UK equity market has become significantly cleaner as regards routine announcements. However, the level of informed price movements ahead of takeover announcements remains too high for comfort – although I must stress that we think we are not the only market that is affected in this way.
In other areas, various agencies do measure financial crime; but the results are patchy, as has been shown by the recent work led by Professor Levi for the Association of Chief Police Officers. We therefore fully support the main recommendations of the UK Government's Fraud Review, and notably the creation of the National Fraud Strategic Authority (NFSA) as well as the National Fraud Reporting Centre.
I always like to excite the academics who come to the Symposium. Academic work in this area is essential. An experienced economist recently said to me that "financial crime policy in an evidence free zone". Following my attendance at the Terror Finance workshop yesterday I am sure Bill Thompson would agree with him. To address this deficit, the FSA is itself launching a further long term research project this autumn to measure the scale and impact of crime in the UK financial sector, with the aim of improving our own understanding of the extent of financial sector abuse, as well as its wider effects on society at large. And we are just commencing the process of selecting the academic team to carry this out.
So as I close, let me spell out some of the main risks to achieving our financial crime outcomes that we see today.
Risks to achieving our financial crime objective
Poor information security currently stands as the highest scored risk on our own risk dashboard. Our Financial Crime Operations team has been dealing with an increasing number of significant personal and corporate data loss cases – more than 30 since the start of 2007, and these were without exception due to poor Information Security controls in firms. We all know that personal data is increasingly being exploited by criminals, helped by a new market where compromised customer data is bought and sold, affecting not only the affected customers and firms, but public confidence in transacting online. We have recently started a major piece of thematic work looking at firms' controls around personal customer data.
An increasing area of concern for FSA is that persons of questionable integrity enter the UK financial market. These people can enter our markets via legitimate channels of Authorisation, Change in Control, Passporting & Listings. Recently we have seen (and successfully prevented) a number of attempts by international criminals to take control of UK financial institutions. The financial markets are global and as the UK is an international financial centre, we must continue to remain vigilant. In Europe, in particular, the single market framework means that a firm authorised in one member state can operate without further vetting in any other member state. So in Europe, and elsewhere we increasingly rely on effective collaboration and information sharing with other regulators to fulfil our financial crime outcomes. My colleague, Justine Walker, will be talking about this in more detail later in the day.
Making the risk-based approach an international attribute
The sharing of intelligence should go hand in hand with the adoption of a risk-based approach internationally: the more widespread the risk-based approach is globally, the more we will see the need to work together to diminish common counterparty threats, and fight risks in a coordinated and effective way.
But obviously the risk-based approach that we advocate so strongly in the UK must be proportionate to the threat considered. A country with weak anti-money laundering processes may pose a very limited threat to the global financial system. So we should look at where the real vulnerabilities are, and not only focus on places where the systems are badly designed, if we want to combat financial crime where it matters the most.
