How Enforcement makes a difference
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Speech by Margaret Cole, Director of Enforcement, FSA
Enforcement Law Conference
18 June 2008
At the FSA, we believe that we can make a real impact in changing behaviour. That’s exactly what we are here to do. And, Enforcement is right in the front line.
It’s two years since our last Enforcement Conference. They say: 'A week is a long time in politics' and two years is a very long time in the financial services world. Today we face a very different landscape and different challenges from two years ago.
We’ve seen some significant changes to Enforcement, to the FSA and to market conditions. As Hector has said, Enforcement is a very important part of what we do at the FSA. It’s a key part of delivering on our goal to achieve credible deterrence. FSA watchers will have noticed a shift in our emphasis. Today, we have a lot sharper focus on Enforcement as a strategic tool at the forefront of our drive to achieve ‘credible deterrence.’ If we get ‘credible deterrence’ right we’ll be well on our way to reforming actual behaviour.
So I’m going to talk to you today about some of the things we are doing in Enforcement to get to this goal. But I’ll start with why we do it.
When I joined the FSA, in 2005 the recommendations of the Enforcement Process Review had just been published. Adopting those recommendations changed the way our cases are run. The point was to bring about a process which was not only fair but that could be seen to be fair. This was very much the ‘hot topic of the day’ two years ago. Things have now moved on.
During the last two years we’ve been developing our approach. We have continued to put out clear messages, both on the wholesale and retail side. We’ve communicated what we want to see through various means. But we are not yet convinced that we are seeing better behaviour across the board.
I’ll give an example why. In the retail area we have repeatedly given messages about PPI. We’ve said that firms have not been alert to the risk of consumers being sold unsuitable policies. And yet, we are still finding evidence of bad practices going on today. Right across the retail landscape we still see behaviour that threatens our objective of making sure that people get a fair deal.
This means we’ve got to use Enforcement as one of our major tools. Our aim is to bring about real changes in behaviour to protect consumers and to guard against abuse in the markets. Where we see clear evidence that behaviour is not improving we will use formal discipline to bring about real change – whether that is in the markets, or in how retail institutions are treating their customers.
This isn’t just semantics. We recognise that Enforcement activity is right at the forefront of the drive to achieve credible deterrence. So we have to be ready, willing and able to do enough cases of the right sort to get the right outcomes, to get the message out to firms and individuals that they will suffer meaningful consequences if they fail to raise their game and improve standards of behaviour.
So, what are we doing in our day-to-day work to achieve this?
A lot of what we are doing now, and have been doing for the last two years, has taken place out of the public gaze. And sadly, as you know I can’t give you specific details of the work we have in the pipeline. But you will have heard me talk about one significant shift of emphasis. That’s our increased focus on using our power to bring criminal prosecutions.
For our active criminal prosecutions I am bound by reporting restrictions. What I can say is that this year we have brought 3 criminal prosecutions for insider dealing and we have more in the pipeline. This commitment shows our determination to use all the powers we have at our disposal to take action to achieve credible deterrence.
Hector, Callum and I recently appeared before the Treasury Select Committee to give evidence about market abuse. We were asked whether we felt that the City of London takes market abuse seriously enough. Sadly our response was “no”.
That’s why one of our goals is to get the City to take this subject more seriously. We feel that the threat of civil fines hasn’t worked as well as we would have liked. We’re convinced that the threat of a custodial sentence is a much more significant deterrent. The good news is that in this area stakeholders and commentators all seem to agree with us.
I should make clear that our aim is to clean up the market, to change behaviour by making best use of all the powers – criminal, civil and administrative – that are available to us. If people have to go to prison for us to achieve that aim then that’s what we are prepared to do. But sending people to prison isn’t the aim in itself. As I said when I appeared before the Select Committee, we intend to be bolder and more resolute about proceeding with market abuse and insider dealing cases so that we can actually bring about a change in the culture in the City. We’ve got to get all the market players to take this subject seriously.
While I’m talking about market abuse, I’d also like to mention the things we are doing internally which don’t hit the headlines. But, they are focussed on delivering the right outcomes. For example, as part of our restructure last year we have hired more people with the expertise we need to have, including boosting the numbers of our lawyers and investigators with criminal expertise from 12 to 30.
And also we now work more closely with our colleagues in the Markets Division to make sure that we are getting the right cases in to the Enforcement Division, and that it happens more quickly.
The point of this is to establish early on whether there is a case of misconduct, or if there is a plausible alternative explanation. Our aim is to avoid lengthy investigations into innocent trades and focus on the ones where an early review points more directly to misconduct. Early telephone interviews are just one way of doing this.
Another thing we are focusing on is insider dealing. As you know, insider dealing cases are tough cases to prosecute. That’s not just our experience, it’s the experience of other UK prosecutors and our foreign counterparts. The evidence is usually circumstantial – there is rarely that thing called “a smoking gun”, and these cases may not be jury-friendly.
That’s why we’ve been exploring some new ways of carrying out our investigations and learning from the experiences of other regulators at home and abroad. That’s also why we think it’s important for us to have the full set of tools to incentivise lesser participants in criminal activity to co-operate with us to help us build the evidence to pursue cases against those who are more deeply involved.
So we are consulting on changes to our existing guidance to add a leniency factor to emphasise that we can take into account the assistance a suspect gives us when deciding what action to take. We may go for alternatives to criminal prosecution for those suspects who are prepared to come forward with evidence against other, more culpable, parties. By that I mean that we can provide incentives for providing evidence by taking regulatory, rather than criminal action in return for evidence. Depending on the facts we might also agree a lower penalty, but as a minimum we would expect a co-operating witness to be stripped of the profits of their wrongdoing.
As you also know, we’ve been in discussions with the Government to get the FSA designated as a ‘prosecutor’ with the power to offer full statutory immunity to co-operating witnesses. We already have a common law power to undertake not to prosecute and we will use this route. But we also think that the statutory power will bring practical benefits as well as sending an important wider message.
So far I’ve been talking mostly about criminal action. But, I should emphasise that we are in no way saying that we will focus on criminal prosecutions to the exclusion of other ways of proceeding. We currently have 31 market abuse cases in Wholesale Enforcement. And, we decide on a case-by-case basis which route to take – civil or criminal.
We know that tackling market abuse is a long term plan. We won’t clean up the City overnight. We’ve got to have successes in the right cases, and that’s precisely what we are working hard to achieve. Most importantly we need to prosecute a steady stream of cases recognising that, like other prosecutors we won’t win them all.
But that sort of visible activity in itself has an important demonstration effect: ‘The FSA means business!’
I'd also like to say something about what we’re doing in the retail area to bring improvements in how firms treat their customers. We said back in September last year that we would impose higher fines for failings in the retail market. In January, in the area of PPI, we imposed the highest penalty to date: over 1 million pounds on HFC.
We also imposed our first penalty on a chief executive of a publicly quoted firm for PPI failings; that was the Land of Leather case in May.
Also last month we fined Thinc Group, a large IFA network, 900,000 pounds for failures in its systems in the area of sub prime mortgages.
And just yesterday we fined a stockbroking firm, Merchant Securities, for not adequately protecting its customers from the risk of identity fraud.
These cases show that we are serious about taking tougher action in key areas to protect consumers. Press commentary suggests that firms are now paying attention to the action we take, particularly as the Land of Leather case showed that senior managers not directly involved in compliance matters can be held to account for failings in that area.
Whilst I’m on the subject of senior management let me also tell you that we will be paying more attention to individuals who hold Significant Influence Functions.
We have frequently stressed the importance of senior management responsibility and oversight. But, some of you might think that we haven’t matched our words with decisive action. Well, a recent study by Deloitte for the OFT confirmed what we already suspected, that action against individuals has a lot greater impact in terms of deterrence than action against firms. So we know that taking enforcement action against individuals is a vital part of achieving credible deterrence overall. So, you can expect to see more Supervision and Enforcement focus on individuals - especially SIF holders.
Previously for SIF holders, we’ve tended to focus on cases of dishonesty or lack of integrity where prohibition or withdrawal of approval was the most appropriate outcome. In the future, we will also consider the competence of SIF holders, and we won’t shy away from pursuing cases against individual SIF holders who breach our Principles and Code. In these cases, fines may be more appropriate than prohibitions.
We’ve made a strategic decision to investigate more individuals. So, even though that could well mean that cases take longer and quick public outcomes are delayed we consider it to be a price worth paying to achieve credible deterrence.
There are a number of other initiatives under way which make use of the full range of our powers. We have obtained injunctions to restrain the proceeds of suspected market abuse. In other criminal cases we have obtained restraint orders under the Proceeds of Crime Act. In January this year an individual was jailed for 15 months for carrying out unauthorised business. We also worked closely with Strathclyde Police in another case to secure a 4 year sentence for an individual who took almost 10 million pounds from investors in an unauthorised investment scam.
In another case we investigated and took civil proceedings against an individual who had conducted unauthorised business. We settled those proceedings on the basis of statements made by him about his assets. Later it became clear that he had lied about his assets. We worked closely with his local police force in arresting and questioning him, and we worked with the CPS in prosecuting the case.
He was convicted last month and jailed for 3 years for offences which included lying in his dealings with us by concealing the true level of his financial means. We will take very seriously anything less than complete candour and openness in dealings with us.
And, something else we’ve been getting on with is the important job of making sure firms make good the losses they have caused to people. As part of settlement packages we have ensured that firms agree to past business reviews and to put things right for their customers. We require that letters to customers don’t look like routine circulars or sales materials. Letters from firms have got to state clearly up front the purpose of the letter, that a refund is possible, and the fact that the FSA has required the firm to send it.
I mention these examples to show that we are intent on using the full range of our powers in order to achieve the best outcomes. I’m talking about the outcomes most suited to the particular facts and circumstances of a case. Our approach is focussed on what we want to achieve and sometimes that will be at the expense of the headlines.
Tough words are one thing – but actions matter more. This brings me to my final point: How will the changes we’ve made translate into our day-to-day practice?
I hope this will come up throughout the day and today is a good opportunity to ask us questions about this. For now let me just say that we have a highly skilled, experienced and motivated team ready to take on the challenges and the difficult cases we’ve got to pursue if we’re going to bring about changes in behaviour through credible deterrence.
You should find that cases progress more quickly – whether they result in discipline or not. You should also find the quality of the documents you receive from us is improved and more consistent.
You will find our people very focused on getting the right outcomes. That might mean a settled outcome, but then again it might not. Of course our aim is to get results, not just because we will be judged by our results, but because the results we get have real meaning in the real world. But we do not put our people under pressure to settle cases. A settlement has to be right – not just a deal for its own sake. We are prepared to take cases to the RDC, to the Tribunal - and beyond, even though we recognise that cases we fight carry more risk and take longer to bring to conclusion. And you will know that this year we have brought our first 2 appeals against Tribunal decisions, in the cases of Fox Hayes and Khan.
So to get us closer to the world we at the FSA aim for, where markets are clean, fair and orderly and retail customers get a fair deal, we are focused on getting better and clearer outcomes and delivering important results to create credible deterrence. Not only by disciplining individual wrongdoing, but also by drawing clear, consistent lines of behaviour that is not acceptable. And setting these boundaries will lead to changes in behaviour across the board.
Today of course gives us a chance to talk about these things in more detail and I hope you’ll take full advantage of that.