After dinner remarks at Cambridge Symposium on economic crime
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Speech by Margaret Cole, Director of Enforcement,
Cambridge Symposium on economic crime
1 September 2008
Tonight I want to share some thoughts on one particular economic crime we’re very focused on right now at the FSA – that’s insider dealing. I am going to tell you what we are doing to get the City to take insider dealing seriously and to show that we mean business.
Insider dealing didn’t exist as a criminal offence in the UK when I came to Cambridge to read law in 1979. It became an offence the following year in the Companies Act 1980. I didn’t pay much attention to it back then – even though I was studying company law at the time. These days it takes up rather more of my time.
But attitudes take time to change and some people persist in the notion of insider dealing as a victimless crime. Some even think it isn’t a crime at all. Milton Friedman, Nobel Laureate in Economics and celebrated free market thinker, didn’t think there was anything wrong with insider dealing. In 2002 he said “we need more insider dealing, not less.” He suggested that it should be legalised because it benefits all investors by quickly introducing new information to the market.
He thought it was inefficient, in market terms, to make everyone wait for a regulatory news announcement, and that trading ahead of a formal announcement would mean the news simply got out faster, leading to a more efficient free market.
It’s not often I get the chance to disagree with a Nobel prize winner - but in the language of econometrics - I think Mr. Friedman is an “outlier”. Its a brave soul that would openly agree with his views in today’s environment.
On the international stage IOSCO’s Core Principles make it clear that investors must be protected from misleading, manipulative or fraudulent practices including insider dealing and other market misconduct. More than 90% of the world’s securities and commodities market regulators are IOSCO members and they have signed up to these Core Principles. And the World Bank and the IMF use the Core Principles as the gold standard against which they assess the financial health – or otherwise – of different countries’ financial sectors. So it’s safe to say that every major financial centre in the world is expected to have laws against insider dealing.
And I’m sure that everyone here tonight takes this subject very seriously. Insider dealing is a serious economic crime and it isn’t a victimless offence. If some people are able to trade on the basis of inside information and are in a privileged position to make profits and avoid losses - that creates an imbalance between market participants. Insider dealers will always have an advantage over others because they have more accurate information about what it is that they’re investing in. This is not only unfair – its cheating. It’s not only unfair to individual investors - it has consequences for markets as a whole.
Whether or not markets are clean fundamentally impacts on the competitiveness of financial markets. Variable levels of market cleanliness between different markets means there isn’t a level playing field. In the longer term market abuse and insider dealing can undermine the health of an economy as a whole.
Even so, when our outgoing Chairman Sir Callum McCarthy was asked by the Treasury Select Committee earlier this year whether the City takes the subject of insider dealing and market abuse seriously enough his answer was “no”. So I’m going to tell you what we at the FSA are doing to get the City to take this seriously.
First, we have a clear objective: to improve the cleanliness of the markets.
Secondly, we have a long term strategy, which involves using all the tools and resources available to us in a targeted way. A big part of our strategy is credible deterrence. What does this mean? It means bringing enough cases of the right sort and getting the right outcomes so that people sit up and pay attention. It’s about making people realise that they will suffer meaningful consequences if they break the law and if they fail to improve standards of behaviour.
Although we’ve been very active since we got our FSMA powers – we’ve imposed 21 regulatory fines against individuals and firms for market misconduct – we’re concerned that civil penalties, however large, haven’t been making enough of an impact. We’re convinced that the threat of a criminal sanction – a criminal conviction and a custodial sentence - is a much more powerful deterrent. So we’ve decided that if people have got to go to prison for us to achieve our objective of cleaning up the market – that’s what will have to happen.
Since the start of this year we’ve commenced 3 criminal prosecutions for insider dealing and we have several more cases under investigation. And some of you may have seen that a few weeks ago we carried out a major search and arrest operation involving 10 premises and 8 individuals. We’re determined to use all our powers to investigate and gather evidence to bring the right cases.
We know that this is a long term plan – we won’t clean up the markets overnight. We need to prosecute a steady stream of cases demonstrating by our visible activity that the FSA means business.
We also know that like other prosecutors – especially in this area – we face many challenges and we expect to lose some cases and to have setbacks. This won’t dent our commitment and determination to stick to our objective. After all we didn’t win 19 gold medals in the Olympics without courage, resolve, hard work and long term commitment. In sporting terms, this isn’t a sprint but a marathon.
And thirdly - we’ve been prepared to make a lot of changes to equip ourselves for the challenges we face. We’ve made changes to our people, our structure, and to the techniques and technology we use. We’re becoming bolder in our approach. We’re also making sure that the different parts of the FSA work as a team to monitor the markets, identify wrongdoing, gather intelligence, obtain evidence and prosecute cases. This is a true joint enterprise for the Enforcement, Markets and Financial Crime Divisions.
We’ve also asked the Government for additional powers because we want to make sure that we have the full toolkit to gather evidence and bring successful cases. We want to be designated as a prosecutor with the power to offer statutory immunity to co-operating witnesses – to add to the common law power we already have to undertake not to prosecute.
The US experience has shown us the effectiveness of incentivising people to come forward and give hard evidence against other more culpable participants. This is especially important in the area of insider dealing and other economic crime where the evidence is very often circumstantial and the burden of proof is high.
So you can see, as I said at the start, that the FSA means business when it comes to insider dealing. And you now have an idea of what we are doing to tackle it.
If recent headlines are anything to go by, people are already starting to sit up and pay attention. For example “Watchdog shows its teeth” (from the FT) and “the City watchdog is taking off the gloves” (from the Sunday Telegraph), both in the last month.
What we now have to do is follow through on this with concrete outcomes that make an impact on behaviour in the real world. I’m convinced that we’re in a strong position to do this, to carry forward our strategy of credible deterrence to get the City to take market abuse seriously.
I started with Milton Friedman so I thought I would finish with him too. He once said “there’s no such thing as a free lunch” – “or a free dinner” I might add. Thank you for your attention this evening, I hope I’ve given you food for thought, but not indigestion.