The FCA – a more aggressive enforcer of financial crime?

On 1 April the Financial Services Authority (FSA) was abolished and replaced with three new organisations which will now share responsibility for the regulation of the financial industry.  These changes follow the coming into force of the Financial Services Act 2012.

The Prudential Regulatory Authority (PRA), operating from within the Bank of England, will now be responsible for the day-to-day regulation of the stability of financial services firms.  The Financial Policy Committee (FPC) of the Bank of England will be responsible for supervision of the financial system as a whole, monitoring and taking action to remove or reduce systemic risks.  Responsibility for supervising the behaviour of firms and individuals operating within the financial services industry (including enforcement action with regard to financial crime) will now fall to the Financial Conduct Authority (FCA).

The changes were announced by George Osborne in 2010 following criticism of the FSA for failing to take action to prevent the financial crisis of 2008.  It is intended that the new “twin peaks” system will strengthen regulation and supervision and will help to avoid another financial crisis.  However, putting the obvious cosmetic changes to the system of financial regulation to one side, what does the future hold for the enforcement of financial crime?

Following the FSA’s first criminal conviction for insider dealing against Christopher McQuoid and James Melbourne in 2009, the Authority went on to secure a total of 22 convictions for insider dealing.  The FCA will now continue the prosecution of 6 other individuals for insider dealing and related offences.  As at 31 March 2013 the FSA had become a successful, confident and well-resourced prosecutor with plenty of civil, regulatory and criminal tools to meet the demands for investigating and sanctioning those involved in misconduct within the financial services industry.

As regards the enforcement of financial crime, the Financial Services Act 2012 largely amounts to the simple transposition of enforcement powers under the Financial Services and Markets Act 2000 (“FSMA”) from the FSA to the FCA.  The statutory remit of the FCA to prosecute financial crime will remain limited to insider dealing, misleading the market and “perimeter offences”.  However, the FCA will continue to rely upon the decision of the Supreme Court in R v Rollins to seek to prosecute money laundering offences and conspiracies which relate to the statutory offences.

An important substantive change can be found in Part 7 to the Financial Services Act 2012 which repeals the misleading statements offence at s.397 of FSMA and creates three new offences including one of misleading statements in relation to a relevant benchmark.  These new offences, like the s.397 offence are based on dishonest or reckless conduct but do not require proof of actual market manipulation. The subject of the benchmark offence is currently limited to Libor only and is clearly aimed at the perceived inadequacy of the FSA’s prosecution powers under the former legislation.  Other benchmarks could conceivably be added in future.

In his speech to the Association of British Insurers in September 2012 the new Chief Executive of the FSA, Martin Wheatley, stated that fines on financial institutions would not alter their behaviour unless individuals were also held to account.  He has also been reported as suggesting that the new regulator would “shoot first and ask questions later”.  Yet in March this year he adopted a less aggressive tone saying that prevention was better than cure, that he wanted to get back to talking to CEO’s and that the “be afraid” message used by the FSA was not going to be heard from the FCA.  Nevertheless, it seems likely that the FCA will continue to build upon the successes of the FSA to become more aggressive in the enforcement of financial crime; capable of using the significant experience already developed by staff transferred from the FSA combined with the full range of resources and tools available to its predecessor.  We shall have to wait and see where the FCA shoots first.

Corker Binning is a law firm specialising in business crime and fraud, regulatory litigation and general criminal work. For more information about how we can help you, speak to one of our fraud lawyers on 0207 353 6000.