On 24 June 2021, the House of Commons Treasury Committee published its report into the FCA’s regulation of London & Capital Finance (LC&F). The report is a litany of criticisms, epitomised by a call for a culture change from, in particular, the FCA’s senior management. Another scathing and related criticism made by the Committee was one of institutional hypocrisy; whilst the FCA required authorised firms to adhere to the principles embodied in the SMR it considered that these did not apply to itself when it made serious mistakes.
The subject of this article is one aspect of that Committee’s report, “The FCA’s attitude to combatting fraud”. This falls within the culture rubric by which the Committee was so troubled. The Committee wanted to articulate and then critique what the FCA believes should be its role in combatting and reducing financial crime. Or expressing this in the lexicon of the FCA, its role in relation to fraud beyond its “regulatory perimeter”.
The Committee held that the LC&F scandal was allowed to happen because the FCA decided that its activities were unregulated or beyond the FCA’s regulatory perimeter. Red flags were apparently missed because the FCA considered that scrutiny of those activities would be inappropriate, or more candidly, a waste of its resources. It certainly did not consider itself responsible for investigating whether the sale of the unregulated products could potentially amount to a fraud on retail investors. According to the Committee, the FCA’s deficiency in relation to fighting fraud is epitomised by the fact that its mindset is that fraud is “principally a matter for the police.”
This alleged attitude did not find favour with the Committee. On the contrary, it excoriated it as an irresponsible abdication of the regulator’s duty to protect customers from fraud. The Committee recommended that “The FCA should develop a strategy for how it will approach fraud risks that are outside the perimeter of regulation but involve authorised firms.”
The FCA’s approach to prosecuting fraud
The FCA regards sections 401 and 402 of the Financial Services and Markets Act 2000 (FSMA) as the cornerstone of its function as regards the enforcement of the criminal law. These sections expressly provide the FCA with power to prosecute specified criminal offences. Section 401 covers the offences created by FSMA, subordinate legislation made under FSMA and under Part 7 of the Financial Services Act 2012. Section 402 covers offences of insider dealing offences under Part V of the Criminal Justice Act 1993 (CJA), the Money Laundering Regulations and Schedule 7 of the Counter Terrorism Act 2008. The FCA has always contended that when Parliament vested these powers to prosecute it did not intend the regulator to resemble the CPS or SFO. In this vein, the FCA has long relied on the fact that nowhere in sections 401 or 402, or indeed elsewhere in FSMA or in any subsequent statute, is there any endorsement of the FCA being expected to or having a power to prosecute for the offence of fraud created by section 2 of the Fraud Act 2006 or similar common law offences. Therefore, according to the FCA its remit is chiefly confined to the offences specified by sections 401 and 402.
The reservation “chiefly” is important. The FCA and before it, the FSA, has rejected the proposition that these two sections provided it with its only powers of prosecution. In 2009 the FSA charged Neil Rollins with an offence listed in section 402 (insider dealing) but also money laundering, which is not listed in that section or in section 401. Rollins submitted that in relation to prosecuting him for money laundering, the FSA was acting ultra vires. This legal objection wound its way to the Supreme Court. In R v Neil Rollins, the Supreme Court held that sections 401 and 402 were not a delimitation of the FCA’s prosecutorial powers. Instead it could bring a prosecution for any offence subject only to any inhibition contained in its memorandum and articles of association. This judgment thus countenanced the FCA to prosecute a wider range of both statutory and common law offences. Consistent with this judgment, Chapter 12 of the current edition of the FCA Enforcement Guide states that the regulator can “prosecute criminal offences where to do so would be consistent in meeting any of its statutory objectives.” 
Since Rollins the FCA has prosecuted offences other than those mandated in sections 401 and 402. When doing so it has emphasised that this was a necessity; necessary in order to ensure that its indictments adequately encompassed the extent of the alleged offending. In its prosecutions for boiler room scams or land banking schemes where the indictment has contained counts of fraud, it has contended that offences contemplated in sections 401 and 402 such as breaching the general prohibition plainly do not capture the full extent of the alleged criminality.
Fraud offences have also found their way into FCA indictments centred on insider dealing. The most recent example is the FCA’s announcement in February of this year that it had charged Mohammed Zina and Suhail Zina with offences of both insider dealing and fraud by false representation pursuant to the Fraud Act 2006, the latter relating to statements made to a bank to obtain the £95,000 they allegedly used for the suspect trading.
But the FCA has not ventured further. It has never launched a prosecution in which fraud alone appears on the indictment. So far, where it has alleged fraud, this has been ancillary to offences contemplated in sections 401 and 402.
Pressure on the FCA to become a mainstream fraud prosecutor
The fallout from the 2008 financial crisis with its populist demands for bankers to be imprisoned led to then government to float the idea of the FSA and SFO merging into one “super” agency. Although that suggestion was successfully repulsed, it precipitated an alternative proposal that was considered by the Treasury Committee in its report on the LIBOR scandal in 2012. This Committee heard from Tracey McDermott, the then Director of Enforcement and Financial Crime at the FSA. She contended that “we are not a general fraud prosecutor…we could prosecute it as ancillary to one of our main offences, so if there was a markets offence, you could throw (it) in…” She added that whilst the FSA was able to prosecute non-financial market offences, this was not its specialist area of expertise and that the regulator’s focus was on FSMA prescribed offences.
The Committee was unpersuaded by her argument. It pointed to the FSA’s then obligation under section 2(1)(b) FSMA to discharge its functions in the way it considers most appropriate for the purpose of meeting its regulatory objectives: “Under s2(2)(d) the reduction of financial crime is one of these objectives. Financial crime is defined in s6(3) as including not only misconduct in a financial market but also any criminal offence of fraud or dishonesty. The FSA took a narrow view of its power to initiate criminal proceedings for fraudulent conduct in this case.” 
The Committee recommended that the FSA should become proactive in prosecuting criminal fraud in its own right. The FSA however quietly opposed this and nothing happened, as shown by the Committee’s LC&F report.
Why is the FCA implacably opposed to expansion of its prosecutorial remit?
Successive Treasury Committees in particular have expressed disappointment and frustration about the FCA’s intransigence. The explanation is not difficult to discern, despite the FCA consistently being coy in providing the whole picture.
A number of individuals who gave evidence to the inquiry, including Nikil Rathi, Chief Executive of the FCA, commented on the lack of resources across the board to allow for the effective investigation and prosecution of fraud by the police and other organisations. One unnamed senior individual was reported to have said that whilst the regulator was happy to work alongside other agencies, it “did not want this [fraud] to become another job for the FCA.”
It is unsurprising that the regulator does not want to find itself having to fill in the gaps caused by the lack of proper funding for other agencies. As one witness commented to the Committee, “while they (the FCA) are capable of doing it [prosecuting fraud] the amount of resources it would mop up would be enormous.”
What is unsaid is a fear that the reputation of the FCA as an effective organisation would be sullied were it to become more like, and thus suffer the same fate as, the SFO. The SFO is in crisis following a wave of successive and humiliating courtroom defeats. The FCA’s senior management must shudder at the prospect of sharing the same fate.
However, the FCA should not allow this fear to hold it back from entering the fraud arena. The regulator has already transformed itself once, from an organization originally known for its reluctance to investigate criminal cases to its position today as a comparatively successful prosecutor. The time has come to transform itself further.
The FCA talks a tough game of “credible deterrence”. To balk at prosecuting criminal fraud in its own right undermines this message. If, in order to satisfy its strategic and operational objectives, it is required to take a fraud prosecution, it should do so. Passing the buck to another agency is not the answer.
Claire Cross, Partner
  UKSC 39
 EG 12.1.1
 S19 FSMA – maximum penalty 2 years
 Para 200 – Fixing LIBOR; some preliminary findings – HC 481-I
 Para 202