Is “My word is my bond” still appropriate for FSA?

Politicians in the last days have done enormous damage to regulators and the regulatory structure in its baying for blood against Barclays and some of its employees. Hitherto, enforcement actions against investment firms were the business of regulators. No more it seems as politicians seek their own prosecutions in the press and in the court of public opinion.

The Serious Fraud Office’s (SFO) belated decision to launch a criminal enquiry into the actions of Barclays sets a dangerous precedent for both regulators and the regulated community. In its investigation into this case the FSA (which was solely responsible) had a number of ways to deal with the situation. It could have: undertaken disciplinary measures under its civil powers; agreed a settlement under its civil powers with a reduced penalty (which was the initial outcome); or, pursued a criminal prosecution with the police or the SFO. But only one should have been pursued, not two as now seems apparent.

The FSA clearly came to the view, for one assumes good reasons, that negotiating a settlement with Barclay’s under its civil powers was the best solution and in the public interest. It is important to note that it would have taken this decision after very careful consideration and after consulting its own lawyers and perhaps external counsel. It may have even consulted the SFO and it is also quite likely that the Bank of England would have been informed also, as the Bank of England is partly responsible for the oversight of wholesale banking under the Non-Investment Products Code (Although we haven’t heard much of this fact, perhaps because the FSA is a dead duck but the Bank is the next regulator.)

Now in the clamour by politicians to look the toughest and not responsible, and in an attempt to gain the political high ground it appears strongly that the SFO has been badgered into an investigation, and the ground cut away from under the FSA in its decision to settle. This is extremely damaging to FSA and to us all in the industry.

In the event of wrongdoing it is accepted industry practice that it is easier and cheaper for both sides to reach a settlement if at all possible. This is why FSA gives a discount for cooperation and an agreement to settle rather than fight. The quid pro quo is that the matter is then regarded as closed with no further action taken. The lawyers on both sides would have negotiated the settlement in good faith and in the knowledge that closure was part of the settlement. Barclays was not under any compulsion to settle and could have fought the case possibly with a reasonable chance of success. Market manipulation (rather than insider dealing) is an extremely difficult matter to prove and it is no coincidence that FSA enforcement actions or criminal prosecutions for the offence are extremely rare – in the UK no more than a handful since the regulation of markets first came about in 1986. To prove beyond reasonable doubt (which is necessary not only in a criminal action but also under FSA’s own civil powers in a serious case such as this with a large financial penalty) that these actions were market manipulation is likely to be extremely difficult in the first place and more so as this relates to a reference price which impacts investments rather than being an investment itself. All this difficulty no doubt influenced the FSA to agree a settlement. Better to have a fine of almost £50 million than a protracted and expensive prosecution which might fail. And, if the individuals were subsequently sacked (as we have been given to understand) and their authorisation withdrawn, FSA could raise significant difficulties for them if they surfaced again and reapplied for authorisation.

FSA is now in the appalling position of having its word impeached by a politically motivated decision. Who now can trust FSA in settlement negotiations knowing that they might be trumped by politicians and exposed to a double jeopardy? Why should a firm or individual ever trust the FSA again? Also, what now is the status of this settlement? Is it potentially invalid and can Barclays even try to get its money back?

Whatever the rights and wrongs of this case, worse than the damage done to Libor is the damage now done to the reputation of FSA (and its successor the FCA) which looks weak and incompetent and prevented from abiding with what it agreed and is right in law. And finally the SFO is also in a terrible position in being forced to pursue a case which was likely to be difficult to prosecute with any chance of success, and now made worse by politicians seeking the high moral ground and perhaps prejudicing the chances of a fair trial.

The writer has worked for the Securities and Investments Board (the forerunner of the FSA) in senior capacity as a markets supervisor, and additionally has been extensively involved in enforcement actions for market manipulation, first as a prosecuting authority for exchanges, second as a member of a disciplinary regulatory panel (the SFA), and finally as an expert witness acting for the defence.

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