The enforcement division at the UK?s financial markets regulator is changing its approach under the uncompromising stewardship of its director, Andrew Procter.
The 220-man team at the Financial Services Authority that Procter heads will no longer put up with ill-informed or uninterested management who see a regulatory investigation as a purely legal matter.
Companies that fail to cooperate fully with the FSA will face increasingly hefty fines, while those that are prepared to take seriously findings about internal controls or disclosure systems and take immediate remedial action will be handed down much more modest penalties.
This means board-level involvement right from the start and a willingness among senior executives to dedicate time and brainpower to an area that was previously the preserve of lawyers and other advisers.
Going beyond the statute
?We expect chief executives to do more than what is required of them by the statute. We expect them to be cooperative in a proactive way,? says Procter. ?We expect them to identify solutions and we expect them to identify compensation arrangements. We don?t expect them to sit back and wait for us to tell them what to do. This is not a criticism of general counsel or heads of legal at all, just a recognition that quite often what is at stake is wider than just legal issues.?
Procter, an Australian lawyer, formerly headed enforcement at the Australian Securities and Investment Commission and was also commissioner for the supervision of intermediaries at Hong Kong?s Securities and Futures Commission. He has been heavily involved in the FSA?s overhaul of enforcement since his arrival at the end of 2001.
Cases such as the investigation of Shell?s misrepresentation of its oil reserves in its accounts and the inquiry into share dealings in retailer Marks and Spencer ahead of Philip Green?s attempt to buy the company have since shown that coming under investigation is a commercial as well as a legal issue. Falling share prices, vulnerability to takeovers and career-ending publicity are possible outcomes for companies and board members under investigation.
The FSA?s enforcement team, which makes up 10% of the regulator?s total staff, is taking increasingly tough decisions on how and who to investigate.
?Our opinion is that too many of the cases that our predecessors used to take were relatively small and got in the way of completing the larger or important cases that make a difference to market understanding or consumer protection,? says Procter.
To this end, the FSA has slashed its portfolio of investigations from 600 to 200, enabling the regulator to provide adequate resources to teams investigating potentially serious or high-profile breaches.
Over the past year the number of cases of mis-selling and financial promotions, threshold conditions and market abuse have all risen, by 50%, 100% and 66% respectively, according to FSA figures. This accounts for over 80% of new cases opened in the past financial year.
In criminal cases or instances of market abuse, cooperation with the individual or company is unlikely, but for investigations in less serious areas, such as failures in internal controls or listing rule breaches, there is more and more scope for companies to work with the FSA to correct problems quickly, thus reducing the likelihood of a fine and reducing the bad publicity generated by the investigation.
To avoid any potential for cutting cosy deals, the independent Regulatory Decisions Committee (RDC) must approve any negotiated settlement in a serious matter and the FSA must publicize details of the agreement it has made.
?If they cooperate by going further than what is required, then we offer them some incentives, such as a discount on any financial penalties and a statement in the publicity following the case, acknowledging the quality and content of cooperation from the firm and stating how this has contributed to a reduction in the financial penalty,? says Procter.
Mediation in action
The example of the moment is the investigation into collusion in the split-capital investment sector. It is the FSA?s largest-ever enforcement investigation and has just reached the stage where the RDC is proposing fines and compensation for customers. The negotiation and cooperation approach has not worked as well as the FSA hoped, with no agreement with firms to reach a settlement. However, the FSA is now attempting mediation and at press date five firms said they would be prepared to go down this route.
But one problem with mediation and negotiation is that the FSA must publicize the outcome of almost every completed case involving sanctions, with the only exceptions being when it is not in the public interest to do so. The publicity is the bitterest pill for company board members to swallow, especially when they have taken the time to cooperate.
Procter is unbending about this exposure. ?As a result of the press coverage, we have spoken to some companies pointing out their reduced fines and they have turned around and said: ?So what, the publicity was still terrible.? We have to find a way of continuing to incentivize companies to cooperate while at the same time we quite unashamedly publicize the outcomes of all our cases and look to get as much publicity as we can,? he says.
