News & what's on - Written by on Sunday, August 19, 2012 13:00 - 0 Comments

A new sheriff is coming to town & LIBOR Fixing Report criticism of the FSA could be a game changer for UK enforcement.

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The ongoing LIBOR investigations already look like their impact will be felt far beyond the esoteric confines of interbank lending rates.

On Friday the House of Commons Treasury Committee published its preliminary findings into LIBOR fixing.

Buried at the back of the report is a finding which could have far reaching consequences.  The Committee, led by the respected MP Andrew Tyrie, using typical English understatement, expressed ‘surprise’ and ‘concern’ that the FSA limits itself in the investigation and prosecution of fraud.

Historically the FSA has confined its role to prosecution of financial market offences broadly where it has been given the specific power to prosecute by statute.

Questioned by the Committee, Lord Turner, Chairman of the FSA said:

“My understanding is that the FSA is not able to bring a criminal case in the UK. If it falls within the category of fraud, which is a general category of malfeasance quite separate from financial regulation, the Serious Fraud Office has a right to look at it, and we have been in contact with the SFO throughout this… In the UK, this issue — as I understand it, but I would defer to my legal expert here—is not one where we, the FSA, have an ability to bring a criminal case, whereas there are some other specific categories of market manipulation where we are able to bring criminal cases.”

Tracey McDermott, FSA Director of Enforcement clarified the position:

“[…] we are not a general fraud prosecutor. We have specific powers to prosecute particular offences… What we do not have is a remit to prosecute false accounting, conspiracy and so on in a general sense. We could prosecute it as ancillary to one of our main offences, so if there was a markets offence, you could throw in money laundering as well, but our investigative powers are limited to the offences that we have the ability to prosecute.”

The Committee was ‘surprised’.

The report records that Ms. McDermott confirmed that the FSA was able to prosecute non-financial market offences in its capacity as a private prosecutor.  Of itself this is of no great significance – the Supreme Court clarified this point a couple of years ago specifically in the case of the FSA.

However, the Committee’s surprise turned to concern when the FSA’s Director of Enforcement elaborated on the rationale behind the FSA’s stance.  The report records that when asked whether there was enough evidence of fraudulent conduct to commence a criminal prosecution in this case, Tracy McDermott responded that “[this] is not our specialist area of expertise. It is not where our fees are raised to prosecute, that is to focus on the FSMA offences”.

Conclusions and recommendations

The report strongly points to a recommendation going forward the FSA take on prosecutions for wider criminal offences involving fraud or dishonesty.

The report notes:

“The FSA apparently believes that its fees are not raised for the purpose of prosecuting offences other than those set out in FSMA.

The Committee is concerned by this. The FSA has responsibility for regulating the key participants in financial markets. The FSA’s decision whether to initiate a criminal prosecution should not be influenced by the fact that its income is derived from firms which it regulates.”

…“The FSA has an obligation under section 2(1)(b) of FSMA to discharge its functions in the way in which it considers most appropriate for the purpose of meeting its regulatory objectives. Under section 2(2)(d) the reduction of financial crime is one of these objectives. Financial crime is defined in section 6(3) as including not only misconduct in relation to 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 recommends that the Government, following the Wheatley review, should consider clarifying the scope of the FSA’s, and its successors’, power to initiate criminal proceedings where there is serious fraudulent conduct in the context of the financial markets.”

If the FSA is to take on the role of investigation and prosecuting more general criminal offences involving fraud or dishonesty concerns over the funding of criminal investigation and prosecution of economic crime(s) (often talked about in the same breath as the SFO) fall away.

The FSA is self funding – deriving its income from those it regulates.

Timing, as they say, is everything.  In a short while the FSA will be no more, replaced by the Financial Conduct Authority and with banking regulation split off.  As the future shape of the FCA is developed this report may herald the arrival of a new sheriff in town when it comes to the policing and prosecution of economic crime.


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