UK plan for early notice of insider-trading probes draws criticism

February 22, 2011

By Peter Elstob

LONDON, Feb. 18 (Complinet) – UK regulatory lawyers have united in their concerns about giving the new Financial Conduct Authority the power to make insider dealing and other investigations public at their initial stage.

The government proposed giving the controversial “early publicity” power to the FCA — the successor body to the Financial Services Authority that will regulate retail, wholesale, and markets conduct of business — in a consultation document that it published on Thursday.

Last year the FSA got the power to publicize enforcement actions at either the decision notice or final notice stages, as it considered appropriate.

These powers were already contained in an existing amendment to the Financial Services and Markets Act 2000, but needed to be switched on by a Treasury Order, which the government duly did in mid-October 2010.

The regulator said it needed to be able to publicize these stages of enforcement actions earlier in the process than previously. It said when those under investigation opted to take their cases to the Financial Services and Markets Tribunal (now the Upper Tribunal), the fact that they were under investigation could remain unknown, sometimes for years, keeping consumers, clients and counterparties ignorant of possible abuses.

As early as June last year, however, Margaret Cole, the FSA’s director of enforcement and financial crime, said that she wanted to go even further. At an FSA enforcement conference she mooted the possibility of publishing minimal information — the names of persons under investigation and what they were accused of — at the initial stage of investigations, when warning notices are issued.


In Thursday’s consultation document the government granted Cole her wish. It said that it intended to legislate to allow the FCA, and the FSA’s other successor body, the Prudential Regulation Authority, to publish the fact that a warning notice had been issued, together with a summary of the notice, including, for example, the grounds on which action was being taken.

The government said that early publication of the fact that the FCA was proposing to take enforcement action would “increase the visibility of the actions it is taking to protect consumers’ interests, while at the same time giving firms greater insight in to the actions taken and their eventual outcome.” This in turn would enhance consumer and industry confidence in the new regulatory system, and enable consumers to make more informed decisions, the consultation document said.

Importantly, the new provision is a power the FCA will enjoy, rather than a duty it will be under. It would not, for example, publish at the warning notice stage if to do so “would not be compatible with its operational or strategic objectives.”

The government also acknowledged the reputational damage that publication could cause to firms or individuals subsequently not proceeded against, and it promised a safeguard “to ensure that that there is procedural fairness for affected firms and individuals.” Where the FCA or the PRA decided to take no further action, the regulator would have to issue a “notice of discontinuance.”

Martyn Hopper, a partner at Herbert Smith LLP, said there was currently insufficient recognition within the FSA that going through a representations process before an investigation is made public increases the quality of decision-making, regardless of the final outcome. He thought that use of the new power could encourage poor-quality decision-making and poor-quality investigation, but was concerned that in the present political climate, pleas for fairness could fall on deaf ears.

“I’m sure due process can be frustrating and inconvenient from a prosecutor’s point of view, but last time I looked we were living in a democracy,” said Hopper who was a department head within the FSA’s enforcement division before moving into private practice in 2004.

Ian Mason, a former head of wholesale enforcement at the FSA, now a partner at Baker & McKenzie LLP, told Complinet: “If you are an individual under investigation, be it for market abuse, lack of integrity or whatever, your colleagues will know. It could be dangerously close to being guilty until proved innocent.”

Mason said there could be a case for early publicity in relation to firms, so that consumers were made aware of issues such as possible mis-selling. “But in the case of individuals, particularly, I think it would be more sensible if publicity did not take place until after the decision notice stage, when they have had the opportunity to respond.”

Angela Hayes, a partner at Mayer Brown International LLP, said publishing the fact that a warning notice has been issued against a particular firm would not be helpful without proper context, and any context the regulator published before the firm’s submissions had been taken into account could prove to be incorrect in material respects and so confusing and unhelpful for recipients.

“The transparency objective can better be achieved by publication of general consumer or market warnings where an issue arises, in the way that the FSA already does, in conjunction with the existing power to publish the fact of an own initiative variation of permission,” Hayes said.

Hopper suspected that the proposal was an attempt to emulate the approach in the United States, and that the UK regulator believed the threat of publishing warning notices would extract more early settlements from those under investigation. “But equally, it could work in the opposite direction. You could end up with a lot more cases being challenged.”

The consultation closes on April 14, and the government plans to publish draft legislation in the spring.

(This article first appeared in Complinet ( Complinet, part of ThomsonReuters, is a leading provider of connected risk and compliance information and on-line solutions to the global financial services community.)

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