The Einhorn effect? How the FSA’s authority might be undermined by vocal unrepentant sinners
LONDON/NEW YORK, Feb. 23 (Thomson Reuters Accelus) – Britain’s Financial Services Authority (FSA) could see its credibility undermined as individuals with deep pockets choose not to challenge fines, instead paying up but then publicly criticising the regulator, a leading regulatory lawyer has warned. “I think it will be interesting to see whether … individuals and firms decide, for good commercial reasons, not to challenge cases, but to either settle them or to leave them uncontested, but then to comment rather adversely on the FSA’s process and finding,” said Helen Marshall, a former senior FSA enforcement official and now a partner at Bingham McCutchen LLP. Marshall told a City & Financial conference on the UK enforcement regime that the recent Einhorn/Greenlight case had been the first high-profile example of this possible trend. She noted that, following the publication of Einhorn’s Decision Notice, the New York-based hedge fund manager had given the Wall Street Journal a lengthy interview criticising the UK regulator and its decision. “And I have to say, in terms of his reputation in the U.S., that fine that the FSA has imposed has done him no harm whatsoever.”
In fact, Einhorn did not acknowledge any wrongdoing, saying in a statement: “We didn’t believe in 2009, and we don’t believe now, that there was anything wrong with our conduct and our actions.” Another individual in the wider case, the issuer’s corporate broker Andrew Osborne, who the FSA found had passed inside information, denied that he had done so, while, like Einhorn and two other individuals whom the FSA fined, not referring his case to the Tribunal. Osborne also said that his fine was disproportionate and bore “no relation to previous cases of inadvertent disclosure and is even higher than many cases of deliberate disclosure”.
Marshall questioned whether the FSA would be able to maintain its enforcement credibility if those penalised for market misconduct opted to pay fines discounted by 30 percent for early settlement, but then sought to discredit the regulator in the wider public forum. “I think that’s something the FSA’s going to have to deal with in the coming period,” she told the conference.
This possible scenario could be further complicated by the new “scientific” enforcement penalties regime that the FSA has brought in for cases where the breaches occurred after March 6, 2010, and also by the possibility that the Financial Conduct Authority (FCA), set to replace the FSA as the main enforcement regulator, will not choose to have a Regulatory Decisions Committee (RDC), the FSA’s non-statutory, semi-independent but internal review mechanism. The higher fines generated by the new penalty-setting regime, which Marshall described as “absolutely an art, not a science”, might increase incentives to settle cases rather than challenge them by referring them to the RDC, and outside the FSA to the judicial Upper Tribunal. Moreover, if the RDC disappeared, the higher hurdle of going to the Tribunal would be even more of an incentive to settle cases early and more cheaply.
Only a handful of cases have so far been subject to the new penalties regime, and Einhorn/Greenlight is not one of these. But Marshall warned that if fewer cases went to the RDC and the Tribunal, one result would be that the FSA would be subject to less challenge and scrutiny in relation to its enforcement process and its findings.
“It’s really too early to judge at the moment,” she told the conference. “We’ve had so few cases [and these] could turn out to be the exceptions that prove the rule. But historically, the FSA has always, I think, been improved by the amount of scrutiny it has been prepared to open itself up to, and I would be concerned if that were not to continue to be the case.”
(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete (http://accelus.thomsonreuters.com/solut ions/regulatory-intelligence/compliance- complete/) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)