FSA toughens approach to insider dealing

LONDON – With its first-ever prosecution of an insider-dealing ring, the UK’s Financial Services Authority (FSA) wants to show it is serious about stamping out this type of market abuse.

Its latest case targets seven people who are facing 13 criminal charges for conspiracy to deal on insider information obtained from two major undisclosed investment banks. One defendant has also been charged for a money-laundering offence. A preliminary hearing took place in April, but the trial could be a lengthy affair, as in previous cases brought forward by the regulator.

With three successful FSA prosecutions for insider dealing now under its belt and more to come, the regulator is strengthening its resources and stepping up recruitment of mergers and acquisitions specialists, as takeovers or demergers are at the heart of many insider-dealing cases. The regulator has close to 450 staff in its enforcement division, which deals with market abuse.

The FSA says it needs more expert staff to match its new robust approach. “Intensive supervision is inherently more confrontational. Our supervisors are making judgements both about the robustness of the business models of firms and the suitability of the products they are selling,” says Hector Sants, chief executive of the FSA. “This proactive approach requires significantly more people than the old reactive model and those individuals must be of a higher quality and supported by more sophisticated systems.”

Critics will take some convincing. “Whether it is going to be able to deliver the right level of expertise in the short term we’ll have to see,” says Philip Martin, who recently stepped down as chairman of the Institute of Operational Risk. But, he says, it is a move in the right direction. “It is gearing up its resources with specialists who can identify the problems and that can only be a good thing. It is an area that has long been neglected in the City.”

One problem for the FSA is that it might be a victim of the UK’s general election on May 6. The Conservative opposition has said it will abolish the FSA and consolidate its work into the Bank of England if it wins the election. This is likely to make recruitment of the high-level experts the FSA wants more difficult. “Who’s going to join the FSA when it might not be around in a year’s time?” asks one industry source.

In the past, the regulator has been accused of having more bark than bite and, along with the rest of City of London financial centre,  being far too tolerant of insider dealing, which some analysts say is widespread. The FSA says suspicious activity has come to light in 29% of mergers and acquisitions, but critics say that estimate could be conservative. “I suspect that figure might be rather optimistic,” says Martin.

The FSA’s new approach will be judged on results. “What will be interesting is what comes to light with the recent prosecutions,” Martin says, citing the case of Ivan Boesky, who amassed a fortune in the 1980s by dealing on inside information on corporate takeovers in the US. He was prosecuted for insider dealing by the US Securities and Exchange Commission, then fined and spent two years in jail after co-operating with the authorities and helping to bring to light several major cases of insider dealing.