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Rapid Response Team: 0800 559 3500
Switchboard: +44 (0)203 947 1539
Rapid Response Team: 0800 559 3500
Switchboard: +44 (0)203 947 1539

Understanding FCA Investigations: A Deep Dive into 'Fool's Gold' Cases

Author: Azizur Rahman  12 August 2013
4 min read

The Financial Conduct Authority (FCA) came into being on April Fools’ Day to replace the much-criticised Financial Services Authority (FSA). But are there any early signs that it is a more worthwhile organisation than its predecessor?

Any organisation that springs into life on April 1 may initially be regarded as a bit of a joke. But for all those investing time and effort in getting the FCA up and running its birth was certainly no laughing matter.

The FCA took over many of the functions of the now defunct FSA and was given an impressive range of powers to ensure it could carry out its role. In having the power to regulate conduct regarding the marketing of financial products, the ability to ban the selling of financial products and the resources to investigate organisations and individuals, it was placed on the front line in the war against financial wrongdoing. In a new era, where every aspect of the financial system is now expected to be more accountable for its behaviour than ever before, commentators have said that the FCA must be more effective than the FSA. It does not have to regulate and supervise the banks and building societies – as that FSA role has been taken on by the newly-formed Prudential Regulation Authority – so, in theory, it should be ideally placed to carry out its mandate.

The FSA had been ridiculed for years as the watchdog that barely managed to bark, let alone bite. It was supposed to be the UK equivalent of the fierce US regulators but it failed to control the banks, took a now notorious “light touch’’ approach to regulating the City and seemed oblivious to pending disasters such as Northern Rock. What started out in 1997 as a single organisation to replace the nine organisations that had regulated the City up until then ended up being the organisation that became associated with the UK’s financial meltdown. If the FSA had not fallen so far short of what was expected of it there is every chance that it would still be in existence. The fact that it became widely regarded as a failure led to its downfall and the birth of the FCA. But with so much now resting on the new organisation, the pressure has been on from the first of April to see that it delivers on its promises.

The FCA’s supporters believe it is more likely to succeed because it is more proactive than the FSA ever was. But making more contact with businesses, organisations and individuals can only be regarded as worthwhile if it brings results. Any gaining of intelligence and swift taking of action is only worthy of praise if it prevents the calamities of the past – or at least brings to book those responsible. Business crime is a constantly evolving sector – it is rare for such wrongdoing to be immediately obvious and for those responsible to fail to cover their tracks. As a result, no amount of FCA proactive behaviour will guarantee success. Anyone involved in fraud, money laundering, boiler room operations or other shady financial activities are unlikely to come crawling out of the woodwork to greet FCA investigators simply because the new organisation is keen to build bridges.

In fairness, it is still early days for the FCA. A lot of the work it has been putting in since April may not bear fruit for months or even years. But the signs so far are mixed. In the last three months, it has fined RBS £5.6M for its clumsy and bungled reporting of its share dealings. It has also fined a property trader £1M over misconduct in sale and rent back schemes – the biggest ever fine for a sole trader in retail. The FCA is also investigating attempts by Barclays in 2008 to seek Middle East funding and appears to be making headway as it looks into the Libor rigging scandal. At the time of writing this, the FCA had just arrested four people in connection with an investigation into insider dealing and market abuse and had a further seven awaiting trial on such charges. So far so good, it would appear.

 But such noteworthy incidents do not tell the full story. For a start, although the FCA’s website says that it and the FSA have secured 23 convictions in relation to insider dealing, a closer inspection shows that all the convictions the FCA is claiming some credit for were achieved before it was even operating. Recently, a second trial of four directors of the company iSoft collapsed due to the FCA making errors of disclosure. The FCA subsequently announced it would not be seeking a third trial of the four men. It also has to be remembered that the FCA has still to produce the report into exactly what happened when HBOS nearly collapsed. FCA Chief Executive Martin Wheatley has insisted that the report has neither “been dropped nor fallen between the cracks’’ but the indications are that the report will not see daylight until next year. For an organisation that started out with the intention of being dynamic and proactive, such a delay hardly seems impressive; especially when it is considered that less than a year ago MP’s were being told the report would be ready in spring 2013. The notion of the FCA being some sort of new broom brushing through the wrongdoing looks even more ridiculous when you consider that FCA chairman John Griffith-Jones was responsible for auditing HBOS – when he was chairman of KPMG - during the 2007-08 financial crisis.

For an organisation that is still finding its feet, the FCA has already acquired some critics. The Treasury Select Committee spoke harshly of it for an alleged lack of concern over the increase in mortgage interest rates at the Bank of Ireland’s UK subsidiary. The Parliamentary Commission for Banking Standards was also far from complimentary in its report “Changing Banking for Good’’. It criticised the FCA for being just like its predecessor in responding inadequately to the interest rate swap scandal and concluded: “If, as they claim, the regulators do not have the power to deal with these abuses, then it is for government and parliament to ensure that the regulators have the powers they need to enable restitution to be made…’’

Whether the FCA has the necessary powers and the relevant expertise to tackle the wrongdoing it has been created to eradicate remains to be seen. Its record so far includes a few modest successes but some notable failures. Such failures can only raise the spectre of the late and unlamented FSA and heap pressure on its successor.

If the FCA is to win over the doubters it needs some major successes soon. Only then will it be the doubters – and not the FCA itself – that appear foolish.

Azizur Rahman C 09369

Azizur Rahman

Senior Partner

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Aziz Rahman is Senior Partner at Rahman Ravelli and its founder. His ability to coordinate national, international and multi-agency defences has led to success in some of the most significant corporate crime cases of this century and top rankings in international legal guides. He is recognised worldwide as one of the most capable legal experts regarding top-level, high-value commercial and financial disputes.

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