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UK Market Regulator Earns Stripes With Shell Fine

The Wall Street Journal: UK Market Regulator Earns Stripes With Shell Fine

“”The Shell case, by raising the stakes so dramatically for the FSA, is kind of another way of rattling the handcuffs.”



July 30, 2004 11:07 a.m.

Posted 31 July 04

LONDON — The U.K.’s Financial Services Authority has hit the big time.

By slapping Royal Dutch/Shell Group (RD, SC) with a GBP17 million fine Thursday over the company’s misreporting of its oil and gas reserves earlier this year, the FSA did little damage to the oil giant’s bottom line.

But the penalty, announced alongside a bigger fine that Shell will pay to the U.S. Securities and Exchange Commission, should send a clear warning to the broader market, observers said.

“For other companies it’s quite a chilling message,” said Chris Higson, a professor in the accounting group at London Business School.

“It’s a reminder…that the much sterner and more savage approach to corporate governance, enshrined in some of the recent U.S. responses to scandals, has crossed the Atlantic,” Higson added.

Thursday’s fine was the largest ever by the FSA, a “super-regulator” that not only oversees banks, financial advisers and insurers, but also enforces the listing rules for publicly-traded companies.

The previous record fine of GBP4 million was against Credit Suisse First Boston in December 2002 for attempts to mislead regulators in Japan.

But in lining up alongside the SEC to smack Shell ‘s wrist, the FSA has also drawn attention to one of its own dilemmas: How can the U.K. agency carve out a global reputation for itself as a tough, no-nonsense watchdog, while preserving the collaborative approach to regulation that it believes sets it apart from its bigger – and more litigious – U.S. counterpart?

That’s an issue the FSA, still in its infancy compared with the SEC, is likely to come up against with increasing frequency. The U.K. agency was formed in 1997 but has been the single regulator for financial services only since December 2001.

Earlier this month the FSA’s chief executive, John Tiner, said the agency’s priority now is to pursue breaches of its rules, especially fraud, in a targeted way – a change from the agency’s earlier focus on churning out new rules.

“These are important times for the FSA,” said a senior partner at a London professional services firm. Like others who work in the City, this person asked for anonymity when speaking about the regulator.

“Over the next year or so, the FSA is going to exhibit the new direction they’re going and will be proving to the financial services community the mettle of what they’ve said,” the person continued.

The FSA said Thursday it wouldn’t comment in detail on the Shell settlement until it publishes the findings of its investigation.

But the close co-operation with the SEC on the case, plus its quick resolution – the FSA’s formal inquiry lasted just three months – is proof that the agency’s approach is bearing fruit, said Gay Huey Evans, director of the FSA’s markets division.

“For any company going through an enforcement case, it can only be helpful to get it out of the way very quickly,” Evans said. “Here’s a classic case where if you can get the regulators to work together, it benefits both the company involved as well as the market as a whole.”

Evans and other FSA executives insist, however, that their goal is not to try and compete with the SEC in terms of racking up fines. Nor does the FSA want to emulate U.S. criminal prosecutors, whose investigations have resulted in executives from companies such as Enron Corp. (ENE) being hauled around in handcuffs on national television.

Instead, Evans said, the FSA pursues what it calls a “risk-based” approach to regulation, under which the agency emphasizes codes of best practice and warns against noncompliance.

This approach focuses on deterring wrongdoers, rather than punishing them after the fact, although Tiner has also warned that the FSA won’t hesitate to go after individuals and firms it suspects of market abuse.

Earning the respect of London’s business and political establishments hasn’t been easy, however, in part because of the FSA’s own missteps.

Last month an appeals tribunal in one of the FSA’s highly-publicized market abuse cases collapsed after it emerged that a key FSA official in the case may have prejudiced the proceedings by talking to a judge on the tribunal.

The FSA has also become bogged down in its attempts to clean up a three-year-old scandal involving the possible misselling of failed investments known as split-capital trusts. Most of the 21 firms implicated in the affair are still refusing to bargain on key points with the FSA and it’s unclear whether the FSA will ever be able to claim a clear victory in the matter.

Even before the Shell announcement, however, things were looking up. For example, the FSA is widely credited with cracking down in the past couple of years on selective disclosure of market-moving information.

And earlier this month the agency won praise for taking just 13 days to investigate share dealings in Marks & Spencer Group PLC (MKS.LN) by the company’s new executive, Stuart Rose, at time when M&S was the target of a bid approach.

Still, it’s the high-profile enforcement actions – such as the sight of executives in handcuffs – that will make or break most regulators’ reputations, said the London Business School’s Higson. And that goes for the FSA, he added.

“It’s no longer a gentlemanly game between regulators and companies,” Higson said. “The Shell case, by raising the stakes so dramatically for the FSA, is kind of another way of rattling the handcuffs. It’s another way for the FSA of signaling that this is for real and that they’re going to be tough.”

Regulator Web site:

-By Jack Grone, Dow Jones Newswires; +44-207-842-9287; [email protected]

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