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FSA fights shy of interventionism

Financial Times: FSA fights shy of interventionism

“The FSA was criticised by some commentators for its decision to fine Shell £17m for misreporting reserves. This penalised shareholders who had already seen the value of their holdings suffer.”: “However, it does seem reasonable to deliver a message to shareholders that they have the responsibility to ensure senior [managers] manage their company well and they should share in the consequences of management not behaving well.”

By Deborah Hargreaves

Published: September 13 2004

The Financial Services Authority is not naturally an interventionist regulator and should look wherever possible for market-based solutions, according to Hector Sants, managing director of wholesale and institutional markets.

Part of the regulator’s approach to monitoring financial markets is to encourage operators to blow the whistle on malpractice. “We have the assumption that the majority of people in the marketplace are decent people seeking to do the right thing,” he said in an interview with the FT.

However, despite its non-interventionist stance, bond market participants are concerned that the FSA could be too heavy-handed if it takes punitive action against Citigroup for controversial trades made at the beginning of last month.

They fear that the regulator could stifle liquidity in government bond markets if it prevents traders from carrying out large trades.

The FSA revealed last month that it was investigating trades in the European bond markets by Citigroup.

However, its plans to host a forum in which to discuss the operation of the bond market next month were already in place and are not related to the Citigroup inquiry, Mr Sants said.

“We are looking to have a high-quality dialogue with the industry on some bond market issues,” he said.

Separately, the regulator has already held discussions with participants in the market for structured finance. “We will come forward with some reminders as to how our current framework impacts on structured trades and reputational risk in those markets,” he said.

The FSA has historically focused its regulatory efforts on the equity market. Bond markets have typically been less open to scrutiny.

Mr Sants said: “It is a valid question to be asked whether constructive changes can be made particularly with regard to the transparency of fixed income, corporate bonds and the methodology involved in electronic trading in this area.”

He added: “Wherever possible, we favour market-based solutions and are certainly not looking to regulate for regulation’s sake.”

He was keen to involve industry practitioners at an early stage in any formulation of policy. This followed the regulator’s bruising encounter with the fund management industry over the FSA’s initial proposals to ban long-standing practices such as “soft commissions” and bundling brokers’ costs.

“There could have been more engagement with the marketplace on this issue earlier,” Mr Sants said.

The FSA was hoping to agree a proposal for change on bundling and soft commissions with the industry by the end of the year.

In its stress on market-based solutions, the regulator was seeking to cut back on policy initiatives and consultation papers that have numbered in the hundreds in previous years.

Mr Sants said: “We want to make consultation more informal and have frequent dialogue directly with practitioners. The end-effect is to reduce the burden of work [that] firms have to engage in.”

The regulator has been criticised in the past for being too slow with its inquiries and Mr Sants agreed that it could sometimes be speedier. “But speed should not be at the expense of fairness and effectiveness.”

That is particularly the case when investigating individuals. “Clearly, the deterrent effect of enforcement is better if people believe we will take action against individuals,” he said.

The FSA has the power to fine individuals as well as companies and ban people from working in the City. It can also initiate criminal investigations into insider dealing – and believes it should do this more often – although these are rare.

Mr Sants said the level of a fine should be proportionate to the offence, adding that it was wrong to compare the FSA’s fines with those of the US Securities and Exchange Commission. SEC fines are typically greater since they contain some compensatory element for investors.

The FSA was criticised by some commentators for its decision to fine Shell £17m for misreporting reserves. This penalised shareholders who had already seen the value of their holdings suffer. Mr Sants was sympathetic to this criticism, saying it was not the FSA’s intention to inflict a double hit on shareholders. “However, it does seem reasonable to deliver a message to shareholders that they have the responsibility to ensure senior [managers] manage their company well and they should share in the consequences of management not behaving well.”

POACHING CITY PROFESSIONALS FOR A STINT AS GAMEKEEPER The Financial Services Authority is trying to encourage more City professionals to do a stint at the regulator, writes Deborah Hargreaves. In the US, the Securities and Exchange Commission, has typically had more success in attracting industry participants to work on regulation for a period of their career. Hector Sants, managing director of wholesale markets, told the FT: “We would like people to come to the FSA as part of their career development both at senior and junior level. It has worked better in the US than the UK. It could be to do with the newness of the FSA and its standing in the business community.” The FSA has also stepped up its graduate recruitment and is making an effort to ensure its name is recognised more widely at universities. It wants to encourage graduates to join the regulator as a way of gaining a good understanding of financial markets before possibly moving on to a career in the City. The regulator plans to recruit 60 graduate trainees to its four-year programme next year, up from 44 this year and 19 last year. It has also increased the starting salary for a graduate to £26,000 to make it more competitive with the City. Graduates gain exposure to three different types of jobs at the FSA, followed by a six-month secondment to the industry.

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