Contributing just another “tidbit to pass around” in the current discussion on competitiveness between New York and London and on London’s market standards, I’d like to note the FSA’s ‘outsider trading’ enforcement case as an example of the UK’s regulatory enforcement style.
Margaret Cole, FSA Director of Enforcement, addressed a City & Financial conference with a speech entitled FSA Investigations & Enforcement 2007. She began her remarks by setting out the scope of the talk, referring to the FSA’s “philosophy behind enforcement activity [and] the use of enforcement to change behaviour in the interests of accomplishing the FSA’s overall strategic agenda”, and by presenting some self-proclaimed “shameless praise” of the UK’s financial services industry, before going into, among other things, ’succesful Enforcement outcomes’ of last year.
Sean J. Pignatelli, at the time a US equity salesman with CSFB, as it then was, had received an analyst’s e-mail, the content of which could have been construed as inside information. (…keep btwn us for now”.) Instead of verifying with Compliance or management if it was or not - it turned out it wasn’t - he went into sales mode and called clients to pass on this information. In other words, he was not inside, he was outside. Still, the result: a £20,000 fine in November 2006 for “failing to exercise due skill, care and diligence” in breach of Principles 2 and 3 of the FSA’s Statements of Principle for Approved Persons. (FSA’s press release, Final Notice)
At the time it was suggested that “[t]he ruling will unnerve the City given that the regulator accepted that real inside information was not involved and that Mr Pignatelli had neither thought he possessed inside information, nor had deliberately sought to give that impression.” (FT)
On the contrary, Cole argued. This case is, in line with the FSA’s strategic shift to more Principles based regulation, an example of how enforcement has succeeded to change behaviour:
This was the first reported case of “outsider dealing” and had a big market impact, emphasising the care and attention that Approved Persons must give to the information they disseminate to the market. Feedback from firms suggests that this case has really hit home with traders who are asking compliance lots of questions about what is or is not acceptable.
A quote from her closing remarks:
We believe that Principles-based regulation can bring you [a real regulatory] dividend [for good behaviour], flexibility and the opportunity for you take decisions that are the right decisions for you. The Principles for Businesses provide a framework and clearly set out our expectations of the right behaviour by industry participants. We are absolutely convinced of the overall merits of a Principles-based approach and the FSA is committed to using Enforcement tool selectively and strategically to support that approach.