FSA and Stiffer Penalties for Individuals - Essay Example

?FSA and stiffer penalties to individuals Introduction Financial Services ity (FSA) is the responsible for regulating the financial services market in the U.K. FSA is a limited company fully owned by UK government while the Board of directors is appointed by the Treasury department. FSA functions are governed by the Financial Services and Markets Act 2000 (Davidson 2010). FSA regulates banks, insurance companies, mortgage companies and investment advisers. The objectives of FSA are to maintain confidence in the financial markets by ensuring stability in the UK financial system. FSA also protects consumers by reducing financial crimes in the financial markets (Davidson 2010). In the past few weeks, FSA has imposed heavy penalties on individuals for regulatory breaches. FSA has been much more efficient in ensuring prosecution of individuals who breach regulatory requirements. FSA has implemented a new policy that is aimed at deterring financial crimes through imposing penalties that reflect the magnitude of the regulatory breach, or financial scandal (Pettet 2001). The recent penalties are based on numerous factors including the need to achieve an appropriate deterrence effect and removal of any profits that may have accrued due to the regulatory breach. FSA has also considered the mitigating and aggravating factors and need to apply any settlement discount in imposing the high penalties (Davidson 2010). Main legal aspects of the cases The Financial Services and Markets Act 2000 and Market Abuse regulations of 2005 mainly deal with insider dealings and market price manipulation misconducts. The offence must occur in the prescribed markets. The prescribed markets include the markets governed by UK recognized investment exchanges (RIE) and other markets in the EEA countries. Some of the financial markets in the UK, where such market abuse occur include ICE futures, London stock exchange and London Metal exchange limited. Other markets include the NYMEX Europe limited and EDX London Ltd (Davidson 2010). The qualifying investments that are governed by FSA market abuse regulations include the transferable securities like shares, securitized debts and bonds that are regulated by the ISD directive. Other securities include the forward interest agreements, currency and interest rate swaps, future contracts and derivative securities. Firms are required to report any suspect dealings and implement adequate internal control and compliance mechanisms (Davidson 2010). FSA has the powers to deal with misconduct that is not necessarily market abuse but that breach the guiding principles of FSA. Sections 401 and 402 allow FSA to prosecute various financial markets offenses under the Financial Services and Markets Act of 2000 and any other relevant legislation (Pettet 2001). Some offenses include offering securities for sale to the public without publishing a prospectus since FSA listing requirements under Section 85(2) require the issuer to provide a prospectus before the actual listing. Section 397 of the Act prohibits firms and individuals from making fraudulent and misleading statements and manipulating the market fundamentals (Pettet 2001). Insider dealing is one of the criminal offenses that have led to high penalties to individuals. Insider trading is a criminal offence if the individual transacts the securities with inside information, or encourages another person to transact in the securities while in possession of inside information that is not available to other market participants (Davidson 2010). If the insider avails information to a market player other than in the ordinary performance of his duties or employment, FSA will consider such act as criminal insider dealing. Section 52(3) outlines that the above offenses are committed when dealing with a security in the regulated market or where transactions of price affected securities are executed by an individual using the inside information or are conducted by a professional intermediary using such inside information (Pettet 2001). Inside information includes information that can significantly impact on the price of the securities and that has not yet been made public, or that is specific to the particular security. However, individuals may not be guilty of insider trading if they actions conform to the price stabilization guidelines or the requirements of Buyback and Stabilization regulations (LaBrosse and Singh 2011). Information is specific to a particular security if it explains the existence of an event that has occurred or that is expected to occur in the future, and that will reasonably affect the price of the particular qualifying security or other investments that are related to the security (Davidson 2010). Section 118 C (4) of the Act clarifies that individuals who execute orders based on inside information provided by market makers or clients are also guilty of insider trading. The purpose is to make front running trading a market abuse behavior, since the individual stands to benefit by purchasing shares ahead in order to profit from the anticipated price movements. Client order handling provisions prohibits traders from misusing such information that related to the pending orders of their clients (LaBrosse and Singh 2011). In considering whether pending orders exists, FSA outlines various situations like when an individual is approached by another market participant for a transaction that is not immediately executed at arm’s length according to the price offered by that person (Seredydska 2011). Another market abuse offense that individuals have been penalized is the issue of misleading statements. Section 397(1) of the Financial Services and Markets Act provides for the circumstances that such offense will occur. If an individual makes a forecast, statement or promise that he clearly knows as misleading and false and that is material in nature, the individual will have issued misleading information to the other market participant or investor. If the individual also conceals material facts and information, the FSA can penalize such individual for issuing misleading information (Davidson 2010). In 2005, Former chief financial Officer of AIT Group was prosecuted for issue of reckless and misleading information by stating that the company profits and market turnover would meet the market expectations (LaBrosse and Singh 2011). Another offense where individuals have been fined is manipulation of transactions. Section 118(5) of the Act states that such market abuse behaviors consist of transactions that give deceptive or false impression of the demand and supply or the price of the qualifying instruments. For instance, buying a security and issuing positive information about the same security with the aim of increasing the security price in the future is a manipulating device that is illegal according to FSA regulations (LaBrosse and Singh 2011). Another misconduct outlined by FSA is disseminating misleading information to the market in order to imply a positive impression of a particular qualifying instrument. Section 118(7) of the Act prohibits issue of misleading information on internet boards or chat rooms when the issuer knows that such information is misleading (LaBrosse and Singh 2011). Section 188 (8) of Act prohibits misleading behavior or market distortion. Such behavior has the potential of creating misleading information to the demand and supply or the price of the particular investment. Misleading behavior will also occur if regular users of the market are likely to regard it as unreasonable behavior. For instance, movement of empty ships in the sea may create a negative impression on the value and demand of commodities thus leading to distortion of the prices of such commodities (Mwenda 2006). FSA’s disclosure and transparency rules have aided in combating inside trading activities. Rule 2.2 require all the issuers to notify the RIS of any inside information that may cause percentage changes to the price of the security. Rule 2.5.1 permits issuers to delay any inside information that may affect the legitimate interests, but such information should not mislead the public as long as the issuers can satisfactory ensure the confidentiality of such inside information (Seredydska 2011). Rule 2.3 requires the issuer to make such inside information available to issuer’s internet by the close of the following business day. If RIS is not available for business, the issuers must publish the information in two national newspaper and two newswire operators in the UK so that RIS can distribute the information to the public as soon as it opens (Mwenda 2006). Rule 1.3.5 requires all issuers not to combine in any way RIS announcements and their marketing campaign information in a manner that may appear to mislead the public. Rule 2.6.1 on control of inside information requires all the issuers to establish mechanisms and safeguards of inside information while Rule 2.2.9 require the issuer to consult the RIS at the earliest possible time when in doubts about the timing of information disclosure. Rule 2.8.1 requires all the issuers to provide records of employees who access inside information and people on insider list should remain on such records for a period of not less than 5 years from the date that the list was drawn or updated (Barnes 2009). FSA has issued eight principles that govern the market abuse behavior and conduct of individuals. Individual managers should conduct financial business with integrity and with due diligence and skill. Individual managers should implement effective risk management systems and maintain sufficient financial resources (Seredydska 2011). Individuals should identify and manage potential conflicts of interest and treat the customers fairly. FSA has outlined various punitive measures against individuals who engage in market abuse or have assisted and encourage other persons in market misconduct (Mwenda 2006). FSA can impose unlimited fines, make public the individual misconduct, require the individual to disgorge the profits or losses suffered and prosecute the individual in court of law. FSA can also require the individual to compensate the victims of such misconduct (Seredydska 2011). A record fine of 33,000,000 pounds was imposed on JP Morgan in 2010 for failure to segregate client funds. In 2009, the total fines were 35million pounds, but the figure rose to 89 million pounds in 2010. FSA has effectively prosecuted insider dealing crimes and other market abuse offenses. The current approach to enforcement is based on management integrity and business prudential judgments and not systems or control measures implemented by the financial institutions (Seredydska 2011). Over the last few years, FSA has prosecuted more cases and imposed stiffer penalties to individuals for breach of the rules. Through retail distribution review, FSA has made looked at the fundamental structural shortcomings in the market instead of dealing with adverse situations. The UK government has given FSA statutory powers of immunity when investigating crimes like insider dealing while witnesses who agree to give evidence can receive State protection (Seredydska 2011). Some of the recent cases that FSA has successfully prosecuted include Greenlight Capital Inc where the fund manager, David Einhorn was fined 7.2 million pounds for participating in market abuse. Einhorn had been informed by a broker that Punch Taverns, a UK firm was considering raising additional equity. Following that information, Einhorn offloaded Greenlight Stake in Punch Taverns from 13.3 percent to 8.98 percent. Punch Taverns raised equity capital and the share prices declined by almost 30 percent. Einhorn’s move to offload shares from Punch Taverns saw him avoid losses of 5.8 million pounds. Although Einhorn refused to agree to non-disclosure agreement, FSA found out that his trading actions were based on the prior information he received from the broker’s call. Einhorn was fined 638,000 pounds as disgorgement of losses that he avoided by selling his stake in Punch Taverns and additional fine of 3 million pounds. FSA further fined Greenlight Capital Inc 3 million and additional 650,795 as disgorgement of losses escaped by the firm since Einhorn was the sole proprietor and portfolio manager of his firm. Although Einhorn has made it clear that his intentions was not to trade based on the information, FSA used the objective test and definitely found out that Einhorn’s trading was based on the insider information. On December 2011, FSA fined Jaspreeet Singh Ahuja, a former UBS adviser 150,000 pounds and banned him from participating in any functions related to the regulated financial markets. FSA found out that Jaspreeet has relied on a pre-existing investment model to enable a client based in India to participate in Indian investments through an investment fund based in Mauritius centrally to Indian investment law and UBS compliance requirements. Rupinder Sidhu was sentenced to two years jail term for insider dealing activities between May and August 2009. Sidhu relied on prior information from Anjam Ahmad about the future transactions of Ako Capital thus was able to earn of 137,000 pounds as profits in few days through spread bets. Ahmad volunteered to testify against Sidhu before the FSA and was fined 50,000 pounds for insider trading. In January 2012, FSA found Ravi Shankar Sinha guilty of fraudulently acquiring 1.367 million pounds from JC Flowers and fined him 2.867 million pounds as both disgorgement fine and punitive penalty for the offense. FSA noted that Ravi issued invoices payable to himself to another firm that held JC Flowers investments. Ravi was not entitled to receive the funds thus such behavior was illegal in the financial services market in UK. Other individuals who have been fined for regulatory breaches include Anthony Smith who was fined 16,000 pounds in August, 2011 for exposing his clients to unsuitable advice and Sir Ken Morrison who was fined 210,000 pounds for breach of transparency and disclosure rules when he failed to disclose reduction in his shareholding and voting rights in Wm Morrison supermarkets. In July, 2011 Richard Lindley was fined 14,000 pounds for failure to comply with the firm’s control and compliance measures since he exposed customers to unsuitable advice. In the same month, Andrew Ruff was fined 28,000 pounds for non-compliance with systems and controls. In April, 2011, Alistair Curren was fined 100,000 pounds for submission of forged mortgage application forms and failure to declare income. In January 2011, FSA imposed a penalty of 17,500 pounds to Ceri Rees for failure to ensure customers received correct information regarding the Unregulated Collective Investment Schemes (UCIS) (Bourne 2011). However, section 122 of the Act makes several exemptions since some behaviors of individuals may not necessary constitute to market abuse. For instance, transactions that do not comply with Buyback and Stabilization provisions may not be a market abuse (Mwenda 2006). Reasons why FSA is having much success in prosecuting individuals FSA has adopted a deterrence strategy in prohibiting cases of insider dealings and market abuse. FSA has ensured that individuals who breach regulatory requirements receive higher penalties as well as criminal prosecution. FSA has prohibited more than 200 individuals from participating in the regulated financial markets industry. FSA has been empowered to investigate misconduct and enforce penalties in order to re-dress the market abuse (Mwenda 2006). FSA has implemented a supervisory mechanism on the financial markets that aim at reducing the individual chances of engaging in market abuse (Barnes 2009). FSA has statutory powers to collect information regarding individual misconduct as longer as such misconduct is committed within its jurisdiction. Section 165 of the Act grants FSA powers to request the firms to provide specific information within a specific period of time and in the manner requested by FSA. FSA officials are granted powers under Section 165 (7) to request for information from persons who are connected to the firms or depositories of the collective investment schemes that are not authorized as artificial persons or any clearing house that fall under the jurisdiction of FSA (Lacy 2002). The Act empowers FSA to require all the firms to furnish information and financial records as well as the names of the employees who access inside information. FSA may require firms to provide information on details of the skills of the firms employees at the firms’ own expense (Mwenda 2006). The information may include details of individuals who acted in different capacities at different times in the past. FSA under Section 166 (4) has been able to impose managerial obligations to the firms under investigation thus it has been able to minimize its costs in investigations and prosecution of the individuals (Mwenda 2006). FSA has been able to appoint its own investigators to identify and collect evidence on individuals suspected of inside dealing and market abuse. Section 167 (1) empowers FSA to appoint investigators if it suspects the conduct of the individual was fraudulent, and investigations can be extended to any member of the firm or partnership on matters concerning business transactions that were carried out at any particular time when such individual was authorized (Barnes 2009). Section 168 (4 and 5), allows FSA to carry out special investigations on circumstances where the firm or individual is not permitted to undertake regulated activities or when an individual market player has been accused of money laundering offense or when the firm contravenes a FSA rule. Section 168 (5) also extends to circumstances whereby the individual has breached prohibition orders or when the individual has performed a transaction which he or she is not authorized to undertake (Barnes 2009). Considering the global integration of the UK financial system, FSA has powers under section 169 to request assistance from foreign regulators in the investigations if the case is substantial enough to the UK financial system. FSA has been able to investigate the activities of the collective investment schemes (Barnes 2009). Section 282 (1) allows FSA to use its general investigative powers to investigate the conduct of individuals in collective investment schemes if a matter of public interest has been raised or when the management of such schemes is not willing to voluntarily comply with FSA requirements and regulations. Under section 413, communications between a lawyer and client are not protected if the intention of such communications are to aid a criminal offense thus under Section 175 (4), a lawyer may be compelled to provide details of his clients for investigative purposes. Section 177 of the Act compels all individuals to cooperate with FSA investigators in gathering information related to the misconduct while section 177 (3) outlines that individuals may incur liability for giving false information (Hicks and Goo 2008). Conclusion FSA has imposed high penalties to individuals for regulatory breaches. The main legal aspects of the cases include inside dealing, misuse of information and presentation of false information. FSA has been successful in prosecuting individuals due to the extensive powers granted by the financial services and Markets Act. FSA can appoint investigators and request any information from the firms. FSA under Part 5 may make a public statement on individual misconduct, impose financial fines, and prohibit the individual from participating in the regulated markets or withdrawal the status of the individual as approved person. In deciding the size of the penalties, FSA has been guided by the need of deterring inside dealing and market abuse. FSA considers the loss to consumers, the seriousness of the breach and intent of the breach. FSA will also consider the impact of the breach on the financial markets confidence and whether the breach was occasioned by adverse weaknesses in the control systems of the firm. Bibliography: Barnes, P. 2009. Stock market efficiency, insider dealing and market abuse. Surrey. Gower Publishers. Bourne, N. 2011. Bourne on Company law. New York. Taylor & Francis. Davidson, A. 2010. How the city really works: the definitive guide to money and investing in London’s square mile. London. Kogan Page. Hicks, A and Goo, S. 2008. Cases and materials on company law. Oxford. Oxford University Press. LaBrosse, J and Singh, D. 2011. Managing risk in the financial system. Cheltenham. Edward Elgar. Lacy, J. 2002. The reform of United Kingdom company law. New York. Routledge. Mwenda, K. 2006. Legal aspects of financial services regulation and the concept of a unified regulator. Washington, DC. World Bank. Pettet, B. 2001. Company law. London. Longman. Seredydska, I. 2011. Insider dealing and criminal Law: dangerous liaisons. London. Springer. Read More