The Financial Services Authority has stepped up its efforts to crack down on insider dealing and other kinds of market abuse in London trading.
In recent months the regulator has increased the number of staff working in its insider dealing unit from 12 to 30 and said it wants to pursue more cases as criminal rather than civil actions. It also plans to review the controls and policies that companies have in place to stop rumor mongering.
Market turmoil caused by the credit crunch has put insider dealing—believed to be rampant in London—back under the spotlight. At the end of March, the FSA launched a high-profile investigation into trading of shares in HBOS bank after they fell 17 percent. The agency suspected that short-sellers were spreading false rumors about balance sheet concerns to force the bank’s price down.
The FSA says that nearly one-third of all merger and acquisition announcements are accompanied by what it calls “informed price movements.” Those informed movements do not automatically mean insider trading, the agency stresses (they could be driven by media reports of a possible takeover, for example), but insider trading still is very possible.
Dewar
The FSA recently published a newsletter outlining its strategy to tackle market abuse. Sally Dewar, managing director of wholesale and institutional markets at the FSA, says the push will focus efforts on what it calls “credible deterrence.”
“Clean markets are vital to the continuing success of London as an international financial center,” she says. “Market misconduct, particularly in the form of insider dealing and market manipulation is cheating and reduces investor confidence in the U.K. markets.”
A big part of credible deterrence is making sure there is a genuine fear that the FSA will discover and punish wrongdoing. Hence the regulator wants to bring more criminal cases for insider trading (it started its first this year) and increase the size of the fines that it imposes in civil actions.
The newsletter also sets out some of the work the FSA has done to prevent insider dealing, to improve its detection techniques, and to gather market intelligence.
The government has promised the FSA more powers to tackle market abuse, including the ability to reach plea bargains with suspects and offer immunity to whistleblower witnesses. However, it has yet to say when it will bring forward the necessary legislation, and the FSA recently complained about the lack of progress.
Directors Avoiding Audit Committees
Worries about a heavy compliance burden and the threat of personal litigation are making corporate directors in Britain increasingly reluctant to chair audit committees, according to a survey by Ernst & Young.
Each year the firm asks directors whether they are more or less likely to serve as an audit committee chairman than they were 12 months ago. The numbers have consistently trended down, and this year’s survey shows that six times as many respondents are “less likely” rather than “more likely” to accept an audit committee chairmanship.
As one survey respondent put it: “Getting it wrong has huge implications; you need great technical expertise to do it well.” Another said that “increased bureaucracy and increased risk of personal litigation” were major factors in choosing not to chair an audit committee.
Gerald Russell, a senior partner at Ernst & Young, is not surprised that directors regarded the role as a hot seat they would rather avoid. “The audit committee chair is still the most exposed non-executive role,” he says. “It is technically demanding, and many of today’s finance leaders have been scared off. It takes an individual with a very special set of skills to do the role, but the available talent pool appears to be dwindling.”
The survey of directors from among Britain’s leading 500 companies suggested that regulation and governance concerns still topped board agendas. Respondents said these issues were even more important than the effect of the credit crunch and gathering economic storm clouds. (The survey was conducted between September and December last year).
Thirty-five percent of directors said regulation and governance would be their top challenge in the next 12 months, compared to 13 percent that mentioned general economic conditions.
Risk Disclosures Planned for FTSE 100
The annual shareholder reports produced by many of Britain’s leading companies fail to give a sufficiently detailed explanation of the risks that could affect their future performance, according to the Strategic Planning Society.
The society gives annual awards to companies that produce the best shareholder reports, but this year it used the occasion to criticize big-name companies that it said were not providing the right information. The biggest failures included Royal Bank of Scotland, Barclays, British Sky Broadcasting, and Cable & Wireless.
The society gives out its awards after an assessment of the forward-looking content in a company’s annual report. The assessment asks four questions: Is there a clear statement or discussion of strategy? Do the strategies convey a sense of direction? Are the strategies necessary and sufficient? Does the narrative indicate core competencies or sources of advantage?
Wood
Out of a total possible score of 40 on those questions, 15 of the FTSE 100 companies scored less than 10. Royal Bank of Scotland scored only 2; Barclays 4; BSkyB and Cable & Wireless only 6.
“It makes it very hard for investors to judge the future prospects of a company, if the strategy is not easily understood,” says Ian McDonald Wood, director of FutureValue, a consulting firm that performs the analysis for the society. “Either these companies do not have clear strategies or they are remarkably poor communicators.”
Reports Slam Financial Sector Governance
Two influential reports have criticized the international financial services industry for poor standards of governance and risk management that contributed to the credit crunch.
The Financial Stability Forum, a grouping of central bankers, published a report on the credit crunch that said banks had severely underestimated risks. Some of the standard risk-management tools firms used were “not suited” to estimating the scale of potential losses on structured credit products, it said.
The report also pointed to fundamental control and governance problems. It concluded, for example, that: “A number of banks had weak controls over balance sheet growth and over off-balance sheet risks, as well as inadequate communication and aggregation across business lines and functions.”
A separate report from the Institute of International Finance, a global association of financial firms, also criticized governance standards in the industry. The financial market turmoil had “raised questions about the ability of certain [bank] boards properly to oversee senior managements and to understand and monitor the business,” it said.
The IIF report said in many cases in-house risk management experts warned their senior colleagues or boards that people were taking the wrong trading or lending decisions, but these “aggressive risk-taking decisions” were not stopped.
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