New watchdog won’t scare City

IT is only just over a year since Hector Sants, head of the Financial Services (FSA), told the City in no uncertain terms that he wanted business to be “very frightened” of his organisation. Central to that warning ran the theme of “credible deterrence” through increased criminal prosecution, particularly in relation to insider dealing.

Despite the tough talk, and significant investment, the government last week confirmed that the FSA will be disbanded by 2012 and in the process its e?nforcement function will be ceded to a new Economic Crime Agency (ECA) that is still to be formed.

Specific details of the ECA are noticeably thin. The present thinking appears to be that it will involve merging the SFO, FSA enforcement and the Office of Fair Trading into one agency that will tackle bribery, fraud and insider trading. However, it is also possible that other agencies such as the City of London police fraud unit could similarly be included. The creation of an overarching agency, akin in some respects to the US Department of Justice, is in principle a sensible one. However, as is perhaps all too common with UK crime initiatives, the reality may not match the rhetoric.

A number of immediate questions arise, not least: who will lead the ECA? In recent months both the FSA and the SFO have engaged in something of a media turf war seemingly in an attempt to position themselves as the “toughest” agency and so the natural lead for the new ECA. Leaving aside the unedifying nature of enforcement agencies trying to litigate through the press, can either body really claim to be any more effective than the other? The SFO has secured a number of high profile plea deals over the last year but is still to show that it can successfully prosecute a major corporate at trial.

The FSA has secured convictions after trial in a number of reasonably straightforward insider dealing prosecutions but failed recently in a more complicated case. In fact the trial judge initially ruled that the defendants had no case to answer before the Court of Appeal sent the matter back to the jury, which then promptly returned not guilty verdicts.

Leadership aside, critical to the effectiveness, or otherwise, of the ECA will be the resources that it is given. If the existing agencies are simply combined without being given additional funding the ECA could struggle to make any discernible impact. Even if it is given extra funding it may well find that many senior enforcement officers currently at the FSA do not move to the ECA.

Because the FSA is industry funded it has been able to recruit staff at pay levels that broadly reflect City rates and so significantly above the remuneration offered by government agencies such as the SFO. It is no accident that the FSA has been able to recruit a number of staff from the SFO; will those same staff be willing to return to government employ and the almost certain pay cut that will follow? If not, then despite the government’s good intentions, the ECA may be inadequate from the outset.

Detail as to how and when the ECA will operate is still awaited, but history has frequently shown that progress is not made by simply rebranding organisations. The SFO, FSA and most recently the OFT, with the collapse of the BA/Virgin price fixing trial, have struggled to prosecute complicated cases. The ECA is therefore likely to need something beyond the sum of all three agencies to succeed as an effective anti-fraud weapon. In the interim the City might not be as afraid as Mr Sants had hoped.