It remains the case that this Bill is bogged down in Parliament but that is not stopping the FSA from carrying on as if the Bill is already passed into Law and in force. Indeed, Howard Davis, Chairman of the Financial Services Authority speaking in London on 20 December 1999 said “Of course there is no proof yet of the way the new legislation will operate, since it has not yet completed its progress through Parliament. But the FSA has been a de facto single regulator for eighteen months now…”

Earlier in the same speech, Davis referred to “..the regulators now merged into the FSA…” and “…the old PIA part of our business…” It has for long been apparent to all in the UK that the FSA is acting as a single regulator, assuming the powers set out in the Bill, even though it has no statutory authority for so doing. It has, however, entered into contracts with some bodies to do their regulatory work for them.
The document, put out in the name of the FSA can therefore be taken to be a fairly fixed view of what the FSA will do assuming that the powers described in the FSMB are passed into Law. Indeed, the New Regulator paper declares itself to be based on the December 1999 version of the FSMB and acknowledges that changes may be necessary if the Bill is changed before passing into Law. There are a considerable number of amendments tabled and awaiting debate.

The draft Bill has four objectives, one of which is to reduce financial crime.

The New Regulator paper reflects the provisions of the Bill in that it show three types of target crime – money laundering, fraud or dishonesty, including financial e–crime and fraudulent marketing of investments; and criminal market misconduct, including insider dealing. The paper says that the Bill will give the FSA new powers in this latter area. The paper says that the issue of financial crime prevention is a question of the integrity of the financial system. Readers of WMLR Vol.1, Issue 1 will recall the argument put forward in that issue that London does not view the integrity of its financial services system with the same jealousy as, for example, New York. It is important to note that the FSA is a civil law regulator (although some power to bring criminal proceedings is included in the Bill)

It is notable that, amongst all the various possible emphases that could be put in relation to financial crime, the paper highlights only one – “We will be doing more work across the whole financial sector to assess the effectiveness of firms’ money-laundering controls and customer identification procedures.”
Given that the FSA will become the regulator for law and accountancy firms, for those who offer a discrete financial services, those businesses that have so far had an easy ride from their professional bodies who have taken a largely lackadaisical approach to the existence of money laundering systems, can assume that they will not have such an easy time of it. The police, for example, have power to prosecute for non-compliance with rules requiring the putting in place of know your customer rules (and others) but have not prosecuted. Admittedly, as one senior policeman told WMLR, “Breach of the Money Laundering Regulations 1993 is not an arrestable offence so we have very limited right to inspect.”

It is not clear to what extent the FSA will seek to regulate those firms that provide discreet and non-discreet investment business, that is to say, it is not plain whether the FSA’s powers will extend only to the discreet business in those cases or whether all financial services business will fall within the FSA remit. It would produce a burden for firms to have two regulators for the same area of work, and it would make sense for those providing discreet investment advice to have all financial services business regulated by the FSA.

However, this would produce an anomaly. Those firms having only non-discreet business are likely to remain regulated by their law society and each law society may take a different view from each other and the FSA.

Discussing the general terms of the new approach, reference is made to proportionality. In essence, this means a recognition that there will be a trade off between consumer and market protection and the cost of that protection. Regulated businesses will have to bear the cost of compliance and it is essential that the cost be in proportion to the likelihood of risk. Amongst the risk issues are The impact factors will be similar for all types of risk, irrespective of the source, and include considerations such as the number of retail consumers affected and the systemic nature of the problem. For firm-specific risks there is a common set of probability factors grouped into three categories – control risk, business risk and consumer relationship risk.

These comments are made in relation to general business but it is notable that they are also the primary risks associated with fraud and money laundering.

The emphasis on the combined approach created by risk management as a central tool is reinforced in the paper: “Where a firm within a particular supervisory category enters a situation of heightened risk, the intensity of the supervisory relationship will be adjusted accordingly, for a temporary period until the events prompting the crisis have been addressed. If the risks are not addressed within a set period, further action is likely to be appropriate (e.g. intervention, wind-down etc.)”

In simple terms, this appears to mean that, with regard to money laundering, where a regulated business appears to have a substantial dependency on one customer, or work of one type (thus making boutiques a natural source of concern), or to one geographical region (especially one which has known problems) a regulated business will be more likely to receive close attention than one with a more general practice. The underlying purpose of this may, however, be viewed more cynically as tending to imply that businesses with a greater spread of risk are less likely to be at risk of collapse and therefore to require rescuing by the market or cause investor or customer loss.

And, of course, there is the old question of quality and reliability of internal controls – long recognised as the root cause of many failures in the financial services industry. In this paper set out as “The intensity of the FSA’s supervisory relationship with a firm will also be influenced by our assessment of the firm’s risk management procedures.”

The FSA intends to carry out a number of projects during the year 2000. One of those is “Money laundering: customer identification and related requirements."

Recent high-profile cases have underlined the importance of adequate controls against money laundering. This project will identify best practice appropriate to different circumstances, both at the stage of taking on a customer, and subsequently; it will have regard to different market sectors. The project will examine the contribution which the FSA should make, in co-operation with other relevant bodies, to the achievement of the regulatory objective for the reduction of financial crime.”

For some businesses, for example, law firms, this will prove a shock. So far, they have not had any effective guidance from their Regulator, the Law Society, on how systems should be designed or implemented. Indeed, it has proved almost impossible for training providers to make up sufficient numbers to run courses to do with money laundering, even for senior staff, as law firms have not grasped the fact that they are bound by money laundering laws. In January 2000, Legal Abacus, the journal of the Institute of Legal Cashiers and Administrators in Great Britain and Ireland re-published the “Blue Card” previously published by the Law Society of England and Wales in which it was made plain that the carrying on of any financial services business brings a firm within the scope of the 1993 Money Laundering Regulations.

Most Law firms have not yet woken up to the fact that The Law Societies in the UK are expected to shortly lose their regulatory function in relation to those firms providing discrete investment advice and that firms will be subject to the supervision of the Financial Services Authority. The FSA told WMLR “about 800 firms are authorised by the law societies for such business (of about 8,000 authorised firms in all).” The FSA will, it says, have powers of inspection over those firms it regulates. At present, it is not clear how matters such as capital adequacy requirements, previously not applicable to law firms, may affect practices. The FSA told WMLR that there are several proposals capital adequacy of solicitors’ firms. These range from a requirement that all firms demonstrate or provide assurance that the firm is solvent in the sense of being able to meet its liabilities as they fall due and to have positive nett assets. For firms carrying on discretionary management (not otherwise regulated) an expenditure based capital requirement. So far, there have not been detailed proposals produced for consultation. The paper does make reference to changing adequacy requirements in response to changed risk.

In addition to the New Regulator paper, the FSA has published a further paper titled A Short Guide to our Preparations for the New Regulatory Regime. In it, the FSA sets out the four obligations it will have under the FMSA, if it is passed in its current form. Of particular interest to WMLR readers is reduction of financial crime: reducing the extent to which it is possible for a business carried on by a regulated person to be used for a purpose connected with financial crime.

On financial crime, the Short Guide says that the FSA has established a Financial Crime Liaison Unit to provide an internal centre of expertise on fighting financial crime; made substantial progress towards concluding memoranda of understanding with the criminal prosecution authorities - the Serious Fraud Office, the Crown Prosecution Service and the DTI - to clarify working relationships under the new legislation, and to strengthen existing co-operation with these authorities; continued to sponsor the Financial Fraud Information Network, which links a number of UK regulatory, investigative and enforcement agencies in sharing information to fight financial crime.

The Short Guide establishes that the FSA will “in most cases” inform regulated businesses that they are subject to an investigation and that where a warrant is sought will need to satisfy the Court of the reasonableness of grounds for such. However, this is somewhat mealy mouthed because the FSA will have (indeed, already operates) a general power of inspection. It is not clear at what point an inspection turns into an investigation and when a warrant would be required to continue an inspection. Further, the FSA “will not make public the existence of any investigation.” This is not the same as saying that it will keep confidential the fact of an investigation.

The Short Guide says that FSA will, if the Bill is passed, have the right of prosecution in criminal courts. One of those areas is failure to comply with the Money Laundering Regulations 1993 and this power is, the Short Guide says, shared with the traditional prosecuting authorities. But see below about the powers of prosecution.

On 24th January, well over 100 amendments were proposed to the FSMB. These range from the provision of legal assistance to those brought before the FSA Tribunal (the funds for which assistance are to be provided to the Lord Chancellor’s Department by the FSA and, by reason of the FSA being funded by the industry, back-charged to regulated businesses) to providing the FSA power to charge for copies of its Code.

The Government’s explanatory note with regard to money laundering matters covered by the FSMB explains only “The Authority may make rules applying to authorised persons concerning the prevention and detection of money laundering in connection with the carrying on of regulated activities. These will enable the Authority to make compliance with the Money Laundering Regulations a regulatory obligation. The Authority will also be able to make rules supplementing the Money Laundering Regulations.”. This exactly represents the relevant section clause in the Bill, clause 119: “The Authority may make rules in relation to the prevention and detection of money laundering in connection with the carrying on of regulated activities by authorised persons.”

It is to be noted that clause 119 does not provide powers of criminal prosecution. At the time of writing, WMLR has not been able to identify that clause in the Bill which the FSA claims in its paper gives it the power of criminal prosecution.

In conclusion, then, it seems that the FSA is making a stand on money laundering, and is making it clear that it will regard failings as a regulatory breach. WMLR has previously alluded to the question of personal responsibility and there is no doubt that individuals and businesses will face disciplinary proceedings even if criminal prosecutions are not brought. The FSMB includes sweeping powers of inspection and production and there are not at present effective safeguards against self-incrimination. This is leading to considerable debate over whether an Act in the terms of the Bill will breach the European Convention on Human Rights. The Government has certified that the Act will not so breach but this certificate is being viewed by commentators as having questionable merit.