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Regulators need to tread carefully over insider trading

FINANCIAL TIMES    july 10, 2007  Paul Murphy, INSIGHT

It almost said "read me". The transcript of a speech delivered last week by John Tiner, departing chief execitive of the UK's Financial Services Authority, came with a content warning that it would include "some blue sky thinking about the possible future direction of aspects of financial services regulation which Mr Tiner stresses are his personal views".

Mr Tiner's tenure at the helm of London's financial watchdog, alongside chairman Callum McCarthy, has been broadly successful, returning some augustness to an institution that had suffered visible growing pains under Sir Howard Davies, its founding executive.

But with Mr Tiner looking forward to six months hard gardening leave before easing himself into that inevitable City sinecure, there was a chance here to splash a little colour across the typically monotone regulatory waterfront he has patrolled for the past six years. There was a chance to add some genuine insight as to how financial regulation might be improved.

No such luck. What we got instead was a staid valedictory, with one half-fresh piece of news-bait - a call for new supergrass approach to the detection of market crime (specifically insider dealing) where the FSA might offer immunity from prosecution for those providing hard evidence against others.

Blue sky? Red haze, more like, in the eyes of many in the financial community who have to pick up the bill associated with such on-the-hoof law enforcement.

Mr Tiner's plea comes on top of perennial demands from the Serious Fraud Office for the abolition of juries in complex fraud cases. It also follows the abandonnement of efforts by financial regulators to do away with the cardinal right to silence for those accused of financial misdeeds - rightly struck down by European human rights legislation.

As such, this was another veiled admission from a financial regulator that, after more than two decades of fiddling with the rules and scatching away at Common Law, the FSA is no nearer rectifying the fact that financial markets routinely get abused. Current thinking on how to tackle the problem clearly draws on the tactics used to grind down the IRA in Northern Ireland. Detention in Belmarsh or at least a system of financial control orders cannot be far behind. But neither Mr Tiner nor the market at large ever seems to stop and think - what are they fighting?

Trading on price-sensitive information is rampant in London although seemingly, not as rampant as elsewhere. With a comical flourish, Mr Tiner compared the FSA's own statistics, suggesting about a quarter of all deals leak in the UK, with research from the New York Times suggesting some 41 per cent of the deals are abused in the US (note to FSA: ask the NYT to compute British leaks and it would probably come up with a much bigger figure tha 25 per cent).

In broad terms, the porousness of markets, both here and in the US, has remained pretty static for as long as people have tried to measure the matter. But if the leakage of information is uniform, the costs associated with trying to control flows of information - and, therefore stop leaks - have mushroomed. The FSA puts the cost of City firms complying with its rulebook directly at 600m pounds - a crude understatement in the eyes of those City executives who actually sign off the bills on burgeoning compliance departments and spiralling legal bills.

It is 21 years since the then head of Barclays de Zoete Wedd, Sir Martin Jacomb, described insider dealing as a "victimless crime". He was derided at the time although, 21 years on, it is clear that the "victims" are a very different constituency from those cited by Sir Martin's detractors. Thanks to years of regulatory muddle, London, like New York, is now in the grip af an information paranoia. The criminal class remains undisturbed, ordinary investors are denied access to the financial truth at every level of the markets while those lucky enough to have a professional City seat are treated with constant suspicion.

It's time for an educated debate on the matter. Blue sky or otherwise.

The writer is editor of FT Alphaville

paul.murphy[@]ft.com

 :++  State-corporate crime

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