A defeat for the FSA, but there’s no turning the regulatory tide

Well, you win some you lose some. On the day that the Financial Services Authority (FSA) announced its largest-ever civil fine, against JP Morgan, the City watchdog also suffered a defeat in its high-profile attempt to secure an insider trading conviction against three men, two of them former City lawyers.

The first case illustrated once more the FSA's sometimes melodramatic determination to reinvent itself as a get-tough enforcer for the post-crunch age, with the regulator seemingly now digging out the grand rhetoric for every fine over fifty quid.

There was also some surprise among lawyers that in calculating the level of the fine - very nearly twice the size of its previous highest sanction - the regulator appeared to be retrospectively applying a harsher model for financial penalties that was unveiled earlier this year.

FSA head of enforcement Margaret Cole was in typically thundering form, talking up the fine against JP Morgan for failing to keep client money sufficiently separated from its own funds, quite undeterred by the bank's own self-reporting and co-operation:

"This penalty sends out a strong message to firms of all sizes that they must ensure client money is segregated in accordance with FSA rules."

However, the strong message didn't quite made it to Southwark Crown Court, where the jury took just 90 minutes to acquit former McDermott Will & Emery partner Michael McFall and co-defendant Peter King, the former financial director of Neutec Pharma, on insider trading charges. Co-defendant Andrew Rimmington, a former Dorsey & Whitney partner, had been discharged on compassionate grounds, and was acquitted after the FSA dropped its case.

The result spoils what had looked an increasingly formidable record for the FSA with the body securing five out of five successful prosecutions in a little over a year. The question in the mind of many lawyers is where this defeat leaves proposals from the new coalition Government to create a unified agency to tackle white-collar crime. This would likely mean handing over the FSA's criminal investigative powers to a new body, which would presumably assume similar activities from the Office of Fair Trading (OFT) and Serious Fraud Office (SFO).

While the FSA does appear to have won a considerable reprieve from the Conservative Party's pre-election threat to abolish it and hand over its powers to the Bank of England, removing its criminal powers would substantially hobble a body making every effort to appear fleet of foot.

As it is, the regulator, which is still trying to shake off criticism for being too light-touch ahead of the credit crisis, will have to hand over its market regulation brief to Threadneedle Street.

So losing its criminal powers would be seen as a cruel reverse given that many market practitioners believe the FSA has made a credible job of imposing a firmer regulatory hand over the last two years. In comparison, the OFT and SFO have both just suffered high-profile reverses of late with the collapse of the competition body's BA price-fixing case and the SFO facing judicial criticism for its plea-bargaining tactics.

But however this develops, the push towards tougher enforcement in imposing civil remedies and pursuing white-collar criminals is not going to go away. For similar reasons, there will be continued pressure for more prescriptive regulation in general. Years of fiscal austerity will keep the issue on the agenda as governments move to assuage voter anger at bailing out the banking sector.

It may prove a more litigious world, but conventional commercial litigation will probably be something of a sideshow. Ultimately, regulation will shape the business environment of the current decade.

For more, see Former McDermott City partner acquitted in FSA insider trading case and CC takes lead role as FSA hands out record £33m fine to JP Morgan.