The Money Blog

There are a number of ways the FSA can be alerted to a particular problem. It is likely to instigate a fact-finding investigation. Frequently, the investigators will be looking foe relevant documentation.

“Document” has a very wide definition includes information recorded in any form. Firms have a general duty to cooperate with the regulator under principle 11 of the FSA’s Principles for Businesses and, arguably, this will involve producing documents on request: FSA handbook at SUP 2.3.3.

The FSA has statutory powers to require the production of documents by the Financial Services and Markets Act 2000 which sets out, in part XI, the broad framework for the FSA’s investigatory and information-gathering powers.

Section 165 FSMA allows the FSA to require an authorised person (and connected persons) to produce “specified documents or information of a specified description” where the FSA reasonably requires the documents in connection with the exercise of its statutory functions.

Under s167 FSMA, the FSA can, if it considers there is good reason, appoint a competent person to conduct a general investigation into a firm’s business or its ownership or control. The investigator can require any person to produce documents he or she reasonably considers relevant to the purposes of the investigation (S171 FSMA).

S168 contains a similar power to appoint investigators, but in relation to specific contraventions or offences such as market abuse, money laundering or insider dealing.

The investigator can require any person to produce relevant documents but the threshold is lower.

The investigator only has to consider that the person in question may be able provide relevant information before seeking disclosure (s173 of FSMA).
Where a person could be compelled to produce a document under this part of FSMA, but it appears the document is in the possession of a third person (who is not otherwise within the scope of the relevant power), that third person can be required to produce the document (s175 of FSMA).

The FSA may exercise its powers under s165 of FSMA at the request of an overseas regulator.

From mid-2001, under the new financial services and market act, all market participants were subject to the same CIVIL regime for dealing with market abuse, so levelling the playing field for all market users. In addition, they will have detailed guidance to help clarify what does amount to market abuse.

Financial penalties will be imposed on those who abuse markets.

As an alternative, the FSA can use public censure. The new market abuse regime complements the existing criminal offences of insider dealing and market manipulation. The FSA will be able to prosecute these offences.

Categories of market abuse
The Act defines three categories of market abuse. The draft Code sets out the FSA’s opinion on behaviours that would or would not constitute abuse in each category so as to give guidance to those affected by the new regime:

Misuse of information
Example, knowing of a forthcoming takeover and buying shares in the Target Company prior to general disclosure of that information.

Giving False or misleading impressions
Example, posting on a bulletin board an inaccurate story that an important deal had been secured by a major company.

Market Distortion
Example, undertaking trades just prior to an exchange closing, with the purpose of positioning the price of a share or basket of shares at a distorted level. This could, for example, be to avoid having to pay out on a related derivative contract.

The FSA is an independent body regulating the UK financial services industry. The FSA has three main aims:

The first is maintaining confidence in the UK financial system by supervising exchanges, settlement houses and other market infrastructure providers; conducting market surveillance; and transaction monitoring.

The second is promoting public understanding of the financial system to help people gain the knowledge, aptitude and skills they need to become informed consumers, so they can manage their financial affairs more effectively.

The third is securing the right degree of protection for consumers. Vetting entry aims to allow only those firms and individuals satisfying the necessary criteria (including honesty, competence and financial soundness) to engage in regulated activity. Once authorized, they expect firms and individuals to maintain particular standard and monitor how firms and individuals meet them. Where serious problems arise they investigate and, if appropriate, discipline or prosecute those responsible for conducting financial business outside the rules. They also use their powers to restore funds to consumers.

Their work focuses on three main types of financial crime:
• Money laundering
• Fraud and dishonesty
• Criminal market misconduct such as insider dealing.

They also consider
• The need to use resources in the most economic and efficient way
• The responsibilities of the management in regulated firms
• The need to balance the burdens and restrictions on firms with the benefits of regulation for consumers and the industry
• The need to allow innovation
• The international character of financial services and markets and the UK’s competitive position
• The value of competition between financial firms

This is basically the ruling in LIPKIN GORMAN v KARONALE (1989). Bank should not pay any cheques not authorised by the customer (i.e. that the bank has no mandate to pay); and this basically means those with forged or unauthorized signatures.
If the bank pays such cheques it must make good the loss to the customer.

Problems:
Well, there are the one you would expect! How on earth do you know when it’s forged; good ones by definition will not be noticeable?
Further, what if someone has got the authority to draw cheques, but is simply misappropriating funds? This will be even harder to detect.
To complicate things even more, the bank has a duty of confidentiality. The existence of this may prevent them from disclosing facts they know.
The judge in LIPKIN GORMAN had the happy task of sorting this out. (The rulings he established are all quite straightforward if you remember that it’s just a case of when a bank can wrongly pay a cheque and get away with it).
The basic premis are that the bank will be protected if they didn’t know it was a cheque they shouldn’t have paid.
What the judge was giving were the criteria for when they couldn’t reasonably be expected to know that they should not have paid, and will thus be entitled to debit the customers account.

The criteria he established were as follows:
1. When the circumstances are such that a reasonable banker would hesitate to pay the cheque at once.
2. If they did have grounds for hesitating, then to continue and pay would amount to negligence by the bank and render the bank liable.

The question to ask is; whether a reasonable and honest banker, knowing the relevant facts, would have considered that there was a serious or real possibility that the funds were being (misused).
Here the judge held that the bank had no such knowledge and were therefore entitled to debit the customers account. Surprise, surprise the bank won!

The bank’s duty of confidentiality comes from the JOACHIMSON V SWISS BANKING CORP case. The bank’s duty of secrecy is not an absolute duty and there are exceptions to this duty. Most of these exceptions come from the case of TOURNIER v NATIONAL PROVINCIAL AND UNION BANK OF ENGLAND (1924), but there are also other important exceptions from various statutes.

TOURNIER v NATIONAL PROVINCIAL AND UNION BANK OF ENGLAND (1924).
This famous case listed four exceptions where disclosure can be made without the customers express authority
(1)Under a legal duty i.e. compulsion of Law e.g. subpoena
(2)It’s in the Bank’s Interest e.g. suing for a disclosed amount
(3)It’s in the Public Interest e.g customer trading with an enemy
(4)With the customer’s Express OR Implied consent e.g. bank statements to their accountant

Compulsion of Law
Many statutes allow bank to disclose information of transactions on a customer’s account to the court or the good old honest British bobby. There are loads allowing this and more are being enacted after Sep 11^th and the incidents of drugs/money laundering
BANKERS BOOKS EVIDENCE ACT 1879
POLICE AND CRIMINAL EVIDENCE ACT 1984
DRUG TRAFFICKING OFFENCES ACT 1986
PREVENTION OF TERRORISM (TEMPORARY PROVISJONS) ACT 1986

Public Duty to Disclose
This is really wide and been criticised. The usual sort of things is operating account of an ‘enemy’ i.e. group of people the government has decided to declare war on. It was used in the LIBYAN case.