The UK’s Financial Services Authority has been flexing its muscles with increasing vigour to crack down on people such as insider dealers, and its regulatory zeal is not surprisingly driving business for the legal profession.

The UK’s Financial Services Authority has been flexing its muscles with increasing vigour to crack down on people such as insider dealers, and its regulatory zeal is not surprisingly driving business for the legal profession.

The FSA’s increasing activity, says Withers, the law firm, has also highlighted a gap in the market for law firms which act for individuals who have to deal with the watchdog. There are plenty of firms which act for firms in their encounters with the FSA, Withers said, but as far as individuals such as executives are concerned, there are few law firms handling their business. It is a gap that Withers’ financial services regulatory practice – a relatively new part of the law firm – says it is filling.

A particular issue is what happens when a person trying to apply for an important job in financial services – such as at a private bank – has to navigate tougher requirements set down by the FSA, a process that has seen the regulator arguably try to micro-manage the HR decisions of companies, Withers said.

One of the most significant changes in recent months has been how the FSA now increasingly seeks to validate the hiring decisions made by firms of people in what are classified by the FSA as “significant influence functions”, such as company directors, explained Harvey Knight, consultant at Withers, during a recent interview with WealthBriefing.

“If you were going for a directorship at a major financial institution then it has been well publicised by the FSA that you would definitely be interviewed by the FSA. However, in practice, the net is now being cast much wider and the latest feedback we are receiving is that applications for directorships of any institution of any significance are likely to attract such regulatory scrutiny,” he said.

The kind of people that Withers has acted for in dealing with regulators include owner managers of regulated businesses such as hedge fund managers, chief executives and other significant influence office holders including in-house counsel, traders, salesmen, private bankers, as well as high net worth individuals seeking to pursue legal claims with a regulatory dimension.

“My biggest FSA Enforcement case that is in the public domain is that of Keydata Investment Services, which was taken into administration in June last year by the FSA and I am acting for the CEO,” he said.

Oversight

The FSA is applying increased regulatory oversight over such people, including an FSA interview panel process which reviews involvement in the decisions by firms to hire a senior executive and vet their suitability for the job, including their competence and capability, he said.

Knight’s practice is focused on how regulations in financial services affect specific individuals. In most cases, he said, law firms tend to act for organisations in dealing with regulators.

“There is a gap in the market in terms of the quality and the capabilities of [law] firms that are dedicated to servicing the interests of the individual rather than the institution,” he said.

Knight used the expression “on the bus-off the bus” to describe what happens. When a person remains on the bus and is in an FSA-approved role, it is very unlikely that his conduct since he was last approved by the FSA will come up for regulatory scrutiny.

Once the person gets off the “bus” of a financial institution, it could take a great deal of time and trouble for a person to jump through various regulatory hoops to get back into the market, even if the person has convinced their new employer they are fit and proper. Knight said: “One of my roles is to assist individuals (often in conjunction with our employment practice) in providing the appropriate information to their prospective employers as to why they are fit and proper.”

He continued: “This information in turn ought to allow those prospective employers to satisfy the FSA that they have done the necessary and appropriate checks on these individuals and their fitness and propriety.”

“Now that the FSA is seeking to make judgments on judgements of its regulated firms and their senior managers, it has never been more important for those firms and the individuals that work for them to understand the FSA’s concerns and how to respond to them in the most appropriate way,” he said.

Regulatory expertise

Withers added regulatory expertise to its UK financial services practice when Knight joined the law firm in 2009, after six years in a senior role at the FSA advising inter alia, its authorisation and approvals function, although the law firm has always had a capability in this area.

“There is more demand for it because there is a more intrusive regulator,” Knight said.

He voiced concerns over issues such as how policymakers have sought, sometimes successfully, to overturn the terms of previously agreed employment contracts for banks (for example, AIG in the US, and various part-state owned banks in the UK).

“Certainly we have to consider very carefully with our employment colleagues how the FSA’s Remuneration Code may impact on any new contractual arrangements,” he said. 

One difficulty is how the FSA decides what type of firm is deemed to be important for the purpose of imposing any controls. It is not clear, for example, how an institution such as a family office might be affected, he added.