David writes in the FT about the failings of the FSA


David wrote a piece for the Financial Times, in which he argued that the Financial Services Authority- which is responsible for the supervision of the banking system – pursues a “schizophrenic existence”. It is, he said, failing to respond properly to real outrages – such as the Arch Cru scandal, whilst desperately attempting to shore up its newly tough image by prosecuting innocent individuals.

Hannam is clearly a victim of injustice

Shortly before I became chairman of the Future of Banking Commission, I interviewed a leading City lawyer about the causes of the crash of 2008. When I asked him whether the Financial Services Authority was lax, he said “Oh, more than that. They positively encouraged some of the riskier practices, because they thought they made the City more ‘competitive’.” During our subsequent inquiry it became apparent that this idea infected the whole policy approach to the financial sector, from legislation to regulators’ mindset.

The consequences have been disastrous. They knocked the British economy on to its back and cost the taxpayer hundreds of billions of pounds. Within the global context, even brilliant regulation would not have prevented the catastrophe but incompetent regulation certainly made it much worse, and for this the FSA carries much of the can.
Accordingly, since then the FSA has pursued a schizophrenic existence. On the one hand it has sought a “tough” reputation, off the back of a number of cases where banks actually reported their own misdemeanours – hardly indicative of improved investigative or forensic powers. On the other hand it has frankly continued to be as limp as wet lettuce in the cases that really mattered. Most obviously, in dealing with the Royal Bank of Scotland, which cost the taxpayer £45bn, it failed to find anybody culpable, a conclusion helped no doubt by the fact that its investigation was so slapdash that it omitted to interview seven key board members.

Neither has it stopped one in five major deals being preceded by “unusual price movements”.

On a more mundane level it has failed to protect the most vulnerable investors, its most important charge. Take the Arch Cru scandal. In 2009, 20,000 savers – many of them widows and pensioners – saw their life savings obliterated when the supposedly low-risk investment funds collapsed. The FSA’s response? An inadequate compensation fund that did not properly penalise the culpable companies, and that left those pensioners tens of thousands of pounds out of pocket.

While failing to do the most fundamental parts of its job, however, the FSA has been desperate to prop up its new “tough” reputation. Which brings us to the case of Ian Hannam.

Let me start by declaring an interest. Mr Hannam is an old friend of mine, and contributed to my bid to be leader of the Conservative party. Because I thought that might bias me, I carefully scrutinised the FSA case against him. I looked hard to find fault. Instead, I found that the FSA had extended the definition of insider trading beyond any other case I had seen. The offending comments looked to me like the normal traffic of major commerce. To be sure, I sought the advice of one of Britain’s more eminent QCs. He agreed, described the judgment as “extremely harsh”, and thought it should be challenged.

The FSA accepts Mr Hannam acted with integrity and honesty. It accepts that he acted on the orders of his client, Heritage Oil. It accepts that there was no trade. It accepts that there was no benefit to anybody, and no harm to anybody. So why try to destroy a career and a reputation, and rob London of one of its most talented wealth creators?

The case hinges on two emails, which are the result of a sift through a total of 20,000 emails. What the FSA does not tell us is that this sift was triggered by Mr Hannam himself when he blew the whistle on a real insider trade. The FSA also forgets to mention that Mr Hannam’s emails were to a foreign government minister, a man who understood the confidentiality that applied to such communications. Heritage Oil was seeking to strike a deal with this government, and Mr Hannam was carrying out its bidding in these communications.

By doing this the FSA gives a misleading impression. It reminds me of an American district attorney, up for election, trying to convict a defendant in the public eye before the case even gets to court, putting his own political reputation before the demands of justice.

This is where the problem lies. Few are more critical than I am of the City’s worst excesses. Everybody wants to see a tougher, more effective regulator. It must act in accordance with principles of natural justice, however, or it will not have the proper deterrent effect. Then London, and not just Mr Hannam, will lose. When it comes to regulating the City, we must not pay for past incompetence with future injustice, no matter how populist this line may be.