An arrogant FCA bent on self-serving vendettas

One feels sympathy for the Financial Conduct Authority. But then, the hole in which it finds itself is of its own digging.

Its predicament involves the case of Ian Hannam, a prominent City banker whom the FCA has accused of passing inside information to a foreign government official. An appeals tribunal has found that Mr Hannam did indeed breach the UK rule book, and upheld the regulator's £450,000 fine. But, as is gradually being realised, the rule book itself is unworkable. It involves pursuing upright citizens for synthetic crimes.

"It was not part of the Authority's case that Mr Hannam deliberately set out to commit market abuse," the FCA wrote in a decidedly un-triumphant press release following the tribunal's decision, "or that Mr Hannam lacked honesty or integrity". Why is our regulator hammering honest people?

Here is the backstory. While doing his job looking for deals involving the oil exploration companies of Kurdistan, Mr Hannam found himself obliged to report to what was then the Financial Services Authority that certain directors at one company were dealing on inside information. The people involved claimed ignorance, said sorry and reached a settlement with the regulator. That was in early 2010: Mr Hannam had handed the FSA what was then their biggest insider-dealing collar to date.

But as part of the formal investigation, Mr Hannam's database of 40,000 emails collated at JPMorgan Cazenove was passed to the FCA, which duly combed through the emails and found precisely two where Mr Hannam - in trying to encourage a transaction - appeared to have passed price-sensitive information to a Kurdish government minister, who did not deal on the information and kept it confidential.

This was the ultimate victimless "crime". But it happened to have been committed by London's most prolific corporate financier - a man who had more or less single-handedly reshaped the composition of the FTSE 100 index. So the FCA threw the book at him.

Why? More backstory. Before July 2009 the FSA, as it was then, quietly avoided imposing some of the more unworkable aspects of the Financial Services and Markets Act 2000 - a law largely fashioned at EU level that sat awkwardly with the regulator's soft-touch regime, which stressed principles rather than rules.

Then George Osborne announced that, if and when he became chancellor, he would abolish the FSA. Faced with an existential threat, the FSA opened fire on whoever was in range. The agency needed to be seen to be doing its job; and the public at large wanted bankers behind bars.

Unfortunately, the aforementioned act did not capture all the idiocy that brought the credit crunch and ensuing financial crisis upon us. The sort of spivvy property finance that destroyed Royal Bank of Scotland and HBOS was not against the law. But the FSA could go after supposed equity market "insiders" because past scandals and regulatory inaction had led to catch-all legislation that was supposed to make equity markets some sort of "level playing field" for all investors.

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So pursuing the (technically) wrongful distribution of price- sensitive information presented a solution to what was in effect a public relations problem for the FSA, even if these cases had nothing to do with the regulator's previous failings, which had helped bring on the crisis.

And it pursued its new quarry with the gusto of a body that was going to be abolished if it failed to deliver. The Serious and Organised Crime Agency was called in to tap phones. MI5 followed up by bugging offices. Arrests soon followed.

Trouble is, the agency began to believe its own publicity. Its eyes were on Westminster, rather than the wellbeing of the financial sector. The 2000 law had been repurposed as a puritanical tome that could be thrown in just about any direction.

Sadly, having hanged a string of bid gossips and other fringe operators, the UK regulator began to imagine bigger prey. That is what led us to the comical hounding of Prudential chief executive Tidjane Thiam (he failed to inform the FSA of his designs on rival asian insurer AIA for fear the FSA was a leaky ship). That is why Mr Hannam was pursued so relentlessly. It also explains the FCA's bungling in March of its announcement that it was looking into mis-selling by the insurance industry, creating a false market in the entire UK insurance equity sector in the process. Our regulator has become chief market abuser, all in the pursuit of PR.

On the political front, we have come full circle, with Mr Osborne this month announcing a review of the FCA to ensure it is striking the "appropriate balance of fairness, transparency, speed and efficiency".

But the damage has been done. The careers of Mr Hannam and others have been ruined. A deep chill has settled over the Square Mile and Canary Wharf. Fear of a psychotic regulator, with a frenetic desire for positive press, is seriously hampering the ordinary, honest working of our financial sector. Mr Osborne needs to widen his review.

The writer is the founding editor of FT Alphaville

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