SFA declares war on badly run companies

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The Independent Online
The Securities and Futures Authority plans to slash compliance costs and red tape for well-managed City firms and raise costs for poorly managed ones in a radical attempt to "prevent another Barings".

After an "annus horribilis" for the securities regulator which started with the collapse of Barings bank and ended with the Sumitomo copper scandal, the SFA chairman, Nick Durlacher, said it was time to concentrate compliance resources where they were most needed.

The SFA is moving away from concentrating on which sectors are risky, and instead is looking at which firms handle risk well, and those that do not.

Mr Durlacher said: "We will look at the inherent quality of the firm rather than the type of business it does. SFA inspections for good firms will be far less frequent."

Unveiling the regulator's annual report for 1995/6, Mr Durlacher said poorly run firms would be penalised in a number of ways. If their systems for controlling counter-party risk, or credit for securities transactions, were found to be inadequate they would be forced to put aside more capital to safeguard such risks. This might even necessitate some firms seeking a capital injection, Mr Durlacher said.

This would have a big impact on security firms' costs, he added. Traditionally, capital cover for many securities transactions has been 100 per cent of the worth of the deal. This could be cut to as low as 8 per cent for well- managed firms.

In this "carrot-and-stick" approach, well-run firms will have red tape slashed. They will be required to make fewer exposure reports, which in derivatives can be time-consuming and expensive.

The SFA plans to impose extra training requirements where problems are greatest, reduce reporting burdens in some areas where a firm's systems and standards are proven, and scrap "uneconomic, ineffective or unnecessarily burdensome" rules.

Mr Durlacher admitted the SFA had taken "a pounding" for its roles in Barings and Sumitomo, and that the regulator had ended the year 1995/6 "wiser".

The SFA chairman said that when the collapse of Barings "exploded on the scene" the SFA immediately had to review its reporting procedures and make sure that co-operation with the bank of England was working properly, that "nothing was falling between the cracks".

The SFA's disciplinary investigation that followed into Barings had been "a very difficult process, very much in the public eye. We were not able to bring a case against Peter Baring [the former chairman of Barings] or Andrew Tuckey [another senior executive] because there was no evidence of wrong-doing. We were roundly attacked in the press for that."

In response, the SFA next week will start consulting its members over new powers which it proposes will allow it to prosecute or take other action against senior management for problems in their firms.

There was one silver lining to the year, Mr Durlacher added. The European Union's Investment Service Directive, (which provides firms with "passports" to do business in any EU nation) was implemented in the UK last January.

Half the EU countries had not implemented it yet, said Mr Durlacher, and Germany was not planning to do so until mid-1997.

The annual report said the SFA made a net deficit after tax of pounds 890,000 for the year to March 31 due to the cost of systems redevelopment.

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