Introduction
Welcome to the FSA's Financial Crime conference. The presence of so many of you here in the audience demonstrates the importance the industry attaches to financial crime issues. I am particularly pleased that the Economic Secretary will be speaking after me, given his role in the establishment of the FSA, and the interest he takes in financial crime issues.
Since the FSA's last Financial Crime Conference in late 2005, we have seen some important developments in the UK's efforts against financial crime. These include a new more principles-based anti-money laundering (AML) regulatory regime, the publication of revised Joint Money Laundering Steering Group Guidance, and proposals for a new UK strategic approach to tackling fraud.
But the criminals haven't stood still either. They are constantly evolving, using more and more sophisticated techniques and becoming more adept at identifying new ways to defraud, to launder money, or to commit market abuse.
As all of us working in the field of financial crime are only too well aware, it is very difficult to get accurate measures of the scale of financial crime. While criminals, in a similar way to legitimate businesses, want the greatest return for the least expenditure, they don't come and discuss their business plans with us, or have their results audited and published so that we can all understand what they're doing. And the consequence of their operating outside the law is often a much higher cost to society as a whole than that immediately generated by the crime. I will come back to the problem of measuring financial crime later.
Nonetheless, I believe we would all agree that financial crime has been increasing and continues to do so. We highlighted in the Financial Risk Outlook for 2006 that the risk of financial fraud was increasing, and this continues to be the case, as we shall be reporting in the new Financial Risk Outlook that we will be publishing later this month. And any increase in fraud, or in other types of financial crime, or indeed in any other type of crime committed for financial gain, brings with it an automatic increase in criminal proceeds that need to be laundered.
All of us involved in the fight against financial crime, Government, law enforcement agencies, regulators, and you in industry who stand in the front line, have been making great efforts to counter financial crime. But we have to recognise that risks in this area inevitably evolve quickly and the responses from either the authorities or the industry need to match them. This is a continuing challenge: as we react to the most recent attacks, so the criminals move on to new ways of achieving their objectives. We have to keep raising our game.
So we must maintain our efforts: we must recognise that opportunities for legitimate business can also be opportunities for criminal business, and can therefore create threats for firms and for society as a whole. As I said in a speech on the risks of over-regulation last September, while the extent of financial activity by criminals and terrorists may be relatively modest in the context of the financial system, criminality and terrorism impose much broader costs on society as a whole and so the fight against financial crime must appear increasingly high on any financial regulator's list of priorities. So we have to balance the needs of the market and what it can offer us all as consumers with the wider needs of society.
FSA's strategy and structure
The FSA is approaching these challenges systematically. First, we have adopted a financial crime strategy which aims to achieve three things:
- A better understanding of the scale and incidence of financial crime in the UK financial sector and an accepted methodology for its measurement;
- A reduction in the extent of vulnerability to financial crime in the industry, starting with poorly performing sectors and firms;
- An increasingly risk-based approach to international and domestic financial crime policies and practices, including those to counter the financing of terrorism.
Of course, we will not be working in isolation. Our objective on financial crime can be achieved only as part of a broader UK strategy, led by the Government, which gives higher priority to tackling fraud, terrorist financing and money laundering.
We will be working closely with Government and with our intelligence and law enforcement partners, to help ensure that all our AML efforts are informed by high quality intelligence and that information provided by the industry is used effectively. We look to the Government to deliver the much needed national framework for fighting fraud recommended by the Fraud Review.
Over the last two years, I believe we have succeeded in increasing the FSA’s capability to deal with financial crime issues. As well as our new strategy; we have designed and delivered a new training programme to equip our supervisors to identify financial crime risks in firms; and we have increased our outreach to both industry and law enforcement agencies to encourage greater flows of intelligence to industry, and greater data sharing within industry. To support our strategic aims, we have also adopted a new intelligence strategy, designed to deliver the intelligence the FSA needs to make proportionate and well informed decisions; to identify poorly performing firms and sectors; and to help us target our resources effectively.
In addition, we are putting in place a new structure to deliver our financial crime objective more effectively. Our financial crime expertise has been spread throughout the FSA. In order to increase effectiveness, and to produce a centre of expertise to provide FSA-wide advice and intelligence, I have this month created a new Financial Crime and Intelligence Division which brings together all our financial crime and intelligence expertise. I have asked Philip Robinson to lead the new division, and to devote all his time and formidable energy to making a real difference to the FSA's contribution to tackling financial crime.
As part of this new division, we are creating a new operations team that will give us the capacity to undertake more thematic and case work on financial crime issues, including those where firms or law enforcement agencies may alert us to an urgent problem. The team will be led by financial crime experts, supported by staff drawn from across the organisation, to ensure that our financial crime, supervisory and other skills are deployed together to tackle these problems. As the team builds up, we should be able to tackle these issues more rapidly and in more depth. That is likely to mean us visiting more firms and more often to discuss financial crime issues. I make no apology for that. It is part of raising the FSA's - and the UK's – game in the fight against financial crime.
And when we do identify those poor performers, we will be prepared to take some action. This doesn't mean we will take enforcement action in each and every case. We have a range of tools at our disposal before we get to that point. But if we find that a firm demonstrates a serious failure in their systems or behaviours, investigates what's happened, takes management action that they tell us will put things right, and then demonstrates a further serious failure, that firm should understand that enforcement action is the most likely option for the FSA, to ensure that overall standards are raised across the industry. Depending on our overall view of the adherence of the firm to good systems and controls, we do not preclude taking enforcement action against failures related to financial crime at the first instance. This is consistent with our approach to the so-called regulatory dividend from firms who can demonstrate both a strong culture towards controls and effective scrutiny of their risks in practice.
The new division, with its concentration of expertise, will help us to enhance our understanding of financial crime issues within the industry. But, as I said earlier, there are no good measures, or even measurement approaches, of the overall scale of financial crime. A leading academic criminologist has observed that most of the current financial crime measurement methodologies have more to do with marketing than with economics, because measurements are usually surveys that might demonstrate a gap in the market for a particular product. That makes it difficult for us to know how to calibrate the resource we should be putting into our financial crime activity. And it makes it more difficult to put forward well-reasoned arguments for making financial crime more of a priority for law enforcement.
We have therefore concluded that the FSA needs to develop an approach to measuring the scale of the problem so we see informed judgements about our prioritisation of resource, and to allow us to influence UK strategy more effectively. We plan to bring together a broad range of economic experts from inside and outside the FSA to establish an agreed working basis. But we need to recognise that financial crime is rather different from our other objectives. The negative consequences of money laundering, terrorist financing and fraud are experienced not just in the financial sector in the form of losses or a reduction in public confidence, but also in the wider community as part of the wider social harms of crime. These are externalities that the market cannot correct. In its anti-crime strategy, Government chooses to intervene in the market to reduce these negative effects. The FSA's financial crime objective is one component of that intervention. So our measurement and methodology will include a consideration of the wider consequences of financial crime both within and outside the financial sector.
As part of enhancing our understanding, we have just carried out our first survey of stakeholders on financial crime issues. We will use the detailed results of the survey to help inform our priorities and provide a better focus for our financial crime work in the coming months.
Philip Robinson will tell you more about the survey later. But among the key findings are that:
- No-one can put a figure on the amount of financial crime in the UK but 40% thought it was rising, and over a quarter thought it was rising a lot.
- Like us, firms see the key emerging risks as identity theft and hi-tech crime. They see hi-tech crime as a particular problem because they find it difficult to predict the evolution of hi-tech attacks due to the speed of technological development.
- And, I'm glad to say, our stakeholders recognise a considerable improvement in the FSA's work on financial crime in the past two years.
Future work programme
Looking ahead, we have identified one especially high risk area to consumers from rising information security and hi-tech crime risks. We will be taking forward a co ordinated work programme in this area over the next year, to examine the risks in more depth and consider how they can best be mitigated.
This work, some of which is already underway, will involve both close collaboration with other regulators, as personal financial data is increasingly held outside the financial sector (e.g. by phone or utility companies), and a review of offshoring, as such data is often held outside the UK (e.g. in offshore administration or call centres). And it underscores the close connection between our financial crime and consumer objectives.
I have already undertaken that we will look again at the financial crime and information security risks associated with the offshoring of significant functions in financial services firms, in the light of the concerns expressed by the Treasury Select Committee over recent media reports.
The other workstreams we are considering are:
- The security of consumers’ banking data held outside the financial services industry, where we will work with the Information Commissioner's Office and others to discuss measures to improve the security of banking information in sectors outside our own scope;
- Data loss through employees, where we will study the potential for breaches of information security through deliberate or accidental employee action (such as the careless disposal of sensitive consumer data; or the removal of sensitive consumer data from the workplace), and the systems and controls firms have in place to mitigate such risk;
- Identity theft risk arising from financial marketing practices, where we will look at issues such as the appropriateness of marketing literature which contains non-essential, and sometimes sensitive, consumer data, such as unsolicited credit card cheques and partially completed credit application forms, and also the inclusion of sensitive personal information in other types of communications from firms such as pension statements.
- Principles-based regulation: AML
This is a very important time for the UK's anti-money laundering regime. The changes we have made to our rules demonstrate our commitment to moving towards a principles-based framework which allows firms and the regulator to refine their processes and focus their resources on areas of real money laundering and terrorist financing risk. Our aim must be to make life more difficult for the criminals who seek to infiltrate the financial services industry to commit crime and facilitate their activities. We hope the changes will also minimise inconvenience and cost, for both the firms we regulate and the consumers we are responsible for protecting. We want to see this approach working at the front line, at the customer interface, and not solely in Head Office policies and procedures. So, when we come to assess firms' implementation of the new JMLSG Guidance later this year as a key part of our thematic programme, I very much hope we will find that firms have responded whole-heartedly to the new regime, and that less regulatory intervention will indeed be the outcome.
Market abuse
Nor should we overlook the links between our AML and market abuse regimes. Market abuse is one type of financial crime, and of course the UK AML regime covers all types of criminality, such as market abuse, tax evasion and drug dealing. We have made very clear what our expectations are of firms. These include:
- the need for senior management to take responsibility for ensuring that firms identify their market abuse risks, and developing appropriate systems and controls to manage and mitigate these risks. This includes the need to manage conflicts of interest properly;
- in complying with their obligation under the Market Abuse Directive to provide us with suspicious transaction reports;
- in self reporting to us if they uncover wrongdoing by their employees or by their peers. Intelligence from firms is vital to assist FSA in our work.
The FSA has a twin track approach to market conduct matters: taking enforcement action and educating firms as to the standards which must be achieved to maintain clean financial markets. Where the FSA finds that a person has engaged in market misconduct it will deal firmly with them, and we have publicly indicated that we are increasing the level of financial penalties which we will impose. We also have a significant thematic work programme, including a major project to look at the leakage of information on public takeovers. Although the evidential challenges to bring successful cases are significant, recent institutional cases reflect our determination to take the necessary action.
International AML work
On the international AML stage we have a full agenda too. We recognise that, however much they welcome our approach in the UK, firms that are internationally active face different approaches in other jurisdictions. The FSA is committed to doing what it can to ensure that a genuinely risk-based approach is adopted as widely as possible. We are already assisting the Financial Action Task Force (FATF) in developing a risk-based approach to both AML and countering terrorist finance. We hope this will lead to greater understanding and acceptance of the risk-based approach at both the international and the EU levels.
And the UK will take on the Presidency of the FATF for a year this June. The FSA is working closely with the Treasury to help shape the objectives for our Presidency. One key aspect the Treasury will want to emphasise is moving the focus of assessments to how effectively standards are implemented rather than technicalities of implementation. And this is very much in line with the FSA's overall approach to supervision.
The FSA has also agreed to be the first chair of the new UK AML supervisors' forum that the Chancellor announced last year. The forum will help to share best practice on risk-based supervision, investigation and enforcement work, to share information on trends in supervisory investigations and disciplinary actions, and consider how to measure and monitor the impact of supervision on the wider aims of the AML regime, i.e. reducing crime and the money laundering associated with that crime, and ensuring that UK markets remain both competitive and clean. This is evidently all very close to the FSA's own agenda.
Countering future threats: working smarter together
I referred at the beginning of this speech to the close relationship between some of the opportunities and the threats we face. To take one very important example, we are now seeing increasing evidence of cross-border attempts by firms and individuals with dubious backgrounds to enter the UK market via authorisation, change of control or passporting under the Single Market Directives. We are also seeing applications for listing, both on the main market and on AIM, from entities from jurisdictions for which it is difficult to undertake really effective due diligence. To help mitigate this risk we have been increasing our intelligence capability as I explained earlier. We are also developing closer relationships with a wider range of supervisors around the world so that we can consider any concerns jointly.
But we all have to get smarter at working together. The FSA has consistently championed the need for better data sharing within industry and better flows of intelligence from law enforcement to industry. We welcome the progress that has been made, especially since Serious Organised Crime Agency (SOCA) became operational last April. But there is still much that could be done. So we will continue to work with the Home Office's recent proposals, and with others in Government, to improve the situation further.
We also need to improve data sharing at international level. Criminals are adept at exploiting differences between jurisdictions, and we all need to find ways of making it harder for them. The FSA is increasing its intelligence capability and expanding its links with our overseas counterparts in many countries. We look to Government, industry and law enforcement to continue their own good work in this area.
One area where I believe the FSA could make a real difference is to enhance understanding on all sides of what can be achieved on countering terrorist finance. We all see the problem of terrorism, and we will be hearing more about it later this morning. We all want to do whatever we can to deal with it. But I think we need to pause to consider whether what the industry is doing, at considerable cost, is delivering the results we want for society. As with the AML regime, we want to be smart, not just compliant. So we are looking at how to bring everyone involved round the table to see how to achieve this, much as we did with our "Defusing the ID" issue a couple of years ago. We look forward to collaborating closely with you all on this vital question.
So, there are real threats ahead, to our markets and to our society. We can tackle them effectively only if we tackle them together. That then is what we must do. We intend to approach this in the three key areas that I have spoken about.
- The FSA attaches great importance to fighting financial crime and our new division demonstrates this commitment;
- We will be using intelligence to inform ourselves of emerging risks and threats; for example, on information security and criminals accessing financial services firms through ownership or employees;
- And we will bring focus to work on the terrorist financing threat.
I hope you will all support us in this work.
