Nervous welcome for FSA regime

The fear is that it will come down hard on individuals who stray into the dark realms of regulatory non-compliance, or committing the new offence of market abuse.

Chief executives and other senior staff are at particular risk from the FSA's bite.

The regulator's handbook warns: 'A firm must take reasonable care to maintain an appropriate apportionment of significant responsibilities among its directors and managers...' This means that they can be held more accountable than before for failing to monitor their firm's daily business and activities.

If they are found wanting, the regulator will discipline them personally. Its armoury is considerable, including unlimited fines, public naming and shaming, financial restitution orders and disqualification from certain jobs. The previous 10 regulatory bodies, including Imro, the SFA and the PIA, which have all now been replaced by the FSA, did not have quite such sharp teeth.

Apprehension about the FSA's intentions has been fuelled by rumours that the regulator will be looking for a trophy victim - despite its denials. Richard Ward, head of the wholesale financial division of Calleo, the management consultants, says: 'The FSA is widely viewed as having failed in its regulation of Equitable Life, the pension provider. It will be anxious to be seen to be more professional and more decisive in future, and if it does not appear to be taken seriously, it will go for a scalp.'

Senior managers at larger banks may be the first to feel the FSA breathing down their necks. The regulator will divide its attention between its 10,000 member firms on the basis of the probability and potential impact of their failure. 'Large firms tend to be low probability, but high impact. They fall into category A,' says an FSA spokesman.

Firms in category A will each be allocated up to five dedicated FSA staff to monitor their compliance with the new regime.

But the regulator is keen to dispel fears that it will pursue senior managers at the slightest hint of irregularity. A spokesman says: 'Disbarring and fines will be very much a last resort. We expect firms to engage in a dialogue with us. Senior managers will only be punished in cases of severe and persistent malpractice.'

Despite the FSA's neighbourly talk of dialogue, the sheer scope of its powers is causing concern, and there are complaints that its intentions appear vague. Its 3,000 page 'handbook' detailing its powers is described by one solicitor as a 'monstrosity', in which requirements are 'splattered' around and hard to follow.

Angela Hayes of Lawrence Graham, the law firm, says: 'There are many grey areas and potential traps for the unwary. The systems and controls that the FSA has in mind are not simply the narrow compliance function. Senior managers will be responsible for everything from business risks and strategy, to remuneration policy and staff assessment.'

There is concern too that some of the FSA's demands are unworkable. One such area is financial promotion.

As things stand, this is covered only by a consultation paper and Hayes says that guidance over what is and is not financial promotion is not at all clear. Any communication that mentions investments - written or oral - could be construed as promotional, even if that was not the intention.

Moreover, FSA guidelines forbid an established practice, whereby authorised firms can approve a script for unauthorised firms to use in oral communications, such as telephone calls or meetings. This could create problems for call centre operators and will restrict the type of information that companies can give out in open meetings.

The FSA has also created a new civil offence called market abuse, which can have three forms: misuse of information (such as insider trading) creating misleading impressions (for example, posting an inaccurate story on an internet bulletin board) and market distortion (for example, ramping shares to a distorted level).

The FSA is also now prosecutor for the existing criminal offences of insider trading and market manipulation. It has taken over from the Department of Trade and Industry, which until now was the prosecutor in this area.

The FSA's word is not final. It must present its findings to a Regulatory Decisions Committee made up of external representatives and, if the FSA's allegations are upheld, it is this committee that instigates disciplinary procedures.

Even at this point it remains possible to protest. Accused parties in civil cases have recourse to the Financial Services and Markets Tribunal, run from the Lord Chancellor's office.

This system of checks and balances means that cases brought by the FSA may prove lengthy, and therefore costly.

Insurance can be taken out as a financial antidote to an FSA attack. Blackmore Borley, the insurance company, is offering an insurance policy to cover defendants' legal fees. Firms can buy cover for their staff, or individuals can buy it in their own right.

Peter Blackmore, a director of the firm, says: 'People are concerned that they will have to go through a lengthy legal battle to clear their name. They do not want a large and unquantifiable bill.'

The cost of cover varies according to a person's job and the risk of investigation. Senior compliance officers can expect to pay 555 (€888) for cover of up to 1m. But few people seem to have taken out insurance so far, perhaps because of uncertainty about how real is the threat of FSA action. Blackmore says he has spoken to representatives of at least 700 interested people, but has made a mere 50 sales.

He is confident that numbers will rise quickly once the powers of the new regulator become more apparent. 'We are expecting a surge of inquiries in December,' he says.