FSA says still watchdog with "teeth," turning to CFDs

LONDON (Reuters) - Britain's Financial Services Authority said on Tuesday it remained a watchdog with "teeth" and would turn its attention to how contracts for difference (CFDs) are traded as part of wider efforts to clean up markets.

Britain's new coalition government said last week it will dismantle the FSA by 2012, handing its prudential powers to the Bank of England and setting up one body for consumer protection and markets and another to tackle serious economic crimes.

Director of enforcement Margaret Cole told an FSA conference it was vital that enforcement was kept up during the transition period and that the pipeline of cases was not disrupted.

"We must build on this process, not lose it... It's so vitally important not to tinker with something that has made real progress," she said.

Cole said she had been keeping close tabs on illegal activities in the sale of small caps to investors. But faced with this closer scrutiny, some small cap sellers were moving on to selling CFDs, which allow investors to take a punt on changes in share prices without ever owning the stock.

"We will shift our supervision of this area to ensure standards are high," Cole said.

"We are showing that the FSA has teeth and we know these teeth have to stay sharp.. What we are not facing is any reduction in demand for strong enforcement action," Cole said.

The FSA has become far tougher on market abuses since its new "credible deterrence" policy was introduced in 2007, partly in a bid to shed a reputation for a light touch.

"I think the FSA can be proud of its record since implementing credible deterrence," FSA Chief Executive, Hector Sants, told the conference.

Sants, who will head the Bank of England's new regulatory arm, said whatever the future supervisory structure, it was important that the policy of credible deterrence continued.

The FSA's tougher approach has begun to pay off -- five people were sent to prison last year and record fines of more than 30 million pounds were levied. It has levied more fines this year so far than in the whole of 2009.

On Tuesday, ex-hedge fund trader, Anjam Saeed Ahmad, formerly of AKO Capital, was sentenced to 10 months imprisonment suspended for two years and fined 50,000 pounds after pleading guilty to insider dealing.

Cole said punishment would have been even heavier had Ahmad not pleaded guilty and agree to cooperate.

"That sends some very strong messages that it's definitely worthwhile cooperating with the regulator in insider trading," Cole said.

She also said it was a "significant breakthrough for us" that Ahmad agreed to be a cooperating witness, which could lead to further cases coming before the courts in future.

It is unclear where the FSA's enforcement powers will end up -- divided between the new two bodies or folded entirely into the new crime busting agency.

"We anticipate enforcement will remain a strong and vibrant division in the consumer protection and markets authority," Cole said.

Andrew Williams, director of enforcement at UBS bank, said splitting up the FSA's enforcement work between new agencies would be detrimental.

"We want to avoid the double jeopardy of facing enforcement action on the same topic from two different bodies," Williams told the conference.