UK's FSA says tougher jail term would aid market abuse crackdown

LONDON Thu Oct 25, 2012 8:17am EDT

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LONDON Oct 25 (Reuters) - Tougher jail sentences would help Britain crack down faster on market abuse, such as the rigging of the Libor interest rate, by encouraging suspects to cooperate, the head of Britain's financial watchdog said.

Disgraced former Goldman Sachs director Rajat Gupta was sent to prison in the United States for two years on Wednesday for what the judge said were "disgusting" insider trading crimes.

Martin Wheatley, managing director of Britain's Financial Services Authority (FSA), was challenged by a panel of UK lawmakers on Thursday over why the United States appeared better able to tackle insider trading.

"We are being robust. We have sent 20 people to jail in the last three years for insider trading offences," Wheatley said.

But the U.S. system differed in two key ways: it allows for the bugging of suspects' telephone lines, and sentencing is harsher, prompting people to turn state witness, he said.

"If the sentencing was higher we would have more people coming forward to us to want to cooperate with us, and that level of cooperation is what allows us to cut through these things quickly," Wheatley said.

The lawmakers sit on a parliamentary commission that will make recommendations, such as changing laws, to improve standards in banking after years of mis-selling and abuses such as the rigging of the London Interbank Offered Rate or Libor.

Barclays was fined a record 290 million pounds for rigging Libor and Royal Bank of Scotland is expected to be next in line for punishment.

Wheatley expects individuals, and not just the banks, to be pursued over Libor rigging, but such cases will take time.

COMPETITION

The FSA will be scrapped on April 1 and Wheatley will head a new Financial Conduct Authority, part of efforts to end the "light touch" supervision seen before the 2007-09 financial crisis, such as through banning harmful products.

He backed the suggestion that banks should offer a suite of simple financial products that are easy for people and regulators to understand.

But he was sceptical that changes to the law were needed to end "skewed" incentives for banks to sell pricier and unsuitable products as this was already being tackled in other ways.

"I am not aware of any statutory intervention that would be a significant step forward from where we are," Wheatley said.

The lawmakers want more competition in a banking sector dominated by four lenders and Wheatley said he would propose ways of making it easier and less costly to enter the market.

"We will come out with something we think is much more practical," he said.

There could be a "staged" process of approving a new entrant by giving some initial certainty the application is likely to be approved so that it's worth the cost of recruiting a chief executive and building up capital reserves, he said.

Still, only 2 percent of account holders switch lenders as most customers fail to find anything better, said Wheatley.

He will monitor whether customers should be allowed to take their account numbers to another bank, as can be done with mobile phone numbers when switching operators.

"I don't believe legislation or directing the end of free banking is an answer," he added.

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