Thoughts on the FSA Business Plan

For anyone who believes that securities markets should be fair there is much to like in the FSA's new business plan (albeit one has to read between the lines somewhat).

If markets are abused because of greed the extent of the abuse is tempered only by fear of detection and punishment. The FSA's new philosophy of "credible deterrence" must therefore be good news, so long as it is effective in practice. The shift from a "principles based" approach (for which read the much criticised light-touch regime) to an "outcomes focused" one, coupled with a willingness to be more confrontional, is encouraging, as is the recognition that this will need better people, systems and analytical techniques.

However, when the FSA talks about market abuse they focus on insider dealing, and in their plan the other classes of market abuse - which are at least as significant a problem - are further de-emphasised. Reducing insider dealing is clearly a good thing, but it is not enough.

Deterring the other forms of abuse is harder. As we at AVENUES have often observed (most recently in a press briefing on 16 March 2010) this difficulty is exacerbated by an unintended consequence of MiFID, in that with fragmented markets abuse is easier to disguise. No single pair of eyes can oversee the activity across all trading venues with sufficient completeness and accuracy.

So the FSA is right to plan to press for a review of MiFID, seeking enhanced transparency and improved consolidation of post-trade data. This is a step in the right direction (but one that must be taken with one leg tied to the EU).

The plan represents several necessary steps, but not the whole journey towards fair markets.