THE Financial Services Authority is planning a tougher and more intrusive approach to its investigations after its procedures were criticised in a landmark case brought by Legal & General.

Both L&G and the FSA were claiming victory last night after the Financial Services and Markets Tribunal delivered a mixed verdict on L&G’s landmark challenge to a £1.1 million mis-selling fine.

L&G claimed that it had been vindicated in bringing the case because the tribunal found that the FSA’s powerful Regulatory Decisions Committee was “in error”. The FSA pointed to the tribunal’s decision to uphold its finding that L&G had deficiencies in its procedures in selling endowments between 1997 and 1999.

The three-person tribunal, chaired by Judge David Mackie, QC, said that it had provisionally decided to order a reduction in the original £1.1 million fine levied on L&G.

The squabble over who won was overshadowed by the FSA’s threat to be tougher and more demanding of firms it is investigating. Rob McIvor, director of communications at the FSA, said: “We’re clearly going to have to take a harder line against firms that don’t co-operate with us.”

Another senior FSA figure concurred: “In future we’ll have to investigate in a more intrusive way and that will add to the expense.”

The FSA was criticised for extrapolating from a very small sample of mis-selling cases. It said that with hindsight it should have forced L&G to examine a much larger sample.

One independent observer, Neil Fagan, a senior partner in Lovells, which is not representing either side, said that neither had won. “It’s pretty much even Stevens.” He said that the outcome might encourage more firms to challenge the FSA in future.

David Prosser, L&G’s chief executive, who was seen by some as on a personal crusade against the FSA, described the overall 98-page judgment as “good to satisfactory”. “We feel justified in bringing the case,” he said.

“It’s a fair judgment. (The tribunal panel has) been very careful and very thorough.”

He said the cost to L&G was £2 million. Crucially, L&G plans to claim costs and expects to win because it feels it had no option but to appeal against the original finding.

The tribunal looked at two aspects of the case — L&G’s procedures and the charge of widespread mis-selling.

On procedures, it upheld the original FSA finding that L&G’s procedures did not ensure that its sales staff explained the risk that the endowment might not grow enough to pay off their mortgage.

On mis-selling, it concluded that the FSA had largely failed to make its case. Of the 60 cases of alleged mis-selling, it found eight definite mis-sales and fourteen potential ones.

The extrapolation to find systemic mis-selling was therefore “flawed” and the FSA was wrong to conclude that mis-selling generally had taken place.

The tribunal said that it had the power to make recommendations on FSA procedures but was not planning to unless asked by either party. L&G is not expected to make that request.

INQUIRY MAN GOES

The man who headed the FSA’s flawed investigation into Legal & General announced 12 days ago that he was leaving for a lucrative job in the private sector (Patrick Hosking writes). Andrew Procter, director of enforcement at the FSA, is joining Deutsche Bank as head of compliance for the UK and Western Europe.

The FSA insisted yesterday that his departure had nothing to do with the L&G case. Mr Procter, 42, has run the FSA’s 200-strong enforcement arm for four years. In that time his department has fined a total of 57 firms £43.1 million. He will join Deutsche in April after two months in purdah.

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