HOWZAT

“Most market participants are decent and honest people and the UK markets are good places to do business. Institutional abuse is not widespread but there are definitely pockets of unacceptable behaviour,” he said.

The first of Sants’s proactive investigations is already under way.

In recent weeks the FSA has asked a number of investment banks to provide details of recent convertible bond issues. Who, the FSA wants to know, did the bank make “insiders” on these deals? And who did they consult? The FSA has also contacted a number of hedge funds. The suspicion is that hedge funds — which unlike traditional funds invest in debt as well as equities — are using “inside information” from one market to invest in another.

“We view hedge funds as an important and useful asset class, but there are inherent characteristics of the hedge-fund industry that increase the risk of market abuse by the participants,” he said. “They are able to take quick decisions. They are very important players in less liquid markets like the credit markets. And they are big customers of the investment banks, which have huge incentives to speak to them.”

The compensation arrangements of hedge funds — where remuneration is closely aligned to the performance of funds — also increases the risks, said Sants. “The growth of the hedge funds has been a structural change in the market. The characteristics of the market have shifted in the past year.”

He also believes that investment banks’ proprietary trading desk are “high-risk areas”.

As part of his crackdown Sants is investing £15m in a computer system called Sabre to replace the one the regulator inherited when it was formed. The FSA is tendering for a supplier and hopes to be using the new system by early 2007.

“It will be designed to identify institutional abuse rather than simply alerting the FSA to unusual price and volume movements,” said Sants. “It will ensure that we have good information and the ability to monitor activity in the markets.”

The new focus of the FSA will be welcomed by many of its critics who have attacked the regulator for pursuing minor and small-scale cases (see below) while ignoring more widespread abuse.

But it is nevertheless a high-risk strategy for Sants and the FSA. The City regulator has successfully harried a number of individuals — proving that it can use the market-abuse powers it was granted in 2000.

As Sants is aware, taking on some of the best-known names in the City — and their highly paid legal teams and advisers — will be much harder.

“Institutional abuse is far more complex and difficult to enforce. We have to demonstrate clearly that people have used non-public information,” he said.

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