Proportionate regulation is the key

The Memorandum of Understanding signed by the Washington DC-based Commodity Futures Trading Commission (CFTC) and the Financial Services Authority (FSA), the UK financial watchdog, will facilitate a more joined-up approach to regulating what are, after all, the most global of markets.

The agreement formalises the process of sharing information between the two bodies, and should aid in the monitoring and prevention of market abuse. However, whether the agreement actually leads to a decrease in fraud and mismanagement remains to be seen.

Keeping tabs on markets that, by their nature, move faster than they can be tracked by participants themselves is always going to be an uphill struggle. Charlatans and crooks lured by the enormous money to be made selling get-rich-quick schemes to gullible investors will likewise be nigh-on impossible to eradicate.

As a string of successful prosecutions by the CFTC and the National Futures Association shows, a focused and firm approach to targeting wrongdoing can be effective. This proactive US approach to regulation is something that the FSA could look at emulating. The UK regulator tends to take a more reactive approach to investigating misdeeds. This can mean it takes longer for financial crime to be uncovered.

However, the more aggressive approach to prosecuting financial crime in the US is something of which other jurisdictions should be more cautious. While it is sensible to hand down lengthy jail sentences to convicted criminals who have deliberately defrauded investors, imprisoning traders who hide losses seems over-zealous.

Australia seems to have taken the harsher, US-style approach to meting out financial justice. The National Australia Bank (NAB) traders who were convicted for their part in a trading scandal got lengthy jail terms. In essence, all the hapless employees had done was hide losses they had made.

While of course it is right that deception should be punished, it was the system in which the traders operated that was really at fault. It is the senior management who is responsible for ensuring that systems are in place to avoid these scandals occurring.

However, as always seems the way in these cases, it is the foot soldiers, not the generals, who take the flak.