ISE overhauls structures with market supervisory appointment

BUSINESS OPINIONTHE IRISH Stock Exchange (ISE) has unveiled a somewhat overdue overhaul of its regulatory structures.

The key element of it is the creation of the high-profile post of head of market supervision to which they have appointed Mike Duignan, the former head of the market abuse investigation team at the Financial Services Authority, where among other things he investigated insider trading claims.

Mr Duignan will head up a yet to be established supervisory body with its own board and chairman. The exact nature of the supervisory board's relationship to the board of the ISE is not entirely clear, but the purpose of the exercise is to remove any perception that the ISE is not independent in the way it supervises the market.

The ISE is at pains to point out that the new structure is not some knee jerk reaction to what emerged during the Fyffes-DCC court case, in which it's fair to say that the ISE did not cover itself in glory.

The new structure, according to the ISE, is to allow the exchange be more commercially focused, and that changes in the regulatory structure instigated by Europe have rendered moot any need for the ISE to review its procedures in the wake of the Fyffes DCC case.

And, indeed, if an allegation of insider trading was made this morning it would be dealt with by the Financial Regulator rather than the ISE, as the regulator is now the competent authority under Irish law, to bring the Irish situation in line with European norms.

The ISE would most likely investigate the complaint on behalf of the regulator in the first instance, as it holds the relevant data etc. But the decision on whether to take any sanctions and the nature and scope of any report sent on to the Director of Public Prosecution would rest with the regulator.

Thus, the potential for conflicts of interest and interference which proved so damaging to the ISE in the Fyffes DCC case when the details of its investigations tumbled out in court is very significantly circumscribed under the regulator-led regime which has been in place since the introduction of the Markets in Financial Instruments Directive which came into effect since last November.

Mr Duignan's role in any such investigation would be relatively minor. But the fact that the ISE has specifically sought someone with experience in this area speaks volumes. And one suspects he did not come cheap.

The Fyffes-DCC case was incredibly damaging to the exchange. Not only did a €100 million-plus insider dealing fraud take place on its watch, the ISE subsequently came across as being more interested in making the whole thing go away rather than getting to the bottom of the matter. The massive opportunities for conflicts of interest to arise in an exchange directly owned by seven of its stockbroker member firms, a number of which were directly involved in the transactions was also a cause for concern.

The public's confidence in the exchange took a bashing, but perhaps more pertinently, the regulators confidence in it also took something of a knock.

And it may be no coincidence that the new structure settled on by the ISE very closely mirrors the structure put in place when the Financial Regulator was created. Conflicts of interest - between the Central Bank's role as regulator and prudential authority - were a central concern that led to the creation of a new structure.

The reason this is so important is it suits the regulator, for a range of reasons, to devolve a number of the regulatory responsibilities it has had to assume under European law back to the ISE.

It also suits the ISE to have a say in regulation as its allows it ensure that pro-enterprise, light touch ethos is promulgated. This is particularly important in the listed funds business that is increasingly the bread and butter of the exchange.

But the regulator is not going to put its own credibility on the block and Mr Duignan's appointment and the new structure were all the subject of consultation. And there must be a good chance that a former central banker pops up as the chair of the new body.

While Mr Duignan may end up devoting most of his energy to more prosaic matters such as listing prospectuses, one must suspect that he is very much there to make sure the ISE does not drop the ball again on insider dealing.

And human nature being what it is, in time we will no doubt find out if he is effective.

jmcmanus@irish-times.ie