The law firm pointed out that the high number of dawn raids was evidence of the FSA’s increased focus on more conspicuous and heavy handed enforcement exercises since the start of the credit crunch.
The FSA averaged over six dawn raids each calendar year from 2005 to 2007, increasing after the credit crunch to an average of 29 raids a year from 2008 to 2011.
Steven Francis, regulatory partner at RPC, said: “This shift in enforcement activity moves the FSA closer to the Securities and Exchange Commission in the US, where enforcement of white collar criminal activity involves a heavy and very visible police presence.
“Most FSA dawn raids relate to suspected insider dealing, which the FSA has been clamping down on following criticism for letting too much criminal activity continue unchecked.
“The raids are also designed to send a very powerful message to the broader market. A lot of time, preparation and money go into every dawn raid so this is a really significant increase in activity by the FSA.”
A slight fall in raids last year followed fewer incidents of suspicious trading
RPC said that the decrease probably follows a fall in the number of incidents of suspicious trading activity in the run up to a takeover announcement.
This could either signal that the FSA dawn raids are having their desired deterrent effect or that insider dealers are getting better at covering their tracks.
Francis added: “The million dollar question is whether these highly visible raids are fundamentally changing people’s behaviour and reducing insider trading or whether the FSA’s detection techniques are becoming more effective.
“Insider traders might simply be disguising their trades by buying smaller packets of shares through different dealers or they might be making smaller total purchases when they do get inside information, to reduce the risk of getting caught.
“Most of these searches will focus on data recovery to find email correspondence. Dawn raid activity is so widely reported that by carrying out more dawn raids the FSA could push more criminals away from email correspondence to face-to-face meetings instead. This would make future dawn raids less effective over the longer term.”
RPC also explained that exercises such as dawn raids can prove far more expensive than more conservative enforcement policies as the FSA will have to pay staff for additional overtime they have accrued.
Francis said: “The additional costs of a high profile approach involving raids in the presence of police will be more difficult to sustain over the longer term. The regulated firms that fund the FSA will also want to be certain that the regulator is getting the best possible value for money from its enforcement activity.
“The gain from a dawn raid needs to be significant to justify the cost. The FSA has had some significant high profile successes with its raids. Increasingly the regulator’s data retrieval techniques rival the best that exist in the private sector. I expect raid activity will remain significant.”
Steven Francis added: “A dawn raid is an investigative technique not an enforcement outcome. The two shouldn’t be confused. But the image of suits in handcuffs still resonates and did more than anything else to mark the reputation of the US Department of Justice as hawkish and unforgiving. The dawn raid is currently the nearest thing we have to that.”