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Conclusions

The Securities and Futures Authority (SFA)

13.71 As noted in Section 1 of this report, the conclusions here expressed are those of the independent members of the Board. The ex-officio members have not participated in the formulation of the conclusions set out in this part of the report because of the potential overlap between the responsibilities of the SFA and the Bank.
13.72 The SFA was at all relevant times the regulator of BSL and BSLL. The regulation was primarily carried out by its Surveillance Division.

13.73 The review of financial returns submitted to the SFA and the annual review of the systems and methods used to prepare and complete the returns were the SFA's principal methods of supervising BSL and BSLL's financial resources and checking that customer assets were properly safeguarded. In addition, the external auditors, C&L, reported to the SFA annually
13.74 The information provided by BSL to the SFA on the Segregated Account Reporting Statements (SARS) did not until a late stage include the advance margins placed with exchanges ostensibly on behalf of clients because the BSINGCOLL account (which reflects the advance margins funded by BSL) did not feature in those returns. In 1994, margin excesses of up to 35 million had been shown by BSL in its returns; but they were not so great or unusual that they should have attracted the attention of the SFA, whose principal interest in the SARS was to check that it did not show a deficit. The BSINGCOLL account was (for the first time) included in the SARS for the period up to 31 January 1995, delivered to the SFA on 22 February 1995. It showed a margin excess of nearly; l6O million, apparently indicating that BSL had advanced on behalf of clients substantial amounts in excess of those actually required for their margins. The revelation of so large a figure could have caused the SFA to investigate further, but by then it was too late.
13.75 The SFA did not regard itself as required to consider the activities or financial position of the subsidiaries of BSL and considered that its responsibilities with regard to subsidiaries were limited to the express notification requirements relating to subsidiaries set out in its rules. However, we consider that the SFA's responsibility for monitoring a member firm's obligation to maintain adequate financial resources to meet its investment business commitments and to withstand the risks to which its business is subject requires it to have regard to the activities and financial soundness of a member firm's subsidiaries insofar as they are capable of materially affecting the financial integrity of the member firm.
13.76 A consequence of the SFA's perception of what it was required to do was that the individuals concerned on behalf of the SFA with the regulation of BSL did not give consideration to the question of whether or to what extent BSL's exposure to its subsidiary BFS might adversely affect BSL's financial integrity. We consider that a wider lesson should be drawn from this, to which we refer in Section 14.
13.77 The SFA knew, or should have known, from the ample information in the public domain that the Far Eastern operations were very significant to BSL. However, BSL did not provide the SFA with accurate financial returns; and BSL at no time informed the SFA of any exposure that it had to BFS or BSJ or of the level and nature of BSL's funding of BFS's trading activities. The financial returns submitted by BSL to the SFA did show substantial balances receivable by BSL from its affiliates in aggregate; for example 178 million at 31 December 1993 and 254 million at 31 December 1994, having risen to over E500 million in May 1994. We consider that the SFA's regulation of BSL should have had regard to any material exposure of BSL to its affiliates; but on the information contained in the returns submitted by BSL to the SFA, and given the SFA's perception of those balances (which was that they represented transactions undertaken through affiliates on behalf of clients) we consider that it would not be right to criticise the SFA for failing to raise queries as to those balances on receipt and appraisal of the returns.

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