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For a high-flying litigator and the FSA’s former “troubleshooter”, Harvey Knight is far more approachable than one might expect. The ready smile that animates his whole face belies a nimble intellect that has triumphed hard-won battles with industry behemoths such as Legal & General.

Head of the financial services department – which he launched –at national law firm Bevan Brittan, Mr Knight has 17 years’ experience in litigation. Having cut his teeth in the commercial world, acting for Barings bank’s liquidators, “nibbling at” the Robert Maxwell case, and weathering the property crash of the late 1980s defending solicitors from disgruntled homeowners, Mr Knight then turned his attention to a new beast, the newly created FSA.

“The power that institution was going to have was bound to make waves,” Mr Knight had predicted, “Combining nine regulators, moving from self-regulation to a super regulator; it promised to be an interesting creature of huge importance to the markets.”

Mr Knight was sold on the idea and joined the fledgling FSA just in time to help complete the Financial Services & Markets Act, arguably a precursor to today’s Retail Distribution Review. He went on to act as one of the FSA’s lawyers involved in the Financial Ombudsman’s first enquiry into beleaguered Equitable Life and was lead FSA lawyer acting against Legal & General. For someone who prefers to wade in the quagmire of contentious law – a practice of besuited lawyers throwing legal terms at each other like bare-knuckle fighters to determine who will emerge victorious – Mr Knight certainly chose the right time for his move from private practice to the FSA.

He encourages firms to “fight back” against the regulator and force case law to be made. “The regulatory community is overly fearful of the regulator. There are missed opportunities by the authorised community who, at the first sign of displeasure from the FSA, turn on their heels and run. There will be case law if the industry fights back and forces cases to be heard at tribunal.”

Case law would at least give authorised firms a steer in terms of interpreting principles-based regulation and its Treating Customers Fairly initiative, although whether this would be piecemeal statutory regulation by the backdoor is open to debate. But then, Mr Knight questions to what extent the FSA’s enforcement department focuses on only two of its principles – the demonstration of reasonable skills and systems of control – is simply a reproduction of the law of negligence.

Heads on spikes

He says in the beginning the regulator denied it had a role as enforcer, quite correctly as Mr Knight points out, it must go through a correct legal process the same as anyone. That was all before the credit crisis, of course, and the rules (or do we mean “principles”?) are being re-written as we speak. “With the current turmoil I wouldn’t be surprised if the FSA goes back to a more rules-based, prescriptive approach,” he says. “There is a well of popular opinion to sate desire for heads on spikes for the recent turmoil. There has been a great upswing in FSA enforcement against individuals.”

The usual roar of foul play given up by the adviser community in relation to the FSA’s perceived favouritism toward bancassurers, Mr Knight believes to be “a harsh criticism”. He points to the present regulatory intensity engrossing payment protection insurance, a lucrative product in the bancassurance space, as proof of an equitable regulator. He notes that small firms account for approximately 95 per cent of authorised firms, many of which tend to revolve around one or two key individuals, against whom a case is easier to make.

That brings him full circle to the insistence that small IFA firms should challenge FSA decisions if they truly believe their interpretation of principles-based regulation is founded, and force the law courts to rule. A likely reason for their current reluctance, he says, is that after the fireworks both sides must kiss and make up.

One relationship set to remain fraught is that between the FSA and hedge funds with regard to the curb on shorting practices. “Taking long and short positions is part of hedge funds’ structure. If that is restricted, how much damage is done to their business? There are debates among my colleagues about the legality of that but no one wants to put their head above the parapet to test it. The longer it goes on, the more likely it will be challenged.” Not that the FSA will be unduly concerned – it has statutory immunity, unless it can be proved to have acted in bad faith or breached article six of the Human Rights Act. “The hedge funds are stuck between a rock and a hard place,” he concludes, a view unlikely to lift the spirits of hedge fund managers.

Having sat on both sides of the fence and the last year back in private practice, Mr Knight remains defensive of claims the regulator has been caught sleeping on the job, allowing the nation’s financial services to slide into its first crisis in 30 years. “The FSA is not there to determine the corporate direction of any firm. Senior management are responsible for the regulatory and commercial direction of the firm. Whomever is chairman must understand the business and exercise oversight. If the chief executive has too much hubris and is hell bent on a particular course of action without the board’s support, then that spells trouble. That is what happened with Northern Rock. Questions weren’t asked by its own board, let alone the regulator.”

Getting into his stride, he continues: “The regulatory system tries to ensure transparency. At the heart of this market turmoil is that products are not transparent, are not understood by people who use them, they are opaque. That means a market failure has occurred as much as a regulatory failure. Companies should be doing their own risk analysis.”

An indicator of possible future FSA enforcement and/or litigation within the distribution chain are the areas under FSA strategic review, such as structured products, for which he adds, with a glint in his eye: “It will be interesting to see how much risk modelling was done on these products - by providers and advisers.”