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7.53 pm
Mr. David Kidney (Stafford): I am pleased to hear so many constructive comments from right hon. and hon. Members on the Conservative and Liberal Democrat Benches. I especially liked the description of the Bill as a blockbuster, because I intend to concentrate on the new market abuse regime, which I am certain will be big at the box office. Today, we are all engaged in the process of creating a single modern regulator to oversee complex and sophisticated markets and a financial services sector that contributes hugely to the UK's wealth. As we do so, the eyes of the world are on us, for I am sure that others will follow where we lead.
As others have already explained, the process has been open and consultative: it started with the publication of the draft Bill last July, since when two reports of the Joint Committee have been published. There is nothing new to say about the process so far, save that public and professional interest in it has not flagged, as was most recently evidenced by the packed meetings of the Joint Committee whenever it sat in public. As the right hon. Member for Wells (Mr. Heathcoat-Amory) said, the process continues after tonight, with consideration of all the many new clauses that have escaped our scrutiny thus far--for example, those relating to open-ended investment companies--and the innovative process to carry over the Bill between Sessions.
However, as I said, I intend to concentrate on the market abuse regime--a new civil regime proposed to deal solely with market abuse. Clause 95 sets out the sort of behaviour that is regarded as unacceptable. The new regime is intended to complement the existing criminal law controls over insider dealing and market manipulation. I shall briefly explore three questions: why is the new regime needed; how will it work; and what are the European convention on human rights implications?
First, why is it needed? It is fair to say that we have a poor record on detecting the existing criminal offences. I hasten to add that it would be wrong to apply a new civil regime solely for the purpose of making it easier to catch criminal wrongdoers by widening the range of conduct that may be caught and lowering the standard of proof needed to prove our case. However, it is an inescapable fact that existing criminal offences have not been adequate to control market abuse misbehaviour.
The Department of Trade and Industry publication "Companies in 1997/98" tells us that, in the past five years, 126 cases have been referred to the DTI for investigation, but that, in the same period, there have been only five convictions for insider dealing. I suppose that an optimist would cite that as evidence of there being
hardly any misbehaviour in the markets, but I doubt that such a claim could be sustained. The London stock exchange annual report for 1997 offers a glimpse of the pyramid of regulatory activity that precedes DTI referrals: there are about 50 potentially suspicious trades a day, and, in a year, more than 1,000 merit further investigation.
Moving the target slightly, to money laundering, in a written submission to the Select Committee on the Treasury on the subject of "money laundering suspicious transactions", the British Bankers Association tells of the number of reports rising from 490 in 1987 to 14,129 in 1998. Little wonder that one of the FSA's four regulatory objectives is to be the reduction of financial crime. Clause 117 specifically addresses the issue of money laundering by authorised persons.
If the only problem were the weakness of the existing criminal law and its procedures, the proper response would be simply to tighten the criminal law and prosecute more rigorously. However, there are other factors that tell us that the regulator needs a broader array of responses in cases of market abuse, and I shall give three examples. First, most right-thinking people would regard market abuse as wrong, but not always as criminally wrong. Secondly, civil remedies are flexible and can adapt more easily to keep pace with changing trade practices. Thirdly, civil remedies can support the integrity of the markets and protect other participants through such measures as injunctions, disgorgement of profits and restitution to injured parties.
Therefore, I welcome a civil regime to sit alongside the criminal law, always provided that, when there is a question of both the criminal law and the civil law applying, the FSA first considers the criminal route. We have received a written assurance from the Treasury that that will indeed be the case.
My second question is, how will the new regime work? Clause 95 contains a widely drawn definition of market abuse, and there has been criticism that the definition is too widely drawn. That matters because people are entitled to know what actions on their part would be likely to be regarded as contravening the law. That is a principle of article 7 of the European convention on human rights. The people who need to know what is or is not market abuse are not only authorised persons, because the provision will apply to all market participants. However, it is fair to point out that the behaviour must occur in the United Kingdom, or relate to investments traded on a market in the United Kingdom.
The Government intend that clause 95 will be supplemented by a market code drawn up by the FSA. Following many representations, the Government have at least conceded that abiding by the letter of the code gives traders an absolute safe harbour from market abuse action. That is a great reassurance for market participants.
It is clear that a person who infringes the code will be in trouble, but what will happen if the code is silent on the behaviour detected by the FSA? The FSA will then have to measure the behaviour against clause 95. Hon. Members can readily see the problem if clause 95 is so widely drawn that, at a later date, its application is regarded by a court as being uncertain. If the FSA concludes that there has been market abuse, it may seek to impose a fine and/or restitution or it may apply to the court for the same financial outcomes and/or to obtain an injunction.
The processes that apply to a person accused of market abuse apply also to a person accused of regulatory breaches--indeed, regulatory action may also be taken with the one exception of the Government's concession on the point relating to the European convention on human rights, which I shall deal with in a moment. A person who is accused may take the case further than the notification by the FSA of the financial penalty and go to the newly established tribunal and appeal from it to the Court of Appeal on a point of law.
Thirdly, what are the European convention on human rights implications? The Government describe the market abuse regime as a civil regime. Under the European convention, a court can conclude that the procedure is criminal in nature despite its legislative label. Article 6 gives additional safeguards to persons who are accused of wrongdoings that are criminal in nature. Those safeguards include a fair and public trial, a trial within a reasonable time and legal aid in appropriate cases. A fair trial includes protection from self-incrimination--for example, protection for an accused person who is made to answer questions under section 436 of the Companies Act 1985. That person will be protected from answers that have been given under compulsion being used in evidence against him or her.
However, the Government have made the great concession that the market abuse regime is likely to be found to be criminal in nature. In that sense, article 6 safeguards will apply. I do not think that the Government should be portrayed as being dragged kicking and screaming to that conclusion, nor should it be regarded as a weakness. Article 6 is known colloquially as the "British article" because it is regarded as incorporating traditional British values of fair play and reasonableness.
Civil regimes of market abuse already apply in other jurisdictions. European Union members such as France and Spain have civil regimes for market abuse--although their systems of civil codes make comparisons slightly difficult. However, we can see from recent events that they are wrestling with the same questions about the implications of the European convention on human rights--as was shown by the Oury cases in France.
The United States has a successful civil regime that is operated by the Securities and Exchange Commission. There has been no trammelling of its powers, although there is a strong and robust written constitution. The big difference with the SEC's operation of the regime regulating market abuse in the United States is that it does not impose the fines directly--it must take the case to the civil courts--and nor does it keep the fine income, which goes to the Treasury. I am not clear that a civil regime operated through the civil courts would deny the FSA the flexibility that it requires in tackling market abuse. However, I support the FSA's having this new set of powers alongside the criminal law and regulatory powers, and I wish it well in its operations.
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