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Clause 109
Lords amendment: No. 127, in page 51, line 18, leave out subsection (3).
Miss Melanie Johnson: I beg to move, That this House agrees with the Lords in the said amendment.
Mr. Deputy Speaker: With this we may discuss Lords amendments Nos. 128 to 130, 131 and the amendment thereto, 132, 133, 142, 143, 180 and the Government motion to disagree and Government amendment (a) in lieu and amendment (b) in lieu, 228, 487, 488, 489 and the amendment thereto and 490 to 501.
Miss Johnson: This group of amendments covers a number of different points relating to the market abuse
arrangements introduced by the Bill. It contains some relatively minor improvements to the market abuse provisions, which I will describe briefly. We can then debate the specific questions of the takeover panel and the amendments tabled by the Opposition to the Lords amendments.Before discussing the detail of the Lord amendments, it is important to remind ourselves why the Government have introduced part VIII. The new market abuse regime has been recognised to be an important addition to the regulator's armoury to tackle abuse of the financial markets. It closes a gap in the protections for markets, allowing the regulator to take action against anyone, regulated or unregulated, who abuses the markets. Having well-regulated, fair and efficient financial markets is in all our interests.
I said when the Bill left the House that we had no intention of changing the substance of the market abuse provisions, which are effective and fair. I did say, however, that we might look at whether any further, more technical changes were necessary.
Noble Lords in another place supported the aim of the new regime and understood the arguments for our approach. Relatively minor but none the less important improvements were made in another place on a few fronts. I ask hon. Members to agree that those amendments should be part of the Bill.
The first improves the protections available for those who have reasonable grounds for believing that their behaviour is not market abuse, or who take care to avoid engaging in market abuse. We introduced protections along those lines in Standing Committee. The effect of amendments Nos. 127 and 131 is to improve those protections. Rather than being things to which regard must be had in determining whether behaviour amounts to market abuse, the amendments mean that the FSA cannot impose a penalty for market abuse if, having heard representations, it is satisfied on reasonable grounds that someone had reasonable grounds for their belief or exercised due diligence. That is, of course, something that the tribunal can review.
Sir Nicholas Lyell: The Minister might perhaps clarify the following matter. She has pointed out that, in another place, amendments were accepted that put the burden of proof on the defendant in market abuse cases. Is it still the case that one can be found guilty of market abuse without having intended to abuse the market? If that is the case and if the burden is put on the defendant, is that in conformity with the European convention on human rights?
Miss Johnson: May I answer the right hon. and learned Gentleman's question in a moment? The answer to his first point is yes, but I should like to answer his second point in a little more detail in a moment.
To maintain the high degree of transparency provided for in the Bill, amendment No. 133 places a duty on the authority to include in the statement issued under clause 114 on the imposition and amount of penalties, indications of the circumstances in which it will be satisfied that a person comes within the proposed safe harbours in clause 113. Amendments Nos. 489 and 496 introduce those protections into the restitution provisions as well. Amendments Nos. 490 to 493 and 497 to 501 make consequential drafting changes.
The other change made in another place in the area of protections was to provide that behaviour does not amount to market abuse if it conforms with rules specified by the FSA. The effect of the safe harbour put into clause 109 in Standing Committee was too uncertain in that it provided a safe harbour for behaviour that conforms with any of the FSA's rules. The provision would have extended to all rules, even completely unrelated ones. That was going too far and could have had uncertain and random effects.
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The second set of changes concerned the alignment of the provisions on sanctions for abuse with those in parts V and XIV. Under the Bill as it left the Commons, the FSA could not make a public statement about someone as an alternative to imposing a penalty. Lords amendment No. 132 corrects that anomaly. Lords amendment No. 228 provides that a statement obtained under compulsory powers from a person cannot be used in proceedings against that person to make a public statement that he has engaged in market abuse.
The third set of changes involved ensuring that the provisions on those who require or encourage others to engage in abuse work as intended. The changes involved two features. The first entailed closing a potential loophole by which those who required or encouraged others to engage in abuse could escape sanction by using an unwitting third party to perform their abuse for them. Lords amendments Nos. 129 and 130 achieve that objective.
The second feature concerned restitution. The need for the change arises from the fact that someone who requires or encourages another to engage in abuse is not, under the Bill's definitions, said to be engaging in abuse. Consequently, the restitution provisions do not bite on such a person whereas, clearly, they should. Lords amendments Nos. 487, 488, 494 and 495 correct that.
The Opposition have tabled a couple of amendments--to Lords amendments Nos. 131 and 489--and I shall happily respond to their points. The amendments are very similar in form. The first is intended to extend the protection that is offered by clause 113 in relation to the imposition of penalties for market abuse, and the second is intended to have an equivalent effect on clause 370, which deals with restitution for market abuse.
The first part of each of the Opposition's amendments--that is, paragraph (c)--would provide that penalties or restitution were not payable if a person engaging in behaviour that was likely to give a regular user of the market a false or misleading impression did not intend to give such an impression or was not reckless about whether he might give anyone such a false or misleading impression.
It is difficult to see why such amendment is thought to be necessary, given that amendments made in another place would have the effect that the FSA cannot impose a penalty if there are reasonable grounds for it to be satisfied either that the person concerned believed on reasonable grounds that his behaviour did not amount to market abuse or that he took all reasonable precautions and exercised all due diligence to avoid engaging in
market abuse. We believe that the tests of reasonable belief and due diligence--not the tests of intent and recklessness, which the Opposition amendments would add--are the right ones.
Sir Nicholas Lyell: Does the Minister recognise that she is saying that she is reversing the burden of proof?
Miss Johnson: I do not recognise that, but, as I just said to the right hon. and learned Gentleman, I am happy to come back to the point in a moment. I think that the point he has just made is linked to the one that he made earlier.
As I said, we believe that reasonable belief and due diligence are the right tests, and that intent and recklessness--which is the force of the Opposition's amendments--are not the right tests. Let us suppose, for example, that we are dealing with a person who, not having bothered to make the inquiries that a reasonable person would have done, engages in behaviour that misleads the markets. It would be quite wrong for such a person to be given a blanket protection from the consequences of his actions, viewed from his own perspective.
The appropriate question is not what a person thinks about his own actions--which, obviously, could vary widely between individuals, depending on their level of knowledge and experience--but whether the person can show reasonable grounds for believing that his action would not be regarded as abusive by a reasonable person who uses the market regularly, or that he took the precautions and displayed the diligence that a reasonable person would expect. Those are clear and proper protections.
Conversely, the Opposition's amendments would significantly weaken the new market abuse regime. As the Opposition in another place did not return with amendments of that type on Third Reading, I had assumed that, at long last, this particular set of coach and horses had been put back in the stable; obviously I was wrong.
Sir Nicholas Lyell: Why is this particular set of coach and horses so different from, for example, the situation in trading standards? In trading standards legislation, one is not guilty of misleading the market unless one intended to do so. Why should such intent not have to be present in financial services?
Miss Johnson: I am not an expert on trading standards matters. I am also not quite clear that that comparison is one that we need to take on board now. However, as the right hon. and learned Gentleman is seeking an answer to his question on intent, perhaps I can return to that and say that intent is not a feature of the mischief of market abuse--the markets can be damaged regardless of someone's intent. The burden of proof rests with the FSA, which has to prove that someone has engaged in abuse.
We have addressed the issue of whether the protections that we have introduced--which require people to demonstrate that they are covered by them--might be regarded as shifting the burden of proof, and we have concluded that they do not. The Bill is in conformity with
the requirements of the European convention on human rights, and we are confident that there has been no change in that position.
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