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Sir Nicholas Lyell: Could the Minister give just a short explanation of what the FSA has to prove to demonstrate that there has been market abuse? Could she give just one short example?
Miss Johnson: That is pretty difficult to do. What will damage a particular market depends on the standards expected of that market. That is the point of the regular user test. In certain circumstances, abuse might or might not involve a mental element. However, it is pretty hard for me to say what those circumstances might be. It is really a question for the users of the various markets to be covered by the regime.
Accepting a blanket exemption for behaviour that is not intended to distort the market would make it impossible to take action against behaviour that may damage a market in certain circumstances. It would be reckless to make such a change. If we went down the path that I think the right hon. and learned Gentleman is advocating, it would be very difficult in various ways to pursue market abuse.
Miss Johnson: I shall give way on this matter one more time.
Sir Nicholas Lyell: I am very grateful to the Minister. Are there not two defences for the financial public--the civil defence and the criminal defence? Someone who is damaged by market abuse can seek compensation and restitution, and such action does not require the same burden of proof as action against someone who is to be prosecuted for a crime of market abuse. Does the Minister not recognise those differences? Do they not have exact parallels in trading standards generally, and in the case of someone who has taken away someone else's goods in circumstances that might be a civil tort, but not a criminal wrong?
Miss Johnson: The right hon. and learned Gentleman causes me some concern. Market abuse is a civil offence, and I am not quite sure where the criminal part of his distinction enters into the matter. My understanding is that, in United Kingdom law as proposed in the Bill, market abuse is not a criminal matter. He seemed to connect market abuse and criminality.
Sir Nicholas Lyell: Am I not right in thinking that market abuse can lead to very large penalties?
Miss Johnson: Yes, it can lead to large penalties, but that does not necessarily make it a criminal matter. In UK law, market abuse is a civil offence, not a criminal one.
Sir Nicholas Lyell: The Minister cannot simply say that market abuse is called a civil offence when it has effectively criminal penalties, including unlimited fines. She cannot, like Humpty Dumpty, make words mean what she wants them to mean to that extent. Surely she recognises that the European Court of Human Rights will
regard such behaviour as criminal. Perhaps she could take some advice and explain later how the Bill conforms with the convention.
Miss Johnson: The Bill does conform. I said that market abuse was a civil offence under UK law. It may be construed as a criminal offence under the ECHR requirements, but it is a civil offence in the UK. The UK regime is non-criminal. We have introduced various protections that would be appropriate if a case was considered as a criminal matter under the ECHR only because we want to be as safe and circumspect as possible. I repeat, it is a civil offence under UK law.
The amendments also deal with market abuse by firms when control of information rules--or so-called Chinese walls--are in operation. We are well aware that appropriate protection needs to be provided. That is the point of clause 109(9), as amended. We could specify in the Bill the situation set out in the Opposition amendment, but we think that it is better to leave it to the FSA, which will have discretion to make control of information rules. It will do so and work is in hand, but the legal position, as now, is that it does not have to. Putting explicit safe harbours in the Bill rather than leaving it to the FSA to decide when safe harbours should apply would not change the position, as we shall be able to do under clause 109. Be that as it may, the point of our approach is to provide flexibility, because the FSA may want to form a safe harbour from market abuse in other areas. The obvious example is price stabilisation rules.
The FSA will have to consult on all its rules. In doing so, it may identify situations in which further protection is warranted. Equally, it may conclude that it does not want to give protection in all circumstances to everything that is done in accordance with permissive rules. Let us remember that the unscrupulous are very good at exploiting loopholes. The better approach is to leave it to the FSA to consider on a rule-by-rule basis, having regard to consultation responses.
Sir Michael Spicer: I am getting very confused. During her interesting exchange with my right hon. and learned Friend the Member for North-East Bedfordshire (Sir N. Lyell), the Minister said that although market abuse was a civil matter in this country, it would be treated as a criminal matter under European law. Is she saying that corpus juris has arrived already? Some of us fear that it might, but the Government's official position was that it would never arise. Will she clear that up? It would be very serious if a matter were treated under civil law here and under criminal law in Europe.
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Miss Johnson: I did not intend to give the impression that a criminal regime would apply under the ECHR. I intended to make it plain that we have built all possible safeguards into the Bill, including establishing the independent tribunal, to ensure that every safeguard is afforded to anybody against whom a charge of market abuse is made. The Government gave extensive evidence to the Joint Committee a considerable time ago, explaining in detail our reasoning and conclusions on reporting on compliance with the convention. I am sure that the right hon. and learned Member for North-East Bedfordshire (Sir N. Lyell) is familiar with that evidence and it would be helpful for him to look at it again.
I was proposing to turn to the role of the takeover panel in cases of market abuse.
Mr. Loughton: The Minister is going back to the Burns committee, where we heard clear evidence from Lord Lester and other highly learned professionals in the area. They gave clear warnings that the clause contravenes article 6 of the European convention on human rights. Those fears have not been assuaged by the changes that have been made. Treasury solicitors had to admit that European law in this area comes about only by precedent and there are no precedents yet to suggest that the Bill will not conflict with the ECHR. How can the Minister explain that?
Miss Johnson: As I am sure that the hon. Gentleman is well aware, different evidence was given to the Joint Committee by different legal experts. We are content that there is no problem with the market abuse regime in relation to the ECHR. That point was made on our behalf in the evidence.
Mr. Loughton: Even though one of her predecessors was in charge of the Bill at the time, the Minister must admit that the Treasury's solicitor, who brought along an expert in European law, told us that it was not clear that the Bill was not in breach of the convention, because European law is built up from precedent and there is no precedent yet. She cannot give us an assurance.
Miss Johnson: The Bill is ECHR-compliant. There is no problem with the market abuse regime in that context.
Mr. Beard: The hon. Member for East Worthing and Shoreham (Mr. Loughton) has only half represented the evidence that was given to the Burns committee. I do not want to repeat all the evidence, but the conclusion was that the market abuses that were subject to relatively moderate penalties would be consistent with the convention if they went by civil procedures and levels of proof, but, as the penalties became larger, a criminal procedure would be necessary. The Bill as amended reflects that. Lord Lester's opinion was not the only one given. As the penalties are graduated, there is a need to move to criminal procedure. That is what my hon. Friend is saying.
Miss Johnson: I am grateful to my hon. Friend for confirming my points. He was a member of the Joint Committee and was present when the discussions took place.
The role of the takeover panel on cases of market abuse will also be of considerable interest to the House. There is much common ground on these issues. It is a common aim across the House to ensure that takeovers continue to be regulated in the same speedy and effective manner as they currently are. At the same time, the new market abuse regime needs to work as effectively and coherently as possible to prevent and deal with abuse of the financial markets. Those aims are not at issue, but how we achieve them is.
Lest there should be any misunderstanding, let me make it clear that we support the takeover panel. Its work in regulating the conduct and process of takeovers is
important for the effective and efficient operation of capital markets and for the protection of shareholders. We are in no doubt about that.We also believe that it is vital that our financial markets are protected from the effects of market abuse, wherever and whenever it occurs. That is why we have introduced the new market abuse regime. Well-regulated markets attract business, which is good for the market, good for investors and good for the economy.
We do not think that these two aims are in conflict in any way. Clearly, market abuse--indeed, very serious market abuse--can occur during takeovers. It is important that proper procedures and arrangements are in place between the FSA and the takeover panel. We do not want unnecessary duplication or to create unnecessary uncertainty or the risk of tactical litigation in this sphere. We take the practical arrangements seriously. The FSA and the panel are working on operating agreements and setting out formal mechanisms for liaison and information sharing, similar to those that the FSA is working on with the investment exchanges.
The FSA and the panel are also drawing up policy statements concerning the circumstances in which the FSA or the panel would take the lead. As Lord Saatchi said in another place, the best solution is an agreement on a sensible modus operandi. We are of the view that the FSA will be able to adopt robust policy statements which mean that it will only take action against market abuse which occurs during a takeover in exceptional circumstances.
Of course people can seek judicial review if the FSA declines to take action, but as long as the FSA acts reasonably it has nothing to fear. The courts have been very clear that they will not generally intervene during the course of a takeover. Why would we expect the courts to take a different view depending on whether it was the panel that was being reviewed or the FSA?
Even if judicial review were sought, that would not cause problems for the timing of takeovers--the issue about which the panel is concerned. If the FSA does get involved, it will only do so to deal with any market abuse that has occurred or is likely to occur. There is no reason to expect it to impact on the timetable. We think that the procedures and arrangements that the panel and FSA are working on will ensure that problems do not arise, but we have accepted the need for what I might call a safety valve.
Our amendment, like the amendment passed in another place, will allow the FSA to provide a safe harbour for behaviour in conformity with the City code produced by the takeover panel. However, there is a crucial difference between our amendment and Lords amendment No. 180.
Under our amendment, the decision whether behaviour amounts to market abuse will always rest with the statutory regulator, the FSA, and, ultimately, the independent tribunal to be established under the Bill. Under the amendment made in another place, there would be circumstances in which that decision would in substance rest with the takeover panel. By providing a safe harbour for behaviour which, in the panel's opinion, conforms with the code, the amendment gives the panel the power to determine that a person has not engaged in market abuse.
The issue we face is in some ways a narrow one, but it is extremely important. Where market abuse takes place during a takeover, should the ultimate decision on whether
action should be taken rest with the statutory regulator, the FSA, and the tribunal or the non-statutory takeover panel? I think that the answer is equally straightforward. In what I would expect to be the very rare event of a disagreement between the FSA and the panel, it must be right that the last word should rest with the statutory regulator and the independent tribunal to be established under the Bill.
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