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8.30 pm
In serious cases of market abuse, one would expect conduct that was obviously intended to mislead the market, and lead people up the garden path, on the part of an experienced operator. It would not be too difficult to get a jury to convict. In my long experience of the Serious Fraud Office, the one element in the system that seldom causes any problem is the jury. If the Financial Services Authority tells 12 good men and women and true about a piece of crookery carried out by Mr. X or company Y, putting it in straightforward terms, and the jury is shown the facts, they will be ready to convict.
The object of criminal offences, or offences in general, is not principally to convict the one or two people who are prosecuted but to act as a deterrent to the market and to set limits and boundaries. It is far more sensible to do that in a straightforward and up-front way than in a very complicated way.
I said that I would try not to let my speech get too complicated. However, in the provisions that follow clauses 109 and 110, which I think were probably introduced by the Government in another place,
with agreement, such an offence starts off being described as civil. To try and get it past Strasbourg, an elaborate system is set up whereby in order to impose a penalty, one has to apply to a tribunal or the courts. The Bill is trying to set up by the back door a court system that would be much better set up by the front door.The Government want to get the Bill on to the statute book. However, they have got this bit of it wrong; they should have been straightforward. I think that it is a good idea for a code to set out what constitutes market abuse. If the Government had brought that about, it would not be too difficult to secure convictions--but the very elaborate system set out in these provisions will go wrong. I advise the Government not to go further down that route, and, in so far as it is open to them on the amendments under consideration tonight, to correct the position.
Mr. Flight: May I first briefly comment on the code and the panel? However, as my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) said, I intend essentially to speak about intent in relation to market abuse.
I wish to report to our Liberal Democrat friends in particular the comments of Patrick Drayton, the head of the takeover panel, on the amendment. He says that the panel does not feel that the revised amendment addresses any of the concerns that it expressed in relation to the original Government amendment, and that subsection (3) does not address its concerns about the amendment raised in the note that it issued.
It remains the case, under the revised amendment, that the question of whether behaviour complies with the code and hence qualifies as a "safe harbour" would fall to be determined by the FSA in the first instance. That gives rise to--this is the whole problem--the potential for different interpretations of the takeover code, with messy consequences. It will cause uncertainty while the FSA decides whether it agrees with the panel. Disagreeing will have serious consequences for the reputation of each regulator. It may impact adversely on the panel's ability to interpret the takeover code flexibly, and parties may wish to seek clearance on interpretations of the code from the panel and the FSA.
The key problem is that the Government amendment does not sort out who is in charge of a bid situation. What weight would the FSA attach to an interpretation or practice of the panel that is notified to it under subsection (3)? What would happen if the FSA disagreed with an interpretation or practice?
Given the effort that the Government are putting into this, I assume that it is not their intent to accept the European Union directive on takeovers and mergers. Under the directive, the panel and the code would be things of the past, and mergers would be governed by statutory arrangements, with a great deal less flexibility.
I should like to have a last go at intent. My right hon. and learned Friend the Member for North-East Bedfordshire (Sir N. Lyell) made the key point that, sooner or later, whether from the EU or elsewhere, the courts will determine that the offence is criminal, and intent will have to be given voice. I repeat the earlier point that, although the Government have said that it is impossible to give intent a voice, there has been no problem in the United States with the Securities and
Exchange Commission defining intent in relation to market abuse and what to look for as evidence of intent. Indeed, there are some provisions for doing just that.Our attempt, in the amendment, is limited to the single limb of market abuse, consisting of giving a false or misleading impression. This is our last opportunity to include the principle of intent clearly into the Bill. For an innocent man or woman to suffer merely because someone misinterpreted what they said must be wrong. Individuals may not realise that what they said could be misleading or misunderstood. This is particularly relevant in a bid situation, when either side may make announcements.
The Minister seemed to misinterpret our amendment, which relates to amendment No. 131 to clause 113. Under our amendment, even though a person has committed market abuse, the FSA cannot impose a penalty in certain circumstances. If those circumstances are satisfied, the FSA can neither impose a penalty on the abuser nor issue a public censure. That will also be the position in relation to the requirement to pay compensation. We welcome both those concessions, which resulted from an undertaking given to the Joint Committee, but we would be grateful if the Minister would explain what happens in relation to market abuse. For example, is it treated as a disciplinary offence for an authorised firm or approved person? If that is the position, we would like to know that the FSA cannot impose a penalty under the disciplinary procedures.
The amendment would extend the exemption from a fine in two different ways. The first is to provide that a penalty cannot be imposed where the person concerned has not intended to give a false or misleading impression. That follows the criteria for the criminal offence of making misleading statements, which come within section 47 of the Financial Services Act 1986 and which are replicated in the Bill.
If somebody did not intend to give anyone a false or misleading impression and cannot be blamed for failing to realise that he might, it is surely too much of a nanny state and too unfair to subject him to any fine. The Bill provides already that the FSA's policy on fining must take into account when deciding on the size of the penalty whether the behaviour was deliberate or reckless. In that sense, the Bill demonstrates--intention is the key point--that recklessness can be recognised when it occurs. It follows that it is plain wrong to make somebody liable to a fine if he could not be expected to say something different from that which he said.
The second part of the amendment, on which I think the Minister did not comment, relates to Chinese walls. It is straightforward. As everyone will be aware, the Chinese wall is a concept within one financial services group to keep entirely separate corporate finance activity and the goings on in that area. The Government indicated in Committee in this place that, if a person employed by a firm on one side of the Chinese wall were to create a misleading impression because he did not know what was known by employees of the firm on the other side of the wall, that firm could not be guilty of market abuse. That is an important point that needs to appear in the Bill. It should not be left to the FSA to make a ruling.
The Government have amended the Bill to provide expressly, in the context of the criminal offence of making a misleading statement, that firms should not be guilty if
they were using an effective Chinese wall. That should therefore be spelt out expressly in the context of market abuse. We proposed a similar amendment in another place, and Lord McIntosh expressed surprise that we wanted a Chinese wall defence for individuals. The amendment before us makes our position clear.We have suggested also an anti-avoidance provision, which would mean that the firm could still be guilty of market abuse if an individual on one side of the wall who is in possession of information tells someone on the other side of the wall to engage in the relevant behaviour, even though he does not tell him the nature of the information. Due to the speed with which we have had to table amendments, we have omitted a couple of words, which are "or requested" in addition to the requirement to engage.
As appears from amendment No. 128, the Government have amended the clause in another place in a way that we consider to be inappropriate. As a result of previous pressure on our part, the Minister agreed to introduce a provision that behaviour does not amount to market abuse if it conforms with the FSA rules. That appeared in clause 109 before it was amended in another place. As amendment No. 128 makes clear, the safe harbour for compliance with FSA rules now applies only if the rule includes an expressed provision that "behaviour conforming" does not amount to market abuse.
That leaves at large the possibility that compliance with other FSA rules may be viewed as market abuse, and that firms could be in a difficult position if they do what the FSA rules tell them. They could still find themselves engaging in market abuse. I cannot believe that the Government intended that to be the position. When we last debated the issue, we felt that we had resolved it.
We understand that the Government are afraid that a comprehensive safe harbour will validate market abuse, which is not supposed to come within it. Let us say that the rules provide that there should be best execution--that is buying or selling shares at the best price--and the firm concerned complies with that obligation but does so in a trade that in itself amounts to market abuse.
In the Government's view, the safe harbour for behaviour conforming to FSA rules will mean that a firm cannot be guilty of market abuse in those circumstances. That is a wrong interpretation; the rules do not require insider dealing to have taken place, and it cannot therefore conform with them. Firms need to know that they will not run the risk of being accused of market abuse if they do what the FSA rulebook tells them. Therefore, amendment No. 128 must be disagreed to. Similar amendments apply to restitution and clause 489.
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