Financial Services and Markets Appendices to the Minutes of Evidence


Note by Lord Hobhouse of Woodborough

  Thank you for inviting me to give evidence to the Joint Committee on Thursday. Towards the end of the hearing, Lord Lester and I were referred to a document, "FSM 91",[14] which we had not seen before. You invited further comments based upon the parts of the document relevant to the evidence which had been given. You also stressed that the Committee was concerned to try and achieve an acceptable draft, an objective which I would share.

  I agree that FSM 91 is most certainly relevant. Section A addresses points raised during my evidence.

  To recapitulate, the present (and only existing) draft of Part VI proposes to punish (by way of fines) "behaviour" which the FSA considers may affect confidence in the relevant markets. Such a scheme for punishment brings into play a number of principles (as well as Human Rights points) to which the drafting of the legislation must, on that hypothesis, have regard. The existing draft does not do this.

  The previous Progress Report of March 1999 had recognised the need for an independent and fair adjudication procedure and therefore accepted one of the fundamental objections to the existing draft. However a significant number of other points of varying importance remained, some very important. My remarks concerning cl.56 were directed to some of these.

  An important point which still has to be faced is the ambit of cl.56. Three questions can be asked: Who does it apply to? What conduct does it punish? Will it punish innocent conduct?

  The first of these questions is fundamental. The present draft applies to anyone, wherever they may be and whether or not they actually participate in the relevant market. The conduct merely has to be behaviour in relation to a relevant investment and that includes, for example, any commodity which may be the subject of permitted trades on a futures or derivatives market. The intention of the FSA and the Minister is, apparently, that cl.56 should apply to "market participants", those who "take advantage" of the market (FSM 91 §2), "market participants", "individual player of the market place" (Evidence 18 March pages 33-34). The present language does not reflect this intention. It is far wider; its effect will be indiscriminate and arbitrary. The draft code does not (and is not appropriate to) remedy this deficiency in the drafting of c.56. The redrafting exercise will not be too difficult once the actual intended ambit has been thought through. Paragraph 2 of FSM 91 ("Rationale") still does not understand the discrepancy and is an inadequate response.

  The second question is related to the first. Cl.56(1)(b) presently applies to conduct which may be wholly independent of any market transaction to which the relevant person is a party; for example, he may simply have market sensitive information which he does not make public; he may as a producer or consumer simply be resisting pressure being put on him by speculators. A definition is needed which ties the conduct liable to be held abusive into some market (or market directed) activity of the relevant person. Here again the necessary redrafting exercise is not too difficult; drafting techniques exist which can be used to provide the necessary focus to the subclause and enable it to fulfil its purpose of providing a workable definition (and set the limits of the FSA's code making power).

  This in turn leads on to the third question—culpability. The Minister unequivocally rejected any concept of culpability in her evidence (18 March pages 33-34). FSM 91, paragraph 8, however, recognises the difficulties inherent in that view and states the intention not to punish conduct on a no fault basis. It will be appreciated that, if the application of cl. 56 is tightened up so as to require some actual direct or indirect participation in the market and the definitions of punishable conduct are redrafted using words like "designed to" or "calculated to", the definition of the mental element will be much easier to formulate. It might even suffice to have a subclause stating that a person's conduct shall not amount to market abuse if it was bona fide and without any intent to undermine confidence in the relevant market.

  Paragraphs 4 and 5 of FSM 91 include statements which should prove useful in evolving an acceptable and effective draft. It is recognised that compliance with the code can mean that conduct is not abusive and it is also recognised that the code making power is in effect a rule-making power and that therefore the power must be properly defined, including a clear definition of "market abuse".

  Thus, my response to your question is that FSM 91 represents useful and encouraging progress. But much more needs still to be done to recast and redraft Part VI. Time is very short. There is still not even the beginnings of a satisfactory draft. I hope that my contribution has increased the chances of workable and effective outcome: ineffective or unworkable provisions will benefit no one except those who wish to get away with improperly manipulating the markets.

19 April 1999

14   Appendix 5. Back

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