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Financial Services and Markets Appendices to the Minutes of Evidence


Second Supplementary Memorandum by the Financial Services Authority

  1. This Memorandum deals with a number of topics which have arisen in recent evidence where the FSA believes it may be helpful for the Committee to have further views and background information. The note covers the following topics:

    —  the application of Articles 6 and 7 to certain aspects of the FSA's work (paragraphs 2-11);

    —  defining "private persons" for purposes of suing for damages (paragraph 12));

    —  double jeopardy (paragraph 13);

    —  investigation of complaints against the FSA (paragraph 14);

    —  the FSA's feedback statements following consultation (paragraph 15).

A. Application of Articles 6 and 7 of the European Convention on Human Rights (ECHR) to the proposed market abuse regime and to FSA's regulatory enforcement activity.

  2. The FSA is concerned that the provisions of the Bill should be compatible with the requirements of the ECHR. We agree with those witnesses who have said that the credibility of the new regulatory regime would be seriously damaged by early litigation successfully challenging the compatibility of the legislation with the ECHR.

  3. There are two main outstanding issues in the context of the draft Financial Services and Markets Bill. First, whether the power to impose financial penalties for market abuse, and/or for breach of the FSA's rules amounts to a "criminal" sanction for the purposes of Article 6 ECHR. Second, if so, whether the definition of "market abuse" (together with the proposed Code of Market Conduct) or the proposed FSA Principles are sufficiently certain in their application to comply with the requirements of Article 7 ECHR (the rule against retrospective punishment).

  4. In drafting the Bill, the task of ensuring ECHR compatibility falls to the Government. This section draws the attention of the Committee to certain additional points which they may find helpful in preparing their report.

Civil fines for market abuse, disciplinary fines and Article 6 ECHR

  5. The question here is whether the legislation should incorporate the protections that Article 6 affords to "criminal proceedings" in relation to the FSA's power to impose fines or financial penalties under the proposed market abuse regime and/or under the proposed disciplinary regime for authorised firms and approved persons. The Treasury has indicated that it is considering the position carefully in the light of the responses to the consultation on the draft Bill.

  6. While there are clearly arguments that the proposed fining powers would be criminal sanctions for ECHR purposes, it should not be assumed that any sanction which has a punitive or deterrent effect is treated as a criminal sanction for the purposes of Article 6. In Air Canada v United Kingdom (1995) 20 EHRR 150, for example, the European Court of Human Rights considered the imposition by HM Customs & Excise on Air Canada of a requirement to pay £50,000. The payment was required in order to secure the release of an airliner which had (unknown to Air Canada) been used for the importation of illegal drugs and them seized by Customs & Excise. Although in that case the Government appeared to accept that part of the purpose of the £50,000 charge was to punish/deter laxness in Air Canada's security arrangements, the Court of Human Rights held that the sanction was not a "criminal" one for the purposes of Article 6. The Commission has described the requirement to pay £50,000 as "a normal incident of the exercise of regulatory powers which generally accompany international air traffic". Similarly, in Ravensborg v Sweden (18 EHRR 38) a fine for contempt of court, convertible into a term of imprisonment in the event of non-payment, was held not to involve a "criminal charge". In Pierre-Bloch (21 October 1997) the Court considered a sanction which was clearly punitive in its effect—an election candidate was required to pay to the French Treasury an amount equal to that by which he had exceeded statutory limits on election expenditure. Although the candidate could also have been prosecuted in the ordinary criminal courts for precisely the same conduct, the court held the administrative sanction was not criminal. This was partly on the grounds that it was "in the nature of a payment to the community of the sum of which the candidate in question improperly took advantage to seek the votes of his fellow citizens and . . . forms part of the measures designed to ensure the proper conduct of parliamentary elections and, in particular, equality of candidates".

  7. We do not suggest that these cases are conclusive of the issues that arise in relation to the draft Bill. They do, however, demonstrate that determining whether proceedings involve a "criminal charge" for ECHR purposes is not straightforward. It requires an examination of a wide range of different factors. These include whether the "offence" in question applies to a limited class (as is the case in relation to the proposed FSA disciplinary regime) or to the population as a whole (see Ravensborg). There are a number of cases in which the Strasbourg authorities have held that sanctions which are imposed for the purpose of dealing with the misconduct of a regulated profession are nevertheless to be treated as disciplinary rather than criminal sanctions for the purposes of Article 6. (See, for example, the Commission's decision in Le Compte v Belgium, where the imposition of a suspension from the right to practise medicine following disciplinary offences was not considered "criminal").

  8. There is, moreover, clear authority to suggest that the withdrawal of a firm's authorisation would not involve the determination of a criminal charge for Article 6 purposes (see, for example, The Traktorer Aktlebolag v Sweden A 159 (1989)—revocation of liquor licence is not "criminal"). In the context of the regulated community in particular, it would seem odd if the less serious sanction of a financial penalty were considered "criminal", while the more serious sanction of withdrawal of a firm's authorisation were not.

Article 7 ECHR

  9. If such sanctions were to constitute "criminal" measures for ECHR purposes, then the principle of legal certainty that is implicit in Article 7 would apply.

  10. Striking the correct balance between certainty and flexibility in the provisions of the legislation, the Code of Market Conduct and the FSA's rules is of vital importance—regardless of the strict requirements of Article 7.

  11. The Strasbourg authorities have made clear that, while the rule against retrospective criminal penalties does incorporate the principle of legal certainty, it is acceptable for broad provisions to be left to the courts to interpret on a case by case basis. Thus, in the case of Handyside v United Kingdom the statutory obscenity test in the Obscene Publications Act (i.e., publications whose effect is such as to "tend to deprave and corrupt" persons who are likely to read them) was upheld as being sufficiently certain for ECHR purposes. In that case, the Commission made clear that "the requirements of certainty in law cannot mean that the concrete facts giving rise to criminal liability should be set out in the statute concerned. This is satisfied where it is possible to determine from the relevant statutory provision what act or omission is subject to criminal liability, even if such determination derives from the courts' interpretation of the provision concerned".

B. Defining "private persons" for purposes of suing for damages

  12. We are aware that concern has been expressed about the provision in the draft Bill which would allow FSA to determine who is to be taken to be a "private person" who may sue for damages for breach of an FSA rule. We think that this is a helpful provision, in that it would allow us to ensure, in the interests of firms and consumers, that the same definition of private person is used to determine both who is a private person protected by particular rules, and who is a private person able to sue for breach of those (or other applicable) rules. This is a useful contribution to our ability to distinguish between the different levels of protection appropriate for different categories of consumer.

C. Double jeopardy

  13. The Committee invited the FSA to let it have its views on the subject of double jeopardy. We have seen HM Treasury's note to the Committee[15] on this subject and have nothing to add.

D. Investigation of complaints against the FSA

  14. Some witnesses have suggested to the Committee that the proposal for the FSA to be protected from liability in damages should be counter-balanced by a strengthening of the Bill's provisions relating to the independent investigation of complaints against the FSA. One particular suggestion is that the independent investigator should have power to recommend or award compensation against the FSA. As we indicated at the Committee's hearings, we recognise that the organisation and resources of the Complaints Commissioner will need to be commensurate with the demands placed upon him. But we are concerned that if the compensation suggestion were adopted, this could lead to the same kinds of difficulties as liability in damages before the Court. In any case where a major institution needed to be closed, for example, there would be complaints from consumers who lost out as a result, as well as from commercial counterparties and others affected. This could arise however modest the basis for complaint against the FSA, simply because the Commissioner would provide a cost-free means to recover loss. We are concerned that this would be likely to reduce our readiness to take difficult decisions. We believe that the statutory compensation scheme provides the proper safety net for consumers in such circumstances and that commercial counterparties should be encouraged to make their own judgments about those with whom they deal rather than relying on the regulator. Similarly, we think that the right mechanism for a firm to challenge a Decision to close it down would be the independent tribunal, or an application for judicial review of our decision by the courts. The scope for award of damages in such circumstances could, again, impact adversely on the FSA's decision-taking.

E. The FSA's feedback statements following consultation

  15. In evidence to the Committee on 13 April, the Chief Executive of APCIMS said that the FSA had published 21 consultative papers so far but only one feedback statement. Details of all the FSA's consultative papers and subsequent feedback/policy statements are set out in Annex 1 to this Memorandum. In summary, the position is:

    —  In July 1998 in its "Open Approach to Regulation" the FSA set out its approach to consultation. An extract is attached (Annex 2).

    —  Of the 21 consultative papers published since October 1997, the FSA has issued feedback or policy statements in relation to seven; in relation to a further five, FSA's decided policy has been published or communicated in some other way; and in relation to the remaining nine, feedback or policy statements are already in production or are promised;

    —  in line with our commitment in "The Open Approach to Regulation", we make available for inspection all non-confidential responses to consultation papers.

23 April 1999

15   Appendix 62. Back

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