Financial Services and Markets Appendices to the Minutes of Evidence


Supplmentary Memorandum by the London Investment Banking Association


  1. Where sanctions may be imposed, we believe that it is very important for firms and individuals that the behaviour expected of them should be clearly described. Given that the proposed market abuse "civil" offence is to apply to all persons—and not just to authorised persons or approved individuals—it seems particularly important that the types of behaviour which are to be subject to fines and other sanctions should be foreseeable in advance. Indeed, since the primary purpose of the proposed new offence is to deter behaviour which is damaging to UK markets, it would be perverse if there was uncertainty about the conduct which would be subject to FSA disciplinary action because that would be liable to deter acceptable market activity.

  2. However, if Part VI of the Bill were to be adopted in the form proposed last summer all the existing layers of provisions which could apply to market abuse offences would remain in existence:

    —  authorised firms and their employees would be subject to FSA rules, Principles and guidance;

    —  members of an Exchange would be subject to the Exchange's rules;

    —  all persons would be subject to the criminal offences of insider dealing and market manipulation;

but, in addition,

    —  all persons would be subject to the new market abuse offence.

  3. There is thus a danger that behaviour which meets all the requirements of the detailed rules may nevertheless be open to sanction under the less clearly specified new offence.

  4. The new offence is defined in the Bill in very broad terms, and the Code which is designed to describe types of behaviour considered to be unacceptable under it will have only evidential weight. Further, in some areas the present draft of the Code is also very vague. In addition, although the market abuse offence will generally encompass the kinds of conduct covered by the criminal offences this will not be the case in all circumstances (for example, an essential element in the market abuse offence is the impact of the behaviour on the perceptions of market users about the fairness of the market in question).

  5. We believe that the Bill should address the following points:

    —  that compliance with the Code will provide a safe harbour against prosecutions;


    —  that the market abuse offence will not be used as an inappropriate alternative to the mounting of prosecutions for the criminal offences;


    —  that the fact that behaviour was in compliance with an Exchange or FSA rule should provide a safe harbour against a market abuse "prosecution";

    —  that compliance with a statutory requirement should also provide a safe harbour;

    —  that FSA should establish a mechanism for providing formal and timely pre-clearances;

    —  that, if a market abuse by an Exchange member is in breach of Exchange rules, that Exchange rather than FSA should take disciplinary action;

    —  that once the decision has been taken to mount a criminal prosecution, then FSA should not be able to mount a civil market abuse action subsequently if a conviction is not secured (and vice versa);

    —  for authorised persons and approved individuals found guilty of market abuse offences, FSA should be prevented from imposing additional fines for "regulatory offences" in respect of the same behaviour.

  6. The other changes we are seeking are more fundamental in that they are concerned with the nature and rationale of the new offence proposed.

  7. The Government—so far as we are aware—has never provided a statement setting out in detail why a new offence is needed and what the compliance cost implications might be. However, there seem to be two distinct themes. The first is that deterrent sanctions are needed in respect of behaviour which is not criminal but which damages markets (paragraphs 15.5 and 15.11 of Part One of HM Treasury's Consultation Document on the draft Bill). The second is that there are shortcomings in the drafting of the current criminal offences and difficulties in securing convictions under them (in particular, it seems, because of the difficulty of proving intention). We believe that these two distinct concerns should be looked at separately and that there needs to be a proper debate about whether amending the existing offences would not be a better way of meeting the Government's purposes. The examples provided of the sort of behaviour which is being targeted under the new offence—the use of privileged information or giving market participants a mistaken impression of the market in an investment or distorting the market in an investment[28]—already seem potentially to fall within the current criminal offences, with the exception, perhaps, of abusive market squeezes. Moreover, given the breadth of the regulator's rules governing authorised firms and employees, it is not apparent that there is a need for any new offence to apply to them. (On this, the Economic Secretary's comments at the 18th March hearing seem to confirm that it is with regard to the behaviour of non-authorised market participants that there is a gap in the regulatory system which gives rise to the need for the new offences: see Q117.)

  8. We are unpersuaded, on the basis of the material that we have seen so far, that the Government's objectives can be secured only by the introduction of a new wide-ranging and very broadly drafted market abuse offence. To the extent that it is a response to the difficulty of proving intent in the present statutory offences it seems that it should be possible to amend the current legislation so that a person's state of mind can be inferred from their behaviour. Our understanding of the position in the US[29] is that a person's state of mind can be inferred from their behaviour: thus, unless an alternative explanation can be provided, the intent element of market abuse could be proved by demonstrating that the person gained from the transaction or series of transactions which he undertook and that that gain was the predicable consequence of his actions.

  9. It may be that the main purpose of introducing a new market abuse offence which does not include any concept of intent within its definition is to cover reckless or negligent behaviour (in his evidence at the Committee's 16 March hearing Mr Howard Davies said that FSA "do not intend to prosecute people for accidental offences"). If that is the intention, we believe that the implications of this substantial departure from the normal principles of criminal law should be debated fully before the proposed provisions are proceeded with.

  10. We recognise that there may be a deficiency in the criminal law in respect of abusive squeezes conducted by persons who are not members of the relevant exchange or otherwise authorised under the other provisions of the Bill. However, we believe that any such deficiency could be better met by a provision specific to that issue, rather than by the proposed, very widely drafted provision which gives rise to such difficulties of vagueness and consequent uncertainty for market users.

  11. If, notwithstanding the views set out above, it is still considered that the only way the Government's objective can be met is by a new "civil" offence then we would urge the Treasury to consider amendments to Clause 56 which would amend the offence so that a mental element is included. As currently drafted, whether or not there has been a market abuse offence will be predominantly determined by the effects of behaviour rather than by the conduct which constitutes an offence (although there are purpose tests in parts of FSA's proposed Code). We think that this approach is misconceived. Since FSA has said that it does not wish to pursue "accidental offences"[30] we must assume the Government's objective is to cover non-criminal behaviour where there has been serious negligence. If that is the case, then Part VI of the Bill should be amended to specify that negligent behaviour is an element of the civil offence. Not only would such an approach avoid many of the difficulties of the current proposals, it would also facilitate the drafting of the market abuse Code. As explained by Clifford Chance at the Committee's 25 March hearing, it is not reasonable to have an offence of the generality of the sort proposed unless it is to be accompanied by some assessment of whether the behaviour was wilful or negligent: without such a test, we foresee serious difficulties for firms and people undertaking transactions for legitimate business purposes which may have a market impact and this will lead them to consider whether they should conduct the business elsewhere (or to seek pre-clearances from FSA: see our previous submission).

April 1999

26   We are particularly concerned that the Treasury's Progress Report does not provide comfort on this: "it seems unlikely that the FSA would [take action against someone who had complied with the Code] unless it considered that the person had failed to comply with the spirit of the new regime". Back

27   It has been stressed by the FSA that criminal prosecutions will be mounted where appropriate but since an essential element in the decision on whether to mount a criminal prosecution is whether there is sufficient evidence to do so-the "evidential test"-we are not clear that in practice actions for market abuse will not be used as an easy option. Back

28   See paras 15.2 and 15.6 of Part One of HM Treasury's Consultation Document on the draft Bill. Back

29   For example, see the transcript of the presentation by Mr Thomas Sjoblom of the SEC at the FSA's 11 March conference on Market Abuse, not printed. Back

30   See Mr Howard Davies' comments-at Q 78-at the Committee's 16 March hearing. Back

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