Financial Services and Markets Minutes of Evidence

Examination of witnesses (Questions 261 - 279)





  261.  Good afternoon. Welcome to this session of the Joint Committee. As you will have seen from some of the evidence that we have had, we have been dividing our time by certain themes. Today, as we did last Thursday, we have a general theme of discipline and enforcement and the tribunal. We have started with the Bill, as it was published, and we have looked at a lot of the consultation documents that have come in as a result of the Bill. We have now had a Treasury Progress Report. Basically we are trying to find out to what extent the Treasury Progress Report has answered people's concerns, and what are the outstanding issues which still arise. We are also very aware that people may have points that they may wish to make on other issues, apart from our major topic today, and we are happy to take those today as well. What I would like to do is to take each of you in turn. If you would like to introduce yourselves and make any opening statement, which may include any other points you want to get on the record, which do not relate to the topic we are discussing this afternoon. Could I start at this end. Mr Blunden.
  (Mr Blunden)  My Lord Chairman, I am Tony Blunden. I am Company Secretary and Head of Compliance at Credit Suisse Financial Products. CSFP is a member of LIBA. The single point I would like to make in my introductory remarks is the problem of uncertainty attaching to the proposed market abuse regime issue. The proposed legislation and regulation seeks, as previous legislation and regulation has sought, to protect markets by preventing a large number of possible trading sins, which come under the collective and perhaps ambiguous heading of market abuse. However, identifying such behaviour precisely is not without difficulty. Identify too little and you will have been ineffective. Identify too much and you will have been effective in preventing legitimate trading. Of course, we agree that the London market should be fair and dependable and viewed internationally as such. Most people would agree that behaviour, which deliberately sets out to mislead and manipulate prices and therefore threatens the financial markets, that this behaviour needs to be prevented. However, it is important to protect the cornerstones of our current market and to give them undisputed safe harbours. In all respects the activities such as hedging activities, investment activities, and the provision of liquidity should be acceptable market activities, irrespective of the market place. Without these safe harbours the existence and evolution of markets could be undermined. It is also vital that we recognise that the markets, by definition, are imperfect. There will always be factors and events that affect the market, which were not anticipated by the participants. For continual evolution and proper price determination these factors and events need to be permitted, so that players such as speculators, market makers, arbitrage players—and, indeed, firms undertaking stabilisation—should all be permitted to be legitimate participants within the market. We acknowledge that the distinction between legitimate behaviour and abusive behaviour, in the context of an evolving market, is likely to be a matter of degree. After all, market abuse can only really be generally understood as behaviour that runs contrary to market practice and commonly understood market practice. Even then, as markets are constantly evolving, so too is accepted market practice. As such, whether the behaviour amounts to market abuse must and can obviously be subjectively determined. It is nevertheless possible to develop criteria, the tests for such behaviour. At the recent FSA conference on tackling market abuse, Tom Sjoblom of the SEC noted that criteria can be very effective in tackling this problem area. As the purpose of the code was to expand the Act and to provide clarity, it is of the utmost importance that the code itself provides examples of conduct which will be acceptable. If laws are to be drafted generally, and I understand and accept why the Government wants to draft the laws more generally, but the interpretive matter and underlying laws need to provide certainty in order realistically to achieve clear guidance. I noticed in an earlier Committee session that the Chairman of the FSA stated that the code of market conduct should clarify the regulator's expectation in terms of what is and what is not a market manipulation. Unfortunately, we do not yet have a code which indicates what is not market manipulation. It is worth noting that we are only seeking that which the Government believes is the right way to draft regulation. In the Better Regulation Guide, issued by the Better Regulation Unit of the Cabinet Office, the question is asked in paragraph 3.9, "Making sure that regulation works": Is it clear and unambiguous? That is all we are asking for. It is our view that the way forward is now to be found through an open and honest discussion of the constituent components of market abuse. This needs to be supported by clear guidance and the issuance of things such as no action letters, waivers, and the redrafting of the code, to include safe harbours. This will go some way to addressing the lack of certainty. We also hope that this will enable both the market and an understanding of market abuse to evolve. This will assist in maintaining confidence in the United Kingdom financial markets.
  (Ms Hutchinson)  Perhaps if I can do the introductions, I am Lucy Hutchinson, a litigation partner from Herbert Smith, Solicitors. With me is Dominic Clarke, one of my partners in our corporate department. Our evidence addresses issues relating to discipline and enforcement procedures and, to some extent, market abuse. There have been some notable changes in the approach of the FSA but we still have some concerns that these do not go far enough, particularly in relation to the fairness of the procedures, bearing in mind the European Convention and the fact that the FSA is to remain prosecutor, judge and jury. We are also concerned about the overlap of the criminal and civil procedures, penalties and the regime of fines, plus we have concerns over the lack of certainty as to what constitutes market abuse, which is something that has just been mentioned. For market abuse we think there should be a clearer statutory definition of market abuse; and combined with that the code should be made a safe harbour in the absence of intent to manipulate the market. The need for intent is particularly important where the code may conflict with the statutory definition. For example, trading on the strength of relevant but not disclosable information is apparently permitted by the code but may breach clause 56. We consider that compliance with the code should be a defence in the absence of an intent to abuse the market. We are also concerned that the current proposals may breach Article 7 of the European Convention because of vagueness. We think that the avenues of no action letters and also the status of guidance should be reconsidered. We are particularly concerned about the unregulated because they are subject to the market abuse regime, but they do not have the advantage of compliance officers, in-house legal advice, training and guidance. We are still of the view that the market abuse regime is criminal in terms of the European Convention. As far as disciplinary procedures are concerned, these might be categorised as criminal but the position is not clear. There are certainly arguments that it only falls within the civil categories. Turning to the procedural framework, what is envisaged at the moment is a two-tier system with an enforcement committee, which can make decisions and impose penalties; and then a tribunal with a final tier of an appeal to the Court of Appeal on a point of law. The difficulty we see here is the inherent conflict of the FSA acting as both prosecutor, and where no agreement is reached, also making a determination of guilt and imposing a punishment. To make this a fair system, we believe it would be necessary to provide for full disclosure of evidence and an independent impartial decision making process, but this would create a cumbersome procedure, which we think the Government and the industry would want to avoid. So, instead, what we think should be considered is a procedure allowing for a quick resolution, if the parties wish this; and, if not, a fair and proper hearing before the tribunal. This could be done by giving a different role to the enforcement committee. It could remain part of the FSA and its duty would be to consider the FSA's case and that of the defendant but without a full hearing. It would not impose sanctions but it would be able to rule that there was no case to answer so it would act as a filter. If it did not make a rule and there was no agreement, then you would go to the tribunal. If instead the enforcement committee is to make first instance decisions, then we think it should be a separate independent body accountable to the Treasury. Whichever scheme you adopt, there should be a right to legal representation before the tribunal. Also, where you are looking at the market abuse regime, because that is criminal for European Convention purposes, the defendant there should have access to legal advice; if necessary, through Legal Aid or some other fund. That would include the cost of investigatory and expert witness assistance because these are particularly important in financial services cases. On a general point, we think there should be the possibility of settlement without the defendant having to make an admission of liability. Turning to the overlap of criminal and civil points, ideally we think the FSA should not have a power to prosecute. We do have concerns that the threat of criminal prosecution could be used to achieve a civil settlement. Under the current proposals, the FSA suggests that generally it will not seek to impose a civil fine for market abuse against someone who has already been prosecuted. We think that should be a commitment. We also think that as the FSA is not the only prosecuting authority, where it decides to prosecute and then it pursues the civil route, there should be some way of ensuring that none of the other prosecuting authorities step in and prosecute. Turning to the question of fines, we remain of the view that the fines should not be paid to the FSA. We think that can only lead to a conflict, or apparent conflict of interests, with fines being seen as an alternative source of funds. Instead, we suggest they should go to the Treasury. We also think that where costs are awarded against the defendant, that should be dealt with separately from the fine and any costs order must be proportionate and bear in mind the breach upheld and the amount of the investigation related to that breach. We also think that if the enforcement committee is to have decision making powers, it should be able to award costs against both parties; that is, against the FSA as well as the defendant. Finally, on statutory immunity, we think the proposal here may be in breach of the European Convention, but in general we do not think there is a need for statutory immunity anyway.

  262.  Thank you very much. Lord Archer.
  (Lord Archer of Sandwell)  My Lord Chairman, I was not proposing to make any specific points at this early stage. However, it may assist the Committee, (and I am subject to your guidance), and it may perhaps help the record if I trespass, just for two minutes on the Committee's time, to explain how I come to be sitting at this end of the table. I am the Chairman of the Council on Tribunals. The Council was established, by statute, by the Tribunals and Inquiries Act of 1958. Its purpose is to advise Government on matters relating to tribunals and ministerial inquiries, either when we are asked for advice or if visits or perambulations disclose something which should be drawn to attention, by unsolicited and sometimes unwelcome advice. The tribunals, which we supervise, are listed in Schedule I to the Tribunals and Inquiries Act of 1992, which is the latest edition of the consolidating legislation. This may be added to from time to time either by primary legislation, as suggested in this case, or by ministerial order. At the last count there were 78 different systems of tribunals which we supervised. There is hardly a human activity which does not come into contact with a tribunal at some stage. We think that our contribution to the process may be a familiarity with the whole tribunal family, and one of the things we try to do is to spread best practice from one tribunal to another. Therefore, our concern is not specifically with financial services. We do not claim any specific expertise on that. However, we do hope that we have some expertise on tribunals and that, I think, is going to be our contribution to the process. We are independent, although we are appointed by the Lord Chancellor and the Lord Advocate. We are totally independent of Government, and we are not subject to their directions, so we have no axe to grind. Our concern is with the three principles—which were set out in the Report of the Franks Committee in 1957—of openness, fairness and impartiality; and to which we have added a fourth, user-friendliness. I will not feel constrained from attempting to answer a question by the fact that the Council may not specifically have considered it but I will try, as far as possible, to distinguish between matters on which the Council has pronounced and matters which carry no greater authority than the fact that I am the respondent. In view of what has already been said may I add this, part of our problem here, in relation to the powers of the FSA, is that we are shooting at a moving target. If you look at the draft Bill, it has very substantial disciplinary and regulatory powers. Clearly, it is acting in a quasi-judicial capacity. But there has been all sorts of subsequent re-thinking. I understand that Ms Hewitt said, in effect, that it is going to be an adviser and counsellor, and that no-one will actually have any order made which might prejudice them unless they agree to it. (I think she said, unless they virtually settle.) That is what is meant apparently by saying that the tribunal will now be a tribunal of first instance. There are three possibilities. You could have an authority—and I could name quite a few of them, if you wish—which begins by trying to counsel people, sending a warning letter, offering to help, offering to have coffee with them, and regards their disciplinary powers as the end of the line. That gives you certain problems because these two processes sometimes get mixed up. The second possibility is that it is simply a disciplinary authority subject, as it should then be, to an appeal to someone else. The third possibility is that it has no disciplinary powers at all. They are purely there as an advisory authority. It looks as if that is the way the Treasury's mind may be working at the moment, in which case some of the things we have said in one context may not be applicable if the picture has changed.

  263.  I will ask Mr Roe to comment on that when we have finished. We followed this up last Thursday and it was suggested then that maybe we over-interpreted what the Economic Secretary said. If we did I am sure Mr Roe will tell us in a moment.
  (Mr Buxton)  I am President of the British Bankers Association, which represents about 320 members from 60 countries, so although it is a British organisation it represents banks and financial institutions in the City of London generally, from whatever country they come from. Firstly, we have in our evidence so far said that we support the creation of the FSA and look to it to be a world class institution. We want robust and effective supervision which works with the market. That is important. It is also important that it should maintain the confidence of the consumers, so somehow it has to tread that path through the middle. We are concerned about a more formal system and how far the formal system goes: more reliance on detailed rules, which is backed by enforcement as the means of implementation. While formalisation and enforcement clearly have a role to play, they can easily undermine the open relationship that currently exists between regulated and regulator, which should continue to do so for the benefit of both parties. With regard to the Bill, we continue to be concerned about discipline, enforcement and market abuse. Our concerns are that the processes should be fair and reasonable, so that after investigation, enforcement should be considered without the presumption that an offence has been committed. We think there is a danger of amendment making matters more legalistic. That may be a fear of the future but the legislation empowers the FSA to make rules. We think there is a danger that since these rules will be empowered by the legislation but not set out, that gradually we could get an even more legalistic process. The internal processes of the FSA, if they are properly established and run, should enable the overwhelming majority of enforcement matters to be resolved speedily and fairly for all parties. Good legislation and legal practice should enable regulatory processes to work, not be a substitute for them. We are also concerned about the competitiveness of the financial services industry. I think we look at this because of our position at the centre of a banking community in London, which is made up of a very large number of foreign institutions, which give rise to the success of London as a financial institution. We are concerned to maintain that international competitiveness by including a statutory objective that would mandate the FSA to take international comparators into account. There is no doubt that regulation in different centres is compared, particularly by the foreign community, and we do need to be aware of that. We feel that accountability to Ministers, and through them to Parliament, is also fundamental. In a powerful statutory system an additional safeguard lies in obliging the FSA formally to consult and report back on how consultation has affected their decisions. Such process contributes to an open public debate on regulatory issues: something which can be reviewed by Parliament. Thank you, Chairman.
  (Mr Vipond)  My name is Peter Vipond. I am a Director of the British Bankers Association. At this stage I do not think I need to add anything to what my colleague has said.
  (Mr Turner)  My name is Geoffrey Turner. I am the Chief Executive of the Securities Institute. My background is that I have been involved with security regulation since 1973: first with the London Stock Exchange and then the FSA; then at APCIMS, the stockbroker trade organisation; and now with the Securities Institute. I would like to start by thanking the Committee for giving the Institute an opportunity to give evidence on this very important Bill. The Securities Institute is the institute for professionals in the securities industry. Our aim is to set standards of professional excellence for individual practitioners, and to provide the means for attaining them. We are the major examining body for the securities and derivatives industry, and provide a wide range of industry exams and courses, which attract considerable support. Unlike the trade associations and the companies which have given evidence here, our particular focus is on individuals and it is that which I would like to concentrate on. For me the key issue in the regulation of retail financial services is simple, it is, does the adviser know his or her stuff and can the saver or investor rely on that person's skill and judgment? For my Institute the issues of training, competence, integrity of individuals and investor education and recognition by the regulatory system of the responsibility of individuals, are of major importance. So we are awaiting with the greatest interest the publication by FSA of its Suitability of Individuals paper which is promised for the second quarter of 1999. We do welcome the additional arrangements for the accountability of FSA which have been outlined in the progress report. We believe that effective accountability is in the best interests of both consumers and practitioners, but we have further recommended that the FSA should be subject to value for money audit by the National Audit Office. We know there may be some scepticism in the Committee that financial services are too complicated to be able to be taught to consumers but we believe they can and that a start must be made now in the education system. I mentioned a minute ago the capable and competent adviser as key to effective investor protection, the other essential of course is the well-informed customer, and we welcome the Committee's thoughts on our proposal to require the FSA to report annually to the Secretary of State for Education and Employment on the progress it is making to promote public understanding of the financial system and awareness of the benefits and risks of different kinds of investment. The Progress Report records industry fears that the FSA could stray into the areas of financial advice and education in discharging its public awareness goals. The report says that the Government believes the FSA does have a legitimate role in financial education but must work in partnership with institutions having relevant expertise and resources, and I would very much like to say here that we have such expertise and we would very much like to play our part in a partnership with the FSA. I cannot speak for other institutes like the Chartered Insurers, the Bankers, the Scottish bodies, but I feel sure that they too would wish to participate and they have a long tradition of activity in the educational and training field. The FSA have said they recognise the importance of the responsibility of management of a regulated firm to run their business in compliance with the regulations. We believe that the legislation should now recognise the special position of compliance officers and we think it is important they should have some legal standing in the new framework. We have circulated to the Committee an excerpt from a recent Jersey law which recognises the role and importance of the compliance officer, and we would ask the Committee to consider a similar recognition of their vital job in the regulatory system. Thank you.

  264.  Thank you very much. Mr Sylvain?
  (Mr Sylvain)  Thank you, my Lord Chairman. Good afternoon. Let me introduce myself and AUTIF before I turn to the points I would like to make. I am Marc Sylvain and I am managing director of Fidelity Investments, I am a practitioner here. Fidelity is the third largest investment fund company in the UK. I am also representing AUTIF today, which is the Association of Unit Trusts and Investment Funds. AUTIF member firms represent 99 per cent of the unit trust assets under management, mostly the savings of consumers. Before I comment on the points in this Bill, particularly as to AUTIF, I must point out that this Committee itself is not looking at a complete Bill. The specific provisions relating to collective investment schemes, that is the funds we sell to consumers, have not yet been drafted and our concern is that there will be little time left to comment on the provisions which will affect consumer orientated funds. With that proviso, I would like to make two points. The first is that we believe that there is beginning to be some confusion between the enforcement committee idea and the tribunal. We strongly recommend that an independent enforcement committee process be established with six points. That it be enshrined in the Bill; that it have an independent chairman and otherwise be composed of public interest members and practitioners; that it have the responsibility for overseeing the process of enforcement ensuring it is timely and fair to all sides; that it actually be required to hear evidence from both sides on a case; that it be the body which sets fines; and that it be able to award costs against the FSA where the finding is in favour of the accused. I believe an enforcement committee such as I have just proposed would have no problem dealing with those who breach regulatory obligations wilfully or recklessly. Firms which engage in that sort of behaviour should be hung out to dry and, moreover, consumers will demand that. If I turn to the second point, it is about the accountability of the FSA. Today's agenda will include some discussion of market abuse and the role of intent. I would like to suggest there could also be regulatory abuse without there being any intent; it is not necessary for the FSA to intend to commit regulatory abuse for it to happen just the same. I have no doubt that the FSA will be staffed by well-meaning people, that no one at the FSA intends to carry out actions that a city editor might characterise as bullying or intimidation, but if it appears so to the regulated it can lead to a break-down in the system. I believe this is at the root of the loud concerns you are hearing from the industry about the accountability of the FSA given its wide powers of discipline. AUTIF is keen to know how in practice the Bill will put checks in place to ensure that vigorous regulation does not descend into regulatory abuse, particularly when there will be and can be legitimate differences of opinion about how best the FSA should carry out its duties. Let me end by saying that the industry and the FSA share a strong commonality of interest. Our industry depends on consumer trust and a well-regulated environment is essential to inspire consumer confidence. Thank you, my Lord Chairman.

  265.  Thank you very much. We are fortunate this afternoon in having both David Roe, who is head of the Bill team in the Treasury, and Andrew Whittaker, who is deputy general counsel of the FSA. We are very careful that these sessions do not become occasions in which we take evidence from them. The idea is that we should be taking evidence from the witnesses of the day but nevertheless we do like to give them the opportunity to respond to some of the things which have been said to see if we can make progress. I would now ask them if there is anything in any of the opening remarks which would cause them to intervene at this point?
  (Mr Roe)  Thank you, Chairman. I would just respond to your earlier invitation to confirm that what the Economic Secretary said in an earlier hearing is consistent with what is set out in the Bill. If anybody read into that a signal of change in policy, that is not the right interpretation. That is not to say, of course, that Ministers are not taking a very close interest in these proceedings.

  266.  Andrew?
  (Mr Whittaker)  Thank you, Chairman. I would like to respond to a fairly small number of points which have been made but it may nevertheless take me a few moments to do so. Can I start first by dealing with the issue which has been raised as to the certainty of some of the provisions which we will be asked to enforce, in particular in relation to the general principles that we have ourselves enunciated in the past and plan to continue to operate by and also in relation to the general provisions in relation to market abuse. In relation to the principles in particular we think that clarity and predictability of operation are important both to ensure fairness and to assist people to understand the standards we set. We do not think this means there needs to be over-prescriptiveness. The Better Regulation Unit, which has been mentioned already this afternoon, has urged that there should be a focus on the outcomes to be achieved rather than necessarily on the methods by which they should be achieved, and that is certainly something that we apply in the formulation of the general principles we operate under. We would also point out that confidence and predictability which we see as being the aims to be achieved in this context can be achieved not only by hard prescription but also by gentler forms of law, by guidance with authoritative effect and by codes of practice. We also think that case law on Article 7 of the ECHR, which has been mentioned earlier, shows that they are prepared to uphold broadly-worded provisions as well as more specific ones, so we think there is a lot to be said for the proposal made by Andrew Buxton that we should not move towards a more rule-driven system but should continue to operate on the basis of some general principles as well as specific rules where those give people the confidence to be able to understand what is and what is not expected of them. Just picking up on the point which was made earlier about what is and what is not expected in the context of market abuse, it was suggested that the code of conduct in issue should be given an express status under the legislation to enable that to become a safe harbour from the market abuse provisions, and certainly that is an idea we would not have any difficulty with if that were something which were to find favour more generally. There are a number of other points which I could raise but I imagine most of them the Committee will be coming back to before long. Just to pick up, in case it is not dealt with later, the point about competitiveness, we do think the existing requirements of the Bill which require us to take into account the international position of the UK will require us to look at international comparators in order to be able to do so in an intelligent way, so it may be there is no need to change the Bill in that respect.

  267.  Thank you. Could I ask David Roe about this question of the timing of the rules on collective investment schemes. Is there anything you can say about that?
  (Mr Roe)  There is nothing specific I can say at this stage, Chairman. We are very aware of AUTIF's concerns and we are doing all we can to meet them.

Chairman:  I think the order in which we take these issues is very difficult and there is no right order in which to do this. So we will stick broadly to the agenda we have outlined and we will begin with the whole question of certainty. Lord Poole is going to raise questions on this.

Lord Poole

  268.  Each of you to some extent or another has raised the question of certainty and it may be you want to make some more points about the sort of additional certainty which you would feel comfortable with, but our concern, I have to say, is not with how the rules may subsequently be made so much as with what needs to be put into the Bill to ensure the greater certainty you would seek. To the extent that anybody has specific suggestions which have been thought through, that would be very helpful for us.
  (Mr Blunden)  My Lord Chairman, I can respond to that. I think there is a natural clash here between the Government's wish to have flexibility and just establish boundaries in the legislation and the industry's wish to have certainty. For our part, we are quite comfortable with the code itself supplying certainty, it does not have to be in the Bill, but there needs to be certainty provided somewhere so that as a compliance practitioner I can look at transactions and to a reasonable degree advise my senior management those transactions will be acceptable or will not be acceptable under law.

  269.  How do you deal with the point which has been made that says in a rapidly evolving world—and I think any of us who had been operating 20 years ago would be astonished by these markets working now—something could be prescriptively laid down in advance which is going to cause almost more problems than the more open mechanisms which are intended?
  (Mr Blunden)  I do not think everything can be laid down in advance. Indeed, I would not expect the code to be written in stone and to survive for many years. I would expect it myself to be an evolving document and it would involve, I suspect, very much as the FSA rules have done in the past, a number of no actions and waivers which would be given, but hopefully in the new regime they would be given publicly rather than as they have been under the old regime privately where therefore only the regulator and that particular entity know the waiver exists. I do recognise that the FSA have also from time to time published those waivers that they have thought would affect a wider number of people and the publishing of the waivers has helped itself to move the rules and regulations. I think there is also a balance to be drawn between waivers which are specific to a single transaction and really will only ever apply to a single transaction and those in which there is a quite a wide public interest.

Mr Sheerman

  270.  So you are looking for building up a sort of case law of publications?
  (Mr Blunden)  I am sure there will over time be a build up of case law, but hopefully we will not actually need to employ lawyers as an industry. In a sense, working with the regulator, we can build up a two-way flow of what is and what is not acceptable.


  271.  What does this lead you to suggest should be changed as far as the Bill is concerned, which after all is our main concern as a Committee?
  (Mr Blunden)  Ideally, it would be good to see the Bill going further along the lines of requiring the FSA to give advice and guidance and that is something that undoubtedly will be discussed in the Committee further, but to give some form of certainty to the industry.

Mr Beard

  272.  Beyond producing codes?
  (Mr Blunden)  Yes. Things such as the equivalent of no action letters. I recognise in market abuse the regulator cannot possibly give a no action letter for something which might be seen as fraudulent, but at the same time a regulator can give guidance on very specific transactions.

Lord Fraser of Carmyllie

  273.  One of the issues about guidance is not that it might from time to time be changed but as to, when it is changed, what status it enjoys.
  (Mr Blunden)  Yes, absolutely. I recognise that is a problem and there are no easy solutions.

  274.  Do you regard what is proposed at present as the status for guidance as sufficient?
  (Mr Blunden)  I think it is helpful that it will be evidential in nature. I would like to see it go further in that abidance with the guidance actually is a safe harbour itself.

Lord Poole:  Perhaps we can ask others for their views?

Lord Eatwell

  275.  Before we do that, what was striking in the discussion about certainty was the totally opposite position taken by Mr Buxton from that taken by Ms Hutchinson. Mr Buxton seemed to say that Ms Hutchinson's approach would ruin his business. I may be putting that slightly strongly but it is to bring out the difference between you.
  (Ms Hutchinson)  We certainly do not intend to ruin your business!
  (Mr Buxton)  Actually, Sir, I thought there was quite a lot of similarity between what Ms Hutchinson was saying and what I was saying. I think it is a question of where you find the narrow path between everything being in the Bill and nothing being in the Bill. There is a path between the two. Ms Hutchinson may go a little further towards the legislation than I do.
  (Mr Clarke)  My Lord Chairman, perhaps I can answer? We are going towards the safe harbour route. It is not in our opinion possible to cover in a code all the circumstances which could arise. We feel that the code is also going to lag the market to a degree. The code should provide a safe harbour to those people who carry out transactions in accordance with its terms, but I would accept the caveat "in the absence of actual intent to abuse the market". There are no doubt ways in which activities in compliance with the code could be conducted in a way to abuse the market, and I do not think I would have a great problem with that additional requirement. The example we gave was a situation where apparently the code said one thing and the Bill said another. That may be because they were produced at different times. The background scenario we were describing was this difference between relevant information and discloseable information. To take an example of an industry which would be of more use to those represented here, the electricity industry, at the present moment the forward market in electricity futures is not regulated but it is intended to be regulated in the next 18 months or so and therefore perhaps would become within the ambit of the code. If an electricity supplier takes a plant off the market by closing it down, for repairs or whatever, the relevant market might require him to state he has done that, in which case that will be discloseable information. The code says that you cannot trade on the basis of having discloseable information which you have not disclosed if it is also relevant information, ie information which other market users would like to know about. The code says that providing it is not discloseable information, you can actually trade and that might mean the electricity company which wants to close down its plant can go into the market and find the electricity it needs to supply its customers. That is what the current application of the code says. The Bill suggests that all relevant information will have to be disclosed essentially so this is where you have this sort of conflict, and conflicts are bound to arise because there are different economic views as to whether or not people should be required to disclose that sort of information before they trade. Some people may say, "It is perfectly fair and proper that a person who knows they are going to need the supply of a particular commodity should be allowed to go into the market and buy that commodity before he announces to his competitors and the people who are going to sell it to him that he actually needs it." Others would say, "For a totally fair market the sellers actually need to know he needs it." This is the sort of situation which the code is going to have to sort out. If the code takes the view that a particular activity is acceptable, then people should be able to rely on that code unless they intend to abuse the market.

  276.  We discover that Andrew Buxton does really agree with that.
  (Mr Buxton)  Can I just make two points? Firstly, Ms Hutchinson mentioned Clause 56 in her first presentation and that is a very key clause which we think it is too broad and too opaque at the moment. The point which has just been made about the differences between the code and the Bill actually is a very important one. At the moment we do not think that firms of investors can be certain of what the law means in that particular clause and the FSA's code of market conduct cannot remedy this because at present compliance with the code does not bring certainty where no offence has been committed. I think that is the point which has just been made. We absolutely agree with that and we think that Clause 56 needs more attention. The other point I would just like to support is the point made earlier about guidance, and really that comes back perhaps to my moving away from the detailed legislation. I do think that it is important for the industry to be able to get guidance from the FSA rather than the FSA always relying on the law. That is the sort of relationship the industry wants.
  (Mr Sylvain)  My Lord Chairman, we are talking about the guidance and the rules, and often the guidance is how to comply with the rules, whereas we also want waivers of the rules themselves. For instance, if we have a rule which says you have to get something in writing from the consumer, people will start to ask, is a fax okay, is an e-mail okay, is a recorded conversation okay? So there is no intention in this case to continue to abide by the specific rule of "in writing" and more guidance is needed as to whether or not the FSA will waive that rule. Then once people have received that, they need to be able to rely on it. We talk about guidance but I think we have to talk about innovation at the same time, because it is innovation that requires guidance and if the UK is going to be successful you will have people asking the FSA in the face of new innovation, new technology, can they waive a given rule given that it is obsolete now. I am sure you have heard in this Committee before that the rule books do need to be re-written from time to time because they do become obsolete. So I see the request for guidance and waivers for rules as an early warning signal that a rule is becoming obsolete and in that case, as firms move towards the new practice, they cannot then find they are disciplined for that. So we want rule waivers in the Bill and we want to be able to rely on them, absent, as Dominic said, of market intent to abuse.

Lord Fraser of Carmyllie

  277.  Mr Clarke seems to me to have introduced a qualification which is not at present in the Bill but it might be an extremely desirable one to introduce, and I agree with that. As I understand it, you and Ms Hutchinson and other lawyers who have given evidence here, have been arguing that compliance with the guidance on an issue by the FSA should not just simply have a mitigatory effect on a breach of what is Clause 56 at the moment but should lead to the consequence there is no breach whatsoever?
  (Mr Clarke)  With the one caveat, and other people will decide whether that caveat is a fair one or not but I personally do not see any difficulty with it, that if somebody actually intended to abuse the market and used a loophole in the code, to put it simply, I would not have much sympathy with them.

  278.  That is what I am trying to get at. So if you comply with the guidance that the FSA has put up, and it will be from time to time modified according to market conditions—and as others have indicated that may lag behind what is happening in the market place—if you meet the guidance at any time that will be a complete answer to any allegation of breach of what is Clause 56 at the moment. What you seem to be suggesting is that notwithstanding your compliance with the guidance if the FSA could look into your conduct and discover behind that in this unique circumstance intent on your part, that would be enough to sustain a breach of Clause 56?
  (Mr Clarke)  Yes, I think the current law in Section 47 of the current Act is very similar.

Lord Poole

  279.  A code we have all lived by and died by for many, many years which has developed extremely effectively is the takeover panel. I wonder whether you would assert what you have just said applies to the takeover code, because my understanding is that even if you have been to the takeover code and got their approval, or got their approval through an appeals procedure, if it turns out afterwards that the steps you were taking were in some way, for example, against the Companies Act, the fact you went to the takeover panel is neither here nor there? I notice you nod. You are quite sure you are not asking for something from the FSA which is not realistic because there are so many other sorts of laws you can fall over that it could not conceivably be the case you could be excused, as it were, by speaking to them first?
  (Mr Clarke)  The takeover code is not statutory. I will not pretend to be an expert on it but if I remember there is a spirit of the code and a letter of the code, and notwithstanding what the letter of the code says if you are deemed to be in breach of the spirit of the code, a decision that you have not complied with the spirit of the code may be made by the panel. As far as breaches of the Companies Act are concerned, because it is not statutory the takeover panel has no application under the Companies Act and you have to comply with the Companies Act at the same time. The takeover code is actually dealing with a slightly different area. It is concerned with how do you make a bid which is fair to minority shareholders for example and how the procedures are carried out. The Companies Act says very, very little about procedures in relation to takeovers.

previous page contents next page

House of Lords home page Parliament home page House of Commons home page search page enquiries

© Parliamentary copyright 1999
Prepared 19 April 1999