Examination of witnesses (Questions 280
TUESDAY 30 MARCH 1999
and MR GEOFFREY
TURNER, called in and examined.
ROE, and MR
Lord Fraser of Carmyllie
280. Can I try and approach it the other
way round? The mischief I would be seeking to avoid is where someone
who has complied to the letter with the guidance in place from
time to time and has no intent to bring about any abuse of the
market, nevertheless is regarded by the FSA as having breached
Clause 56 without intent and could find himself in breach of that.
That would seem to me to be unfair and the modification you have
suggested seems to me to be a helpful way, if I may say so, of
avoiding that mischief.
(Mr Clarke) I agree it is unfair. Somebody said
at one of the earlier evidence sessions that it was necessary
to have offences of strict liability to ensure certain sorts of
conduct were not carried out and offences of strict liability
do exist under the law but they are usually concerned with "You
shall not do a particular course of action." In this case
the code can say, "You shall not do a particular course of
action and if you then carry out that action in breach of the
code you are going to be in trouble, you do not have the code
to protect you." The situation I am describing is when you
are trying to prevent people manipulating the code or manipulating
the market, or whatever, and in those circumstances I believe
that intent is a necessary element.
281. I think this would be a useful time
to return to Mr Whittaker. We have this familiar group of issues
to do with guidance, principles and intent or lack of it. I think
it would be helpful if we could have your response, particularly
to what Lord Fraser has been saying, about the interaction between
(Lord Archer of Sandwell) My Lord Chairman, if
you are concluding this part of the matter, I wonder if I might
make one comment?
282. Of course.
(Lord Archer of Sandwell) The House of Lords Select
Committee on Delegated Legislation is also considering this subject.
I think you will have the advantage of reading our report before
we have the advantage of reading yours, but it might just be worth
seeing what each other says before we conclude.
283. Thank you very much.
(Mr Whittaker) As I indicated when we last met,
we for our part have no difficulty with the idea that guidance
which we issue should have a special status in providing comfort
to people who act in accordance with it. This would not legitimise
conduct which is criminal under other parts of the law, but could
be relevant for the purpose of the market abuse provision which
we are discussing. We very much want to have a co-operative relationship
with the firms we relate to in which firms feel free to come to
us for guidance. We regard this as good for compliance, good for
the industry. We are not necessarily very enthusiastic about the
idea there should be a duty on us to give guidance in a big range
of situations. That seems to us to raise the issue of who determines
the resource allocation within FSA. Is it the board of the FSA
determining where they think the risks most lie, or is it those
in the industry who come to us and ask us to give guidance? We
know that some overseas regulators find much of their resource
is taken up in giving guidance rather than in the areas they would
themselves wish to target. One further point before we leave the
issue of guidance. We are conscious there is conflict, or potential
conflict, between giving guidance to firms on individual transactions
and the responsibilities of the senior management of those firms
for the management of their businesses. We would not want to encourage
a situation in which there was in any particular area of operation
the growing up of a dependency culture in which firms felt unable
to take action themselves without seeking guidance from the regulator.
With that caveat, we are generally supportive of the idea.
284. Do any of the witnesses want to respond
to that? How far do you think that takes us?
(Mr Sylvain) My Lord Chairman, on the issue of
intent which the FSA seem to want to keep out, as some of the
discussion shows here I do not think you can keep it out. In my
experience, market abuse and something that is intentional is
just an exaggerated form of normal market behaviour. For instance,
every day a large City brokers in the United Kingdom will issue
research reports on stock and it might be a stock that they own.
If they issue a very glowing report about a stock and the price
goes up, was there an intent to abuse the market or is that just
everyday business in the financial services world? Similarly,
if you take a short position on a stock and the stock goes down,
is the fact that the stock went down evidence that you meant to
abuse the market? My point is that I do not think you can distinguish
very easily behaviours which have the same impact between the
one who intended to have a manipulative impact from the one who
simply was engaging in normal markets where in markets it is the
behaviour of buying and selling which forces prices up and down.
So actions all the time in the market will create outcomes which,
with 20/20 hindsight, one might say were intended to drive the
price up or down but which are actually just normal. That is what
happens if you sell a load of stock that you have. The price will
go down but it is not your intent. Your intent is to capture as
much price as you can for that while you are selling. So the intent
is very important in that and I do not see how you can do any
(Mr Vipond) My Lord Chairman, I think that is
exactly right. The problem is with market abuse and it is in clauses
56 and 57, which you have discussed already, rather than many
other clauses, but the intent issue is so critical. Beyond that
I think there is an important issue about guidance, that is, the
guidance from the FSA, and that is that if guidance is to be sought,
then in general the FSA have an obligation to have an open relationship
with firms that will allow them to give that guidance on an informal
basis, where possible, and formally, where necessary. The danger
I think we face at the moment is that people will be reticent
about having that open relationship with their regulator precisely
because of the growth in emphasis on enforcement on a more legalistic
(Mr Blunden) Just a very quick point on the resource
allocation required for guidance. The FSA could take a leaf out
of the industry's book. Where we do not have sufficient resources
to do something we out-source it and perhaps the FSA could make
whoever is requiring the guidance pay for it and make it available
to all on the Internet.
285. May I say that I do feel there is a
very considerable difference of opinion between Mr Buxton and
Mr Vipond and Miss Hutchinson, which I suggest is there in graphic
terms. Mr Vipond has just said no, the legalistic approach would,
he felt, be damaging to a good relationship between the regulator
and the industry and Miss Hutchinson's plea for certainty seems
to be exactly that. Similarlyand I wrote it downMr
Buxton said he was against formal rules, which seems also to be
contrary to the notion of the continuous desire for categorical
certainty. I quite understand the position taken by Mr Buxton
and Mr Vipond because it sounds very much like the process by
which the SIB rules were interpreted and the rule book developed
and so on and so forth. So I wonder if I have interpreted it correctly
and if Miss Hutchinson could say if she felt that the regime of
the SIB principles and developed rule book equally fell into the
dangers to which she has tried to alert us today?
(Ms Hutchinson) I think the concern we have is
that, given the strict penalties, the severe penalties, there
may be for market abuse, people have to be clear, or as clear
as they can be, what is and what is not market abuse, but we do
live in a moving world and, as Dominic said, you cannot legislate
for everything, the market is always going to be ahead of you,
but you do need some safe harbours. If there is a code you ought
to be all right if you comply with that code, subject to an intent
to abuse it. If you ask for guidance and you are given guidance,
you ought to be all right if you comply with it and that is the
certainty working, that in certain situations you know you are
going to be on the right side of the line. We are not trying to
make it more legalistic. What we are trying to doand I
am sorry if this is not coming overis to make it workable
and user-friendly for the people in the market so that they know
where the line is, and if they do not, they know where they can
go to find out.
(Mr Buxton) I hope I did not say I was against
all rules. What I said was that the legislation empowers the FSA
to make more rules and what I wanted is for more rules actually
to be in the legislation on some points. I mentioned particularly
clauses 56 and 57. I think they are very important, but let me
give you a practical example. Andrew Whittaker has talked about
senior executives and their liability. I do not know whether the
Committee is aware that all non-executive directorsI am
talking about non-executive directorsof financial companies
are also completely liable and actually sign a liability document
when they become a director of a financial company. I believe
that those people need to know what their liability is and I think
it needs to be spelt out because otherwise it may be very difficult
to get non-executive directors to be non-executive directors of
financial companies. So I am not against the rule book but I think
I take really exactly the same view as Miss Hutchinson has just
taken. We need as much certainty as we can get within the context
of a relationship with the FSA that we have talked about on guidance.
286. Just a small point on this issue. Howard
Davies has said on record that he favours an informal pre-clearance
on many occasions and Andrew Whittaker mentioned that as one of
the courses of action they may well take, and I suspect that course
of action may well be taken far more frequently than an official
request for guidance. What kind of conversations and what kind
of culture need to be developed at the FSA to get that relationship
(Mr Vipond) If I were starting I would pay tribute
to the old supervisory culture that the Bank of England had, and
some of the old SROs, where I think a great deal of what one would
hope exists in the future already existed. It is not beside the
point that London's success as a financial centre is partly due
to the quality of the regulation and I think you will find that
international firms particularly have appreciated the way in which
they can talk openly and honestly to regulators about complex
deals and get guidance. It is something they cannot do in other
parts of the world very often. The culture is one which is very
much a sharing, not a symbiotic culture but one that shares values,
shares aspirations. One of the biggest tasks Howard Davies has
in merging nine different regulatory cultures is to sustain that
basic ability to work with businesses in the market place. I think
that is something we would all strongly endorse. In a sense the
debate about market abuse, which, is, I repeat two clauses in
the Bill, is a discrete area of special civil offence and we should
not allow that to cloud the overall view of the business of enforcement
of the FSA.
287. Andrew Whittaker, I think we should
wrap up this part of the discussion but do you want to have a
(Mr Whittaker) There are two things I would particularly
point to in terms of promoting the right relationship between
regulator and regulated. I think, first of all, it needs to start
at the top and I think it has started at the top. I think there
is a clear message going out to staff that a good relationship
with the regulated community is important to us in terms of the
regulator we want to be. Secondly, from a personal point of view
I would say that I think a degree of empowerment is important,
that people need to know that in fostering a good relationship
and in taking responsibility in giving views to people in the
industry the organisation will back them, and I think we also
have that as well. So I think those two things are what I would
regard as important. I think they are both in place.
Lord Montague of Oxford
288. Mr Buxton, I want to take up one point
you made about non-executive directors and the difficulty you
might have in securing them. Would they not be protected by insurance,
and, therefore, not be so worried?
(Mr Buxton) There is a degree of insurance that
can protect them but they are not completely protected. I believe
that the protection they have is knowing that they can only be
prosecuted by the FSA for actions for which they are responsible,
i.e. policies that they have laid down that have resulted in a
(Mr Roe) There is just one point I might make
for balance in some of this discussion. I think it is worth bearing
in mind when we are talking about intent what the underlying objective
of the policy that we set out in the market abuse provisions is.
Essentially the new regime is concerned with the effects of behaviour
and very central to the Government's policy here is the idea that
we must have efficient, well-run markets which can allocate resources
effectively and so on. So we are primarily, I think, concerned
with market efficiency and it seems to me and to Ministers to
be the case that confidence in markets is affected by actions
regardless of intentions, and what is important, I think, is for
people to act with due care and attention when they are operating
in financial markets. I say this not because the Government necessarily
disagrees with all of the points that have been made but I think
it is worth keeping in mind that particular background.
289. I hate to attempt to sum this up because
it will immediately cause a whole series of disagreements. But
what I am taking from this is that if there is no intent that
can be shown and if people do stick to the guidance and if they
do take due care and diligence, then they will be reasonably safe.
Is that an over-strong statement?
(Mr Whittaker) I am not sure, Chairman.
Lord Fraser of Carmyllie: If
you have regard to the FSA's formal guidance and if you also go
along and ask them, "What I am about to do, is that okay?",
is that not a proper discharge of due care?
Chairman: And there
is no intent to do something else?
Lord Fraser of Carmyllie
290. I go to the FSA and I say, "I
am going to do this. I do not know whether you would regard this
as abuse. I have looked at your guidance. I cannot see that there
is any breach. Can you tell me on any formal basis?" I understand
that Howard Davies said there is not going to be a formal procedure
but if the qualification that is now being suggested is one of
paying due care and attention, if I have gone through both those
steps it would seem to me that is a very clear indication that
I have discharged that duty that is incumbent upon me, is it not?
(Mr Whittaker) As the Bill now stands, if you
were to come to us for guidance on a particular transaction and
we were to say that we thought that transaction was consistent
with the market abuse provisions, then provided you had been open
with us in what you said and the situation was as you described
it, I think we would be extremely unlikely to take any action
in relation to those provisions. There is not currently in the
Bill as it stands at the moment anything that says that anyone
who has acted with due care and attention can, in the absence
of having gone to the regulator, nevertheless regard themselves
as protected from action.
Chairman: I think
we may have moved a little way forward on this but we will have
to look at the record and we ourselves will have to consider this.
I would now like to move on to general issues about FSA powers
of discipline and enforcement against authorised persons and their
291. I think it moves seriously on to whether
the FSA's powers are coherent and are they sufficient. I want
to come back to Lord Eatwell's theme which has really run through
this, and what Mrs Blackman mentioned, that, on the one hand,
we can hear two voices, one saying, "Let us have a good informal
relationship with the FSA backed up by known powers and rules."
On the other, there is a voice coming quite stronglyand
I am not pointing particularly to Andrew Buxton but one or two
of you are saying, "Don't specify too closely. We have a
good relationship. It is a very dynamic market, and if that dynamic
means the rules get out-of-date, then we need an informal process
by which we can clear that." What would worry some of us
in terms of this being too flexible is that there are other players
in this and we have to remember there are consumers and very often
we hear the views of the big players and the wholesales but the
consumers also have to know there is a dynamic and that the rules
are changing, are becoming more flexible, that there is a smooth
and easy relationship between the wholesale market which may outpace
consumer knowledge. So in a sense do we think that the FSA's powers
here are coherent and are they sufficient? Can I pick on Antony
because Antony is the prime suspect. He has a strong view and
most of us have had the benefit of his presentation to the conference
two or three weeks ago.
(Mr Blunden) I was rather hoping to leave it to
292. You made it a theme in your presentation
that you were concerned about not having a rule book, rules that
were understood, guarantees of safe harbours and so on.
(Mr Blunden) Yes, certainly. That concerns me
greatly. Again, I apologise, my Lord Chairman, I find myself drifting
back to certainty but it seems that most things come back to that.
The FSA's powers are huge, they are enormous, and I find it troubling
that with a great degree of uncertainty as to what market abuse
is the FSA has such an unmitigated amount of powers. I think particularly
with regard to individuals, when the FSA is pursuing individuals,
there is again such a discrepancy of resources that I welcome
Lucy Hutchinson's thought of an independent enforcement committee
and the ability for that independent committee to give Legal Aid
to individuals. Firms can go one on one against the FSA without
too much of a problem but when you are being prosecuted by the
FSA you are looking at bills of hundreds of thousands of pounds
and very few individuals, even in the financial services sector,
can afford that sort of money.
293. The FSA did point out that out of 1,850
staff there are only 110 engaged in enforcement against authorised
persons. In a sense are you not getting your fears for this enormous
power of the FSA, as you describe it, out of balance? The voice
I hear from the other side of the room is "go on, we understand
that people want a seamless transition to build on a culture that
already exists", okay nine regulatory authorities coming
under one, but the aim is to have a seamless transition where
one does not disturb a culture that is working very well anyway.
Are you not getting these fears out of proportion?
(Mr Blunden) If that bit of the existing culture
that is working well, and I acknowledge that part of it does work
well, if that was transferred to the FSA and enlarged then it
would certainly allay some of our fears, although not all of them.
I am aware that a number of times I have had a number of meetings
with the FSA in various bodies and Howard Davies and a number
of his staff have all said "do not worry, it will be fine".
I would love to believe that, and I am sure they genuinely mean
it and they want it to be fine, the problem is we cannot have
a system that is going to exist for hopefully a considerable number
of years relying on the initial chairman, the initial managing
director of enforcement, who I am sure are dedicated to ensuring
that it will be fine but five years down the road we do not know
who this vast amount of power will be handed to and that does
(Lord Archer of Sandwell) My Lord Chairman, I
think everyone is in favour of an informal relationship where
people can talk and get advice. As I said earlier, there are a
number of authorities which operate in this way. If I might suggest
what I think is probably a good example, the Occupational Pensions
Regulatory Authority tries to work in this way. But at the end
of the line if there has to be enforcement action then they are
in the business of quasi-judicial decisions. I think they rather
regard it almost as a failure on their part if it gets that far
but if it gets that far that cannot be a reason for slipshod procedures
and I think there would be some impact probably of Article 6 on
this if we did have slipshod procedures. If I might just suggest
one or two things that occurred to the Council on Tribunals on
this. First of all, Chinese walls are quite important in this
context. Whether they should be Chinese walls or whether they
should be written into the Bill, I do not think I would want to
be dogmatic. But, for example, if anything was said by someone
who was going to be the potential recipient of disciplinary procedure
to the staff at an earlier stage they should be able to do that
without feeling that it might be disclosed to the enforcement
committee at a later stage. There ought to be some sort of barrier
between what is said to the staff and what the enforcement committee
is told otherwise you will not get people being frank and you
will not get them asking for advice. The second thing is that
there ought to be an opportunity, we believe, to present your
case orally at least to the enforcement committee. It should not
be a question of passing judgment on you without you having had
an opportunity orally to argue your case. I would support strongly
what Ms Hutchinson said about the independence of the enforcement
committee. I would want to argue two things about that. The first
is that they should not be in any sense employees of the FSA.
We would recommend that the chairman should be someone like a
High Court judge, or a retired High Court judge if the Lord Chancellor
objected to seconding a judge, but someone of that status who
would operate as chairman and who would not be in any sense under
the control of the committee. In relation to the other members,
the representatives of public interest, I think we would want
to argueit is not spelt out in the Bill, it may be intendedthat
they should have votes together with the chairman so that they
might actually outvote the chairman if that arose. If there is
a disagreement it should be made known to those concerned. When
there is a question, as I think is suggested in the paper, of
the chairman issuing a warning we believe that the other members
should not be associated with that. If they are then they should
be different members who actually hear the complaint. There are
a number of these matters. Perhaps it would be quicker if we put
in a document about it. There are a number of matters of this
kind which we would regard as essential if the FSA is going to
make binding decisions on people.
294. There are two models that are emerging
here as I understand it. One is where the enforcement committee
is a body which takes a decision and it comes to a judgment and
then the tribunal can go through the whole process if anyone is
not happy with it. There is another model which was mentioned
which is that the enforcement committee, in a sense, is merely
a filtering agent which says whether or not a case should proceed.
Meanwhile people try to agree on the outcome and it is only if
they fail to agree that the enforcement committee should give
some indication of how it feels but basically it then goes to
(Lord Archer of Sandwell) Yes.
295. These are two models which I interpret
are being discussed here. Your comments, I take it, are related
to the first model which is where the enforcement committee has
the power to actually come to a decision. Therefore you want to
build in a series of measures to ensure degrees of independence
between the different parts of the process and also to ensure
that the individuals involved are independent.
(Lord Archer of Sandwell) Yes, thank you, my Lord
Chairman, that is so. If that were the pattern then it would be
in rather a Pickwickian sense of the word that the tribunal would
be a tribunal of first instance. It would be a tribunal of appeal.
I think probably what was meant by saying that it was a tribunal
of first instance was that it could rehear the case and the Lord
Chancellor would not make regulations excluding it from hearing
particular evidence. If that was all that was meant then there
is no difficulty.
296. Do you have a view between those two
models as to which direction you would prefer to see this moving;
one is that the enforcement committee is the body that comes to
a decision and then you have the tribunal; or is it that the enforcement
committee sends the case forward to the next stage which is the
tribunal? Maybe that is an unfair question.
(Lord Archer of Sandwell) I cannot be certain
it is the view of the Council but my own view is the second one,
I think, which was why I was pleased to see what the Economic
Secretary had said.
297. It has been dashed from our lips!
(Lord Archer of Sandwell) Like all of us who have
been Ministers someone later construes what we said as to what
we ought to have said!
298. Can I just pick that up. So you think
there would be some merit in a system that took through the enforcement
committee the parties to whatever it is that has taken place in
the hope that there would be some sort of agreement, settlement,
fines, whatever might be the outcome, and only if that failed
then taking it to the tribunal, as it were, for the case to be
more formally heard?
(Lord Archer of Sandwell) Yes, that would be the
model that I had in my mind. I do not know which building they
will operate in but if the two things could happen on different
floors that would be an advantage.
Chairman: Can I ask
what others think about these two models?
299. If you take the second model where
the FSA becomes a sort of Crown Prosecution Service and the tribunal
is the one where the decision is made, is that not going to be
a very cumbersome procedure? One can imagine a large number of
things that are really quite minor in nature ending up going to
the tribunal which really ought to have been settled by the FSA
if you took the original interpretation of it as being a regulator,
which takes these decisions within itself and then uses the tribunal
as an appeal court. It does seem to me that before very long the
whole thing will become gridlocked with cases pending, waiting,
and all the plea bargaining that is going on to try and avoid
it going to the tribunal and little will come out and the result
could very well be that which is not very well represented around
this discussion, that the public at large lose confidence in it.
(Lord Archer of Sandwell) I do see that argument
and I think it is quite an important one. I would envisage, and
I rather thought a number of people in the Committee and a number
of witnesses were envisaging, that the plea bargaining would be
part of the discussion, it would not entail a decision by the
enforcement committee. I can see in a particular case where not
very much is at stake and you cannot get agreement that it would
be better if you could have a quick sharp decision. Possibly you
could have a two tier system.