Joint Committee on Financial Services and Markets Minutes of Evidence

Examination of witnesses (Questions 433 - 439)




  433.  Good afternoon, Lord Hobhouse and Lord Lester. Welcome to this Joint Committee. We have had a number of sessions now at which we have been exploring the issues in the draft Bill. We have been taking as our text the Treasury Progress Report which is the Treasury's response to the consultation and asking witnesses how far they think that what is being offered there meets their concerns. We have had two quite lengthy sessions on the whole subject of discipline and enforcement. We have had present David Roe from the Treasury and Andrew Whittaker from the FSA, who are sitting to your right, who have at the appropriate moment been asked to comment on some of the things which have been said, so we have been able to have running interaction on some of the matters. We are very pleased you have been able to come this afternoon. We have recently had another three papers given to us, two of which are particularly relevant, one from the Treasury and one from the FSA, dealing with the question of enforcement procedures. They move the story on, partly I think falling under the heading of clarification. We are particularly interested this afternoon to discuss with you the extent to which you feel the discussion that has taken place, the clarifications we have had, take forward the issues which each of you have previously expressed concern about or have offered views on. That is basically our agenda. I would like to begin by asking you to comment, and to respond to what you have now seen in terms of this moving story; how far you think it takes us; whether the issues that are of your greatest concern are being dealt with; and how much further we have to go. Lord Hobhouse?
  (Lord Hobhouse of Woodborough)  Thank you for inviting me to attend. As you will appreciate as a Law Lord it is not really open to me to answer legal questions which may in due course come before the courts in particular on the effect of the Human Rights Convention but I am happy that you have asked also Lord Lester to attend, so I will defer to him on any question like that if that is acceptable to you. Now the reason why I have accepted your invitation to appear is because I am concerned, and I continue to be concerned, about the drafting and inclusion in its present form of part 6 of the draft, that is the part which deals with civil fines and market abuse. It first came to my attention last autumn when I attended a seminar of the Financial Law Panel which was also attended by representatives of the Treasury and by members of the judiciary. I am afraid the view that was formed by quite a number of us on that occasion was that it was not yet in a fit state to form part of a Bill to be introduced to the House. That substantially remains the same position today. The only draft in existence is the same draft as was then seen and the only proposals for relevant changes are those which are to be made to Section 60 and following and part 7. You have asked questions about that and you are definitely interested, and if I may leave that to the discussion, but they do in my view go a long way towards meeting the concerns, and that is very helpful because the previous situation was undoubtedly unsatisfactory. It was summarised eloquently by Mr Loughton at one of your hearings as being both policeman, prosecutor, judge and then the person who had the privilege of spending the fine that had been collected. My concerns relate to Clause 56 and they really remain because there have been no changes proposed to Clause 56 and furthermore certain of the suggestions for the improvement of Clause 56 have been specifically rejected by the Minister. If I might just indicate to you very briefly the headings under which those concerns arise. The first is that Section 56 in conjunction with Clause 58 is a power to fine, and it is a power to impose a punishment. Therefore, whatever may be the technicalities, it is essentially criminal and the use of the word civil is not going to alter this. This is not a scheme for the payment of compensation nor is it a scheme for the payment of restitution or restitution. It is a scheme for punishment and indeed that is the intention of the Minister, as she has made perfectly clear. Normally the scheme for punishment would be connected to a declaration if a certain conduct was illegal. Clause 56 subsection (1) does not make any conduct illegal and it specifically refrains from doing that. Therefore, as it is drafted at present it purports to authorise punishment for what is lawful conduct. That is something which is just wrong in principle. The situation is made more serious by the provision of subclause (9) which says that behaviour can be inaction as well as action. That means somebody who is under no duty to act in a particular way, no legal duty, can nevertheless be punished for failing to act and that again is an extreme example of the consequences of this draft as it presently stands. Furthermore, and this is a point which has been made on many occasions, Clause 56(1) drafts what we might describe as the "offence" in terms which lack certainty and clarity. Now you may feel that in this area it is very important that there should be certainty and clarity and that at present is lacking as a number of witnesses have pointed out to you. The code in my view, and I can amplify this if you wish, does not meet this objection, and indeed the function of a code in this context should be to provide a safe haven rather than to meet deficiencies in the drafting of the Bill itself. In other words, the function of the code ought to be to tell people what is not unlawful so that they know where they stand; if they comply with the code then they are not going to be attacked. Fifthly, it is a matter of deliberate policy, as has been stated by the Minister in her evidence on 18 March this year, pages 33 to 34, that the intention is to punish innocent conduct. There has been a deliberate exclusion of any element of intent and it is justified solely by the effect of the conduct upon confidence in the market. That is again a difficult concept to support and it is difficult to accept a scheme which includes punishing people for innocent conduct. Sixthly, there is a lack of definition to whom these provisions are to apply. They are separate from the regulatory and disciplinary provisions. They are deliberately drafted so as to apply to the non regulated community. There is no necessary problem about that but you must then engage on a much more precise exercise of definition, than has presently been undertaken. The Minister, if I may say so, with respect, in the same passages to which I have already referred seems to be under a misapprehension as to the way in which the Bill has been drafted. She treats it as applying to people who are participants in the market whereas it is going to apply to people who are non participants. I can amplify this if you wish. It is quite clear from subclauses 1(a),(b), (ii) and (iii) and 5 and that is its effect and indeed some witnesses who have appeared before you have pointed that out to you and that leads on to the seventh point I want to make which is that it applies extraterritorially, and that is subclause 4(b). All those things when one adds them together add up to a scheme for punishing people who may be abroad, who may not be taking any active part in any market in this country, who have not done anything illegal, whose conduct is innocent, who are under no duty to act where they are accused of failing to act, and nevertheless punishing them for such conduct. That is something which needs very careful consideration before it can be approved and indeed if the objectives which underlie that scheme are to be achieved then it needs a new approach to the drafting and much more careful understanding of what is involved. May I say that I am not adverse to effective regulatory schemes and I would wish to endorse the general approach and policy of the Bill in so far as it is proper for me to do so. It is very important that we get it right on this occasion. That has been said on previous occasions and it is self-evident. Furthermore, in this area of commercial activity, there is always a need for certainty, that point has been made to you, and that is lacking at present and furthermore the whole object is to create confidence and confidence will not be created where an uncertain arbitrary scheme, which may well prove to be ineffective, is introduced in this Bill. Now this is what I would call a bolt on provision, Section 56 and following. If it cannot be drafted in a satisfactory form before the Bill is introduced to Parliament then one of the things which ought to be considered is whether it ought not to wait to an amending Bill in order that a properly drafted provision can be introduced.

  434.  Thank you very much, Lord Hobhouse. Lord Lester?
  (Lord Lester of Herne Hill)  Thank you very much, Lord Chairman. I too would like to say what a pleasure it is to give evidence to you and I shall try to follow the example of Lord Hobhouse by speaking bluntly and avoiding legal jargon or gobbledegook because I sympathise with the great majority of your Committee who are not lawyers. Can I just make one or two preliminary points. The first is this is an excellent procedure. It is quite excellent for the Government to come to this Joint Committee to have pre-legislative scrutiny and that you are taking evidence. Secondly, like Lord Hobhouse, I enthusiastically in my case support the aims of the Bill. I agree respectfully with every point that he has made, looking at the Bill through the eyes of a British lawyer, using traditional British principles of justice without even thinking of the European Human Rights Convention. I am not going to repeat any of the points that Lord Hobhouse has made. What I shall do, if I may, is briefly to answer your question, looking at the answer mainly through the eyes of the new constitutional standards that will be in force when the Human Rights Act comes into force. A couple of points on that, if I may. These are not alien, foreign, curious European standards; the standards in Article 6 of the Human Rights Convention were drafted by British legal civil servants reflecting ancient British principles of natural justice and fairness and Article 6 is described in Strasbourg as the "British" Article of the Convention. So we can leave to one side any feeling that this is some arcane alien standard. One other generality, if I may. When the Bill is published, the Minister will undoubtedly put on the face of it his or her view that it is compatible with the European Convention on Human Rights; that is because Section 19 of the Human Rights Act requires such a statement. Now one unfortunate feature of Government practice at the moment is that reasons are not given at the outset for that opinion. Therefore, it seems to me very important indeed for this Joint Committee, if I may say so, to seek to persuade the Government to give their reasons now and before the Bill is published for considering that what they propose is compatible with Convention rights. I say that because you have my opinion, my advice, the advice of many others with the cards facing upwards on the table. You can understand what we are saying we think the Convention means. What you do not have is the benefit of the Government's response to that. It seems to me unfair to the Joint Committee if you are not provided with some proper response explaining in respect of each of the concerns what the Government's position is; otherwise you are just looking at one side of the picture. May I just say this that the concerns expressed in my joint opinion and the advice were of course concerns expressed because those were the concerns raised by my clients; but in addition to those concerns I have some concerns of my own. You will not have time to go into them now but may I simply say what they are and then pass on to the Convention. Firstly, I doubt very much whether the statutory immunity from liability which the FSA will enjoy will pass muster under Article 6 of the Convention. Similar immunities have been struck down and I doubt whether that one will stand. Secondly, the combination of an FSA power to fine and to use the fine as a clawback for its legal costs seems to me to be wrong in principle. It is improper to use a fine for that purpose and I am sure that anyhow that process should be done by the independent tribunal and not by the FSA themselves who will be self-interested. Thirdly, I am worried—and here I refer to my colleague Charles Flint QC's lecture which the Committee will have been provided with—I am worried, as he is, by what he calls plea bargaining, the pressure upon a person to plead guilty and submit to a massive fine rather than to appeal. I simply remind the Committee that that European principle of "equality of arms", as it is called, says that you must not put a person into an unequal position vis-a-vis an authority like the FSA. Fourthly, I think that giving the FSA the extraordinary power under Section 55(2) to decide the scope of tort liability between who are to be the private persons who can sue seems to me to be a quite extraordinary power to give to a body that is not Parliament or a Minister. That just seems to me constitutionally improper. And lastly, like Charles Flint QC, I think the principle of legal certainty applies not only if the proceedings are classified as criminal in substance for the purposes of Article 6 safeguards but even if they are civil because here people's civil rights to property and to reputation are going to be determined by the FSA at the first instance and that triggers the requirements of fairness and equality in civil proceedings as well as in criminal proceedings. I shall not repeat the other areas of concern. Those are all set out in the opinion and advice. If it is helpful I can respond as to which of those I remain concerned about. I remain concerned that the market abuses regime will be regarded as criminal whatever the Bill may say and therefore will trigger all the procedural safeguards, the full panoply of safeguards required by Article 6. I think it wholly unsatisfactory that that opinion will only ripen into a decision when the Law Lords decide it in three years' time when the Human Rights Act is in force and someone takes the case all the way there upsetting the entire scheme. It seems to me to be lacking in common sense if the Bill is introduced with that ambiguity in it—and I respectfully agree with Lord Alexander of Weedon's Delegated Powers and Deregulation Committee's view that that uncertainty must be removed—and it should be removed by making it clear that what are called civil fines, are criminal and by taking the consequences in terms of procedural fairness. I remain very concerned indeed and nothing that I have read anywhere has in any way altered my view or those of many others that this is in substance criminal, as Lord Hobhouse himself has said. So far as the right to an independent and impartial tribunal is concerned I commend the fact that the Government and the FSA have moved to the position where there will be an independent and impartial tribunal able to look at the substance afresh and carry out the trial from the beginning. My concern about legal assistance for those who cannot afford representation remains. As regards the presumption of innocence that I regard as a very serious matter. Plainly it has got to be respected both by the FSA and by the statutory scheme. As far as compelled evidence is concerned, I remain concerned that though I believe it is not understood widely, the compelled evidence problem, the Ernest Saunders case problem, extends to no more than compelling oral testimony and then using it in evidence thereafter. What must not happen is that somebody can be compelled to give evidence and then their testimony can be used, as happened in Ernest Saunders' case. That does not mean that it is necessary to stop a search warrant being used to obtain evidence of documents and so on independent of the will of the accused. There I think it is quite clear that the Bill as it stands would allow breaches of Article 6 in that respect. So far as legal certainty is concerned I will not repeat the very full description given by Lord Hobhouse. There is a complete lack of legal certainty but what you may wish to discuss is what to do about it. Finally, the prohibition against double jeopardy also seems to me to be still a serious concern. In brief the one area where my concern has been largely allayed is in the right to an independent and impartial court.

Chairman:  Thank you very much. I think you have amply fulfilled your remit of giving us your opinions with an absence of legal jargon. You are quite right there are many of us who are not lawyers. Mrs Blackman?

Mrs Blackman

  435.  I think I am going to modify my question in the light of the statements made. On the issue of civil and criminal justice, what can be done now in terms of amending the Bill to take account of some of the more certain or convincing opinions that you have given this afternoon, for example, in terms of your view the whole of the market abuse regime as being criminal. Do you see moves that can be made to clarify with certainty through the Bill which aspects are most certainly criminal?
  (Lord Lester of Herne Hill)  I think there are several layers of the problem. The first is should the Bill admit on its face that this is criminal, to which the answer is yes it should. Once it does that then Parliamentary counsel will easily be able to reflect the consequences of that in the subsequent provisions of the Bill. What has happened, for reasons I understand but do not agree with, is the sponsors of the Bill are attempting to avoid the full panoply of criminal justice by calling the process civil in form even though it is criminal in its consequences. The policy decision that has to be taken, and I very much hope the Joint Committee will say this, is to recognise what Lord Hobhouse has said so clearly and strongly and will be likely to say were he sitting as a judge I suspect, namely that this is criminal in substance. That is exactly what the French Court of Appeal and Court of Cassation have done as recently as December and January in judgements I have read. It is not just a few practitioners who are saying this. There are courts that have decided this already. That is the policy decision. Once that decision has been taken I think certain matters will flow from that of a technical kind. For example, there will need to be a restriction on the admissibility of evidence that violates presumption of innocence and other matters of that sort. That is the key thing which can be done. It is not a drafting problem. It is a policy question.

Lord Taverne

  436.  I am sorry if I have not necessarily got all the points clear but any knowledge I had of the law was so long ago I have forgotten it all. You say that 56(1) lacks clarity and certainty and the Code does not meet the objection. Do you think then that the Code should be so comprehensive that it deals with all offences which can be regarded as within the scope of this part of the Act?
  (Lord Hobhouse of Woodborough)  The most useful function of the Code will be to provide guidance to people in the City and people who are being advised what is safe conduct. In other words, it provides them with a code which if they follow then they know they are acting in accordance with the requirements of the authority. That is something which people have stressed the importance of in evidence to this Committee beforehand and is very important practically because people participating in these markets, whether at the disciplinary level or at the market abuse level, do need to know what conduct is permissable. So the Code must, in my view, fulfil that function for reasons of fairness and reasons of fulfilling the practical need. What I would like to see in this Bill would be something which would build that in as part of the scheme, part 6 at least, which said that it would be a defence to any allegation of market abuse that a person had bona fide acted in accordance with the Code. That is looking at it from that point of view. Looking at it from the other point of view of the positive, defining the criminal activity, the essential definition must be in the statute, in the primary legislation, in my view. If you are creating a criminal offence or something that is tantamount to a criminal offence, then it ought to be defined in statute although certain Is may be dotted and Ts may be crossed in regulations for example. Certain forms of disclosure that have to be made, certain types of commodity and transaction that have to be disclosed, that type of thing, but there must be a free-standing and adequate definition in the primary legislation itself. May I say this: that having looked at the proposed Code it does not set at rest any of my concerns at all.
  (Lord Lester of Herne Hill)  Would you mind very much if I also said something on that question in answer to Lord Taverne because I find the issues about legal certainty particularly problematic. Would that be helpful?


  437.  It would.
  (Lord Lester of Herne Hill)  The dilemma is that one does not want to have the bad old days of the over-detailed rule book approach on the one hand, but on the other hand, you want people to be able reasonably to foresee whether their misconduct will lead to unpleasant consequences in the form of massive fines and disqualification. This is a very difficult problem because one wants flexibility and one wants legal certainty and plainly the primary Act cannot solve all the problems itself. One other aspect is that if this is not got right members of the bar like myself will be employed by dubious clients who will use every argument they can think of and incur huge costs because it will be worth it given the massive nature of the fines in arguing unmeritorious points because of defects in the scheme. That is why Lord Taverne's question seemed to me to be extremely important. If I can have a stab at answering it. It seems to me that the more one create binding rules the better because if one has binding rules rather than vague moral precepts then that enables one to have reasonable certainty. What is quite clear to me is that what you cannot do is to treat the moral precepts in the Code as triggering what is really criminal liability because of vagueness and you certainly cannot do what the FSA now contemplate apparently which is to treat conduct analogous to what is in the Code as being potentially capable of triggering liability. So there is a long way to go in dealing with it and I think Lord Alexander's Committee suggested one way of dealing with it would be by way of advance clearance to give you a safe harbour. That is alright up to a point but I doubt very much whether the FSA will be very keen (because they will not have the resources) on providing an early clearance system. If they are not keen on doing so they cannot have their cake and eat it as well. If they are not willing to provide that kind of early warning early clearance system it seems to me one has got to go for greater legal certainty. Ideally I would go for both.

Mr Heathcoat-Amory

  438.  It seems to me that if the Government proceed with this Bill as it is quite large parts of it could turn out to be unenforceable so rather than improving regulation we could be undermining it. My question is what might be the consequences if despite the ministerial certificate the Bill turns out by the court to be incompatible with the European Convention in a number of respects? What might happen? Would the FSA have to withdraw and try and use other parts of the Bill? Would the Bill have to be amended by Parliament in short order? Could our witnesses perhaps look a little bit ahead at the worst case scenario to find out what might happen and what we can do about it.
  (Lord Lester of Herne Hill)  When the Human Rights Act comes into force we will be operating under a new constitutional and legal order because the courts will be given the duty under Section 3 of that Act where possible to construe legislation to conform with Convention rights even by means of a strained interpretation and if they cannot do so then they may grant a declaration of incompatibility, where they cannot with their strained interpretation solve the problem which has been left to them by Parliament. That means that there will be great uncertainty in the market-place until the House of Lords has decided whether section so-and-so can be read compatibly with Article 6 of the Convention or not, to take a concrete case, and whether it is criminal or civil in terms of safeguards. This is not hypothetical. There is a case in the Court of Appeal pending judgement, the Dame Shirley Porter case where her case is that the regime under which she was fined £26 million was criminal in nature and one of the issues even without the Human Rights Act the Court has got to decide and the Law Lords may have to decide is that question. Until that question is solved the markets will not have the faintest idea as to the procedural rights which the alleged wrong-doers will enjoy and the House of Lords will have a choice either to reread the statute to solve the problem, to remove the defect or to say we cannot and therefore we declare it to be incompatible with Article 6 which is what the Court of Appeal decided the other day in another case called Kebilene when they decided that a reverse onus provision in terrorist legislation violated Article 6 of the Convention. That is also going to the House of Lords. So there will be a tremendous amount of enjoyable litigation at huge expense for me and my colleagues to no public benefit except to ourselves because of the defects in the legislation. That is why my plea is to take the business away from the bar but to make sure that we have a proper scheme.


  439.  Before going on with the questioning of my colleagues could I ask a question which I keep having to ask myself time and time again as we go through this quite complicated area? How far are your concerns related to the proposed market abuse regime and how far do they relate to the enforcement procedures generally and to other things that may be at issue here? Lord Hobhouse suggested that one part of this might be seen as a bolt-on—the part of it which is to do with market abuse. So far as questions arise from that, it seems to me that one can address them separately. And then there is the more general question, in the comments you are making about certainty and the questions about the criminal nature of some of these issues, of how far they apply to the enforcement process in general. I think it would be helpful to the Committee, as we go on with our conversation, if we could be clear how far they apply to both areas.
  (Lord Lester of Herne Hill)  I am less certain about the position with regard to disciplinary proceedings than market abuse. The way I would put it is that there is certainly a real possibility, given the draconian nature of the penalties, that the courts would regard these proceedings or disciplinary proceedings of a particular kind, certainly where a mental element was involved—dishonesty and matters of that kind—as being criminal in substance. That seems to me to be a very real possibility. The French cases to which I referred were of course dealing with disciplinary proceedings and the French courts held that because of the draconian nature of the fines, which were far more lenient than any we are talking about, there had to be Article 6 safeguards. So there is at the very least a real possibility that for the most heinous of disciplinary offences they would be regarded as criminal in substance. For the less serious ones, my own view is that they are unlikely to be regarded as criminal in substance. There is probably a spectrum of conduct and the gravity of penalty and the seriousness of the wrong-doing probably have to be taken into account. That is not a very helpful answer because it is vague but it is the best I can do.

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