Joint Committee on Financial Services and Markets Minutes of Evidence

Examination of witnesses (Questions 440 - 459)



  440.  And that is taken into account the papers we have had from the Treasury and the FSA about how they propose the disciplinary procedure should work. They propose a first stage which is an administrative process and then, where there is not a resolution of the issue, it becomes a judicial matter.
  (Lord Lester of Herne Hill)  I think they have moved admirably well. I have mentioned already my concern about the fines being inflicted by the FSA including their costs, which is one aspect. The other is the coercive element, saying to Mr X, "You can either go quietly and pay up, or you can exercise your right of appeal". That form of plea bargaining has none of the safeguards it has in the criminal process at the moment and could result in great unfairness.

  441.  How would you take care of that within the outlines of the scheme which is now being put forward by the FSA?
  (Lord Lester of Herne Hill)  I would like to think about that. I have not got a ready answer but it seems to me the problem needs to be thought about properly.

Lord Taverne

  442.  Can I ask you a question which is not covered in your Opinion, and that relates to the procedures which apply to the Ombudsman? Is there any danger that the fairness requirements of Article 6 of the Convention can also be invoked against the provisions dealing with the ombudsman? He seems to have a certain amount of arbitrary jurisdiction against which there appears to be no possibility of appeal. He has great powers to impose very large compensation awards. Is there a danger here too?
  (Lord Lester of Herne Hill)  I do not know whether the Committee have the benefit of yet another Opinion that was done by my colleague—they are in the same chambers, which I should mention for the record is Blackstone Chambers—David Pannick, QC. No, perhaps I cannot quote from that, it is not an Opinion which is in the public domain. Suffice it to say that there are some problematic features of the Ombudsman but I would not wish to give evidence on that now without further consideration.

Lord Fraser of Carmyllie

  443.  As I understand your response it is that the progress report that the Treasury published in March is such that you are confident now that the independent external tribunal would meet the Human Rights Convention requirements, but what you are saying is that does not excuse those who operate the system from ensuring at all stages up to appearance before that tribunal that nevertheless requirements under the Convention have to be met; such issues as equality of arms in plea bargaining have to be considered.
  (Lord Lester of Herne Hill)  That is right, Lord Fraser. I would be happier if there were a legally qualified chair or president of the tribunal, for obvious reasons. Subject to that, it seems to me that it is going to be an independent and impartial tribunal which satisfies the requirement of that part of Article 6, but the FSA will have a duty under the Human Rights Act, section 6, to comply with the Convention rights. It will not be liable necessarily for damages—that is another point—but it will be liable for damages under the Human Rights Act provided the judges somehow read away the immunity that is to be imposed in the FSA Bill. That is another inconsistency that needs to be removed. We do not want judges having to give a declaration of incompatibility of immunity to allow one to sue the FSA if they unreasonably searched my office or coerced me—and I am sure they would not do any such thing—in a way that violates equality of arms. I think Lord Fraser has summed up my position here.

  444.  What I wonder is if we might be in danger of focusing too much on the FSA. It is not only the FSA which will have these powers under the Act, Part XV of the Bill as it is presently drafted would allow the recognised investment exchanges similarly to have rules and impose draconian fines, deprive people of their livelihood and the like, and I take it in those circumstances the whole of the Human Rights Convention would apply to those processes as well?
  (Lord Lester of Herne Hill)  Yes, because they would be treated as public authorities for the purpose of the Human Rights Act and of the Convention. Even if they are private in form, their functions are public in substance and therefore they would be, and all the same safeguards must apply.

  445.  I think you make the point in your supplementary Advice about some of the previous SROs, that the character of the imposition of discipline in those circumstances stems from the contractual relationship within the exchange.
  (Lord Lester of Herne Hill)  Exactly so.

  446.  Am I incorrect then in understanding that once this Bill is in place with this framework that will fly off because the authority that the exchange has exercised in imposing discipline will be as its base a statutory one under the umbrella of the FSA?
  (Lord Lester of Herne Hill)  That is exactly right. I think in the old system they would have been treated as public authorities for judicial review purposes, but now it is certain beyond argument they will be treated as public authorities under the statutory scheme. I see our colleague in the Treasury nodding agreement. I am sure that is their intention as well. So a whole range of other bodies would be required to act in a constitutional way, if I can use that expression, by which I mean in accordance with traditional British principles of fairness which are anchored in the Human Rights Act and the European Convention.

  447.  Because both you and Lord Hobhouse expressed the view that three years hence this issue might come before the House of Lords and be regarded as incompatible with our obligations under that Convention. What I want to see if I am correct in understanding is, that issue might arise out of an action which is taken in respect of some disciplinary proceedings by one of these exchanges and not just the FSA itself?
  (Lord Lester of Herne Hill)  Certainly, and of course that applies not only in the context of this Bill but more widely. We have a unique opportunity at the moment with this Bill to get it right in advance. What I am really saying, and I am sure this is why the Committee is working, we should be prophylactic, we should be preventative, we should not really be authorising either as Government or Parliament a scheme that we know is likely to be highly vulnerable to legal challenge.


  448.  I would like at this point to ask Andrew Whittaker and David Roe whether they would like to respond, bearing in mind, and I think we all have to understand this, theirs is a slightly difficult position in these circumstances. They may not be able to respond in all cases particularly when they are matters for Ministers, but it is often helpful to have their responses at this stage.
  (Mr Whittaker)  Thank you, Chairman. I would like to respond first on a number of points that have been made in relation to ECHR. We are committed to securing the highest standards of fairness in the way in which we operate. We are, therefore, committed to ensuring that we are complying with ECHR and with the ordinary principles of English justice. We are also committed to doing so in a way that is speedy and effective. We support the Government in fulfilling its original commitment, in the Chancellor's May 1997 announcement, to give us by statute all the powers available to the self regulatory organisations by contract and in particular the power to fine. We think it would be a pity if the introduction of a new single regulator were to result in a loss of safeguards for investors and depositors and policy holders rather than an increase in the protection for them. We also support the Government in wanting to create a civil complement to the criminal law for dealing with market abuse. In our view not all conduct which damages markets should be treated as criminal and it is right for the Government to wish to adopt new means where old ones have been shown unable adequately to cover the ground. Notwithstanding all that, we recognise that it is right that the Government should give further thought to the issues which have been raised given the importance, with which we agree, of getting this right, and we look forward to seeing a further statement from them in due course. If the Government does conclude that there is real concern that some of the provisions which the Bill characterises as civil and disciplinary should be regarded as criminal there are in principle two options for dealing with the situation. The first one would be to ensure that those provisions are more clearly defined as civil, while the second would be to put in place any necessary criminal-style procedures to ensure safeguards on the basis that they are criminal. Since we support the need for a civil complement to criminal law our preference would be the former, but we believe that potentially either could solve the ECHR issues. Moving on to the concerns that have been expressed in relation to market abuse, we want to confirm again what we have said previously to this Committee, that within the FSA we have no desire to use the market abuse regime to cover innocent conduct. We would have no difficulty with the provision being amended to make it clear that that is not the intention. As we see it there are various ways in which you can improve legal certainty and some of those have been raised in earlier sessions of the Committee. We, for our part, have no problem with legal certainty being improved both by changes to the Bill, if changes to the Bill would help, and by increased reliance on what we do ourselves either in terms of the code of conduct or in terms of guidance which we give. I have made comments previously to the Committee about our willingness to give guidance. Can I just clarify a number of smaller points that have also been made. Lord Lester expressed a concern that we had at one point indicated that we wished to take into account analogous provisions when interpreting more general provisions. If I could just explain what was meant by that. When we are looking at the enforcement of generally expressed principles and there are also rules in an analogous area, we would take into account the existence of those rules in an analogous area in interpreting the principles if there were some ambiguity as to what they were to be regarded as covering. The point has been made that the nature of the penalties we can operate would be draconian but the withdrawal of authorisation is also a very serious remedy, a very serious sanction, and I do not think anyone would suggest that needs to be characterised as a criminal remedy or a criminal punishment. We think that in addition to the nature of the penalty, the seriousness of the penalty, its nature and context can be taken into account as well. Finally, in relation to the points that have been made about coercion in relation to settlement procedures, we have no desire to have a structure in which coercion plays any part. We are ourselves content to provide safeguards against coercion should that be a concern. The main option we are currently exploring in that regard would be the involvement of a professional mediator. That is all I would like to say.

  449.  Thank you very much, that is helpful.
  (Mr Roe)  I would like to underline that the Government is entirely committed to achieving fairness whilst at the same time not losing sight of the objectives of having effectively regulated markets, which is after all the purpose of the regime. The Economic Secretary when she gave evidence in the Committee did say that there were some issues relating to the Convention on which she would be coming back to you. I would not like my silence or any physical gestures to be interpreted as necessarily implying assent to anything that has been said. On one particular point, on which I would like to look at the record, there was some discussion of the position of recognised investment exchanges and the way that their status would be changed by the current legislation. I am not sure whether that was quite right. I cannot give you a definitive view on that now but it is just something that I would like to flag up as something that when I heard it did not sound quite right to me.

  450.  Thank you very much. Can I ask one question first for clarification before we move on. In the further memorandum by the Financial Services Authority, Lord Hobhouse, in paragraph four——
  (Lord Hobhouse of Woodborough)  Can I just find the document.

  451.  It is FSM 91.[1]
  (Lord Lester of Herne Hill)  Is that the one attached to the questions we received?

  452.  No. If you cannot respond immediately maybe you could have a look at it whilst the discussion goes on. In paragraph four they say: "In principle, we would have no difficulty with a provision that made clear that the FSA could not take action to impose a civil fine for market abuse where conduct is in compliance with the Code."
  (Lord Hobhouse of Woodborough)  I have not yet found the reference, I am sorry.

Chairman:  It is paragraph four. This is a response to some of the points that have been raised. I would be interested to know how far they go to meet your concern.

Lord Taverne

  453.  I was going to ask Lord Hobhouse, or Lord Lester, to respond to a point that was made by Mr Whittaker. Are there circumstances in which fines can be imposed which would not make the conduct a subject of the criminal law?
  (Lord Hobhouse of Woodborough)  My belief is that the answer to that is no in all practical terms. You can fine for civil contempt of court, for example, but I think it would be wrong to build on that analogy in the present context.
  (Lord Lester of Herne Hill)  Under the Convention there are minor fines, like traffic fines, that are not regarded as triggering criminal safeguards but anything which is a serious fine—sorry, not anything. I will start again. If the fine or potential fine is so large, as it would be in this case, then that would tend to trigger criminal safeguards as the French case has illustrated.

Lord Montague of Oxford

  454.  Lord Lester, you did state earlier that you were doubtful about the use of fines. Perhaps you could indicate where you think the destiny of the fines would be acceptable?
  (Lord Lester of Herne Hill)  What I was doubtful about was not the use of fines, it was about the use of fines to claw back the FSA's legal costs.

  455.  Yes, I realise that.
  (Lord Lester of Herne Hill)  It is that combination of two completely different interests. Once you allow the FSA to use the fining process to fund itself rather than giving the money to the Treasury the consequence of that is to create a series of vices. One is that the FSA then appears to be self-interested, and indeed is self-interested, in the amount of fines since it is a way of recovering their own expenses which may be massive in a complicated case. The other is that they become, if you like, judge in their own cause, and with this coercive element, although I welcome the recognition that safeguards may be able to be built in by the FSA against that with the mediation process, but still coupled with that it seems to me that one is going to have a very coercive and unfair result if the fine can be used by the FSA to fund itself. That is why I think one should give that function strictly to the tribunal. So I am not against the use of fines in principle, it is the safeguards and purpose for which the fines are used which I think is important.


  456.  If there was an arrangement whereby the FSA had to budget within its normal budget procedure for its enforcement costs, but there was a system where the fines were used as a rebate back to the people who were paying their fees and it went directly and was not influenced by whatever the costs of enforcement had been, would that still leave you feeling very uncomfortable?
  (Lord Lester of Herne Hill)  I would feel less uncomfortable because it would simply be in a sense a formality to route it in that way rather than to the Treasury. My concerns are more with it including their own costs and it being decided by them themselves.

Mr Kidney

  457.  Could I just ask a couple of questions, first of all on the whole disciplinary regime? Administrative fines do not necessarily have to be classified as criminal, from what you are saying. We have in this country administrative fines from the Revenue and the Department of Social Security and so on, do you accept they are quite acceptable as a civil alternative to the criminal one?
  (Lord Lester of Herne Hill)  I certainly agree, as I think I said at the beginning, that it is a more open question as to when administrative proceedings involving fines become criminal in substance and when they remain civil, and I said there is a spectrum. So they can remain civil, it is a question of degree.

  458.  Is part of the degree the amount? The Inland Revenue, I think, is up to 100 per cent extra of the amount the person fiddled, if you like, and the Department of Social Security is 30 per cent of the amount over-claimed. Would you say they are quite modest things, whereas an open-ended fine under the FSA is huge?
  (Lord Lester of Herne Hill)  There are three criteria they use under Article 6. They are, what is the purpose, is it really criminal in substance? Here it seems to me the purpose is very largely a deterrent, it is to win the confidence of the rest of the world that we have procedures for regulating the City of London and matters of that kind, which is very important. Once it becomes punitive as a deterrent, then on the first criterion of the European Court's case law it will be classified as criminal. The second one is whether the wrong is specific to a particular class of people or to the general community, and that is not a very important test, it does not really much affect us. The third one, which really matters, is the degree of severity of the fine and there it seems to me, given the massive fines on those first and third criteria, as I think I said in my advice, it is very possible that they will be regarded as criminal like the market abuse offences.

  459.  I would like to move on to market abuse and the whole new civil regime. Again there are countries which have legislated for a civil alternative to the criminal regime. Spain has a civil wrong alongside the criminal wrong, and in the USA they now have a civil remedy alongside the criminal remedy. The SEC can go to a court to impose a civil penalty. Are they all then in danger of being really criminal in nature or are there levels of degree so that the civil regime for market abuse can be acceptable if it is drawn correctly?
  (Lord Lester of Herne Hill)  It is complicated to answer questions about comparative law and practice without knowing the full legal regime of the country concerned. Let me take as an example the United States. You are perfectly right in saying that the SEC is able to use civil as well as criminal sanctions, but the SEC is closely regulated not least by the due process clause in the American Bill of Rights and there have been a number of constitutional cases which have interfered with what the SEC might have wished to do, in a similar way to the examples which Lord Fraser of Carmyllie was suggesting when the Human Rights Act comes into force. Of course the United States is not a party to the European Human Rights Convention and therefore the problem will not be characterised in quite the same way under their system. I know nothing about the Spanish system, except their written constitution I am sure will enshrine the Convention's safeguards and there may well be Spanish case law from its constitutional court about which I am not an expert.

1  Appendix 5. Back

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