Joint Committee on Financial Services and Markets Second Report


Memorandum from Lord Lester of Herne Hill QC

  1. I am grateful to the Chairman of the Joint Committee on Financial Services and Markets for the opportunity to give the Committee my views on HM Treasury's Memorandum, confining myself to the concerns about the compatibility of the draft Bill with Article 6 of the European Convention on Human Rights.

  2. The Treasury's Memorandum contains several welcome developments in the Government's thinking, in the light of the Joint Committee's First Report. These developments make it more likely that the eventual legislation will stand up to legal challenge on human rights grounds.

  3. However, there remain important respects in which the draft Bill, read with the Treasury's memorandum, remains vulnerable to successful legal challenge for breaches of Convention rights, with continuing and avoidable legal uncertainty.

  4. I agree with the general summary of the requirements of Articles 6 and 7 of the Convention, contained in paragraphs 5 to 9 of the Treasury's memorandum.

  5. The Government's decision (paragraph 13) to treat the market abuse fining power as criminal in nature, for the purposes of the safeguards in Article 6 of the Convention, and to introduce additional Convention protections in the Bill is welcome. So too is the decision (paragraph 16) to make compliance with express provisions in the code an absolute defence against proceedings for breach of the market abuse provisions, and to clarify in the Bill that the market abuse regime will only apply to market participants.

  6. If the Government decides (paragraph 16) to introduce explicit protections for people who take reasonable steps to make sure that they do not breach the primary provisions, this will further reduce the risk of a successful legal challenge.

  7. According to a report in the Financial Times, on 15-16 May, the Government also proposes to exclude the use of compelled evidence from civil proceedings that could lead to a fine. This is not mentioned in the Treasury's memorandum, but, if it is correct, it will again serve to reduce any mismatch between the Convention and the legislation, giving effect to the Joint Committee's recommendation (Report, paragraph 205).

  8. Unfortunately, the Government remains of the view (paragraph 10) that the entire disciplinary regime applying to authorised firms under Part XII of the draft Bill, and the similar disciplinary powers in respect of approved persons under Part V, would be classified by the Courts as involving the determination of civil rights and obligations, and not of criminal charges, for the purposes of Article 6 of the Convention.

  9. In my view, this is too sweeping an approach, and leaves scope for considerable legal uncertainty and a real risk of a successful legal challenge in a particular case.

  10. It is true, as the Memorandum points out, that the scope of the disciplinary regime is limited to a defined set of persons who are part of a regulated community; that is, authorised persons and certain of their employees. I also accept that the requirement for those who choose to undertake financial services business to become part of the regulated group is necessary for the protection of the public, and that the conduct covered by the regulatory regime is analogous to that which would be covered by regulation of a profession. And I accept that most aspects of the regime would properly be regarded as essentially protective rather than punitive.

  11. However, these factors are not conclusive. I would respectfully refer the Joint Committee to the analysis in paragraphs 10 to 19 of the Joint Note of Advice of 7 April, given by me and my colleague, Monica Carss-Frisk (Joint Committee's First Report, at pp. 96-98),[1] which has not, in my view, been dealt with satisfactorily in the Treasury's memorandum.

  12. The nub of the problem is that, while many disciplinary offences are likely to be classified as civil in nature, some serious disciplinary offences are likely to be classified by the courts as criminal, whether because they effectively cover misconduct which is criminal (e.g., market abuse offences) or because of the risk of the infliction of drastic fines with a dominantly punitive, rather than compensatory or restitutionary purpose.

  13. The risk of successful legal challenge is illustrated by the recent decisions of the French courts applying Article 6 safeguards to proceedings for the imposition of administrative fines in the context of financial regulation. The Commission des Operations de Bourse ("COB") is an administrative authority established to ensure the protection of investors' savings, disclosure to investors, and the proper functioning of the financial markets. The COB is empowered to impose administrative sanctions in respect of breaches of its regulations. The French Cour d'Appel and Cour de Cassation have treated[2] the sanctions as criminal in nature (and hence protected by the presumption of innocence) because of their high level and the publicity attached to them, and the fact that the sanctions are aimed, as in criminal cases, at punishing those who breach the general standards laid down in the COB's regulations, and to deter others from similar misconduct.

  14. I am not clear as to how the Government regard this case law and its potential bearing upon the interpretation of the draft Bill.

  15. In my view, a careful distinction needs to be made in the Bill between those disciplinary offences which ought properly to be regarded as civil and those which ought properly to be regarded as criminal, so as to ensure that, where appropriate, the FSA respects the presumption of innocence in disciplinary proceedings which it decides to bring.

  16. The Treasury's Memorandum has not yet responded to the Joint Committee's recommendation (Report, paragraph 141) that the Government should publish its response on my concern that the proposed immunity for the FSA from suit for damages for acts done in good faith in discharge of its functions may breach the right of access to courts guaranteed by Article 6. In the light of the recent case law of the European Court of Human Rights in several cases against the United Kingdom, I continue to remain concerned about this.

18 May 1999

1   As regards our reference (paragraph 19) to Dame Shirley Porter's case, in decision of the Court of Appeal of 30 April, they effectively treated "wilful misconduct", within the meaning of section 20 of the Local Government Finance Act 1982, as criminal in substance, while rejecting submissions that the presumption of innocence (guaranteed by Article 6(2)) had been breached in her case. Back

2   See e.g., the Oury decisions. Back

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