Joint Committee on Financial Services and Markets Second Report


Memorandum from Clifford Chance

  Thank you for your letter of 18 May 1999 enclosing the Treasury memorandum and Lord Lester's comments on it, and inviting our views. We have also seen an advance draft of LIBA's comments on the memorandum.

  We agree with the observations of both Lord Lester and LIBA and resist the temptation to repeat their points here. The key issue in our opinion is whether it is worth the risk that the FSA disciplinary regime will be challenged, potentially successfully, at some time in the future in the context of a particular case on the grounds that one or more rights under the ECHR were violated because those particular proceedings fell to be characterised as criminal rather than civil for the purposes of the Convention. The Committee may not be in a position to judge now between the competing legal arguments; but it can be fairly certain that such a challenge will be made one day. Therefore, in our view, it ought to express an opinion as to the wisdom of running the risk of paralysis while such challenge is mounted, and disarray if it is successful.

  The following points occur to us to be relevant (and in the interests of brevity they do not purport to be exhaustive):

    —  Undoubtedly the punitive and deterrent use of fines in the disciplinary regimes involves severe penalties by any standard: the Treasury memorandum acknowledges this at paragraph 11.

    —  The conceptual muddle caused by the introduction of significant fines for punitive and deterrent purposes, introducing what are seen as classically criminal law concepts into a regulatory and therefore civil/administrative law regime, predates the draft Bill. But the process of scrutiny involved in moving from a primarily contractual system to a wholly statutory system has necessarily highlighted the confusion. The Human Rights Act 1998 has sharpened the focus of this process of scrutiny.

    —  The distinction traditionally drawn between the protective and punitive purposes may ultimately prove in this context to be one without merit. The Treasury's reliance on "the power to award high financial penalties" as being "vital if the objective of protecting the public is to be realised" illustrates they overlap in any event. Similarly, the use of the powers of public censure, which can cause as much damage to a business as a fine, or to exclude persons from the industry, which deprives a firm or person from pursuing their chosen livelihood, while traditionally seen as regulating a profession for the protection of the public, can be equally punitive when viewed from the perspective of the persons affected and act as a deterrent to others. In this regard we refer to Lord Lester's opinion that "The decisive test is what is at stake for the individual or firm, the gravity of the offence, and the severity of the potential sanction" (Joint Note at paragraph 15(c) reproduced in Annex C on page 98 of the First Report).

    —  Given what is at stake, both for the individual firms and persons involved in any case, and for the confidence of the industry (including its contribution to the economy: see paragraph 4 of the Treasury memorandum), is a minimalist approach to the application of the ECHR appropriate? At the very least, many of the particular disciplinary cases involve alleged offences of such gravity, high stakes for the individual or firm, and potential sanctions of such severity, that as a matter of fundamental fairness (irrespective of the requirements of Convention law), the additional Convention protections should be applied.

    —  The restrictions on FSA powers when applying the additional Convention protections are not such as to debilitate the FSA in the exercise of its enforcement function. The fruits of compulsorily obtained evidence can be used to build the prosecution case; only the transcripts of compulsory interviews of the person charged are inadmissible as against that individual. The civil standard of proof on the sliding scale is unlikely to be materially different in application from the criminal standard in such cases. While in some complex cases financial assistance may be required to ensure equality of arms, such cost alone cannot be a sound reason for denying the other protections.

  There is therefore a real risk of the disciplinary regime being held to be criminal for ECHR purposes, with all the consequences that flow from that. We would therefore urge the Committee to recommend to the Government that it should not seek to describe the entire disciplinary regime as civil; that a line should be drawn between the sort of conduct which should attract the safeguards provided by the ECHR; and that that line should be cautiously drawn, so as to ensure that only minor infractions are characterised as civil for ECHR purposes.

21 May 1999

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