Joint Committee on Financial Services and Markets N/A Report

Memorandum from HM Treasury

Parts V, VI and XII of the Bill in relation to the European Convention on Human Rights


  1. The Joint Committee's report of 27 April invited the Government to respond to a number of concerns which have been raised during the Government's consultation and by witnesses to the Joint Committee about the compatibility of the draft Bill with the European Convention on Human Rights (referred to hereafter as the "Convention"). These concerns have centred on the new power for the FSA to fine any market participant, regulated or unregulated, who engages in market abuse. The Government welcomes the opportunity to explain its position and the extension of the period of the Committee's inquiry for this purpose.


  2. It may be helpful before turning to those concerns to set out some of the general background in this area. The Government is determined to ensure that people's fundamental human rights are recognised and protected by the force of law. The Human Rights Act 1998 gives effect to the Government's manifesto commitment to incorporate the rights and freedoms guaranteed by the Convention into UK law. This Act will fundamentally alter the way in which the courts approach the interpretation of statutory provisions.

  3. The courts will be under a duty to interpret legislation in a manner compatible with the Convention rights. Incompatible subordinate legislation may be quashed in certain circumstances or declared incompatible. Primary legislation which cannot be given a meaning compatible with the Convention rights may be formally declared incompatible by a court. Though such a declaration will not affect the validity, continuing operation, or enforcement of the provision, it will trigger a new power allowing a Minister to make a remedial order to amend the legislation to bring it into line with the Convention rights. People who believe that their Convention rights have been breached will be able to rely on those rights in any legal proceedings involving a public authority. The Human Rights Act also contains a specific requirement for the Minster in charge of a Bill to make a statement on the compatibility of the provisions of any new Bill with the Convention rights.


  4. When considering the design of the new regulatory regime, the Government has therefore considered extremely carefully the question of its compatibility with Convention rights. The Government is determined to set up a regulatory system which will provide effective protection for consumers and for the operation of the financial system as a whole. The UK financial services industry is highly successful and vitally important to the UK economy. It accounts for 7 per cent of GDP and employs over one million people. The financial markets support enterprise, helping to provide funds for investment and growth. The source of these funds is the public's savings, which are entrusted to the industry. There is, therefore, a strong and shared interest in having clear, robust, and effective regulation. But the Government is equally concerned to have a system which is fair, and is seen to be fair, and which is fully protective of human rights.


  5. In considering the appropriate protections for human rights in the context of the draft Bill, witnesses to the Committee have drawn attention to the requirements of Articles 6 and 7 of the Convention. These Articles draw a distinction between the determination of civil rights or obligations and the determination of criminal charges. It is important to note that a matter which is treated as a civil or administrative proceeding for domestic purposes may, nevertheless, be treated as one which involves the determination of criminal charges for Convention purposes. What the Convention ensures is that particular, additional, safeguards are available where what is at issue is the determination of a criminal charge in Convention terms, irrespective of the domestic classification of the proceedings in question.

  6. Article 6(1) of the Convention provides that in the determination of civil rights and obligations everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law. The draft Bill provides for this by setting up a fully independent Tribunal to be administered under the auspices of the Lord Chancellor's Department. Any person against whom the FSA proposes to take regulatory action will have the right to have the matter referred to the Tribunal to determine whether action should be taken and, if so, what that action should be. Following consultation on the draft Bill the Government announced that it will be making a number of changes to the Bill to make clearer the precise nature and role of the Tribunal. During the course of the Committee's inquiry, the Government also had a welcome opportunity to clarify to the Committee the interaction of the Tribunal and the FSA's internal arrangements. The Government welcomes the Committee's broad satisfaction with these arrangements and is giving careful consideration to its recommendations.

  7. The right to a fair and public hearing before an independent and impartial tribunal applies equally in the case of a person charged with a criminal offence (in both the domestic and Convention sense). However, the Convention affords such a person certain additional protections over and above those applying in civil cases. In particular the European Court of Human Rights has judged that answers given under compulsion may not be used in criminal proceedings against the person from whom those answers were compelled. As clause 104(5) of the draft Bill indicates, the Government intends that protection should be provided against such use in criminal proceedings under the Bill, for example in respect of insider dealing.

  8. Article 7(1) of the Convention sets out a prohibition on retrospective criminal provision. This has been interpreted as including the principle that an offence must be sufficiently clearly defined in law so that an individual may foresee the legal consequences of his actions.[1]

  9. In considering which Convention protections it would be appropriate to incorporate into the draft Bill the Government looked carefully at the jurisprudence of the European Court of Human Rights. Although the jurisprudence is still developing and may be subject to interpretation, there are a number of factors which are relevant to the characterisation of proceedings as civil or criminal for Convention purposes. The first factor is the characterisation of the proceedings in domestic law, although a civil categorisation in domestic law is not conclusive for Convention purposes.[2] Second, there is the nature of the conduct at which the provisions are directed and, in particular, the overlap with the criminal law. Third, there is the question of whether the measure is directed at the population as a whole, like tax law or road traffic laws, or whether, on the contrary, it is aimed at a particular group of persons possessing a special status the regulation of which is justified to preserve the proper and orderly functioning of the group.[3] Fourth, there is the nature and level of any penalty. The more punitive and severe the penalty, the more likely it is that the proceedings will be characterised as criminal under the Convention.


  10. Although the Government has carefully considered the contrary arguments which have been advanced, it remains firmly of the view that the 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 for the purposes of the Convention. 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. The requirement for those who choose to undertake financial services business to become part of this regulated group is necessary for the protection of the public. The conduct covered by the regulatory regime is analogous to that which would be covered by regulation of a profession. Although the Financial Services Authority can take disciplinary action where people breach the rules, and these actions can have a deterrent element, they only apply to a subsection of the population and are part of a regime which is essentially protective rather than punitive.

  11. The Government accepts that the nature and size of the potential penalty are also relevant factors under Convention jurisprudence.[4] However, the fact that a fine is imposed does not in itself lead to a conclusion that the proceedings are criminal.[5] Nor does the power to award high financial penalties (which is vital if the objective of protecting the public is to be realised) in itself make the provisions criminal in nature, given their essentially disciplinary character. It is relevant in this context that there is no provision for imprisonment in default of payment of a fine, which is on the contrary recoverable as a civil debt under the draft Bill.[6]


  12. The main purpose of the power to impose a fine for market abuse is also protective. There is no doubt that markets, and the interests of those who deal on them, are damaged if abuse becomes commonplace. The Government welcomes the fact that the Committee accepts in principle the need for a new regime to complement the existing criminal offences. A regime which offers an effective means of combatting abuse serves to protect those who use the markets. The Government recognises, however, that the likely Convention characterisation of the new market abuse regime applying to all market participants is less clear cut than for the disciplinary regime applying only to the regulated community. The same factors are of course relevant. There are two main differences which make the position less certain in respect of the market abuse fining power. First, the market abuse regime is conceptually different from the regulatory regime. It is not concerned with regulating the entry to a regulated community and the conduct and standards of that community. It applies to anyone who participates in the financial markets, a potentially much wider group defined by economic activity rather than by the narrower test of having privileged access to an occupation which is regulated for the protection of the public as a whole. The second difference is the fact that there are significant similarities between the market abuse regime and the criminal offences of insider dealing and market manipulation in terms of scope, content and purpose.

  13. The Government's view is that there are reasonable arguments to suggest that the market abuse fining regime would be classed as civil proceedings for Convention purposes. However, having considered the matter further in the light of comments on the draft Bill and the evidence of witnesses to the Committee, notably Lord Lester and Lord Hobhouse, it recognises that there is a real possibility that the market abuse fining power may be classified as criminal for those purposes. That being so, the Government has decided to ensure that additional Convention protections are put in place in the new Bill.


  14. In order to avoid any risk of a finding that the Bill does not fully comply with the Convention requirements, a change needs to be made to the Bill. This is to ensure that protection against the use of compelled statements is put in place for proceedings to impose a fine for market abuse. Subsidised legal assistance will also have to be made available in appropriate cases to those who do not have sufficient means. The Government will be looking further at how this might be achieved.

  15. The Government is satisfied that the Bill provisions for market abuse fully meet the Article 7 requirement for certainty. The European Court of Human Rights has recognised that many laws are inevitably widely drawn.[7] This is particularly so where an area is subject to change. Further interpretation by a Tribunal or higher Court is not an objectionable feature. The Government has, though, taken steps to provide greater certainty by requiring the FSA to produce a code of market conduct which will provide examples of the kinds of behaviours which are acceptable and unacceptable. While the Government understands the desire for certainty in this area, it is of the view that the right approach is to set out the broad mischief on the face of the Bill and rely on the code, which will be subject to full consultation with market participants, to provide more of the detail. To set out greater detail in the Bill would risk leaving loopholes which the unscrupulous could exploit.

  16. However, the Government has considered carefully the Committee's recommendation for introducing more certainty by making changes to the status of the code. The Government agrees that there is scope for making helpful changes here. It is important that only abusive behaviour is deterred. The Government therefore is considering whether to introduce explicit protections for people who take reasonable steps to make sure that they do not breach the primary provisions. In addition the Government proposes to make compliance with express provisions in the code an absolute defence against proceedings for breach of the market abuse provisions. The Government also proposes to clarify in the Bill that the market abuse regime will only apply to market participants.

  17. The Government believes that with the changes proposed in this memorandum the new market abuse fining regime will be compliant with the Convention.

14 May 1999

1  Kokkinakis v Greece A 260-A (1993) 17 EHRR 397. Back
2  Benham v United Kingdom (1996) 22 EHHR 293. Back
3  Ozturk v Germany (1984) 6 EHRR 409; Ravnsborg v Sweden (1994) 18 EHRR 38. Back
4  Bendenoun v France (1994) 18 EHHR 54. Back
5  Brown v United Kingdom (1998 unreported). Back
6  Brown v United Kingdom (1998 unreported) and Air Canada v United Kingdom (1995) 20 EHRR 150. Back
7  Muller v Switzerland (1988) 13 EHRR 212, 226 (paragraph 29); SW v United Kingdom (1995) 21 EHRR 363, 399 (para 36). Back

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