Joint Committee on Financial Services and Markets N/A Report

Examination of witnesses (Questions 20 - 37)



Lord Montague of Oxford

  20.  Whilst you are having a look at this, will you be looking at the same issue in relation to the ombudsman scheme?
  (Ms Hewitt)  The ombudsman scheme is a very different matter, Lord Montague, because, of course, the whole purpose of the ombudsman scheme is to provide for a fairly informal and fast, albeit fair, system for resolving disputes generally between clients and firms. So I am not sure that the same considerations do, in fact, arise there, but certainly the ombudsman scheme must be fair and thereby meet Convention standards.

Lord Haskel

  21.  Minister, you said in your introductory remarks that you propose to make it clear in the Bill that the market abuse regime will apply only to market participants. May I press you and ask you how you intend to define who a market participant is?
  (Ms Hewitt)  I am not the parliamentary draftsman, happily, and he will wish to come forward with suggestions for the precise form of words. I am certainly not going to try and do the drafting this afternoon in front of the Committee, but I think the point that has been made to us is that the words in the Bill at the moment might be misinterpreted to include people who are very clearly not market participants. They might, for instance, in an example given to me at the London Metal Exchange, be warehousemen in a copper warehouse in Africa who have gone on strike. Their strike might indeed have some very serious consequences upon the market but quite clearly they are not market participants and it is in no sense our intention to catch them. So we do need, I think, to look at how we can more precisely give effect to our intentions there because what we are looking at really are people who are buying or selling or holding investments that are covered by the markets that are embraced by the new regime.

  22.  But there is going to be a very grey area of people who maybe are amateurs but who still participate in the market. You have day traders in the United States. Would they be market participants or not? This is going to be very difficult.
  (Ms Hewitt)  Clearly if you have people who are buying or selling stocks, perhaps on the Internet, they are market participants and, indeed, there are a number of stories now emerging from the United States of America about people using the Internet in order to achieve a false, entirely artificial, rise in the price of their stocks, false information put out on the Internet in order to raise the price of perhaps some Internet-type stock in order that somebody can cash it in and then, of course, when the untruth of the information is discovered, the price falls back. They have become quite common; they are known as "pump and dump" ploys. So there are amateur, but not necessarily naive, participants who quite clearly should be caught by a market abuse regime.

Lord Fraser of Carmyllie

  23.  But is it still your desire, is it still your objective, to catch Mr Hamonaka if he has never left Japan but has nevertheless significantly distorted the London market?
  (Ms Hewitt)  Yes, and Sumitomo was, of course, fined substantial fines by the American regulators for that particular scam, that market abuse. The British regulators were powerless because at that point, and this is the situation now, you have criminal offences, narrow class of behaviour, wide class of persons; you have the disciplinary regime, broader class of behaviour, narrower class of persons, but you did not have what the market abuse regime will provide under this Bill, which is the broader category of behaviour and the broader group of market participants, and I think you need that, just as they have that in the States.

  24.  I am aware of what Sumitomo did. Your summary is absolutely correct. The Minister has been traditionally British not to exercise extraterritoriality. I just want to be clear that you do believe that it is important to achieve a degree of extraterritoriality through this device, do you?
  (Ms Hewitt)  We do have global financial markets and clearly behaviour by someone who may be physically thousands of miles away can have a very damaging effect upon the markets here. They are global markets. There are certainly practical difficulties where you are trying to catch people, particularly individuals who are thousands of miles away but we do not think that is a reason for narrowing the scope of the Bill.

Chairman:  Could we move on to the issue of certainty.

Mr Heathcoat-Amory

  25.  Market confidence and, indeed, the requirement of justice clearly require certainty and this is a requirement of the Convention on Human Rights. You say in your memorandum that the Government is satisfied that the Bill's provisions for market abuse fully meet the Article 7 requirement for certainty. I note here that you say that the Bill itself meets this requirement, so you are not relying on some subsequent regulations or code of conduct or whatever, but when I look at the Bill, and in particular existing clause 56, I find something that is anything but certain. It is highly subjective and it relies on the supposed attitudes of other market participants to the release or non-release of some information. Moreover, it does not actually criminalise anything, it only authorises elsewhere in the Bill the FSA to fine that person if, in their opinion, it constitutes market abuse. So I think this is anything but clear if it is to constitute criminal law, which you now say it is. Do you intend, therefore, to redraft or alter this section of the Bill, and if that is so, when could you do it because obviously there is otherwise a gap between your intentions and what is, in fact, the case?
  (Ms Hewitt)  Thank you, that is an extremely interesting and also rather comprehensive question. The first point is that when you say we accept that this is criminal, I do just want to stress we are not talking about a domestic criminal regime like the normal criminal law. That is not what the market abuse regime is. As Mr Kentridge has indicated, you can argue both ways, whether or not even under the Convention a market abuse regime is civil or criminal, but we think it is as well to be ultra-cautious here and put in those extra protections. On the matter of certainty, we believe that the provisions of the Bill do, in fact, meet the Article 7 requirements for certainty. That refers both to the actual words on the face of the Bill but also the requirement on the FSA to produce a code of conduct on market abuse. The European Human Rights Court has recognised in several cases that many laws are inevitably widely drawn, and I think that is particularly so when you are dealing with areas that are changing very rapidly, and there is no doubt financial services move very fast indeed. So we have a reasonably general set of provisions within the Bill itself. Those are then supplemented by the requirements for a code of market conduct and, of course, the FSA is consulting at the moment on a draft. That code can never be completely comprehensive. It is quite impossible to anticipate fully everything that market participants might get up to in the years to come, but we think that the code will provide a very valuable additional degree of certainty beyond what would be provided if we simply relied on the Bill and then on the development of case-law. I have to say that was the approach that was taken in the United States of America. You had basic mischiefs that had not been elaborated upon in any great detail by the Securities and Exchange Commission but there has been a build-up of case-law over 50 years. We think we can get greater certainty and faster certainty by using the code of conduct. Of course, we are also saying, as I explain in the memorandum, that compliance with the express provisions of the code must be an absolute defence to a charge of market abuse and I think, taken together, that gives probably the highest degree of certainty that we can achieve certainly a reasonable degree of certainty and one which I believe is fully compliant with the Convention. Mr Kentridge, do you want to add to that answer?
  (Mr Kentridge)  I do not really think so, Mr Heathcoat-Amory. The fact is that the European Court of Human Rights has said on many occasions that some sorts of even true criminal offences can only be stated in general terms. The more you define it, it has sometimes been said, the more loopholes there are. But I am not a draftsman either. I believe that the tribunal and the court would make sense of that definition.
  (Mr Eadie)  One final thing perhaps. They have also accepted in Strasbourg that it is acceptable under Article 7, which is the nub of the Convention concern here, for relatively broadly expressed laws to be developed by case law, and that applies both to the development of broadly framed statutory provisions and, indeed, to the common law itself, the classic example being the case of marital rape which went recently to Strasbourg. The strong complaint being made by the rapist was: "I did not realise at the time I committed the rape that it was an offence to rape your wife," and there was genuinely, surprisingly perhaps, some doubt under the common law as to whether that was the position at the date the offence was committed. Strasbourg takes the view it is acceptable for laws of that kind to be developed on a case-by-case basis. So they do not exclude judicial interpretation and, indeed, development of legislative provisions.

Viscount Trenchard

  26.  Minister, could I continue a little bit on the same topic. As far as the code is concerned, I think we were very pleased that the Government set such importance by it and that it will be subject to full consultation with market participants, and also, as you have explained, that you propose to make compliance with its express provisions an absolute defence against proceedings. So that, on the one hand, would seem to provide a much greater degree of clarity, but then what worries me is that it seems to me that even though conduct might not be prohibited by the code, it might still be found to be in breach of the statutory precepts in clause 56. I worry how that situation might sit with the Convention.
  (Ms Hewitt)  I think, as you suggest, Lord Trenchard, we partly touched on that in the immediately preceding question, the code of conduct is very important because it can spell out specific mischiefs that do constitute market abuse and it can also spell out, if you like, positive courses of action that would mean somebody was not engaging in market abuse, and I think that is essential, but it would be impossible for any code to deal with every possible eventuality or to anticipate everything that people might do in future. Therefore, I think the FSA must be able, in the years to come, to proceed against people for market abuse, as defined in clause 56, where the actions that have given rise to the market abuse are not referred to in the code itself, where it is silent, because otherwise we will have a situation where somebody will think of something, a mischievous person will think of something that is absolutely an abuse of the markets but somehow, because it has not been dealt with in the code, the FSA will not be able to proceed and that will be clearly an unacceptable state of affairs.

  27.  I worry about that, particularly because subsection (9) explains that behaviour includes inaction as well as action, so I find that conceptually quite difficult.
  (Ms Hewitt)  The inaction could arise, for instance, where, in order for somebody to deal fairly on the markets, they have to supply full information to the markets. It might be information about something that is changing within a company, and if they do not provide that information, so inaction, depending what else is going on, that could constitute market abuse. It may be a situation that constitutes an abusive squeeze, where simply holding on, refusing to close off a position or to make certain supplies available, is an integral part of the abusive squeeze and thus the market abuse. It is an inaction rather than a positive action but it is nonetheless integral to the behaviour that constitutes market abuse and the FSA must be able to deal with that.

Mr Kidney

  28.  Minister, we were interested that you said that the code will provide an absolute safe harbour for those who comply with its positive provisions, whereas in our report we thought a qualified safe harbour depending on a person's intentions in what they actually were doing when they complied with the strict letter of the code. Why have you been more generous than we would have been?
  (Ms Hewitt)  We have looked at this very carefully here and we are very mindful of the desire in the industry for as much certainty as possible as well as the requirement of the Convention for appropriate certainty, and we felt it was right here to say that if somebody has complied with the express provisions, then really they should not be vulnerable to an action against them by the FSA. Indeed, I have to say that even if we had gone for a more qualified position, I think it is very unlikely that the tribunal or the courts would have upheld action by the FSA in that circumstance.

  29.  Where the code is silent you said that they would not be seeking punishment of people who take reasonable steps to comply with the spirit of the code. What do you have in mind by "reasonable steps"?
  (Ms Hewitt)  We are looking at the kind of draft provision which will take into account the situation of people who act with due care and in good faith and the code may be silent on the matter. Someone who acts with due care and in good faith should not really be proceeded against for market abuse, but we are looking at the appropriate draft provisions in this area.

  30.  Would you expect the FSA to issue guidance from time to time explaining the kinds of things they would think reasonable, and if so, would then the guidance be some kind of safe harbour, just as the code is?
  (Ms Hewitt)  I think one has to draw a distinction here between guidance and the code. I have no doubt at all that the FSA will want to update the code from time to time, but obviously when it does so it will go through the appropriate consultation before it finalises any changes to the code. The question of guidance is a rather different one and we are certainly not persuaded that guidance from the FSA, which could be to a specific authorised person or firm, should have the same weight as the code. In any case, I do not think that is a matter that needs to be dealt with on the face of the Bill itself.

Chairman:  Could we move on, finally, to the whole question of overlapping regimes. We have some general questions about how we now work in a world where we seem to have two approaches.

Mrs Blackman

  31.  If an authorised person engages in market abuse, then necessarily they will have broken the FSA's general rules. Does that present a dilemma in terms of the distinction you make between the two regimes, the disciplinary regime and the market abuse regime?
  (Ms Hewitt)  No, I do not think it does present a dilemma. In practice, when it comes to market abuse by authorised persons you actually have three regimes. You have the criminal regime, because it may be that the authorised person should actually be prosecuted for insider trading or whatever; you have the market abuse regime, which applies to authorised persons but also to non-authorised participants, and then you have the disciplinary regime. In that situation the FSA, I think, will, first of all, have to decide whether or not a criminal offence has been committed, and if so, whether or not a criminal prosecution will be appropriate, but if a criminal offence and a criminal prosecution are not in question, then they will need to look at the possibility of taking action under the market abuse regime, and if they do so and if they compel that individual to answer questions, then, of course, they will not be able to use the answers that have been compelled in proceedings for a fine. Then they have the question of disciplinary proceedings. Now it may well be the case that an authorised person who has committed market abuse and perhaps been fined for that market abuse under the market abuse regime is also, in the view of the FSA, no longer a fit and proper person to be authorised for participation in the financial services industry, in which case it is perfectly proper for the FSA to proceed against that person under the disciplinary regime. What they cannot do is fine the authorised person under the market abuse regime and then come back for a second bite of the cherry, a second fine, under the disciplinary regime, but they certainly can proceed under the disciplinary regime for a suspension or a complete ban on that person's participation in the markets. Precisely the same thing happens in the legal profession and in the medical profession. Indeed, Mr Kentridge gave the example of the doctor who was struck off for conduct that, on the face of it, constituted a criminal offence of indecent assault. I think in that case the victim did not want to prosecute. There were no criminal proceedings but it was totally proper for the General Medical Council to proceed via disciplinary proceedings and strike the doctor off.

  32.  Do you think the Bill makes those distinctions clear enough?
  (Ms Hewitt)  It will.

Lord Fraser of Carmyllie

  33.  May I ask one practical question about this, Minister? If to Strasbourg-proof the actions of the FSA you make attendant upon almost everything they investigate, everything they do, and take all those steps that ensure you would not fine someone in breach, like no longer relying on compelled statements, do you think the disciplinary side of things is actually workable or are they actually just going to clog up?
  (Ms Hewitt)  I do not think that taking proper steps, as we are doing, to ensure that we comply with the Convention on Human Rights Act is going to make the regime unworkable at all. First of all, in the market abuse regime where the Saunders-proofing will apply, the FSA will still be able to compel people to answer questions. They will not be able to use the compelled evidence against the individual who gave those answers if they are seeking to fine them for market abuse, but they will be able to use the evidence that they compelled in restitution and injunction cases, civil proceedings. They will also be able to use the information they obtain to suggest other lines of enquiry or to get documentary evidence that will then be available to them, and, of course, the evidence that is compelled from one person can also be used against somebody else in proceedings for market abuse. On the disciplinary side, the issue is not whether Saunders-proofing would make the disciplinary regime unworkable. The issue is simply that Saunders-proofing is not justifiable and that comes back to the issue we were talking about earlier about the nature of a disciplinary regime and the licensing of people who choose to participate in a profession or some other authorised activity. From a policy point of view I see no reason whatsoever why financial traders and other authorised people should be treated any differently from doctors or lawyers.

Mr Sheerman

  34.  May I say, Minister, that much of what I have heard this afternoon has set my mind at rest, these questions of whether this is clearly compatible with the new European Court of Human Rights obligations that we have decided to sign up to. But I have been pushing right through this Committee's proceedings, whenever possible, to get international comparisons. On the one hand, I do think that in regulation matters, whatever industry you are in, whether it is in the environmental sector or any other, many people do not like making comparisons across regulatory regimes or cross-national comparisons. Is there anything we can learn from people who have signed up to the European Court on Human Rights that have similar regulatory regimes? What is their practice? They have been involved with that for some years, although from what you and your two colleagues here today have been saying, my mind has been put at rest. That is a real level of achievement. My mind is at rest in a sense, because we must in ECHR go through the English courts first. We are going to build up the system gradually of what has been the real experience over a number of years in comparable countries to our own?
  (Ms Hewitt)  I think your general point about the need to learn from the regulatory regimes in other countries is absolutely right and we also, in developing this Bill and the policy behind it, looked to financial services regulation in other countries as well as in our own country and tried to learn from the good as well as the bad. When it comes to the specific matter of the Human Rights Convention, I think you have to recognise that the jurisprudence is developing very fast and, therefore, rather than looking at how does the French or the Italian or whatever regulatory system deal with the Convention, the best thing is for us to get the best possible and the most up-to-date legal advice on the matter and then make a judgment about how we should proceed. As we have seen in the Oury case for whatever reason they clearly had not anticipated that those proceedings were going to be found wanting, although, as Mr Kentridge has outlined, even without the Convention they would have been found wanting under our conception of natural justice. When it comes to hearings in front of our British courts on Human Rights Act issues, I am sure that they will also want to look at cases that have been settled in other parts of the European Human Rights Convention area but, indeed, they will probably want to look elsewhere as well, because, of course, in Canada and Australia, for instance, they have had Human Rights Acts for much longer and there is a developing body of jurisprudence there that can also be brought to bear on the interpretation of the Act, but that is not specific to financial services.

  35.  But are there any countries where there has been real difficulty in running a regulatory regime like this because of the constant problems of running into these sorts of legal difficulties with the courts?
  (Ms Hewitt)  Not that I am aware of.
  (Mr Kentridge)  I have really not been into it at all. I just cannot answer that.

Lord Montague of Oxford

  36.  May I enquire whether there is a country which has an ombudsman scheme where we can learn whether hearings are necessary and what effect that might have on the operation of the existing ombudsman scheme, which, of course, is at the moment relatively informal?
  (Ms Hewitt)  There is, of course, Sweden, from which the father, the parent, of the ombudsman scheme came, but, as I indicated earlier, the scheme will have to provide for a fair and public hearing in order to comply with the Convention and the FSA are aware obviously of the need for compliance and we will expect the operator of the ombudsman scheme to make rules for such a hearing. But I think the important thing is not to undermine the essential nature of the ombudsman scheme to provide for, as I said, relatively informal, non-legal proceedings so that we can get disputes resolved.


  37.  Minister, I think we must let you go. We said we would try and finish shortly after five. We are very grateful for the evidence you have given, and your colleagues. I think it has been very helpful. As you know, throughout this our aim has been to try to clarify people's positions and to try and get views to move as close as possible towards each other. I hope we have taken another step in that direction. We will see how some of the other people from whom we have asked for written evidence respond to it, but I hope that we are continuing to shuffle towards something which has maybe a wider degree of agreement than when we started this process.
  (Ms Hewitt)  Thank you very much indeed and I shall look forward very much to the Committee's next report.

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