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Lord Donaldson of Lymington: The Minister has said on several occasions that this is a non-criminal regime. But is it? I gather that the noble and learned Lord, Lord Hobhouse, told the Burns committee that he had no doubt at all that this is a criminal regime. I think that it is. If I, as an unauthorised person, choose to go into the market and commit market abuse, what civil obligation have I infringed? It is a criminal obligation.
7.30 p.m.
Lord McIntosh of Haringey: Of course I read the memorandum to the Joint Committee of the noble and
learned Lord, Lord Hobhouse, and I read the much longer submission from the noble Lord, Lord Lester of Herne Hill. The conclusion which the committee drew was not the conclusion of the noble and learned Lord, Lord Hobhouse, but the conclusion, which I thought had been accepted, that this is a matter of degree. Clearly, at one end, there is a criminal aspect to market abuse. But what we are seeking to create, and believe that we can create, is a civil regime at the other end of the spectrum.
Lord Fraser of Carmyllie: I am grateful to the noble Lord for giving way. He has now repeatedly gone back to the paragraph where we indicated that we wanted any regime on market abuse to complement the criminal law. I do not depart from that at all. What I want to see as clearly as possible is a proper boundary between the criminal law and the civil law. I certainly do not understand the idea that complementing the criminal law contains within it an idea that there should be an unclear overlapping between the two. I should be interested to hear from the Minister at some time what conduct he believes would be caught by subsection (2) which in no respects would ever be caught by the criminal law. Under paragraphs (a) and (b) I can envisage circumstances in which one would be caught by insider trading. The noble Lord should remember that this is a UK regulatory provision where, in terms of paragraph (b), it would not be caught by the criminal law of fraud in Scotland.
Lord McIntosh of Haringey: How many successful prosecutions for insider trading have there been in the past few years?
Lord Fraser of Carmyllie: That is exactly what we wanted to extract from the noble Lord. He has now given the game away. He is not trying to determine a precise description or a precise complementing between the criminal law and market abuse. What he is trying to achieve, and what the Government have been trying to achieve, is in some way a looser approach which gets over the problem of the difficulties that have been encountered in London in prosecuting for serious fraud, insider trading and the like. That could not underline more clearly what the noble and learned Lord, Lord Donaldson, is saying. What the Government are really trying to impose here is a criminal system or a criminal set of provisions and they think that they can get away with it by describing it as civil.
Lord McIntosh of Haringey: I was quite explicit in my opening remarks before I moved to the individual amendments. I said that there is a criminal regime. There is no doubt about that. Insider dealing and other matters are covered by the criminal law. There is no attack on that. On the other hand, there is a regulatory regime with which the rest of the Bill is concerned which does and can apply only to the regulated financial community. There is a gap here. There is an element which is not covered. There is an element of abuse which I think everyone who is objective about
the matter recognises to be abuse. It is occasioned by persons who are not regulated, but it is not serious enough to be covered by the criminal law. That is the scope for the market abuse regime and that is why we and the Joint Committee have always said that there has to be a market abuse regime in addition.I have also said--I have made it clear and have not concealed it--that there is a spectrum; that there is a point which will differ in different circumstances between a criminal regime and a civil regime. Perhaps I may give an obvious example. Even though we have put in place European Convention on Human Rights criminal protections, what is criminal for ECHR purposes is not the same as what is criminal for domestic purposes. I shall give an example of the non-criminal behaviour which we are rightly to be able to get at: a range of potentially damaging behaviour which is not the subject of an offence which it would not be appropriate to criminalise. Let us take the Sumitomo case. That involved an unauthorised person trading through authorised firms establishing large off-market positions in the copper futures market and, through his dominant position, manipulating the market and distorting the copper price. The effect on the price of copper, which was felt all over the world through contracts, was very large indeed. But a criminal prosecution was not possible. This comes right to the heart of one of the motivations for the market abuse regime.
Perhaps I may take the issue of insider dealing. Insider dealing is not referred to in the Bill. Subsection (2)(a) refers to information,
- "which is not generally available to those using the market".
Perhaps I may deal with the government amendments. The policy has never been that this regime should capture behaviour which has an effect that no one could have foreseen. Again, I can do no better than to quote Patricia Hewitt's evidence to the Joint Committee. She said:
- "We want people to act with due care when they are interacting with the financial markets, but of course we do not want to sanction people for the effects of actions that are unforeseeable. The regime is designed to protect the efficiency of markets. It is designed to deter unacceptable behaviour, not acceptable behaviour, and clearly there needs to be a degree of certainty in achieving that".
The Joint Committee said that it was satisfied that what the Government proposed would broadly meet the recommendation in its first report for more
certainty. That was in paragraph 23 of its second report. We have introduced these protections in Clause 109(3) of the Bill. That subsection provides that in determining whether behaviour amounts to market abuse, regard must be had to the extent to which the person concerned took care to avoid engaging in abuse or believed that the behaviour would not amount to abuse.A number of amendments have been put down by noble Lords opposite and by the noble Lords, Lord Eatwell and Lord Lipsey. Perhaps I may continue to describe my amendments first. The effect of our Amendment No. 212 is just to delete that subsection. The overall effect that the amendment and our related amendment, Amendment No. 218, to Clause 113 have means that everyone ought to be in agreement about that. I have not heard anything other than that. We have decided to divorce these matters from the question of whether abuse has taken place and impose them as fetters on the FSA's powers to impose penalties or make statements. Amendment No. 218 provides that the FSA may not impose a penalty on a person or make a statement if, having considered representations, there are reasonable grounds for it to be satisfied that the person concerned believed on reasonable grounds that his behaviour did not amount to abuse or that he took all reasonable precautions and exercised all due diligence to avoid engaging in market abuse. Whether there were reasonable grounds for the FSA to be satisfied in a particular case is something which the tribunal will be able to consider.
In addition to improving the nature of these protections in line with our general approach towards certainty and transparency, we are proposing in Amendment No. 220 that the FSA will, as part of its policy statement on the imposition of penalties, have to give indications of the circumstances in which it is to be expected to regard a person coming within these protections. The FSA has to consult on and publish this policy statement.
The noble Lord, Lord Eatwell, said that Amendment No. 208 was flawed. But the reason the test is drafted in this way is so that the tribunal ultimately can decide whether there were in fact reasonable grounds for the person believing that his behaviour was not abusive. This provision does not stop the FSA from proceeding to issue a decision notice if it is satisfied that the person's grounds are not reasonable.
The effect of the amendments is to provide more effective protection against the allegation of market abuse than Clause 109(3) does at present. I hope that it meets the substance of Amendment No. 212A in the name of the noble Lord, Lord Kingsland. We have also taken the opportunity to restrict the protection to belief where there are reasonable grounds for the belief. That is in line with Amendment No. 213--I understand from what he said that the noble Lord will not pursue it--and Amendment No. 203 tabled by the Opposition Front Bench.
While referring to protection, let me deal with Amendment No. 214. Clause 109(9) already provides that behaviour which conforms with FSA rules does
not constitute market abuse. We have been accused of resiling from the position that we took in the House of Commons. We believe that, as drafted, this goes too wide. Of course it is not, and never has been, our intention that behaviour in conformity with any completely unrelated FSA rules should protect a person against an allegation of market abuse. I do not believe that noble Lords opposite, or honourable Members of the Opposition, thought that that was the case. While we do not think that the provision would be read in this way, we are taking the opportunity to clarify the matter. That is the reason for Amendment No. 214. But the protection in Clause 109 still provides a safe harbour for behaviour conforming with rules such as price stabilisation rules.We are proposing that the protection should apply only where the rule in question states that behaviour conforming with it does not amount to market abuse. The obvious examples are rules on price stabilisation and Chinese walls, but the amendment deliberately gives the FSA the flexibility to specify other rules if that is appropriate.
Finally, I turn to the amendments which deal with the reasonable regular user of the market's role in determining whether abuse has taken place. I have heard it said that we are too strict; and that we are too lax. I am glad to have the support of my noble friend Lord Grabiner, who confirms our view: that the issue is objective, not subjective. This is very much at the heart of the regime. It was, quite rightly, the subject of debate at Second Reading. I think that there may be some misunderstanding as to how it works.
The Bill as considered by the Joint Committee did not have the concept of the reasonable regular user. We introduced that following a review of the legislation in the light of the Joint Committee's concern that the definition of market abuse in the Bill lacked the necessary clarity. In carrying out this review we consulted with industry representatives and the FSA.
Let me take one step back before I describe the reasonable user test. The purpose of the regime is to protect from the effects of abuse the markets which will be covered by it. It will allow action to be taken against the bad apples who abuse the trust of other market participants whether they are regulated or unregulated. But it is not telling those markets how they should operate and what standards they should have. That is not the purpose of the market abuse regime. The then Chief Secretary made this clear when announcing the proposals in May 1998. He said:
- "It is not our intention that the new regime should stop generally acceptable market behaviour--far from it. Nor do we want to deter proper innovation in the financial markets".
Let me make clear that I am not advocating self-regulation. The FSA may, of course, have a role in raising standards in markets, but only where the adoption of particular standards by market users means that there are investor protection or market confidence issues. Where that is the case, the FSA will be able to take action under its rule-making powers or under its powers to enforce the recognition requirements for exchanges.
The job of the market abuse regime is to police accepted and acceptable standards of behaviour. Of course, good markets depend on those who use them having confidence in their fairness and efficiency. So the standard of behaviour which is reasonably to be expected will be one which takes into account the need for the market to operate fairly and efficiently. That is why we introduced the regular user of the market. The view of the regular user is the view which an impartial third party who regularly uses the market would take on an objective and reasonable basis as to whether a particular person's behaviour represented a failure to observe the standard of behaviour reasonably to be expected of someone in that position. A reasonable man is someone who knows right from wrong.
Let me give a couple of examples. Let us suppose that someone is engaged in a squeeze on a commodity market. He holds a large number of contracts which require delivery of, say, a metal of a certain quality to him on a particular date; and he has control over a large amount of the supply of the metal of that quality. He takes advantage of that position to extract artificially high prices; that is, he squeezes the market. If the reasonable regular user would take the view that the squeeze fell within Clause 109(2)(c) the next question he would have to ask is whether there was a standard of behaviour reasonably expected of any person in the same position as the squeezer in relation to the market.
The hypothetical regular user addresses the question from the viewpoint of an impartial person who regularly uses the market. He does not decide whether there is a standard of behaviour reasonably expected of a person in the position of the alleged abuser by looking at the personal characteristics of the alleged abuser. That is what would happen if Amendment No. 208B were accepted. He asks himself whether there is a standard of behaviour which a person in the position of the alleged abuser is reasonably expected to observe. If the answer is that there is no such standard, then the alleged abuser will not have engaged in market abuse.
However, if the answer is that there is such a standard, then there will have been market abuse. But the question will turn in each case on whether an impartial regular user of the market would take the view that there is a reasonable expectation that a person in a particular position should not take advantage of that position to squeeze the market.
I do not think that I can bear to take the football example. I do not understand what it is about. I do not know who Stanley Matthews was. I do not understand
about pulling sleeves; although I am advised that the Stanley Matthews example is very helpful to the government case.
Amendments Nos. 210 and 211, in the name of my noble friend Lord Eatwell, would remove the regular user from the condition concerning distortion of the markets in Clause 109(2)(c). If we did that, who is to judge whether the behaviour would or would not be likely to distort the market in the investment? Surely the best person to take that judgment is the regular user. He is the person who is considering whether behaviour lives up to expected standards.
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