Financial Services and Markets Appendices to the Minutes of Evidence


Supplementary Memorandum by the Association of Private Client Investment Managers and Stockbrokers (APCIMS)


  1.1 The Treasury have stated in paragraph 13.5 of the Progress Report that the intention of the market abuse fines is to protect people's confidence in the market (rather than to penalise wrongdoers). In my view, punitive legislation is not an appropriate way to prevent firms doing something which they do not intend or expect to result in the "market abuse" consequences. This is especially the case where those consequences depend on what onlookers may think, which the firm may have never even contemplated; you cannot prevent firms doing something unless they intended to do it. It is unfair to penalise firms (and, indeed, ordinary companies) on this basis.

  1.2 It seems to me that the threat of penal sanctions would mean that firms will continually have to ask their compliance officers to take a view on what onlookers may conclude from a particular transaction. This would impose probably unacceptable delays in effecting a particular transaction, and may anyway not avoid the offence being committed, if the compliance officer does not view the transaction in the same way as the market (as it is all subjective). Alternatively, it will penalise firms merely because they are there. This policy will cause major problems not only to regulated firms but also to the wider community. For example, non-UK gold producers will be liable if gold futures traders interpret their conduct as meaning something, even if that impression was not intended; this will be the case even if the gold producer had no idea how its conduct would be interpreted or, indeed, that there is such an offence of market abuse in the UK which can be committed by it inadvertently.

  1.3 In relation to discipline generally, it is somewhat unfair that the FSA may discipline firms, which complied with FSA guidance. Although paragraph 5.8 of the Progress Report states that the FSA is not likely to do so, this leaves open the possibility that in certain cases the FSA will wish to discipline firms which follow its guidance, which surely is not an appropriate method of regulation. Indeed, it is not at all clear that (as should be the case) the FSA's restrictive policy on discipline (typically, fines) will apply also to the FSA's exercise of its powers to require restitution or disgorgement.

  1.4 More important in practice is the risk that counterparties or clients can successfully sue for contravention of rules (and claim restitution) even though the firm has complied with the FSA's guidance, which surely is all that the Treasury can expect. It is therefore very important that the Bill should provide that Private rights of action (under clause 80) do not apply where the firm has followed FSA guidance; if the firm has nonetheless contravened the "spirit" of the guidance (whatever that means) the FSA can still discipline that firm even if counterparties and clients are not entitled to sue.


  2.1 The Treasury has stated in paragraph 6.11 of the Progress Report that it will not agree to incorporate a provision in the Bill that the FSA will act "reasonably". It explains that this is because as the FSA is a public authority it will anyway be required to act reasonably. However, the term "reasonable" is used in that context in a different sense.

  2.2 The leading case is the Wednesbury decision in 1947. Without getting too technical about it, the Court of Appeal held in that case that, assuming that the public authority (in the present context the FSA) takes into account only and all relevant matters, it would not be treated as acting "unreasonably" merely because it reaches an unreasonable decision. Instead, it would only be treated as acting "unreasonably" for this purpose if it reaches a decision that, in the present context, no reasonable regulator could have reached. The Court expressly started that a court would not have the authority to substitute its own view as to what was a reasonable decision for that of the FSA.

  2.3 This is surely not enough for regulated firms. They want to know that if they act properly the FSA will also act properly. What this means is that the FSA should not take decisions which are unreasonable (in normal English). For this reason it is important that the FSA should be subject to an express obligation to act reasonably.

9 March 1999

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