Memorandum by the Law Society's Company
A. INTRODUCTION AND
1. This memorandum is submitted to the Joint
Committee in the context of its consideration of the draft Financial
Services and Markets Bill. The Joint Committee has received our
November 1998 Memorandum submitted to HM Treasury. This Memorandum
supplements the points we made in our November 1998 Memorandum
in respect of certain questions on which the Joint Committee is
focusing its inquiry, taking into account HM Treasury's recently
published Progress Report.
2. We have no additional comments to offer at
this stage on Questions 2 (Statutory Objectives) 5 (Ombudsman
and Compensation Scheme) and 6 (Market Abuse). With regard to
market abuse, the comments we expressed in detail in our November
1998 Memorandum, and in particular:
2.1 The general lack of a mental element in
the ingredients of the offence is unduly severe and will give
rise to great uncertainty and potential injustice. The draft legislation
opens up the possibility that a person who reasonably believed
that his behaviour would not distort the market could still be
penalised. In these situations the regulator will have the considerable
benefit of hindsight;
2.2 The provisions designed to prevent use of
unpublished information are so wide that they raise the risk that
a person can be penalised for acting while in possession of information
which is so imprecise that its significance can only be judged
remain and nothing in the Progress Report or the
recent report of the FSA on the response they received to Consultation
Paper 10 lead us to change the view we previously expressed.
3. We therefore offer in Part B of this Memorandum
further comments on questions 1 (proposed arrangements of accountability
of the FSA), 3 (Discipline, enforcement and the Tribunal) and
4 (Scope of the new regime). Our comments are summarised in paragraphs
4 to 17 below.
4. We believe that the blanket statutory immunity
for the FSA is no longer justified and should be limited, if at
all, to an immunity for staff and officers of the FSA rather than
the body itself (see paragraphs 8 to 11 below).
5. The FSA's abilities to keep the fines it
imposes creates a clear conflict of interest. They should be paid
either into the Ombudsman Scheme or the Compensation Scheme (see
paragraph 14 below).
6. The scope of the new regime should be clearly
limited in the face of the Bill, to business activities, except
within strictly defined exceptions (see paragraph 16 below).
7. The Treasury should, like the FSA, be under
a statutory duty to consult on changes to the scope of the regime
(see paragraph 17 below).
B. QUESTIONS ON
Proposed arrangements for the accountability of
8. We welcome the additional provisions to be
built into the Bill, as set out in paragraph 3.7 of the Progress
9. We are now broadly content with the arrangements
proposed, subject to one issue. We question the justification
for the continuation of the FSA's blanket statutory immunity bearing
in mind its significantly increased powers (particularly with
regard to prosecutions and rights to enter premises). In paragraph
3.10 of the Progress Report the Government justifies the continuation
of the immunity on the grounds that without it "the regulator's
staff would be unable to go about their business without being
unduly hampered by concerns about legal action". As lawyers,
we find that a remarkable statement. Accountability under the
law is vitally important for any public authority. It is our understanding
that other Public Authorities such as the Police, the Serious
Fraud Office and the Customs and Excise do not have such a wide
ranging immunity and this does not seem to hamper these authorities
in carrying out their legal functions.
10. We are aware of the argument that if the
FSA were made liable for damages, then this is a cost that the
regulated community will have to bear, so that the regulated community
will end up bearing the cost of paying its own damages claim.
This is rather similar to the argument that mutual insurance companies
should not be fined because those who end up paying the costs
are the policyholders themselves, an argument that the FSA has
rejected on the grounds that this risk is one the policyholder
takes when acquiring such a policy. The effect of a damages claim
where the immunity exists is that the aggrieved party bears the
loss; where immunity does not exist the cost is effectively shared
across the whole regulated community. It seems obvious to us what
is the fairer result.
11. We therefore strongly urge that the draft
Bill be amended to remove the statutory immunity for the FSA itself.
We accept that different considerations may apply in relation
to individual officers or members of the FSA's staff. The argument
for the statutory immunity in the case of SRO board members and
staff enshrined in the Financial Services Act 1986 was that without
it individuals would be discouraged from filling regulatory positions.
This may still be a valid consideration, although it does not
seem to be a deterrent as far as the Police and other authorities
referred to above are concerned. The financial risk can of course
be covered by insurance. It would therefore be possible to retain
the immunity for individual officers and staff members whilst
removing it for the FSA itself.
12. We should also mention that we are aware
of legal action before the European Court of Justice questioning
the legality of the current statutory immunity regarding banking
regulators and whether such immunity is consistent with the EU
Discipline and Enforcement
13. A representative of our Committee will be
giving oral evidence to the Joint Committee relating to the issues
on which we have expressed concerns.
14. We continue to have concerns in that all
fine income is retained by the FSA. As we stated in our November
1998 Memorandum, we regard the ability of the FSA to keep fines
levied as giving rise to a serious conflict of interest and will
appear to undermine its impartiality as the FSA, and potentially
its staff have a direct interest in the monies collected by it.
We are disappointed that our suggestion, made in discussions with
Treasury Officials, that fines be paid to the Ombudsman or Compensation
Schemes, thus removing the conflict whilst at the same time helping
to fund the costs of the regulatory system has not been taken
15. We welcome the Government's proposal to
impose a new statutory duty upon the FSA to establish and publish
procedures and to act in accordance with those procedures. FSA
Consultation Paper 17 indicated that these procedures would be
detailed in a Broad Resolution of the FSA. We consider that this
is too informal; we believe that the rules of procedure should
be set out in formal rules of procedure, which would be subject
to the specific requirements of the Bill regarding consultation.
Scope of the new regime
16. We have previously expressed concerns that
the potential scope of the new regime was far too widely drawn
in the draft Bill and, in particular, did not limit the scope
to activities carried on by way of business. This concern remains.
The Treasury has recently consulted on the secondary legislation
regarding scope and except in one instance relating to trustees
of occupational pension schemes (mirrored in the current law)
the scope is limited to activities carried on by way of business.
We therefore see no difficulty in this limitation being contained
in the Bill itself; the extension of the legislation to activities
of a private character is something which in our view should properly
be a matter of primarily legislation except in clearly defined
17. The Progress Report contains a commitment
by the Treasury to consult fully not only on the initial secondary
legislation but on future changes. We are therefore disappointed
that there is no statutory duty imposed upon the Treasury to consult
in these matters, equivalent to that imposed upon the FSA in relation
to its legislative powers. Our concerns appear justified in the
light of the fact that the Treasury published on 17 March a very
important consultation paper on Financial Promotion with a deadline
for comments of 30 April which is totally inadequate for a subject
of this importance. We are concerned that without a clear statutory
duty to consult within adequate procedures the temptation to pay
lip-service to the principle of consultation will easily arise.
22 March 1999