Financial Services and Markets Appendices to the Minutes of Evidence


Memorandum by Mr Michael Marks

  I welcome the opportunity to provide you with some personal observations upon the Financial Services and Markets Bill.

  I should emphasise a few points before I start. Whilst I am Chairman of LIBA and also Chairman of the European businesses of Merrill Lynch, the comments I am making are expressed in my capacity as someone who has been in the City for around 40 years, during which time I've witnessed a fundamental change in the financial services industry in general and the City in particular. Nevertheless, there are core features and virtues of the City which have survived and which subtly bestow its distinctive character and strength. Changes in the past have not eradicated these core values and it is imperative that future changes don't either.

  I should perhaps also mention that I am neither a lawyer nor a professional regulator and so my views do not necessarily have the forensic and technical depth that those of my colleagues on the Panel may possess. Therefore I approach the issues as a practitioner and one who wants to see a thriving and fair market in which consumers get what they want and participants are able to make a profit—so far as the markets will allow!

  I think that the Bill presents a very exciting opportunity. Self regulation and the SROs have served us well, but I agree that it is time to look at the creation of a unified regulator. I have seen the statutory objectives and criteria which have been set out in the Bill and they are very commendable. However, if the Bill, when it comes out of the Parliamentary process, does not lend itself to cost effective and straightforward implementation then the FSA will not be in a position to meet those objectives and criteria, however well intentioned.

  Moreover the Act when it emerges has to be seen to be right. It must inspire confidence both in consumers and participants. And to do that it must strike various balances along the way.

  There must be the correct balance of weight of regulation between the retail and wholesale sector.

  There must be the correct balance between flexibility and certainty.

  There must be the correct balance between robustness of regulatory power and the fear which will stifle the taking of financial risk and innovation and push business offshore and weaken markets.

  There are many balances to be struck, but the common thread that is running through all these issues, is that they are being determined in public and with the opportunity for informed debate and inevitable disagreement over detail and in some cases substantive issues. I cannot recall in my career such an open and indepth process. This is very welcome and I wouldn't have it any other way. However, it means that there is an even greater responsibility on all of us to ensure that the results make sense. Of course, not everyone is going to agree about everything but it is clear that some real issues have emerged in the consultation process which must be addressed in a sensible way, if the FSA is to inspire confidence from day one.

  I am glad the theme for today is Discipline, Enforcement, the Tribunal and Market Abuse, because I detect that this is an area where there are some real issues to be addressed.

  To me there are a number of key points.

  1. Have we really got the balance right between the criminal regime and the regulatory regime? I appreciate that there is a dilemma: on the one hand there has been a none too brilliant record on prosecutions for insider dealing and S47 offences. Because of the need for intent and meeting the "beyond reasonable doubt" burden of proof, we are told that a significant volume of prosecutions is not achievable and that therefore the deterrent virtues of the provisions are lost. On the other hand we hear the howls of protest that the civil Market Abuse is criminal in nature—hence the European Convention on Human Rights arguments—and that all the criminal-type protections should follow and that intent should be part of the "offence". We are also told that the Market Abuse regime is not to "replace" the criminal offences and is there to catch those things which wouldn't otherwise be caught.

  In my humble view we are in danger of getting to a stage where there is a risk one will need a degree in law to trade in the UK market. This could still the heartbeat of the City.

  I think we need to accept a basic fact: an individual who is found against under something like the Market Abuse regime is likely (though, I concede, not inevitably) to be finished. They will not work in mainstream financial markets in this country again. It doesn't matter whether it is a civil or criminal code, whether there is a fine or not. Therefore, whatever characterisation is given to the "offence", the process must be fair and seen to be fair if we are to deprive people of their livelihood.

  I think it follows from this that the boundaries of the acceptable have to be set as clearly as possible. My sense is that the code supporting the statutory provision is drawn too widely although I accept that, if we are to proceed on the basis of a code, then there will always be a risk that its slipstream will catch activity which with hindsight was acceptable.

  Three things follow from this: first, it is imperative that realtime guidance from FSA is forthcoming (by the way I don't think it should be charged for!) and moreover is binding—so that firms and individuals at least have the opportunity to know how far they can go in their activities; second, there should be no question that someone who has followed the code should be subjected to "prosecution" and thirdly the current process of consultation should flush out those areas which might otherwise fall foul of the code and the Government can decide whether these constitute acceptable behaviour. If they do: make a safe harbour for them, if not leave them where they fall. In any event let's have some clarity.

  I think it also follows that there should be some element of intent required. I understand that the FSA are saying that they have put in a concept in the code which is tantamount to an intent (although not as strong) with the concept of Principal Purpose. I'm not a draftsman but surely we can find a way of putting at least some level of intent enshrined in the Bill.

  2. A second key point is the impression which has been generated that the powers of the FSA are too oppressive.

  I have a broad understanding of the kind of powers that are proposed to be afforded to FSA and would say that if these powers (or even a watered down version of them) are to be conferred then we need to ensure that the natural justice and procedural niceties are especially well enshrined. It seems to me that some of these issues go in step with each other—the wider the offences or the more draconian the action or investigative powers that can be exercised, then there is more of an imperative to have concepts such as Intent or Binding Guidance woven into the fabric of the regime. Also, for example, I think that the propensity to prosecute in relation to breach of General Principles rather than specific rules is fraught with dangers and, without proper protections, is open to abuse.

  In short: if there are to be very strong powers then the protections must be commensurate with them.

  I have focused on disciplinary matters because that is the theme for today, but I also think that this area illustrates the need for us to get the overall structure right. If it is too weak and open to abuse by practitioners then consumers lose out and in the end will seek alternative ways to save and spend their money. If the system is capricious or oppressive then it will drive business away from London. Whole markets can disappear in the blink of an eye. This is not just about nationalistic view of keeping London strong, it is about not fragmenting one of the most powerful financial engine rooms in the world, where everyone comes to service their financial needs.

  If I were to sum up my view, I suppose I would say, the financial services industry needs to be fair and well regulated to provide protection where needed and a unified regulator is a good move; but do not underestimate the need to have transparent fairness and clarity for the participants—otherwise it might be impossible to rebuild the incredible foundation we have in London and which might be lost if businesses thought that it was more convenient to carry out their activities elsewhere.

30 March 1999

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