Joint Committee on Financial Services Minutes of Evidence

Examination of witnesses (Questions 200 - 219)




  200.  Good afternoon and welcome to this session of the Joint Committee. As you will know, we are now in the process of trying to major on some particular topics and having along groups of witnesses who will help us to do that. Today the main themes are the question of discipline, enforcement and the tribunal, but we are happy to have additional comments that may be particularly on your mind as this is the opportunity you have to make them. We have a little bit of flexibility, but we would like to concentrate on the subject that we have indicated as far as possible. I think the best way to begin is if you could introduce yourselves and make short introductory remarks about what you think are the main issues and the main things that concern you. Very much in our mind is the fact that we have had the draft Bill. We have had the consultation period and we have had lots of information from that. We have now had the Treasury's Progress Report and I think the Committee is particularly interested to know to what extent you believe that the proposals that were in the Progress Report take us forward and how much is left outstanding to take forward to the next stage. We do not want to go over the ground where the Treasury have responded. What we want to do is to move on to the areas where you feel that we are still facing a shortfall in terms of what you would like. Mr Morton, would you like to start?
  (Mr Morton)  Thank you, my Lord Chairman. I am Guy Morton. I am a Partner in Freshfields and Chairman of the City of London Law Society's Regulatory Working Party which has the task of commenting on this Bill and matters connected with it. I think I would like to focus on three points by way of introduction. First, on enforcement and the Enforcement Committee structure. I think that there is a fairly general consensus among City lawyers that although very much welcome progress has been made, some further movement is needed to strengthen the independence of the enforcement mechanism within the FSA. Exactly how that works I think is probably a lesser issue. Whether you have a fully fledged tribunal of first instance within the FSA or leave it to the Enforcement Committee to take the first decision as an FSA decision with appeal to the Appeals Tribunal is a lesser issue. The crucial point, I would submit, is that people who are the subject of enforcement should have access to an independent body and have the opportunity to put their case and, if necessary, to negotiate a settlement having seen the case against them and the evidence on which it is based. I think that costs are always an important issue. As you will know, of course, there have been widespread concerns under the current structure that people have been effectively deterred from pursuing defences because they simply felt they could not afford it and ran the risk of being bankrupted if they tried to do so. That is an issue and it is an issue under the European Convention of Human Rights as well. If I can move on then to market abuse. I think the main point about market abuse is the need for greater certainty in the definition, which does seem to us not to give an adequately clear impression of what behaviour is regarded as objectionable. The second issue I would highlight about market abuse is the fact that the current structure does involve a novel delegation of rule making, law making power, if you will, to a non-public body because it seems to us that although the code is in label only evidential, its practical effect is to make rules and that is particularly so because of the uncertainties in the definition of market abuse. Finally, if I could just mention the European Convention on Human Rights. As the Committee knows, there has been a lot of debate about the categorisation of both the market abuse and the disciplinary regimes. I think we would feel that they ought to be categorised as criminal for the purposes of the Convention, which has some consequences, particularly on the admissibility of evidence obtained compulsorily. The Government up to now has taken the view that they are to be categorised as civil, which would have a different effect, of course. There are also issues about whether the FSA principles and the market abuse definition meet the test of legal certainty required under Article 7 of the Convention. The point I would like to make there is that whoever is right on these perhaps arcane matters it is essential, I would submit, that the position be clarified before the Bill is passed, because nothing could be more damaging than to proceed and to find that there remained uncertainty or, even worse, that the first time the powers were used they were struck down on Convention grounds.

  201.  Thank you very much. Mr Farrow?
  (Mr Farrow)  I am Kit Farrow. I am the Director General of the London Investment Banking Association. I am, as it happens, also the Vice Chairman of the London Metal Exchange, but I am not speaking for them this afternoon. The London Investment Banking Association (LIBA) is the principal trade association for the investment banking industry in London. Its particular concern is the impact of the Bill on the competitiveness of London as an international financial centre. My remarks this afternoon will be directed to inter-professional business and business with experienced investors including high net worth individuals. I will not be addressing my remarks to retail business customers. LIBA shares and supports the principles for the enforcement regime that were set out in the FSA's Consultation Paper 17. They were: the maintenance of an open and co-operative relationship between firms and regulators; transparent, proportionate and consistent exercise of power; and fair treatment for those in the enforcement process, but we are concerned that a number of the specific provisions in the draft Bill and CP17 are contrary to those principles working out in practice. We welcome a number of the changes that have been announced by the Government in recent weeks which have met some of our concerns, but we believe that the proposals still need substantial further change. Maintenance of an open and co-operative relationship is an essential element in the UK's approach to supervision. We believe that the FSA should take as the primary objective of formal disciplinary action the stopping of malpractice and the provision of appropriate remedies to clients who have suffered disadvantage. It should reserve deterrent sentences and retribution for cases of fraud, gross negligence and other rank abuse. We believe that the right approach is for the regulator to operate a system which encourages, reinforces and rewards good compliance within firms. This will not be achieved securely if retribution and deterrents are the primary objectives of the enforcement regime. Good internal control by firms is far more effective in practice than external inspection can ever be; and it should be encouraged and reinforced by the approaches to cases where firms have themselves identified regulatory breaches in their own firm. Where firms have detected a failure, and have promptly set about rectification and redress and have promptly notified their regulator, the only purpose of a fine or public censure will be retribution and deterrence. We think the imposition of a penalty is generally inappropriate in such a case and will prejudice an open and co-operative relationship. We are concerned that CP17 says, "it is equitable that those who breach regulatory obligations should generally pay a penalty", which seems to be slanted towards an inevitability of imposing penalties every time you find something wrong, i.e. in the way that a parking meter attendant does. The second objective is the transparent, proportionate and consistent exercise of powers. We think it is necessary to make clear any rules which can give rise to disciplinary proceedings. High level principles interpreted with hindsight do not seem to us to be a basis for enforcement and we believe that the FSA should recognise that it should not take disciplinary action for breaches of principles alone. This point is particularly important for investment banks because of the need to avoid over-prescriptive rule books which will deter innovation. The market abuse offence and its evidential code—which will apply to everybody, not merely to authorised persons—are also both vague and subjective. The overlap and the conflict between the criminal law, the market abuse code, the principles, regulatory rules and exchange rules means that we are very far at the moment from the admirable objective of making the rules more user-friendly with which the Bill was launched. We think that the FSA should follow the Better Regulation Guide which was circulated to all Government Departments last year—with a foreword by the Prime Minister—and we think that it should be obliged to act in conformity with the Code for Crown Prosecutors. Specifically, it should be required to take into account the extent to which a firm has sought to compensate persons that have been harmed by its actions. Lastly, the commitment to provide fair treatment. We think that it should meet the standards of the European Convention. We believe on the basis of advice from Leading Counsel that the ECHR does apply and we have provided that opinion to the Committee. However, we think that the Government should be keen to apply the standards of the ECHR because it wants Britain to have a fair and just system, not simply because it has been obliged to apply the principles by international law. While some of the changes already announced by the Government will bring the enforcement regime closer to the standards required, important discrepancies remain in respect of fair process and clarity of rules. In this introduction I have touched on only a few points in which we feel that the substance does not match the broad principles. I would be happy to send the Committee a list of very specific points to substantiate what I have said.

  202.  Thank you very much. I think that would be helpful because this Committee has to concentrate on what has to be done with the Bill in order to make it as sensible as possible. So we are interested in specifics as well as general information. Mr Mayhew?
  (Mr Mayhew)  My Partner, Chris Bates, and I are here on behalf of Clifford Chance. As you know, my Lord Chairman, the firm has provided a response to the Bill and to CP17. Chris takes the role of advising clients as to how their businesses can comply with regulation and so he sees the varied ways in which business is conducted both here and abroad because of the international client base. I tend to be on the litigation side and see the problems when compliance has not happened or when they have ignored Chris's advice. So we come at it from different angles, but together we have spent the last number of years looking at the system and working with the system, as it were, on the ground under the 1986 Act. We are not here as an academic exercise as lawyers, but more as practitioners who have talked to our clients about the way in which this Bill might impact on their business. Can I just draw back and say that we are talking here—and I hesitate to teach the Committee anything of this nature—about administrative power of a significant amount being handed to a private law body albeit with statutory objectives. It is well-established amongst English law that administrative power is only tolerable if the safeguards of procedural fairness and in the context of the legal regime which is criminal in nature of legal certainty apply and this is why Guy Morton and Kit Farrow have referred to Article 6 and Article 7 of the European Convention on Human Rights, but you do not even need to refer to the Convention because it is part of English law already as it is part of the administrative law that has been built up over a number of years by the Divisional Court in the judicial review proceedings which governments have had to contend with over the years, so it is a matter of our own law anyway. The framework currently envisaged by the Bill does not measure up, in our submission, because we consider that the courts should take the view that the regime is criminal in nature. Even though it is called civil, it is, in fact, substantively criminal and the reasons for that have been worked out in Lord Lester's opinion, which you have seen and to which Kit Farrow has referred, and that has had a consequence, we say, on the Bill as currently drawn. For example, the decision-making powers of the tribunal and, we would hope, also the FSA need to be subject to compliance with the right of a fair trial. It is clear that the tribunal as currently proposed does comply with the provisions of Article 6 of the Convention except in relation to the concept of equality of arms which is one of the concepts underpinning Article 6, i.e. if it applies in a criminal regime. We say to make the system work, to avoid people having to get to the tribunal stage, the FSA's internal adjudication powers should also be subject to an overriding principle of fairness because people will not buy into the results unless they feel they have been fairly arrived at. That involves concepts such as the separation of the investigation and prosecution functions on the one hand and the adjudication function on the other. It involves making sure that decisions are reached with proper consideration of the views of the people affected by them and with no appearance of bias. If that is achieved then the result will be more acceptable and, indeed, better quality. You have kindly circulated the models which we have drawn up to help illustrate the points we are making. I will not take you to them now, but if at an appropriate moment you would like me to explain that, I would be quite happy to do so. There is an element of confusion which has come in because since the Bill was published and since the consultation paper was published we have had pronouncements both from the Treasury and more recently from the Economic Secretary to this Committee itself which tends to suggest that thinking is moving in a different direction from what is currently in the Bill and I am happy to illustrate that to you to show you where you would want to see that the change coming through the next draft of the Bill. Guy Morton has already touched on the issue of self-incrimination and the admissibility of statements. Essentially what that is saying is that the compulsorily obtained statements, which the FSA will have powers to obtain under threat of imprisonment, should not be used in enforcement proceedings, i.e. they should not be placed before the tribunal. The fruits of those interviews, of course, can be used. If someone under interview gives disclosure of information which can then build the case for the prosecution, that is fine, not a problem. It is actually the self-incriminating statement that cannot be used, that is all and that accords with the principles of both criminal law and the Convention. The third area is the question of certainty and the problem of vagueness of the market abuse provisions which I will not go over again. The key point there, of course, is that you can cure that through the evidential code provided that it is sufficiently descriptive of the conduct you are trying to prohibit, but the corollary of that is that if something is not described in the code you are back into the area of uncertainty and we say that the FSA is wrong to consider that it can take enforcement action against people who have done something which is not covered by the code at all because then you are simply saying to people, "If we do not like it we can effectively take proceedings against you". As Guy said, the code is actually revealed as being in effect a form of legislation and we are troubled by that in terms of the scope, i.e. its regulating conduct of anyone anywhere in the world whose behaviour may indirectly affect the UK markets and this is something Chris can explain in much better detail than I. He has this nice example of the Singapore trader in oil who happens to trade Brent oil. That will affect the Brent oil contract which is traded on the IPE in London. Something that is happening across the other side of the world can have an effect on the market here and would currently be caught by the proposals. It also engages in the FSA having unfettered power to introduce a number of wholly new concepts into UK law in which we believe the case for doing so has not been made out. I think our approach is that traditionally an incremental increase of law is the preferred approach rather than introducing some grand design. We do not believe a case has been made out for not extending the scope of the criminal law if you believe that there is conduct which should be criminalised. Similarly we could have a parallel administrative fine system sitting alongside the criminal law system. What we find difficult is the idea of introducing a new layer of proscribed conduct which introduces uncertainties about what conduct is and is not permissible depending on the description and how certain it is. In any event, and this should be something of particular concern to this Committee, we believe these effectively rule-making powers should be subject at least to Parliamentary scrutiny. Finally, can I just touch on one topic which again has concerned us and I know it has concerned the Committee and that is the question of intent and the market abuse system. We do not believe that strict liability is an appropriate mechanism in this case. When you have broadly defined concepts you do need to have a mental element, otherwise you have conduct being described which is not culpable and you need to have a mental element to make it sufficiently certain and fair and there the mental element may vary depending on the specificity of the conduct, so broadly speaking a knowledge of consequences of actions or recklessness is sufficient for these purposes. It is very important to us in this respect that we are not seen as being anti the Bill or, indeed, anti the FSA. That is not our remit. We do believe in a strong system of enforcement being good for London. What we do want to avoid is uncertainty and problems that will entail following a system which is not adequately thought out and designed.
  (Mr Bates)  I think David has taken my points and I would be happy to deal with questions.
  (Mr Whiting)  My Lord Chairman, I am Alan Whiting, Executive Director: Regulation and Compliance at the London Metal Exchange. I will confine my opening remarks to those aspects of the draft Bill which impinge particularly on the operation and regulatory functions of the LME and the other recognised investment exchanges and clearing houses, namely the recognition regime for investment exchanges and clearing houses, statutory immunity and the market abuse regime. The LME welcomes the retention in the Bill of the special recognition regime for investment exchanges and clearing houses which currently operates under the Financial Services Act 1986. The LME endorses the Government's view that this part of the current regulatory regime has worked well and that where exchanges can demonstrate that they can meet the required standards, "the regulatory system should allow them a wide degree of freedom to set and police their own market rules". We believe it is appropriate for the Financial Services Authority to have a power of direction over the exchanges if they are failing to meet the broadly defined recognition criteria. We are not even calling for this power of direction to be subject to appeal—we are very reasonable people at the exchanges—as long as it is clear that the power relates explicitly to principles in the recognition criterion rather than the detailed means by which they are satisfied. In particular, it should not be a function of the FSA to oversee the commercial direction and decisions of exchanges. In view of the FSA's new power of direction this should be made explicit, rather than implicit, in the legislation. One of the most important of the recognition criteria requires exchanges to run proper markets and to deter market abuse and financial crime. The LME takes its regulatory responsibilities, which it carries out under statute, extremely seriously. It is the exchanges, not the FSA, who are the front-line regulators and who deter and detect abuse on their markets. The exchanges have pressed over the years for statutory immunity from civil suit for their regulatory functions. The draft Bill restricts immunity to actions taken by members of the exchange. This is unsatisfactory for all the reasons we have set out in the detailed submission which we have given to the Joint Committee as it will impede the effectiveness of regulation of the exchanges and the deterrence of market abuse. The exchanges believe that the balance of public interest versus private rights points firmly to the granting of statutory immunity for the regulatory actions, taken in good faith, of the exchanges and clearing houses. In its Progress Report on the Bill, Her Majesty's Treasury, when rejecting a proposal to remove or reduce statutory immunity for the FSA commented: "The Government considers that if this were done the regulated staff would be unable to go about their business without being unduly hampered by concerns about legal action". We entirely agree and would point out that this applies equally to the regulatory functions of the exchanges and clearing houses. The LME welcomes the extension of the market abuse regime to cover both non-authorised persons and off-exchange activity which has a manipulative effect on official exchange markets. One has only to refer to the Sumitomo affair to appreciate the need for these two extensions. Sumitomo was not a member of the LME or an authorised person, and nearly all of its business was not transacted on exchange but was transacted in a manner which manipulated the exchange's market. The scope of the market abuse regime does, however, need one clarification. While it is right to include behaviour off market which influences the official market and from which the perpetrator will benefit, it cannot be right to include the actions of warehouses, mining companies and metal fabricators, etcetera, who do not participate in investments, whether qualifying or not, even though their actions may influence the official markets. If we were to do that you would be requiring people who have never even heard of the LME to have tremendous knowledge not only of the LME but of the market abuse regime and the law. This cannot be sensible. There is confusion at the moment about whether this class of person is caught within the scope and we need clarification that they are not. Finally, the market abuse regime must provide greater clarity on what will constitute market abuse. It is essential that the code of market conduct is sufficiently well defined to avoid market members and users unwittingly contravening the new regime. That would not only be unjustifiably damaging for the firms concerned and for financial services business in the UK, but it would also bring the market abuse regime itself into disrepute. It is particularly important that it is made explicit, at least in the code, that any conduct which conforms to the rules and guidance of the exchange will not constitute abuse under the code and the legislation. For anyone who is concerned that this may be giving the Exchanges too much power I would point out that this is one of the recognition criteria and we cannot have rules and regulations in relation to investment business which are not approved by the Financial Services Authority. I would be pleased to expand on any of these points and any further points. Thank you.

  203.  Thank you. Mr Telford?
  (Mr Telford)  My name is Philip Telford and I am a Senior Policy Researcher working on personal finance issues for the Consumers' Association. If I could say a couple of brief points about the Bill generally and then go on to talk a little bit about enforcement which is today's topic. Generally as an organisation we are certainly enthusiastic about the Bill and we see a variety of advantages in having a single financial services regulator. We are also very conscious, of course, that the Bill is a widely drawn framework document and much will depend on the rules formulated by the FSA. We have certainly been very encouraged by the attitudes and actions of the FSA to date in a wide variety of areas. If I can turn to the Bill itself, as you can imagine one of our major concerns is about consumer representation and we did have worries about the lack of a statutory basis for the FSA Consumer Panel. We are pleased that has now been addressed as we have seen from the Progress Report. As you may have heard from other organisations we would certainly prefer the scope of the Bill to be widened to include the sale of mortgages. Again we are conscious there are reserve powers in the Bill to bring that in later if that is seen as appropriate. We certainly welcome the statutory duty on the FSA to promote public understanding. There are a couple of areas in which we will be suggesting amendments to clarify the wide definition of consumers in the Bill and also to qualify the principle of caveat emptor. On the subject of enforcement we see it as very important not to lose sight of the purpose of the rules and powers of the FSA. We would see it as vital for the functioning of markets and for consumer confidence that the regulator does have wide-ranging disciplinary and enforcement powers and is not afraid to use them, or hindered in doing so. We certainly hope and expect that the FSA will be proactive in identifying problems in the market before they become widespread and that they will target their investigations so that the weight of enforcement falls where it is most appropriate. We are also very strong supporters of individual accountability. We think firms that adopt good practices have nothing to fear from this regime. We think it is essential that there are strong and flexible powers for the FSA and we certainly agree that it is time now to sort those powers out and to clarify them rather than leave it as it is for year after year, once the FSA are fully up and running and have their full powers. We will be happy to contribute any way we can to try and sort out this point.

  204.  Mr Mayhew, how long will it take to explain your diagram?
  (Mr Mayhew)  I would hope no more than five minutes.

  205.  I will give you five minutes!
  (Mr Mayhew)  I want to illustrate how the various enforcement mechanisms work.[1] Taking the current model, the SRO model, the first chart is to illustrate that you have under the SRO model clear separation between adjudication and prosecution so the investigation team investigates the matter and hands it over to the prosecution which acts as a check on the work done so far. It then goes to the enforcement committee made up of practitioners advised by the executive. At that point in time they authorise the issuing of the disciplinary proceeding. If there is no settlement reached the matter refers over to the SFA Tribunal. The important point here is that there is no power in the regulator to impose the result, it has to go to the tribunal for decision.

Mr Kidney

  206.  Can I ask about model 1. That is only one SRO out of many. The PIA, for example, do they not impose their own fines?
  (Mr Mayhew)  Again they do have an adjudicate function which involves some impartial decision-making process or at least an appeal to that process. What I am trying to do is look at what the current SROs have been dealing with and IMRO as well and look to see where the Bill is going. If I could take you to model 2——

  207.  One more question about model 1. In the whole system when there are disputes what is the standard of proof? Is it the criminal standard of beyond a reasonable doubt to solve the dispute or the civil one that one is more likely than the other to be correct?
  (Mr Mayhew)  The standard of proof adopted is the civil standard of a balance of probability. They talk about a sliding scale. The more serious the charge the more certain the evidence has to be. Certainly the disciplinary panels I advise in the markets work on the principle that if it is tantamount to theft or tantamount to a crime one effectively applies the criminal standard. That is in accordance with English law. I think the standard of proof issue is, by and large, a red herring because ultimately if it is a serious charge the tribunal will apply the more weighty standard.

  208.  It is not a red herring when people say to us we should now say that for fines and possibly withdrawal of authorisation it should be the criminal standard of proof when for many years we have all tolerated the civil standard for people who can suffer fines and have their authorisation removed.
  (Mr Mayhew)  In terms of the application of the civil test of the balance of probabilities the tribunals have regularly said that the more important the charge the more weighty the evidence has to be. It has effectively been akin to the criminal standard.

Chairman:  I must ask the Committee to look at all the charts and then ask questions.

  209.  I have stopped now anyway!
  (Mr Mayhew)  The next model is what we call the proposed model under the Bill and here the important point is that under the Bill the FSA is proposed to be given power to actually impose the decision. You start with the warning notice setting out the proposed action giving reasons and inviting representations, and then move to a decision by the authority actually imposing the result, giving the effective date, reasons and right of appeal. Then of course there is the right of appeal to the tribunal which is independent of the FSA and the power to review the merits and impose its own decision. Under the modifications proposed in the Progress Report you see the FSA has the duty to establish and publish procedures, the right to see the evidence relied on by the FSA, both welcome improvements and, secondly, in relation to the tribunal the Government has indicated that they are going to drop the name "appeal" and call it a tribunal at first instance. There will be no restriction on evidence going to the tribunal and there will be appeal to the Court of Appeal. If you turn the page we then have the proposed model with some flesh coming through with the consultation paper CP17. Effectively what this describes is how you get from the warning notice to the decision notice and you see the role in particular of the enforcement committee where it is both a quality check on the prosecution at the stage prior to the issuing of the warning notice but also proposing to play a part in the adjudication process of reaching a decision. This has been the area of most concern to practitioners, that you cannot have an enforcement committee exercising an adjudication function if the prosecution has special access to it. It undermines the concept of impartiality. Howard Davies in his recent speech to the Chancery Bar talked about having two panels drawn from the enforcement committee, one which would handle the first part and one to handle the second part, recognising the need for impartiality.

Lord Poole:  Can I just butt in and ask why do you need to have impartiality? Surely, the whole point about this system is that it is almost admitted there is something special about financial services and that those who engage in financial services live in a rough and ready world and have to learn to live by it. I am not talking about the delivery of retail product to consumers, I am talking about the investment bank, metal market, whatever it is, where you have extremely highly paid, hugely intelligent people working very hard to make as much money as they possibly can and looking for every conceivable way of doing so within whatever happens to be the acceptable form of behaviour that applies at the time, in a legal sense or otherwise. It does not seem to me that what you are suggesting is necessary at all. Can I ask you to explain that.


  210.  Can I ask you to hold your explanation until you finish the diagram otherwise your five minutes will become a good deal more.
  (Mr Mayhew)  If we turn the page to the CP17 model enhanced, I will not dwell on this, this reflects the submissions we made to the FSA essentially to try and make sure there was a separation of the prosecution and adjudication function and in particular introducing a number of checks to ensure that the adjudication system was rigorous. If I can then move on to what I call the preferred model.

  211.  Five is your preferred model?
  (Mr Mayhew)  Yes for this reason: that it has the beauty of simplicity I think but also I believe it accords with something the Economic Secretary said to the Joint Committee at page 32 of the evidence. What she said was that they were looking to a system whereby if the parties, that is the FSA and the person affected, could not agree a result then the matter would be referred to the tribunal, which is what we consider to be the most appropriate way of dealing with this. It mirrors to some extent the SRO approach we saw at the beginning with the FSA but the important point here is that the enforcement committee plays a role in the process both in reviewing the staff recommendation and deciding on the notice of intention to act and indeed in any settlement discussions that might take place to try and achieve the result, but if a decision is not agreed it is then referred to the tribunal for determination in accordance with the rules that will be issued in relation to that tribunal. This alternative model does exist already under the 1986 Act. The Financial Services Tribunal, although it does not have a huge jurisdiction, does operate in this manner. Section 59 offences where directors are being threatened with the prospect of not being allowed to be employed in the industry have this model of the then SIB issuing a notice of intention to act and if it was not agreed it would be referred to the tribunal. One point I want to say is I am not clear if this is what Ms Hewitt was actually referring to in her evidence because it certainly seemed to be a shift away from the Bill model and that is something the Committee may have to clarify at some stage to see if this is the model rather than the one currently proposed in the Bill.

  212.  If I could hold you and your answer to Lord Poole and ask Mr Whittaker, do you recognise these diagrams as being a description of the various stages you have been through? Mr Mayhew meanwhile can think of his answer to Lord Poole's question.
  (Mr Whittaker)  I think the substance of most of the description given by David is a description I recognise. I have not studied every part of these diagrams as they relate to the legislation and the rule books since like the Committee I have only seen them as we came here today. In particular in relation to the alternative model I am not in a stronger position than the witness (David Mayhew) in offering a view as to whether or not this is what the Economic Secretary had in mind.

  213.  David Roe?
  (Mr Roe)  I fear that the witness is reading rather too much into what the Economic Secretary said. Although she is very interested in hearing these kinds of suggestions, I think she was speaking at a rather higher level of generality than these diagrams operate at. I would not draw the conclusion that you have drawn.

  214.  If you would now answer Lord Poole and then I will come to Mr Beard.
  (Mr Mayhew)  The implication of the question, my Lord, is that somehow people who work in the City do not need to have a fair process because they make lots of money, the risks are very high but because they are successful there it is. I challenge that as being an inappropriate premise anyway.

  215.  It worked very well for quite a long time as a matter of fact.
  (Mr Mayhew)  With respect, no.

  216.  It is just because you are a lawyer is it not? It would seem to me you are creating an opportunity to——
  (Mr Mayhew)  With respect, my Lord, no. The SFA, for example, which has one of the busiest tribunal systems, has worked very well indeed and a lot of the cases are settled before they get to the tribunal stage but there is a very clear demarcation between adjudication and the prosecution function and the reason why you need that is because people will not feel that they are being fairly treated or the quality of decisions made is right if they do not have a system whereby they are appealing essentially to a decision maker who has an open mind in listening to both sides. It is inevitable when you are in the prosecution team, and I have acted as a prosecutor for exchanges as well, that you take on the prosecution mind set. You are not there in a position to make decisions as well. If you can get an agreed result, all well and good but the point is that unless people feel that they have the ability to appeal to a fair-minded decision-maker then they will not buy into the result. They may be forced into the result, which is one of the criticisms of the current system, that the chips are all on one side of the table, or they will appeal and take the thing to the tribunal and the whole thing will then get bogged down into the tribunal. What we are looking to achieve is a system whereby most cases are dealt with by agreement and even in that process you would want to have a sense that you are not just talking about prosecution.

Mr Beard

  217.  But there is a third party at this feast and that is the public in general who need to be satisfied that justice is being done from their point of view, too. I do not see how this sort of plea bargaining hugger-mugger you end up with in this last diagram is going to enhance that process in the least. I can see why it should be recommended by someone representing your own interests in that the upshot of this is likely to be the amelioration of any penalty that is likely to be delivered, but that is really not the object of the exercise. I would also suggest that if this is going to be the case on every occasion that you end up with this bargaining process the whole process will grind to a halt. There will be very little done, very little will come out of it and the amount of work and the amount of man hours tied up in this process will be enormous.
  (Mr Mayhew)  If I can respond to that. We are not suggesting a system of plea bargaining which in some way devalues the process of enforcement. What we are suggesting are ways and means whereby both the regulator and the regulated or indeed the unauthorised, because it includes the market abuse system, can achieve a result without going to the full panoply of a tribunal hearing which is very expensive, very time-consuming and very disruptive.

  218.  Can justice be seen to be done in that case?
  (Mr Mayhew)  That is the current system we have where we have the SROs reaching agreements with their members and imposing results. You get a Board Notice but you do not see anything more than that. If you want justice to be seen to be done you have to go to tribunal whether on the public interest side or in the interests of the people accused of wrongdoing.

  219.  On every occasion?
  (Mr Mayhew)  If that is what you want to see but that would grind the whole system down. The regulators would be very opposed to that result. They need to have a system that delivers fast and efficient results. What I am saying is that has to be counter-balanced by a system that which enable people to have fairness incorporated into that result.

1  See Evidence, pp. 73-74. Back

previous page contents next page

House of Lords home page Parliament home page House of Commons home page search page enquiries

© Parliamentary copyright 1999
Prepared 15 April 1999