Examination of witnesses (Questions 300
TUESDAY 30 MARCH 1999
and MR GEOFFREY
TURNER, called in and examined.
ROE, and MR
300. Can I ask the other witnesses how they
feel about these two models?
(Mr Sylvain) I think from the Association of Unit
Trusts and Investment Funds we would prefer the model where most
problems are resolved at enforcement committee level, very little
would go to the tribunals. Most of the issues that are faced by
practitioners of the FSA are minor issues, we are not talking
about BCCI and Barings every day, we are mostly talking about
was a reconciliation done on time. An enforcement committee that
is independent, structured the way Lord Archer described it, with
an independent chairman, with members who are public interest
members and practitioners who could hear in a sensible, relaxed
environment in some sense, not as formal as a tribunal, the points
being made by the FSA, the points being made by the accused, in
this case the firm, and come to a decision on whether it recommended
going forward. I would imagine it would develop guidance over
time for the FSA on what should be brought forward and what should
not. Over time the staff of the FSA will learn what will never
get by the enforcement committee, it is too minor, and others
obviously will have to be addressed by that committee because
they are very serious. In that sense, as somebody mentioned before,
case law will develop and it will all be done within this enforcement
301. This is model one.
(Mr Sylvain) The tribunal is really very far down
the road, very expensive to go through and probably does not meet
the efficiency, quick resolution, that both consumers need to
see and that the firms themselves want.
(Mr Turner) My Lord Chairman, could I just comment.
I favour, and I am sure the Institute favours, model one in that
it looks pretty like the system that was used and is used at the
FSA where most of our members are. I saw that system for four
or five years working fairly and efficiently and it is certainly
one that I think the Committee should pay much attention to.
(Mr Vipond) I would not be surprised if we too
did not favour model one because frankly I do not think model
two is workable. Something like 95 per cent of the cases currently
concerned in bodies such as the SFA and IMRO are settled without
reference to a tribunal. The sheer volume of these cases requires
a quicker, more efficient, more informal means of dealing with
them. Also I think it is important to remember that we are not
talking about criminal cases, we are not talking about civil cases,
we are talking about breaches of rules established by the FSA
and these are not crimes that are heinous, they are large exposure
breaches and that sort of thing. I think it is very important
that they can be dealt with. The problem comes with the enforcement
committee which in many ways is not spelt out in the Bill very
much at all because the enforcement committee has really got to
be an adjudicator, it has got to be something that can solve problems,
but it has also got to be something that in the last instance
can become a formal prosecutor and take things to the next stage.
I think it is going to be very difficult to specify precisely
how an enforcement committee can work and in many ways it is very
difficult to put it down into primary legislation.
302. But you would like to see it in the
(Mr Vipond) Indeed. We would like to see it clear
in the Bill that it has this role, as it were, of preventing things
going to the tribunal when they can reasonably be settled before.
303. So you do not think you need the independent
chairman that Lord Archer was suggesting?
(Mr Vipond) I think if you set it up in the way
Lord Archer started to set it up, it looks by the time you have
finished awfully like a tribunal. It looks like a formal tribunal
with full legal powers and capability and very impressive, but
if you have that then you do not need what he went on to describe
as the appeal tribunal because you have got a tribunal. What you
need to make sure is that the processes internal to the FSA are
fair and reasonable and give people a chance to make their case
but they can always appeal to a tribunal.
304. I am not worried at any rate about
most companies in the business of financial services holding their
own against the FSA. It is very expensive, hugely time-consuming
and can be very scary but that is fine. The people I worry about
are the individuals in a firm who find that actually the management
and the FSA have done a deal which says, "Sorry, guv, you
caught us out. We did not know the procedure properly. Can we
have a fine." He has very little say in that. How are you
going to protect the rights of these employees, to whom I do not
think necessarily always enough attention is paid?
(Mr Vipond) I think I agree with that and there
are two issues, one to do with the enforcement committee and one
to do with costs. On the enforcement committee, it is important
that individuals have the capacity to appear before it, state
their case and state it to the enforcement committee without the
FSA, as it were, prejudging it. There must come a point at which
the enforcement committee looks again and looks cleanly at the
position the individual is in, and that I think has not been spelt
out adequately yet. The second point is cost and I think it is
very important the distinction you make between firms who have
got the money and individuals who, as Antony Blunden said earlier,
by and large have not, and it is important, therefore, on grounds
of natural justice and fairness that a process is found whereby
individuals can be supported to the extent that that is reasonably
necessary for them to defend themselves.
305. Going back to what Ms Hutchinson said
earlier in her introductory remarks, that one of the objections
to the arrangements was that it was going to be judge, jury and
prosecutor all within its own walls: is that not true of any regulator
we have? Why is this one different in that respect? Is it not
also true of the voluntary organisation that it is taking over
from, so why is it especially different in this respect?
(Ms Hutchinson) If others do have it that does
not make it ideal.
306. No, but the consequence of following
your argument is that you get into these convoluted procedures
that may be much more theoretically just but will be much more
cumbersome, and surely what one is looking for is some compromise
between the two?
(Ms Hutchinson) That was really why we suggested
the second alternative, because our concern is that if the FSA
is the prosecutor, judge and jury, we do not think that is the
right approach because if anyone wants to take it further they
start off on the back foot. They have already been, as it were,
found guilty. If you are going to have them doing that, then you
should not have that. You should have the adjudication made by
a separate person and it comes back to Lord Archer's point about
having the enforcement committee as an independent body, and if
it is going to make an adjudication it is going to have to look
at the evidence. You are going to have to have a proper full oral
hearing. You may have individuals who cannot afford to be represented.
They may have a right to be represented but that is not much good
if they cannot afford it, and the FSA, of course, will no doubt
have their in-house legal advisers or whatever, so you do not
actually have a level playing-field there, and if the appeal is
to a tribunal where it is by way of a re-hearing, you seem to
be committing yourselves to two full hearings, and given that
the approach, we think, is to have a market that acts quickly
and efficiently, there is co-operation, there is a good culture,
what we were suggesting was that the enforcement committee would
act as a filter, could possibly put forward some type of mediation
service. You would be able to have settlements without admitting
liability. You would have these other ways of resolving matters,
and if you could follow those routes then I would not expect the
breaches which have been described as administrative to find their
way up to the tribunal.
307. Do you hope that the 95 per cent. or
whatever it is, of cases that are presently resolved would nevertheless
be resolved within the first stage of your proposals?
(Ms Hutchinson) That is right, but I think it
is important, if you are going to achieve that, that, if you are
a defendant, you have to be able to settle on the basis that you
are not admitting liability.
308. But is not a lot of the anxiety that
is being expressed arising from the fact that you as practitioners,
whether legal or financial, have become used to a voluntary organisation
where you knew one another and it was very much more informal
and now you are seeing the thing move to a proposed statutory
base with powers which I think to an extent there is a tendency
to exaggerate for the FSA, and this is just the anxiety of seeing
a new, more distant, more formal procedure replacing a voluntary
(Mr Sylvain) My Lord Chairman, I think that is
an excellent point that relates to the one made earlier. It all
depends who is running the organisation and if we had a Ralph
Nader type running the FSA or a Rudolph Giuliani, how would we
know that we are not at zero tolerance and that is having moved
too far? So I think the powers are very strong and unless they
are balanced by a body that can actually act as a brake on what
might be overbearing regulation, then I fail to see how the individual
is going to be protected in that situation.
Lord Fraser of Carmyllie: If
you come to the position that Part VI of this Bill cannot properly
have as its heading "Civil Fines for Market Abuse" and
what is in procedure there is essentially criminal in nature,
if we are to meet our obligations under the European Convention
on Human Rights, are we not bound to have a tribunal which allows
all the evidence to be heard before it and is not qualified, as
the appeal tribunal is, in the restriction that is imposed on
it as to the type of evidence that can be heard before it?
Chairman: That has
been changed, I think. The Treasury responded to that in the Progress
Lord Fraser of Carmyllie: But
we are still going to have an independent tribunal.
309. I am still puzzled about the extent
of the powers or activities of the enforcement committee which
is envisaged. Some reference has been made to the current structure
of enforcement of the SFA, and I declare an interest as a member
of the SFA's enforcement committee, and in that operation the
vast majority of problems are dealt with by the committee hearing
reports from its staff and determining a penalty which is then
negotiated with the person who is the defendant. Those negotiations
usually reach a settlement and a very small number do not reach
a settlement and go on to a tribunal. Some of the penalties imposed
are very severe. Sometimes, for example, people are expelled from
the industry and they put their hands up and say, "It's a
fair cop." The notion of all those sorts of things going
on to a tribunal would completely gum up the system.
(Mr Clarke) My Lord Chairman, I think there may
have been some misunderstanding. The question keeps getting mixed
up between model one and model two. The model we were proposing
is exactly the same as the industry is requesting, which is that
the committee can, by agreement, reach a settlement for disciplinary
action to be taken against somebody. Our difficulty is that that
would be a very informal procedure and would be internal to the
FSA. If the committee is unable to reach agreement with the defendant,
which is probably more likely in the case of an individual who
has more to lose than a commercial offender, then the Bill proposes
that the committee then makes a formal decision of guilt and imposes
310. Then it goes to the tribunal?
(Mr Clarke) Then it goes on to the tribunal. So
the defendant goes to the tribunal with a decision against him
having already been made. At that stage he has not been able to
present all his evidence; he has not heard all the evidence against
him. It seems to us that if you are going to make a formal determination
of guilt then you have to go through really a tribunal system,
which is that you have to have all the evidence at the first stage.
That is not practical. Our suggestion, therefore, is that you
can have the informal procedure but if you cannot reach agreement
you then proceed to the tribunal without a formal hearing of guilt
so that the defendant does not start what I might call the fair
process having a formal decision against him already having been
Chairman: The key
difference between these two models, after all of the negotiations
and discussions have gone on, is whether or not the enforcement
committee then gives a judgment before it goes on to the next
stage; or whether it simply says "we cannot reach agreement,
let us move it on to the next stage".
311. Why should the evidence not be there
in the first stage?
(Ms Hutchinson) It could take quite a long time.
This is why we were suggesting that you do not have all the evidence
at the first stage, at the initial enforcement committee stage,
when you try and reach a settlement. The enforcement committee
will be able to say to the FSA "you have not presented a
case that needs answering" and could filter it out, so the
FSA would have to put a certain amount of evidence on the table.
You would not go through the full hearing calling witnesses and
seeing all the evidence.
(Lord Archer of Sandwell) My Lord Chairman, I
was horrified by what I thought was the implication of the question
by Lord Eatwell. What he seems to be suggesting is that you have
a committee which receives a report from somewhere and then decides
that there has been an infringement, it then decides what is the
penalty and then it says to the person concerned "are you
happy with this" and if he says "no", they say
"all right, we will now start to consider it but we will
not consider it properly, we will consider half the evidence and
somebody else can do the rest". My Lord Chairman, nobody
has ever devised a tribunal which operates like that since the
Lord Poole: This is
the most beautifully expressed view of Lord Eatwell's activities!
Chairman: I am sure
that other members of Lord Eatwell's committee would be very quick
to explain that it does not quite work like that!
312. So far I am glad to say that I have
not found myself in front of Lord Eatwell but the more I listen
the more worried I become! I think there is a concern that on
the other hand a lot of evidence has been given to us, and we
are here talking about the wholesale rather than the retail, that
what is wanted is something that is reasonably quick and reasonably
dirty but that also will catch and find a way of looking after
the hard cases and in particular the individual. It does seem
to me this sort of rough justice tends not to be quite as rough
as it sounds. I would suggest that you might be prepared to accept
it given what you were saying earlier about the need for an independent
chairman, for example. Do you feel that would help in preserving
what Lord Eatwell is saying works rather well but adding in some
protection for the individuals concerned?
(Lord Archer of Sandwell) I think we are discussing
the second model rather than the first model now. I was rather
minded to say that I would favour the second model. What I do
not think we can do is to muddle the two. If it is the second
model then it goes on to the tribunal without a finding against
the respondent and I do not see anything wrong in that. If it
is the first model and there is going to be a finding against
the respondent then we do need to have the safeguards that we
have been discussing.
313. I think this is probably the moment
to give David and Andrew a say, if they so wish. Again, you do
not have to respond.
(Mr Roe) I am not sure whether I am allowed to
ask a question.
314. By all means.
(Mr Roe) I am interested in what Lord Archer said
about what the nature of the difference is between these two models
in the sense that they are at the point where a decision is taken
and the case will go forward to the tribunal and in one case it
is a finding and in the other case it is something else. I would
be grateful if he could explain precisely what the something else
is on the second model. I would like to understand that a bit
(Lord Archer of Sandwell) If I may say, something
turns here on how the Treasury sees it. The something else could
be either of two things. It could be a decision to prosecute,
and that can very properly be taken by a committee without hearing
anybody: "we think there is enough prima facie evidence
for the case to go forward". Or it could be a decision to
say "we are not prepared to settle for the offer which the
respondent has made", and that again happens every day and
that is perfectly sensible. What it must not be is a finding against
him I would have thought.
(Ms Hutchinson) I think what we were suggesting
was that there would not be any findings at all by the committee
apart from no case to answer or in giving its blessing to a settlement.
If no settlement were reached, the SFA would have to decide if
it wanted to prosecute it would then have to, as it were, bring
proceedings in the tribunal but it would know that it would have
to make its case out.
315. I do not understand that at all. Surely
what happens is that the committee has the person they feel has
done something or other and they say "Look, we think you
have breached principle one of the FSA principles and that means
you are out and that is what we believe" and the person says
either "I accept that" or "I do not accept that".
Without the committee actually making a finding how do you start
making a settlement? How do you start having a discussion?
(Lord Archer of Sandwell) In a prima facie
case you can very properly say "we think there is a case
to answer here, do you want to answer it or do you want to settle?"
316. Which is really what you are doing.
I think we are jumping around the language a bit.
(Mr Whittaker) I am conscious that this discussion
has revealed that we are all finding it difficult to accommodate
the implications of there being a first instance tribunal. Certainly
we have found that has been something that we have needed to factor
in at a fairly late stage in our decision making processes about
what sort of procedure we would like to adopt. It seems on the
one hand that we want, given there is to be a first instance tribunal,
to avoid duplicating the role of that first instance tribunal
by judicialising the decision that we might be asked to take or
the process that we might be asked to go through. Therefore, we
and the Committee are all left with trying to square a very awkward
circle which is trying to work out, given that people who want
the fullest possible hearing of the issues concerned will have
the opportunity to go to the tribunal, whether there is anything
that is capable of dealing with the vast majority of cases that
may not need anything quite so elaborate on a less ambitious basis
which provides people with confidence that their decisions have
been dealt with fairly but nevertheless with more speed than they
might get with the tribunal.
Lord Fraser of Carmyllie: Do
you propose to distinguish between circumstances where there is
agreement on the facts but not on the penalty? Suppose I put my
hands up and accept my abuse of the market is obvious but to be
disqualified for life is too much for me.
Lord Poole: Do not
forget the case which is the firm saying that about somebody who
has not been asked to speak.
Lord Fraser of Carmyllie
317. I am only concerned about this draconian
penalty. Do I go straight to the tribunal?
(Mr Whittaker) I am not sure that this is the
right forum to try and answer a question like that which has lots
of sub-questions built into it.
Lord Fraser of Carmyllie: I
would ask you to consider it.
318. Before wrapping up this part, can I
raise the question of costs which came up in the earlier discussion?
This is something which I have been thinking about and I am not
at all clear about the extent to which it is sensible that either
party should be able to claim costs back from the other. It has
always struck me that this becomes a mechanism for causing people
to hire yet more and more expensive help and to press the process
on and on. Is there any case for saying no costs could be claimed
against the other party? Each party simply has to accept its own
costs. This then builds in a certain amount of self-regulation
about how far and at what expense they press their case on? I
keep hearing lots of stories about people who are worried or frightened
of taking their case on because they are meanwhile acquiring great
liability in terms of the costs of the FSA who they think have
very deep pockets.
(Ms Hutchinson) I think there are a number of
tribunals where there is not a power to award costs but the current
proposals envisage that in a fine there will be two elements.
There will be the penalty, the punitive element, and also the
costs elements, and we do not think that is right. We think if
there is a power to award costs it should be even-handed, so that
the FSA might be, as it were, on the wrong end of the costs order
as well as the defendant.
(Lord Archer of Sandwell) The Council on Tribunals
certainly have the same anxieties as you have, my Lord Chairman.
They think that it may deter people from pursuing their remedies.
There are a number of different patterns. Most tribunals do not
award costs. Some do and I think, if I remember, the present Financial
Services Tribunal award costs where someone has been acting "vexatiously,
unreasonably or frivolously" and that seems to me a possibility.
319. Perfectly reasonable.
(Mr Sylvain) My Lord Chairman, we are not always
talking about firms, as Lord Poole mentioned. We are often talking
about individuals and the deep pockets of the FSA as against the
individual I do not think represent any situation where fairness
and natural justice have taken place if you cannot get your costs
back. If you are defending yourself, as Lord Fraser said, for
your livelihood and your life, I do not see how that can go forward.
So the enforcement committee or the tribunal should be able to
award costs against the FSA, but at the same time you could go
the other way, of course.