Financial Services and Markets Minutes of Evidence



Examination of witnesses (Questions 300 - 319)

TUESDAY 30 MARCH 1999

MR ANDREW BUXTON, MR PETER VIPOND, MR MARC SYLVAIN, LORD ARCHER OF SANDWELL, MS LUCY HUTCHINSON, MR DOMINIC CLARKE, MR ANTONY BLUNDEN and MR GEOFFREY TURNER, called in and examined.

MR DAVID ROE, and MR ANDREW WHITTAKER in attendance.

Chairman

  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 committee.

  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 Bill?
  (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.

Lord Poole

  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.

Mr Beard

  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.

Chairman

  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.

Mr Beard

  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 one?
  (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 Report.

Lord Fraser of Carmyllie:  But we are still going to have an independent tribunal.

Lord Eatwell

  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 a fine.

Chairman

  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 made.

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".

Mr Beard

  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 Spanish Inquisition.

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!

Lord Poole

  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.

Chairman

  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 better.
  (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.

Lord Eatwell

  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?"

Lord Poole

  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.

Chairman

  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.


 
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