Examination of witnesses (Questions 440
THURSDAY 15 APRIL 1999
and LORD LESTER
440. And that is taken into account the
papers we have had from the Treasury and the FSA about how they
propose the disciplinary procedure should work. They propose a
first stage which is an administrative process and then, where
there is not a resolution of the issue, it becomes a judicial
(Lord Lester of Herne Hill) I think they have
moved admirably well. I have mentioned already my concern about
the fines being inflicted by the FSA including their costs, which
is one aspect. The other is the coercive element, saying to Mr
X, "You can either go quietly and pay up, or you can exercise
your right of appeal". That form of plea bargaining has none
of the safeguards it has in the criminal process at the moment
and could result in great unfairness.
441. How would you take care of that within
the outlines of the scheme which is now being put forward by the
(Lord Lester of Herne Hill) I would like to think
about that. I have not got a ready answer but it seems to me the
problem needs to be thought about properly.
442. Can I ask you a question which is not
covered in your Opinion, and that relates to the procedures which
apply to the Ombudsman? Is there any danger that the fairness
requirements of Article 6 of the Convention can also be invoked
against the provisions dealing with the ombudsman? He seems to
have a certain amount of arbitrary jurisdiction against which
there appears to be no possibility of appeal. He has great powers
to impose very large compensation awards. Is there a danger here
(Lord Lester of Herne Hill) I do not know whether
the Committee have the benefit of yet another Opinion that was
done by my colleaguethey are in the same chambers, which
I should mention for the record is Blackstone ChambersDavid
Pannick, QC. No, perhaps I cannot quote from that, it is not an
Opinion which is in the public domain. Suffice it to say that
there are some problematic features of the Ombudsman but I would
not wish to give evidence on that now without further consideration.
Lord Fraser of Carmyllie
443. As I understand your response it is
that the progress report that the Treasury published in March
is such that you are confident now that the independent external
tribunal would meet the Human Rights Convention requirements,
but what you are saying is that does not excuse those who operate
the system from ensuring at all stages up to appearance before
that tribunal that nevertheless requirements under the Convention
have to be met; such issues as equality of arms in plea bargaining
have to be considered.
(Lord Lester of Herne Hill) That is right, Lord
Fraser. I would be happier if there were a legally qualified chair
or president of the tribunal, for obvious reasons. Subject to
that, it seems to me that it is going to be an independent and
impartial tribunal which satisfies the requirement of that part
of Article 6, but the FSA will have a duty under the Human Rights
Act, section 6, to comply with the Convention rights. It will
not be liable necessarily for damagesthat is another pointbut
it will be liable for damages under the Human Rights Act provided
the judges somehow read away the immunity that is to be imposed
in the FSA Bill. That is another inconsistency that needs to be
removed. We do not want judges having to give a declaration of
incompatibility of immunity to allow one to sue the FSA if they
unreasonably searched my office or coerced meand I am sure
they would not do any such thingin a way that violates
equality of arms. I think Lord Fraser has summed up my position
444. What I wonder is if we might be in
danger of focusing too much on the FSA. It is not only the FSA
which will have these powers under the Act, Part XV of the Bill
as it is presently drafted would allow the recognised investment
exchanges similarly to have rules and impose draconian fines,
deprive people of their livelihood and the like, and I take it
in those circumstances the whole of the Human Rights Convention
would apply to those processes as well?
(Lord Lester of Herne Hill) Yes, because they
would be treated as public authorities for the purpose of the
Human Rights Act and of the Convention. Even if they are private
in form, their functions are public in substance and therefore
they would be, and all the same safeguards must apply.
445. I think you make the point in your
supplementary Advice about some of the previous SROs, that the
character of the imposition of discipline in those circumstances
stems from the contractual relationship within the exchange.
(Lord Lester of Herne Hill) Exactly so.
446. Am I incorrect then in understanding
that once this Bill is in place with this framework that will
fly off because the authority that the exchange has exercised
in imposing discipline will be as its base a statutory one under
the umbrella of the FSA?
(Lord Lester of Herne Hill) That is exactly right.
I think in the old system they would have been treated as public
authorities for judicial review purposes, but now it is certain
beyond argument they will be treated as public authorities under
the statutory scheme. I see our colleague in the Treasury nodding
agreement. I am sure that is their intention as well. So a whole
range of other bodies would be required to act in a constitutional
way, if I can use that expression, by which I mean in accordance
with traditional British principles of fairness which are anchored
in the Human Rights Act and the European Convention.
447. Because both you and Lord Hobhouse
expressed the view that three years hence this issue might come
before the House of Lords and be regarded as incompatible with
our obligations under that Convention. What I want to see if I
am correct in understanding is, that issue might arise out of
an action which is taken in respect of some disciplinary proceedings
by one of these exchanges and not just the FSA itself?
(Lord Lester of Herne Hill) Certainly, and of
course that applies not only in the context of this Bill but more
widely. We have a unique opportunity at the moment with this Bill
to get it right in advance. What I am really saying, and I am
sure this is why the Committee is working, we should be prophylactic,
we should be preventative, we should not really be authorising
either as Government or Parliament a scheme that we know is likely
to be highly vulnerable to legal challenge.
448. I would like at this point to ask Andrew
Whittaker and David Roe whether they would like to respond, bearing
in mind, and I think we all have to understand this, theirs is
a slightly difficult position in these circumstances. They may
not be able to respond in all cases particularly when they are
matters for Ministers, but it is often helpful to have their responses
at this stage.
(Mr Whittaker) Thank you, Chairman. I would like
to respond first on a number of points that have been made in
relation to ECHR. We are committed to securing the highest standards
of fairness in the way in which we operate. We are, therefore,
committed to ensuring that we are complying with ECHR and with
the ordinary principles of English justice. We are also committed
to doing so in a way that is speedy and effective. We support
the Government in fulfilling its original commitment, in the Chancellor's
May 1997 announcement, to give us by statute all the powers available
to the self regulatory organisations by contract and in particular
the power to fine. We think it would be a pity if the introduction
of a new single regulator were to result in a loss of safeguards
for investors and depositors and policy holders rather than an
increase in the protection for them. We also support the Government
in wanting to create a civil complement to the criminal law for
dealing with market abuse. In our view not all conduct which damages
markets should be treated as criminal and it is right for the
Government to wish to adopt new means where old ones have been
shown unable adequately to cover the ground. Notwithstanding all
that, we recognise that it is right that the Government should
give further thought to the issues which have been raised given
the importance, with which we agree, of getting this right, and
we look forward to seeing a further statement from them in due
course. If the Government does conclude that there is real concern
that some of the provisions which the Bill characterises as civil
and disciplinary should be regarded as criminal there are in principle
two options for dealing with the situation. The first one would
be to ensure that those provisions are more clearly defined as
civil, while the second would be to put in place any necessary
criminal-style procedures to ensure safeguards on the basis that
they are criminal. Since we support the need for a civil complement
to criminal law our preference would be the former, but we believe
that potentially either could solve the ECHR issues. Moving on
to the concerns that have been expressed in relation to market
abuse, we want to confirm again what we have said previously to
this Committee, that within the FSA we have no desire to use the
market abuse regime to cover innocent conduct. We would have no
difficulty with the provision being amended to make it clear that
that is not the intention. As we see it there are various ways
in which you can improve legal certainty and some of those have
been raised in earlier sessions of the Committee. We, for our
part, have no problem with legal certainty being improved both
by changes to the Bill, if changes to the Bill would help, and
by increased reliance on what we do ourselves either in terms
of the code of conduct or in terms of guidance which we give.
I have made comments previously to the Committee about our willingness
to give guidance. Can I just clarify a number of smaller points
that have also been made. Lord Lester expressed a concern that
we had at one point indicated that we wished to take into account
analogous provisions when interpreting more general provisions.
If I could just explain what was meant by that. When we are looking
at the enforcement of generally expressed principles and there
are also rules in an analogous area, we would take into account
the existence of those rules in an analogous area in interpreting
the principles if there were some ambiguity as to what they were
to be regarded as covering. The point has been made that the nature
of the penalties we can operate would be draconian but the withdrawal
of authorisation is also a very serious remedy, a very serious
sanction, and I do not think anyone would suggest that needs to
be characterised as a criminal remedy or a criminal punishment.
We think that in addition to the nature of the penalty, the seriousness
of the penalty, its nature and context can be taken into account
as well. Finally, in relation to the points that have been made
about coercion in relation to settlement procedures, we have no
desire to have a structure in which coercion plays any part. We
are ourselves content to provide safeguards against coercion should
that be a concern. The main option we are currently exploring
in that regard would be the involvement of a professional mediator.
That is all I would like to say.
449. Thank you very much, that is helpful.
(Mr Roe) I would like to underline that the Government
is entirely committed to achieving fairness whilst at the same
time not losing sight of the objectives of having effectively
regulated markets, which is after all the purpose of the regime.
The Economic Secretary when she gave evidence in the Committee
did say that there were some issues relating to the Convention
on which she would be coming back to you. I would not like my
silence or any physical gestures to be interpreted as necessarily
implying assent to anything that has been said. On one particular
point, on which I would like to look at the record, there was
some discussion of the position of recognised investment exchanges
and the way that their status would be changed by the current
legislation. I am not sure whether that was quite right. I cannot
give you a definitive view on that now but it is just something
that I would like to flag up as something that when I heard it
did not sound quite right to me.
450. Thank you very much. Can I ask one
question first for clarification before we move on. In the further
memorandum by the Financial Services Authority, Lord Hobhouse,
in paragraph four
(Lord Hobhouse of Woodborough) Can I just find
451. It is FSM 91.
(Lord Lester of Herne Hill) Is that
the one attached to the questions we received?
452. No. If you cannot respond immediately
maybe you could have a look at it whilst the discussion goes on.
In paragraph four they say: "In principle, we would have
no difficulty with a provision that made clear that the FSA could
not take action to impose a civil fine for market abuse where
conduct is in compliance with the Code."
(Lord Hobhouse of Woodborough) I have not yet
found the reference, I am sorry.
Chairman: It is paragraph
four. This is a response to some of the points that have been
raised. I would be interested to know how far they go to meet
453. I was going to ask Lord Hobhouse, or
Lord Lester, to respond to a point that was made by Mr Whittaker.
Are there circumstances in which fines can be imposed which would
not make the conduct a subject of the criminal law?
(Lord Hobhouse of Woodborough) My belief is that
the answer to that is no in all practical terms. You can fine
for civil contempt of court, for example, but I think it would
be wrong to build on that analogy in the present context.
(Lord Lester of Herne Hill) Under the Convention
there are minor fines, like traffic fines, that are not regarded
as triggering criminal safeguards but anything which is a serious
finesorry, not anything. I will start again. If the fine
or potential fine is so large, as it would be in this case, then
that would tend to trigger criminal safeguards as the French case
Lord Montague of Oxford
454. Lord Lester, you did state earlier
that you were doubtful about the use of fines. Perhaps you could
indicate where you think the destiny of the fines would be acceptable?
(Lord Lester of Herne Hill) What I was doubtful
about was not the use of fines, it was about the use of fines
to claw back the FSA's legal costs.
455. Yes, I realise that.
(Lord Lester of Herne Hill) It is that combination
of two completely different interests. Once you allow the FSA
to use the fining process to fund itself rather than giving the
money to the Treasury the consequence of that is to create a series
of vices. One is that the FSA then appears to be self-interested,
and indeed is self-interested, in the amount of fines since it
is a way of recovering their own expenses which may be massive
in a complicated case. The other is that they become, if you like,
judge in their own cause, and with this coercive element, although
I welcome the recognition that safeguards may be able to be built
in by the FSA against that with the mediation process, but still
coupled with that it seems to me that one is going to have a very
coercive and unfair result if the fine can be used by the FSA
to fund itself. That is why I think one should give that function
strictly to the tribunal. So I am not against the use of fines
in principle, it is the safeguards and purpose for which the fines
are used which I think is important.
456. If there was an arrangement whereby
the FSA had to budget within its normal budget procedure for its
enforcement costs, but there was a system where the fines were
used as a rebate back to the people who were paying their fees
and it went directly and was not influenced by whatever the costs
of enforcement had been, would that still leave you feeling very
(Lord Lester of Herne Hill) I would feel less
uncomfortable because it would simply be in a sense a formality
to route it in that way rather than to the Treasury. My concerns
are more with it including their own costs and it being decided
by them themselves.
457. Could I just ask a couple of questions,
first of all on the whole disciplinary regime? Administrative
fines do not necessarily have to be classified as criminal, from
what you are saying. We have in this country administrative fines
from the Revenue and the Department of Social Security and so
on, do you accept they are quite acceptable as a civil alternative
to the criminal one?
(Lord Lester of Herne Hill) I certainly agree,
as I think I said at the beginning, that it is a more open question
as to when administrative proceedings involving fines become criminal
in substance and when they remain civil, and I said there is a
spectrum. So they can remain civil, it is a question of degree.
458. Is part of the degree the amount? The
Inland Revenue, I think, is up to 100 per cent extra of the amount
the person fiddled, if you like, and the Department of Social
Security is 30 per cent of the amount over-claimed. Would you
say they are quite modest things, whereas an open-ended fine under
the FSA is huge?
(Lord Lester of Herne Hill) There are three criteria
they use under Article 6. They are, what is the purpose, is it
really criminal in substance? Here it seems to me the purpose
is very largely a deterrent, it is to win the confidence of the
rest of the world that we have procedures for regulating the City
of London and matters of that kind, which is very important. Once
it becomes punitive as a deterrent, then on the first criterion
of the European Court's case law it will be classified as criminal.
The second one is whether the wrong is specific to a particular
class of people or to the general community, and that is not a
very important test, it does not really much affect us. The third
one, which really matters, is the degree of severity of the fine
and there it seems to me, given the massive fines on those first
and third criteria, as I think I said in my advice, it is very
possible that they will be regarded as criminal like the market
459. I would like to move on to market abuse
and the whole new civil regime. Again there are countries which
have legislated for a civil alternative to the criminal regime.
Spain has a civil wrong alongside the criminal wrong, and in the
USA they now have a civil remedy alongside the criminal remedy.
The SEC can go to a court to impose a civil penalty. Are they
all then in danger of being really criminal in nature or are there
levels of degree so that the civil regime for market abuse can
be acceptable if it is drawn correctly?
(Lord Lester of Herne Hill) It is complicated
to answer questions about comparative law and practice without
knowing the full legal regime of the country concerned. Let me
take as an example the United States. You are perfectly right
in saying that the SEC is able to use civil as well as criminal
sanctions, but the SEC is closely regulated not least by the due
process clause in the American Bill of Rights and there have been
a number of constitutional cases which have interfered with what
the SEC might have wished to do, in a similar way to the examples
which Lord Fraser of Carmyllie was suggesting when the Human Rights
Act comes into force. Of course the United States is not a party
to the European Human Rights Convention and therefore the problem
will not be characterised in quite the same way under their system.
I know nothing about the Spanish system, except their written
constitution I am sure will enshrine the Convention's safeguards
and there may well be Spanish case law from its constitutional
court about which I am not an expert.
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