Joint Committee on Financial Services and Markets Second Report



Market Abuse

19. As noted above, the Government has announced a series of changes to Part VI of the Bill, the market abuse regime, to increase certainty and reduce the chance of successful legal challenge on ECHR grounds. These changes meet many of the points made in our First Report. We consider them in turn.

COMPELLED EVIDENCE

20. First, and most significantly for the FSA as it seeks to enforce the regime, statements which the FSA compel a person to make will not be able to be used against him in proceedings. The Minister observed that this would not render the FSA's powers to compel evidence useless: they will still be able to use compelled evidence to suggest new lines of inquiry, to justify an injunction or an order for restitution or disgorgement, or to proceed against a person other than the one who gave the evidence.[21]

LEGAL ASSISTANCE

21. Secondly, "Subsidised legal assistance will¼be made available in appropriate cases to individuals who do not have sufficient means".[22] The Government is considering[23] how this scheme will work, and whether it will be an extension of Legal Aid or a free-standing scheme.

PROTECTION FOR THOSE WHO TAKE "REASONABLE STEPS"

22. "The Government...is considering whether to introduce explicit protections for people who take reasonable steps to make sure that they do not breach the primary provisions [of Part VI]".[24] The Minister explained that the intention is to protect those who operate with proper precautions, with due care and in good faith in areas where the Code of Market Conduct is silent. "Of course we do not want to sanction people for the effects of actions that are unforeseeable".[25]

23. The London Investment Banking Association (LIBA) would prefer the offence itself to include a mental element;[26] and Herbert Smith consider that the FSA should be required to prove intent to abuse the market, rather than merely being able to point to an absence of reasonable steps.[27] However we are satisfied that what the Government now proposes would broadly meet the recommendation in paragraph 270 of our First Report.

CODE AS AN ABSOLUTE SAFE HARBOUR

24. "The Government proposes to make compliance with express provisions in the code [of market conduct] an absolute defence against proceedings for breach of the market abuse provisions."[28] The Minister confirmed that the proposed safe harbour would extend only to compliance with express provisions of the Code, not to actions as to which the Code was silent.[29]

25. This is in line with a view expressed by the FSA towards the end of the first part of our inquiry;[30] but it goes further than we recommended in our First Report.[31] We recommended that "the draft Bill should provide a safe harbour for behaviour that complies with the FSA Code of Market Conduct except where the FSA proves that the person responsible for it intended to engage in market abuse or exhibited recklessness or possibly negligence about the abusive effect of the behaviour". The Minister explained that the Government has been advised that, even if the Bill did so provide, action against someone who had fully complied with express provisions of the Code would be unlikely to succeed.[32]

26. In our First Report we considered the case for extending the safe harbour further, to include conduct in compliance with the rules of an exchange. We were persuaded that this would not be appropriate, and this remains our view.[33]

DEFINITION OF MARKET PARTICIPANT

27. "The Government also proposes to clarify in the Bill that the market abuse regime will only apply to market participants."[34] This meets a point made to us by Lord Hobhouse of Woodborough, another of the Law Lords.[35] The Minister explained[36] that the definition will include participants in UK markets who may be physically located overseas, though she acknowledged that in such cases enforcement presents practical difficulties.

DEFINITION OF MARKET ABUSE

28. In our First Report we considered the proposed definition of market abuse in Clause 56 of the draft Bill, and recommended that it should be made more clear.[37] The Government stands by its original draft.[38] However most of our witnesses remain of the view that Clause 56 requires clarification, despite the Government's other proposals to improve certainty. According to Lord Steyn, "there is a substantial risk that in respect of market abuse the system will be held not to comply with the Convention principle of certainty".[39] Lord Hobhouse put it thus: "So long as the draft for Clause 56 remains in its present form, there will be a serious risk that it will fail in its objective and, far from providing a scheme which will catch the unscrupulous, will provide them with a means of escape which a properly drafted provision would foreclose."[40] LIBA point in particular to "the unclear and subjective tests in the current drafting of Clauses 56(1)(c) and 58(b) and...the lack of clarity about the 'in relation to' tests in Clauses 56(4) and (5)".[41] We would further observe that the expression "true and fair market" is opaque.[42]

29. We acknowledge the Government's dilemma. It seeks a provision sufficiently wide to make evasion difficult, yet sufficiently clear to stand up in court. We remain concerned that the current draft of Clause 56 lacks the necessary clarity. Quite apart from any difficulty which this may cause in court, we are concerned that it may cause businesses to err on the side of caution, thereby deterring innovation.


21  Q 33. Back

22  Q 1. Back

23  QQ 17-19. Back

24  Evidence, p 3, para 16. Back

25  QQ 1, 29. Back

26  Appendix 9, para 6. Back

27  Appendix 4. Back

28  Evidence, p 3, para 16. Back

29  QQ 1, 26. Back

30  First Report, Appendix 5. Back

31  Paragraphs 268-270. Back

32  Q 28. Back

33  But see LIBA, Appendix 9, para 6. Back

34  Evidence, p 3, para 16. Back

35  First Report, Appendix 60. Back

36  Q 24. Back

37  Paragraphs 260-263. Back

38  QQ 3, 25. Back

39  Appendix 3. Back

40  Appendix 1. Back

41  Appendix 9, para 7. Back

42  We note that in the context of accountancy the expression "true and fair" has been the subject of considerable elaboration by the profession. Back


 
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