Joint Committee on Financial Services and Markets Second Report


Memorandum from the London Investment Banking Association

  1. The Members of the London Investment Banking Association (LIBA) very much support the objectives set out by the Treasury in their memorandum: the regulatory system to be established under the Bill must be clear, robust and effective but the system must also be fair and fully protective of human rights. We must emphasise that we share the Government's view that high standards should be expected of financial services firms—our concern is that the legislation should ensure a fair disciplinary process.

  2. In this letter we comment on the main issue raised in the Clerk's letter to us of 14 May, namely whether the proposals in the Treasury's Memorandum make it more likely that the eventual legislation will be free from challenge on human rights grounds. As explained, below, we believe that the Treasury's proposals—although helpful in the Market Abuse area—are insufficient. We would also note the concerns we have expressed earlier about the rationale for the introduction of a new "civil" offence and there continue to be many concerns about the way the offence is currently drafted.[24]


  3. We are pleased that the Government has decided to put in place new safeguards designed to ensure that ECHR protections are enshrined in the Market Abuse legislation proposed in the draft Bill. Apart from the announced changes to the Enforcement Committee/Tribunal process we believe that the three key elements[25] which need to be included are protection against the use of compelled statements, the provision of legal assistance to those who do not have sufficient means, and amendments to the framework proposed in the draft Bill to achieve the Article 7 requirement for certainty.

  4. Our understanding is that the legislation will be amended to provide for the first two of these and that, on the third, the Government:

    (1)  proposes to make compliance with express provisions in the FSA Code an absolute defence against proceedings for breach of the Market Abuse provisions (we assume that this will entail an amendment to Clause 57 of the draft Bill);

    (ii)  proposes to clarify in the Bill that the Market Abuse regime will only apply to "market participants";

    (iii)  will consider the introduction of explicit protections for people who take reasonable steps to make sure that they do not breach the primary provisions (again we assume that this will entail amendments to the Bill).

  5. We believe that these proposals are extremely helpful and that they could address most of the concerns that we and other bodies have raised on the certainty issue with regard to the Market Abuse offence.

  6. Until drafts of the provisions are brought forward, however, our view on whether they will suffice to enable the Market Abuse legislation to stand up to legal challenge on ECHR grounds is cautious. In particular, we continue to believe that a mental element is needed in the definition of the offence—we are not sure that point (ii) above will achieve this satisfactorily—and we are unclear how "market participant" will be defined (point (iii) above). We also continue to believe that the Code should recognise that compliance with an exchange rule should also provide a defence against a Market Abuse charge.

  7. Moreover, the value of point (i) above in achieving the necessary certainty will depend on the extent of revisions to the Market Abuse Code proposed in FSA's consultation paper 10: in particular, it will be necessary for the Code to make clear what behaviour is held to be unacceptable and the Code will need to cover all aspects of the statutory offence if areas of uncertainty are not to remain. We would draw the Committee's attention, in particular, to our concerns about the unclear and subjective tests in the current drafting of Clauses 56(1)(c) and 58(b) and to the lack of clarity about the "in relation to" tests in Clauses 56(4) and (5).

  8. Until the overall package of measures covering Market Abuse can be reviewed, therefore, we believe that it is not possible to confirm that the new proposals in themselves will protect the FSA from successful challenges under the Convention. It would undoubtedly be helpful in this regard, however, if the Government was to make it clear that it intended to address the above concerns.


  9. The memorandum explains that the Government believes that FSA's disciplinary process should not be regarded as "criminal" for the purposes of the Convention and therefore no changes to the Bill are proposed in this area. The fact that eminent lawyers have differing views indicates that the arguments on this matter appear to be finely balanced—as we discuss below—and we are very concerned at the risk that the FSA's disciplinary process will be vulnerable to successful challenge if the new framework does not provide Convention safeguards. This could be potentially very serious for the efficacy of the new regime and, since inclusion of the three key safeguards set out in paragraph 3 above would not appear to undermine FSA's disciplinary process, we believe that the prudent course, given the prevailing uncertainty, would be to proceed on the basis that the process—at least in certain cases—should be regarded as potentially criminal for ECHR purposes.

  10. It may be that amendments to the legislation are not essential for this: for example, perhaps the same result could be achieved if FSA made completely clear in its forthcoming policy statement that the disciplinary process would reflect Convention safeguards, and this policy was endorsed by the Government. However, it is not clear to us that such a non-legislative solution would protect FSA from successful challenge. Given that there appear to be good arguments on both sides as to whether particular conduct the subject of the disciplinary regime will be regarded as criminal or civil in ECHR terms, we believe that perhaps a way forward is for it to be made clear in the legislation where the line is to be drawn. In achieving this, the law should err on the side of caution to avoid the risk of a Court determining at some later date that safeguards, which were not provided, should have been. This would enable the "compatibility statement" to be made under Section 19 of the Human Rights Act to be given with complete assurance.

Practical implications of recognising the ECHR safeguards

  11. Perhaps the most important Convention safeguard as far as the day-to-day business of firms is concerned is the principle that behaviour should not result in punishment unless the prospect of the behaviour resulting in disciplinary sanction is reasonably foreseeable when it is undertaken. This issue will largely arise in practice in the context of whether FSA should be able to take disciplinary action—i.e., the imposition of a fine or public censure of a firm—for breaches of the Principles alone. We consider that the issue of uncertainty will only arise in respect of those Principles which are drafted in the most general and/or subjective terms. Thus introduction of the "certainty safeguard" would only be of practical significance if there are Principles which do not indicate the sorts of behaviour which is considered to be unacceptable,. We do not believe that the introduction of the certainty safeguard would in practice have the effect of curtailing FSA's ability to police firms' behaviour—it would only limit the ability to punish on the rare occasions when an abuse occurs which is not otherwise covered in the rules or guidance. When such a new abuse was detected the firm would be required to cease that behaviour and a specific rule introduced to permit punishment of anybody else who repeated the abuse. In this connection we would note that it appears to be common ground that Convention safeguards—if they are required—would only be applicable to FSA's exercise of its disciplinary powers and would not apply to the exercise of the powers of intervention,

The legal arguments

  12. As for the legal arguments, we must defer to the lawyers whose Opinions the Joint Committee has already received. We would note, however, that although the underlying purpose of providing FSA with disciplinary powers is to provide protection, as the Treasury argue, the mechanism for delivering this objective is to deter behaviour in breach of the rules through the imposition of significant penalties. The third sentence of paragraph 11 of the Treasury's memorandum appears to confirm the importance of severe penalties for the deterrence element, and our understanding of the advice provided by Lord Lester is that this is the key test in determining whether the regime should be regarded as criminal for ECHR purposes. We would also note that our understanding of the cases referred to by the Treasury is that these primarily concern the ability of professional bodies to determine whether a person should be able to act in a professional capacity and that they do not deal with the imposition of fines solely for deterrence purposes. We accept that procedures with regard to the former may not be regarded as criminal for Convention purposes but the fundamental question is whether a framework which allows for the imposition of unlimited fines for punitive and deterrent purposes would be regarded as criminal under the Convention or not.[26]

  13. We would note, in addition, that the Treasury's memorandum does not comment on the recent French judgment—in the Oury case—where it appears to have been accepted by the French Appeal Court that the Convention's criminal safeguards should apply. Lord Lester has explained the relevance of this case, most recently in his memorandum of 18 May to the Joint Committee. While Mr Kentridge spoke to the Committee about the case, he dealt with only one of the two Oury judgments. The second judgment, which dealt with composition of the body which reached the enforcement decision of the Commission des Operations de Bourse (COB) is perhaps more relevant. FSA's consultation paper 17 highlights that a major purpose of the disciplinary process is to impose sanctions for deterrent and punitive purposes—see for example paragraphs 82 and 104 of CP 17—and the similar approach by the COB was important in the determination that the sanctions available to the French regulator were criminal in nature.

  14. In addition, and as we have argued previously, we believe that providing Convention safeguards is important in ensuring the fairness of FSA's process whether or not, in strict law, the disciplinary process should be regarded as criminal for ECHR purposes: we do not believe—as noted above—that the introduction of such safeguards would undermine the efficacy of FSA's policing powers.


  15. In the Market Abuse context, the Government proposes to make compliance with the FSA Code a defence against proceedings. We believe that a similar approach should be adopted by FSA with regard to disciplinary proceedings for breaches of their Principles so that compliance with a specific rule should protect a firm against disciplinary action for breach of a Principle (this would build on the Joint Committee's recommendation at paragraph 248 in the First Report of last month). In addition, we feel that we should also point out that another way of providing certainty to firms is by amending the legislation so as to allow them to obtain guidance from FSA on the legitimacy of transactions under the rules: if, ultimately, it is decided that Convention safeguards should not apply to FSA's disciplinary process, we think that it will be particularly important for the Government to consider again the need for a binding no action procedure.


  16. It will be clear that we have serious concerns that the proposals in the Treasury memorandum are not sufficient to ensure that the legislation will stand up to legal challenge on ECHR grounds. Moreover, we believe that the introduction of a disciplinary regime without Convention safeguards—whether or not such safeguards are legally required—will force firms to seek more detailed rules to secure the level of certainty that they need that the business which they are undertaking will not give rise to disciplinary penalties: we are concerned that this will be destructive of innovation in London's financial markets. We do not wish to limit FSA's ability to operate Principles but merely to constrain the ability to use the most subjective of the Principles—for example Principle 5 of the present draft (in consultation paper 13)—as a basis for punishment.

  17. Please let us know if it would be helpful for the Joint Committee to discuss these issues with LIBA.

21 May 1999

24   See our submission to the Joint Committee of 21 April and our submission to the Treasury of 16 November in which we raised a number of concerns about the drafting of Clauses 56 and 58(2): we suggested that strengthening the existing criminal offences might be a better way forward. In our submission to the Treasury on the draft Bill we also raised concerns about consultation and accountability: in particular, whilst Clauses 57(8)-(10) require consultation on the Market Abuse Code, there appears to be no requirement for consultation on subsequent amendments to it (Clause 57(4)). Given the subject matter, it is essential that market practitioners' views are taken into account before the Code-or amendments to it-are promulgated. Back

25   We understand that the Government will be responding to the Joint Committee's recommendations on the payment of compensation (paragraph 146 of the First Report; and also see paragraphs 10 and 11 of the Joint Opinion of Lord Lester and Javan Herberg of 27 October 1998). Back

26   The Treasury's memorandum also observes that there is no provision for imprisonment in default of payment of a fine: for fines imposed on firms, of course, the question of imprisonment does not arise. Back

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