Joint Committee on Financial Services and Markets N/A Report



Examination of witnesses (Questions 1 - 19)

WEDNESDAY 19 MAY 1999

MS PATRICIA HEWITT, MP, MR SYDNEY KENTRIDGE, QC and MR JAMES EADIE

Chairman

  1.  Good afternoon, Minister, and welcome to the Joint Committee again. We have seen a lot of people since our last session, which was about two months ago, although sometimes I feel it seems like a lifetime. We are very grateful for your early response to the Committee's suggestion that the Government should respond to the concern that we heard in some of the evidence about the proposed market abuse regime and the whole question of ECHR issues. We have looked at the paper and we have asked some of those who gave evidence earlier to comment on the paper. We have already heard from Lord Hobhouse and Lord Lester and we are hoping to hear from some others by the end of the week. It is then our intention to complete our work by Thursday 27 May and to issue a second report as soon as possible afterwards. We do not expect it to be a long report. Our ambition at this stage is limited to trying to bring together the evidence we receive and to point out where there are substantial measures of agreement and where there are still some differences. I would like to ask whether there is anything by way of opening statement that you would like to make. It might also be of interest to the Committee if there is anything you can say about what your plans might be for responding to the other points in our first report and the progress of the Bill generally.
  (Ms Hewitt)  Thank you very much indeed, my Lord Chairman. It is a great pleasure to be back with your Committee. Perhaps I could start by introducing counsel whom we have retained to advise the Treasury on this matter: Sydney Kentridge QC and James Eadie. They have very extensive knowledge and experience in this area. I thought it would be very helpful to the Committee if you were able to hear directly from them on matters relating to the European Human Rights Convention jurisprudence and for them generally to help me answer questions so that you are not getting the legal opinion at second hand from me; you are getting it directly. If it would assist the Committee, when I have made some introductory remarks I would like to ask Mr Kentridge also to give some introductory remarks about how they see this area. I would also very much like to welcome the report that you issued from this Committee at the end of April. As you indicated, you have done the most extraordinary amount of work in a very short space of time and I and my colleagues are very grateful to you for that. I must say, if I may, that the report not only contains a number of extremely perceptive and helpful suggestions but it was also a great pleasure to read and I would like to congratulate you on that. It is not always true of parliamentary committee reports. I and my colleagues are now looking very carefully at that report and considering the conclusions and recommendations in it. I will certainly want to respond to each of those conclusions and recommendations. I will do so in due course as we prepare the Bill for introduction. It is obviously not something that I wanted to rush so I will not be giving you a detailed response to that report in the session this afternoon. I hope that that will be acceptable to the Committee, except for some points that bear directly on the matters that we are considering today. Today of course we are looking directly at the whole issue of the compatibility of the disciplinary and the market abuse regimes with the Convention and the Human Rights Act. As I said when I gave evidence before, we have had the whole issue of compatibility with the Convention at the forefront of our thinking as we have developed and consulted on the detailed proposals in the Bill. As I indicated before, we are determined to certify that the provisions in the Bill are compatible with the Convention and we will do that on introduction. I believe that the Bill is fundamentally sound. I set out the reasons why in the memorandum that I have already let you have, but I think it would be helpful if I just summarise the main points. The objectives that we have in designing this new legislation are, first of all, to ensure that there is effective, proportionate regulation of financial services and, secondly, to ensure that that regulation fully protects people's human rights. As we discussed last time I was here, we all as consumers benefit from strong, cost effective regulation. It makes us more confident in entrusting our savings to the financial services industry and the industry in turn benefits from that confidence. I think it is very important that we are not naive in confronting the need to deal with people who are prepared to profit unfairly in the financial services industry and we need to be alert to the damage that they can do to the great majority of honest individuals and firms and more generally to the financial system and the economy as a whole. We want, and we will get, a regime that is fair but it is not going to be a regime that is soft on people who take unfair advantage of market position or privileged information to abuse the markets. That is why we are giving the FSA an effective range of statutory powers but at the same time we have to ensure that effective regulation does not ride roughshod over human rights. We are determined to ensure that it does not. We do not regard the European Human Rights Convention as an awkward stumbling block that we have to find a way around. We have put it right at the heart of our own legal system by incorporating it through the Human Rights Act. The Convention of course requires through Article 6.1 that in the determination of civil rights and obligations a person has the right to a fair hearing by an impartial tribunal. Article 6 and Article 7, together with the case law, confer further safeguards that are relevant when what is at issue is a criminal offence as characterised in Convention terms. That of course includes the presumption of innocence, the need for a sufficient degree of certainty in legislation and restrictions on the admissibility of compelled evidence. Domestic criminal offences obviously attract all of the Convention criminal protections but sanctions that are not criminal in our domestic law may nonetheless be criminal for Convention purposes and that is really at the heart of much of what I think we will be discussing this afternoon. If I may turn first to the disciplinary regime, we have no doubts that the disciplinary regime and the provisions that cover employment in regulated activities meet the Convention requirements already. They are not criminal either for domestic or Convention purposes. They are disciplinary regimes that are concerned with protection of consumers and they apply to a regulated community. They are analogous, in other words, to the licensing and disciplinary regimes that concern the conduct, standards and discipline of a profession, including of course the legal profession and the medical profession. That is the disciplinary regime on the one hand. On the other hand, we have the market abuse regime. I think that the classification of the market abuse regime is less clear cut. We still believe that there are good arguments that it be characterised as civil for Convention purposes and that is because it is a protective regime aimed at safeguarding confidence in the major United Kingdom markets. As I think we would all agree, it is vital to sustain confidence in the markets because if they are damaged it impacts ultimately on economic growth in this country and everybody's standard of living. There are two key differences between the fining regime for market abuse and the disciplinary regime. First of all, the market abuse regime extends as it must to market participants who are not members of the regulated community, so it covers everybody who participates in the market for the simple reason that the markets can be and are damaged by abusive behaviour by unregulated persons. The Sumitomo case is a very good example in point. The world copper markets were distorted for years because of abusive trading by the unregulated head of copper trading in that firm. That is one key difference. The other key difference is that in the case of the market abuse regime there are significant similarities between the regime and the criminal offences that already exist of insider dealing and market manipulation. The new regime is distinct from the criminal offences and we have made it quite clear that where there is criminal behaviour it will be prosecuted through the criminal courts where the evidential and public interest tests are met, but nonetheless that overlap does colour the nature of the market abuse fining regime to some extent. Those two differences do not mean in our view that the market abuse fining regime will necessarily be characterised as criminal under the Convention. That will be a matter for the courts. I do accept that there is a degree of uncertainty there and as a result we have decided to introduce the additional criminal Convention protections in this regime. What we need to do, as I indicated in the memorandum, is to change the Bill to restrict the use of compelled statements that have been obtained during an FSA investigation in proceedings to impose a market abuse fine on the person who gave that compelled evidence. In other words, we need to Saunders-proof the market abuse fining regime. Subsidised legal assistance will also have to be made available in appropriate cases to individuals who do not have sufficient means. The Government will be looking further at how that might be achieved. There are three other changes to the regime that we do intend to make and I would like to mention them, although they are not in fact necessary for Convention purposes. The first one that we have touched on before is that we will clarify in the Bill that the market abuse regime only applies to market participants. That was always the intention, but I think there was some concern about how it had been given effect. Secondly, we will make compliance with the express provisions of the code on market abuse a complete defence against a charge of market abuse. If the behaviour in question was not referred to in the code, then of course the FSA will still be able to take action if they consider the conduct to be abusive. No code can cover every possible eventuality that arises over the years to come. Finally, we will be looking at ways to ensure that people who take proper precautions to ensure that they do not breach the primary legislation cannot then be fined for market abuse. We want people to act with due care when they are interacting with the financial markets, but of course we do not want to sanction people for the effects of actions that are unforeseeable. The regime is designed to protect the efficiency of markets. It is designed to deter unacceptable behaviour, not acceptable behaviour, and clearly there needs to be a reasonable degree of certainty in achieving that. If it would be convenient, my Lord Chairman, perhaps I could hand over to Mr Kentridge now to make some further remarks on the Convention jurisprudence in this area.

  2.  Of course.
  (Mr Kentridge)  My Lord Chairman, we are grateful to you and to the Members of your Committee for giving us this chance to address you. If I may briefly introduce myself, I am a practising barrister in London. I have some experience of human rights cases in various different contexts. I did represent HMG in the Saunders case in Europe and I should say at once unsuccessfully. My friend Mr James Eadie was with me in that case. He has an unrivalled knowledge of the jurisprudence of the European Court of Human Rights and the Commission as it was. He must have appeared in more than 50 cases. If there is any question which arises about any particular decision of the European Court of Human Rights, there is no one better qualified to answer your questions on that. I know that you have had legal views expressed to you by various people and it is not surprising—in fact, even in a clearer context it would not be surprising—that the views of lawyers differ but in the context of the application of the Convention to a new regulatory regime we are all to a certain extent groping. None of us can say with certainty how the courts are going to interpret the Convention in the time to come. We must get what guidance we can from the decisions of the European Court of Human Rights, but it is only guidance. We must remember that when the Human Rights Act comes fully into force these matters will be dealt with in the first place, and one rather hopes for the most part, by the courts of England and of Scotland. In approaching this Convention, they will of course apply the basic principles of our own jurisprudence. The particular matter on which we have sought to give advice relates to the distinction for Convention purposes between the disciplinary regime on the one hand and the market abuse regime on the other. If I can deal first with the disciplinary aspect of it, we have expressed the view, not dogmatically but with a degree of certainty, that in European Convention terms the disciplinary regime would be characterised as civil and not criminal. We say that for a number of reasons. One is that the objective of the disciplinary regime is to establish and maintain standards of conduct amongst a professional community, not only in the interests of that community itself but in the interests of the public, particularly the investing public, to give them the protection of having their affairs handled by persons of competence and integrity. From a more technical point of view, what characterises this regime as disciplinary and therefore civil rather than criminal is that although disciplinary proceedings might lead to a fine, first, in our own law under this Act it will be characterised as civil and not criminal. That of course is not conclusive in European terms. What is of the utmost importance is that this regime does not apply to the public at large to whom a criminal regime would apply, but it applies only to members of a particular profession or occupation—that is to say, persons or companies who are authorised. In terms of the European jurisprudence, that is a vital point. Thirdly, one looks at the nature of the conduct which is dealt with. The nature of the conduct dealt with is fundamentally not breach of the criminal law but breach of the rules of a particular profession and occupation. Finally, there is the question of what the sanctions are for breach of the rules. The sanctions here could be a reprimand or a suspension or, in a serious case, even a striking off but, in some circumstances, a fine. As I understand the opinion of Lord Lester—and I must say his opinions are always entitled to the highest respect—the matter that worries him is that there may be a fine for an infraction of disciplinary rules. That is so and the reason is that there will be infractions of disciplinary rules which may not be so serious that one will strike off the person concerned or even suspend him from carrying on his occupation but which nonetheless require some sanction and that is where the fines come in. I know that, my Lord Chairman, you and the Members of the Committee have been told that a fine in its very nature is punitive. That cannot be denied. It is, but there is no disciplinary——

Mr Sheerman

  3.  Do you mean it is not an unlimited fine? I understood it was the unlimited nature of the fine.
  (Mr Kentridge)  I will assume that it is unlimited and I will try to explain why. The first point I want to make is that the European Court naturally recognises that there are some sorts of proceedings which are disciplinary and civil and not criminal, notwithstanding that there is a fine. The reason I would suggest is a very simple one. The reason is that a disciplinary provision would have no teeth at all unless there were some sanction for infraction. One must realise that very often a fine is the more merciful sanction. What about the vexed question of the unlimited nature of the fine? Those concerned with drafting this legislation I know have thought very seriously about that. There were only two alternatives. One is a limited fine and the other is an unlimited fine. In that regard, one has to bear in mind the community that we are dealing with. These people in this community are very big players. In the case of some of them and some of the transactions which they undertake, the sort of fine that would bankrupt most people and most businesses may just be the tiniest blip on their balance sheets. I think it is a case where the fine must fit the infraction and the person or company responsible. If one has perhaps an employee on a salary who has broken disciplinary rules, one would assume that the fine would be a moderate fine, but if one had, for example, a case of a deliberate disciplinary infraction by an enormous company anything other than a very large fine would have no effect at all. One must assume—not merely hope—that the Financial Services Authority and eventually the tribunal which will hear disciplinary offences will approach this matter in a reasonable way. They will not make it their business to impose fines which are going to make it impossible for people to live in the community. The other reason, apart from the general principle, which makes us more confident in expressing this opinion is one of the latest cases in the European Court of Human Rights and that is the case of Brown. Brown was a solicitor who committed breaches of the solicitors' disciplinary rules and he was fined £10,000. In the circumstances of his case, £10,000 was a very substantial fine. He went to the European Court of Human Rights saying, "But I did not have the protections of the criminal law and proceeding". The Court found that the proceedings were civil on the grounds I have mentioned. They were intended to be civil. The criminal prosecution authorities did not come into it. Failure to pay the fine did not result in going to prison. The rules applied only to the community of solicitors who had subjected themselves to those rules and the fine in the circumstances was regarded as reasonable. One does not want to be dogmatic, but those whom we advise presumably want our opinions and not merely our doubts. This is what I would like to say more generally about the problems with which you are faced here. When it came to the market abuse regime, as the Minister has said, there are very good arguments that that too is civil, but none of us could give a confident opinion on that and therefore, out of an abundance of caution the drafting of this Bill will proceed on the assumption that it will be found to be criminal. Therefore, additional safeguards will be put in, particularly the Saunders safeguard. That is the main safeguard. We believe that with what we have called in shorthand the Saunders safeguard that the market abuse regime will be a safe regime. We have also expressed the opinion, on which we could expand if required, that given the nature of market abuse the general definition of it in Section 56 is adequate from the point of view of the European Convention on Human Rights. If I could conclude on something very general, my Lord Chairman, the Human Rights Act which will come into force next year is a practical measure and it has the enormous advantage that these matters of the interpretation of the statutes of this country measured against the European Convention will, for the first time, be matters for English and Scottish courts. I cannot over emphasise the importance of that. One of the real drawbacks of the previous regime was that when a case from this country went to the European Court it had before it no judgment of the English or Scottish courts on the point before it. What will happen now is that the courts of this country, the Court of Session, the Court of Appeal and the House of Lords, will have considered all these points before they go to Europe. I must say that I am confident that a court in this country, looking at the disciplinary regime with its vast experience of disciplinary regimes in this country, will hold that this is civil. One has to take a view on it. This is the view which we have taken and which we have expressed. If one wants to take a negative view of these matters, one has to accept that there is going to be no statute so tightly drawn that some barrister is not going to stand up in court somewhere and say that his client's human rights have been contravened. That just has to be faced and one has to trust the courts of this country to deal with it. May I in conclusion just read to you something which was said by Lord Woolf in dealing with the new Bill of Rights in Hong Kong? What he said, in my respectful submission, applies equally to our new Human Rights Act. He said, "The issues involving this Bill of Rights should be approached with realism and good sense and kept in proportion. If this is not done, the Bill will become a source of injustice rather than justice and it will be debased in the eyes of the public." I have no doubt the courts of this country will approach the Human Rights Act in that spirit. Thank you.

Chairman:  Thank you very much for those introductory remarks which I think are very helpful. We heard a lot of points of view during the period when we were taking evidence and we have been very anxious to hear the Government's response to them. We would like to probe a little on some of these issues, first of all on discipline generally and then market abuse and there are one or two questions about overlap.

Lord Fraser of Carmyllie

  4.  Minister, you are holding an opinion which is clearly less equivocal on discipline than might be traditional. You express some confidence in saying you are firmly of the view. In paragraph ten, you conclude by saying that one of the characteristics of this which leads your counsel presumably to that view is that this applies only to a subsection of the population and is part of a regime which is essentially protective rather than punitive. In the event, some financial services practitioner in the future may be fined personally hundreds of thousands of pounds. He might not only be suspended; he might be deprived of practising as a financial adviser for the rest of his life and he might suffer very serious adverse publicity for all that. Does that not have a punitive quality to it and is it not intended to have a punitive quality? Is it not perfectly reasonable that it should have a punitive quality to it?
  (Ms Hewitt)  I think Mr Kentridge has already elaborated on the reasons for our confidence that this is in fact a civil regime. The distinction between protective and punitive is not an absolute one. In the circumstances you describe, clearly the individual would feel that these were pretty punitive sanctions, but the central point here is that the disciplinary regime applies to the limited group of people who have chosen to become authorised persons within the regulatory regime of financial services. The central purpose of the regime is to protect the clients of those authorised persons, just as the purpose of the disciplinary regime for doctors is to protect doctors' patients, or the disciplinary regime for solicitors has as its purpose to protect solicitors' or other lawyers' clients. That protective function is extremely important, but the crucial issue when it comes to the question of characterisation for Convention purposes is that the disciplinary regime only applies to this limited group of people and that it is part of the licensing system, if you like, that the individual who chooses—nobody is forcing him—to become an authorised person within the financial services industry submits himself to when he joins that profession. It is precisely analogous to the other disciplinary regimes and clearly those are civil for Convention purposes just as we believe this is.

  5.  I am not allowed properly by law to drive my car and drink. It is not primarily for my own purposes; it is for the protection of other people, is it not? To a common law practitioner, the clear distinction that is drawn between what is civil and what is criminal is one that is readily enough understood. I wonder if your legal counsel are confident that there is not prospectively a sort of continuum here. If you start with a rap on the wrist, a small fine to someone, that will be treated as civil but at some indeterminate point, as the activity gets more serious, the fine gets greater and the penalty, the suspension, gets greater. That is likely to be treated by the European Court as criminal and accordingly the difficulty is to determine what characteristics you should give to the proceedings to ensure, as it crosses over that point, that you do have an adequate set of protections in place.
  (Ms Hewitt)  I think it is confusing that we have one distinction between civil and criminal within our own domestic law that I think we all understand, which is not the same as the distinction between civil and criminal regimes under the Convention.
  (Mr Kentridge)  That is the sort of question to which one says, "That is a very good question" while trying to think of the answer, but if I may respectfully agree with Lord Fraser I think it is a continuum. That means that one has to make up one's mind where on the continuum one is. My own view is that, even where under a disciplinary proceedings you may have large fines, all the other aspects of it—the fact that unlike the driver under the influence of drink, which is to protect the public and which applies to everyone—this applies only to people who have chosen to become authorised, who have submitted themselves to a disciplinary regime, just as I have submitted myself to a disciplinary regime by becoming a barrister. If you consider that aspect of it, I would say one is able to say that this disciplinary part is on the right end of the continuum. Market abuse? You are in the middle. To be cautious you say, "Let us regard it as criminal". I did have a note here through the kindness of Mr Eadie. There have been numerous cases of disciplinary tribunals, not all from this country but which have come before the European Court, where the sanctions include expulsion from your profession which can be much worse than a fine. If I could just give you the names—we have the cases if anyone wants to look at them—in the case of Guchez v Belgium it was applied in a case of the disciplinary tribunal over architects, civil. Konig v Germany, doctors, civil. De Moor v Belgium, advocates, also civil. Here we have had cases arising from disciplinary proceedings by IMRO which are characterised as civil, although it dealt with the question of whether someone could be in this profession at all. Another very interesting case is Wickramsinghe. Those were disciplinary proceedings against a doctor who was struck off the roll. The interesting thing about it is that he was struck off for conduct which was by any judgment criminal conduct, namely the indecent assault of a patient, but in spite of that the European Court of Human Rights said no, this is civil. It disciplines him in his own profession and it is a profession which he has joined, so all of European jurisprudence on disciplinary matters which I am aware of comes down on the civil side of the continuum. I know that there is a French judgment to which Lord Lester has referred you but that raises a different question.

Chairman

  6.  I think we understand quite clearly this distinction about people who are part of a regulated community. Our question is directed to the last sentence of paragraph ten which slightly puzzled us because you make the point that it only applies to a subsection of the population, but then you go on to say, "... and are part of a regime which is essentially protective rather than punitive." In the latter part of that sentence, we do not quite understand the distinction between "protective" and "punitive" because it seems to us that, by the very nature of some of the arguments you were making about very deep pockets in some of these firms, there must be a punitive element here. It would appear that you are bringing into account here two sets of arguments, and yet whenever we raise the second one you simply return to the first one.
  (Ms Hewitt)  In a sense, we were simply elaborating on the first argument. Clearly, that distinction is not a hard and fast one and, yes, there does need to be a punitive or, if you like, a deterrent element within the disciplinary regime, but it is the nature of the disciplinary regime that makes it clearly civil.

Mrs Blackman

  7.  It is the use of that punitive element and the degree of that punitive element in that argument that is quite difficult to square.
  (Ms Hewitt)  This comes back to two points that Mr Kentridge has made. The first one is that the fining powers of the regulator in the disciplinary regime have to be capable of being proportionate both to the mischief that is being caught and the size of the player. It can be perfectly proper to have a limit on the fines that you might impose on GPs or even on lawyers, although some of them are quite wealthy, but when you are looking at authorised persons that include legal persons, that include companies, within the financial services industry, you are talking here about companies that are capitalised for billions of pounds. Therefore, either you simply do not put a limit on the fine that can be imposed or you put a limit that is so high that it is meaningless in terms of any effective restriction on the FSA. The issue is simply that when the FSA or indeed the independent tribunal come to decide, within the disciplinary regime, on a fine then of course it has to be proportionate both to the mischief and to the player, the person concerned, but it is the size of some of these players that means there should not be a limit. Equally, my second point is that it is of the essence of a disciplinary regime, a regime that licenses entry into a continued participation within a profession, within a set of activities, that the regulator has to be able to suspend or indeed to expel somebody from that profession. Of course, deprivation of livelihood is an immensely serious sanction and one that clearly will have and is intended to have a deterrent effect. That does not change the nature of the disciplinary regime from being civil.

Lord Montague of Oxford

  8.  I was very relieved to hear your use of the phrase that disciplinary policy should not be soft. I think that was the word you used. In view of the situation as you have described it, I wonder whether it would be helpful or desirable if the FSA had a transparent fining policy. It might be very difficult but it might also be helpful and necessary.
  (Ms Hewitt)  I think that is something that the FSA can certainly consider. I cannot recall—forgive me—whether it is something that you raised with Mr Davies when he was here before.

  9.  No.
  (Ms Hewitt)  It is certainly something that they might want to consider and which I think could have the beneficial effect of making the disciplinary regime even more transparent and spelling out in a sense consequences of actions. My first reaction would be that it is not desirable for the FSA to tie itself down to a kind of tariff because it is essential both that the enforcement committee of the FSA and the tribunal itself should be able to look at all the circumstances of the case, the nature of the mischief, the impact that it has had and the nature of the player. I do not think you can capture that in a tariff scale: "If you do this it will be £10,000" and, "If you do this it will be a million." You simply could not do that.

  10.  And also to maintain public confidence that it is working effectively.
  (Ms Hewitt)  I am reminded that under clause 59, which I had forgotten, the FSA has to prepare and publish a statement of its policy on fines, but I certainly do believe that that policy needs to be about the general principles and the criteria that will guide those decisions, rather than a kind of tariff scale from which you read off the amount of the fine.

Lord Poole

  11.  Could I ask your advice on a small point of information? On the continent, when people join the sorts of occupations that are regulated that lead to the view that the disciplinary procedures are civil, do they in any sense, in signing up, give up their rights to being treated as criminals? You were citing doctors and architects. I wondered whether there was anything to be said for somebody who becomes a member of such an occupation saying, "Am I to understand that these are civil proceedings that I am signing up to?".
  (Mr Kentridge)  I certainly do not know enough about what happens in other countries. Certainly when you join an occupation or profession in this country you do not explicitly give up anything. If my Lord Chairman would allow me to add something to that, what one must always bear in mind—we have been stressing the difference between civil and criminal—the fundamental difference we have been discussing is whether compelled statements can be used against you. What one must remember is that, by common law, what everyone is entitled to, whether he has joined a profession or not, is fundamental fairness. Whatever you call the regime, even if it is civil, you have to be treated fairly. If there is a case against you, you have to be told what it is. You have to have a chance to answer it. Unfair evidence cannot be used against you, even if your own statements can be, but not if you have been tricked or trapped into giving them. One must remember the distinction here is not between an unfair civil regime and a fair criminal regime; it must be fundamental fairness in both cases with a little extra protection in the criminal one.
  (Mr Eadie)  In some of those cases that Mr Kentridge mentioned, the dispute in Strasbourg was not between civil and criminal. It was whether those people in those professions had any civil rights at all. The argument that was at the centre of those cases was whether or not, because it was effectively administrative or within a closed profession, they could even claim the protection of paragraph one of Article 6 by saying, "We have a civil right". That is even one stage below, if you like, the distinction which we are arguing about, which is between civil on the one hand and criminal on the other.

Mr Sheerman

  12.  Nearly all the examples you and Mr Kentridge have given are professions regulated by themselves. Because they are professions, they are regulated by a long term body of rules, well acknowledged and used. I am not saying that working in the City is not a profession but they certainly do not operate in the same way as lawyers, doctors or architects. What we are seeing is that the Financial Services Authority is imposing discipline, not a group of peers deciding on the rules of the relevant society. It is true that you have only been using that sort of comparison, is it not? Is it not different?
  (Mr Kentridge)  I will ask Mr Eadie. The IMRO cases?
  (Ms Hewitt)  While you think about that, I would stress that if you look, for instance, at the medical profession and the powers of the General Medical Council, although you are right that it is peers of doctors who are deciding it, the powers come from the Medical Act 1983 and originally from an Act of 1858. They are not self-regulatory bodies. Of course there will be quite substantial peer involvement in the processes we are setting up under the Financial Services Act.
  (Mr Eadie)  IMRO, at the time of the APB decision, which is the one Mr Kentridge referred to, was a self-regulatory organisation. It was contract based as opposed to statute based.

  13.  Can I switch track a little here? That was really on the back of Lord Poole's question but when Mr Kentridge made his remarks he mentioned a French case. I think he was referring to the Oury case which does seem to throw a rather different light on the penalties. I can see Mr Eadie smiling but it is in the Lester response. This has been a very interesting Committee, almost like a university seminar. When Lord Lester came back on his second bite, he did mention this Oury case which raises different questions. Perhaps you could respond to that.
  (Ms Hewitt)  We have all enjoyed reading the Oury decision sometimes in French and then more helpfully in English. Let me just stress that of course decisions of the French courts do not decide the characterisation of any part of our Bill and future Act for Convention purposes.
  (Mr Kentridge)  I have read a translation of the Oury case. Like most French judgments, it is very succinct. I will not say "opaque". It is not all that easy to understand but there are certain aspects about it. Firstly, although they said there that the presumption of innocence had to apply as it would in a criminal case, I do not know that they characterised the matter as criminal, but whether they did or not if you read the facts of that case, what happened was that the managing director of a company apparently was charged with deliberately putting out false information about the company into the market. As I read that, that is more equivalent to our market abuse regime than to disciplinary. In fact, I did see a note from Lord Lester and he speaks of it as a regulatory provision, not a disciplinary provision. I would read it as a case about a regulatory provision closer to the market abuse side of the continuum. That is why I do not read it myself as an authority that the disciplinary provision would be criminal. On this case, if this case had come before an English court or a Scottish court, without any reference to the European Convention, the appeal would have been upheld. One of the people who was sitting as a judge had, outside court before the hearing, made a statement to the effect that they were guilty. It was a case like the Queen in Alice in Wonderland: sentence first, verdict afterwards. It was a most shocking case. I do not think you would find anything there that says that a disciplinary hearing is criminal.

Viscount Trenchard

  14.  I would like to ask Mr Kentridge to go a little bit further on this question of whether or not a presumption of innocence should be afforded to those charged with offences under the disciplinary regime. It seems to me that the punishment may, in certain circumstances, be disproportionately large. If you work in the City and even if you have committed some breach which may have been unintentional, because there is also the question of the absence of intent, the punishment may be so great it may not only include a fine but your name may be in the newspaper so you will probably lose your job and you are probably unemployable by any other firm for the rest of your career. Yet, if the regime is civil, you do not benefit, as I understand it, from a presumption of innocence.
  (Mr Kentridge)  If I could just make a distinction, as I understand it, there will certainly be a presumption of innocence. There will never be a case under a disciplinary regime where the disciplinary body can simply say, "Here is the charge against you. Prove that you are innocent." The presumption of innocence has a number of aspects. The presumption of innocence, in general terms, will be there but there is one aspect, and one aspect only, of it which will not. One aspect, and only one, of the presumption of innocence in a criminal case is that if you have been compelled to give testimony and have not given it voluntarily it cannot be used against you. As I understand the thinking behind the statute, it has been thought that it is perfectly legitimate and not against fundamental fairness in a disciplinary regime to be able to use against someone his own answers. If I could again go to my profession, if the Bar Council were to say, "We have had a complaint against you and you have to answer it because if you do not that is a disciplinary offence in itself. What did you do? What do you say about that?", I would have to answer, but I would not find anything extraordinary in the fact that, when I am charged, my own account and explanation is there before the tribunal. After all, supposing I had said, "Yes, I am guilty and I have no excuse". The thinking is that it would be quite extraordinary in a disciplinary proceeding, as distinct from a criminal one, that that cannot be put before the tribunal. It is not a case of no presumption of innocence and a presumption of guilt. The real distinction we have been discussing, as I understand it, is simply whether that one particular protection is appropriate in a disciplinary context and the thinking in the statute is that, in a purely disciplinary context, there is no need for that protection and in fact it might stultify all the disciplinary proceedings. I think in law it is a very real distinction but, as I understand it, that is the policy behind the distinction.
  (Ms Hewitt)  The presumption of innocence applies in both regimes, disciplinary and market abuse.

Chairman:  I think this is a convenient moment to move on to the issues of market abuse and criminal justice.

Mr Beard

  15.  Before we leave that Chairman, could I just make one point? Whereas Mr Kentridge has been very clear in saying that the regime for disciplinary cases is civil irrespective of the size of the penalty, we have an opinion from Lord Lester and Miss Monica Carss-Frisk that gives an equally firm view in the opposite direction. I quote: "It may be criminal for the purposes of Article 6 of the ECHR where the nature of the offence or the nature and degree of severity of the penalty is so indicated." That is quite the opposite and I just wondered if you would like to comment and explain how that sort of difference could arise?
  (Ms Hewitt)  I have here two lawyers who agree but you can generally find two who disagree.
  (Mr Kentridge)  I have great respect for what Lord Lester says but I believe that the Brown case in the European court supports my view and I do not believe that the Oury case in France really supports Lord Lester's view. But in the end, Mr Beard, whatever the differences one does have to take a view. No-one can give a guarantee that his view is right but we have considered it and this is the view which we have come to, for the reasons which I have tried to state. I do not know that I could really say more, my Lord.

  16.  Thank you. Could I go back to the question of compelled evidence because it has been made clear that there will be provision made to avoid compelled evidence being used in a prosecution which is criminal. There was an article in The Financial Times on 15 May which implied that compelled evidence would be avoided in virtually all proceedings. Could you confirm the appropriate interpretation?
  (Ms Hewitt)  No, the memorandum sets out the correct position. The Saunders-proofing restrictions on the use of compelled statements in proceedings to impose a market abuse fine do not apply to proceedings that are disciplinary, even if they lead to a fine.

Mr Loughton

  17.  Minister, in paragraph 14 of your memorandum on the subject of legal aid, you were considering subsidised legal assistance in appropriate circumstances. What are those appropriate circumstances and how do you envisage it is going to be paid for?
  (Ms Hewitt)  This is a matter, Mr Loughton, which we are still considering. The Convention requires legal assistance to be made available where that is necessary in the interests of justice. I think what that suggests is clearly one has to look at the means of the person, the individual or the company, against whom market abuse fining proceedings are being brought. One also has to look at the complexity of the case and whether or not it is actually reasonable to expect the individual concerned to put his own case or whether legal representation is going to be required in order for that person to have a fair hearing. There might well be other considerations but, as I indicated in my opening statement, we are looking at how that provision of the Convention can best be given effect to.

  18.  I think "in the interests of justice" is a pretty wide phrase and I am thinking of cases which have been touted here recently where compliance officers have been prosecuted and have been ditched by their former firms and effectively left on their own. How would you envisage the means-testing of whether it is in the interests of justice for an individual, as opposed to the former firm, who, of course, can afford to pay large bills, and also there is the point about how we are going to pay for this?
  (Ms Hewitt)  We have not yet decided what kind of subsidised legal assistance we wish to put in place for market abuse fining cases, whether it should be an extension of legal aid or whether there should be a self-standing scheme that simply applies to proceedings under this Act. So that is something that we are having a look at and I have not got a scheme that I can offer you at the moment. Clearly we also have to look at how any such scheme should be paid for but the situation you describe is precisely the kind of situation I think we do need to take account of because if you have proceedings against a large company then it is perfectly reasonable for you to expect the company to be able to pay for representation. If you have proceedings against somebody who is extremely wealthy, then the same thing probably applies, but if you do have proceedings against someone who, although those proceedings have not been concluded, has nonetheless been dismissed from his firm and does not have substantial accumulated wealth, then I think you probably need to take a different view, and that is what we are looking at in order that we can come forward with an appropriate scheme for subsidised legal assistance.

  19.  Are you ruling out a levy on firms?
  (Ms Hewitt)  I have not ruled anything out yet. I have not made a decision on this issue.


 
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