Examination of witnesses (Questions 20
WEDNESDAY 19 MAY 1999
and MR JAMES
Lord Montague of Oxford
20. Whilst you are having a look at this,
will you be looking at the same issue in relation to the ombudsman
(Ms Hewitt) The ombudsman scheme is a very different
matter, Lord Montague, because, of course, the whole purpose of
the ombudsman scheme is to provide for a fairly informal and fast,
albeit fair, system for resolving disputes generally between clients
and firms. So I am not sure that the same considerations do, in
fact, arise there, but certainly the ombudsman scheme must be
fair and thereby meet Convention standards.
21. Minister, you said in your introductory
remarks that you propose to make it clear in the Bill that the
market abuse regime will apply only to market participants. May
I press you and ask you how you intend to define who a market
(Ms Hewitt) I am not the parliamentary draftsman,
happily, and he will wish to come forward with suggestions for
the precise form of words. I am certainly not going to try and
do the drafting this afternoon in front of the Committee, but
I think the point that has been made to us is that the words in
the Bill at the moment might be misinterpreted to include people
who are very clearly not market participants. They might, for
instance, in an example given to me at the London Metal Exchange,
be warehousemen in a copper warehouse in Africa who have gone
on strike. Their strike might indeed have some very serious consequences
upon the market but quite clearly they are not market participants
and it is in no sense our intention to catch them. So we do need,
I think, to look at how we can more precisely give effect to our
intentions there because what we are looking at really are people
who are buying or selling or holding investments that are covered
by the markets that are embraced by the new regime.
22. But there is going to be a very grey
area of people who maybe are amateurs but who still participate
in the market. You have day traders in the United States. Would
they be market participants or not? This is going to be very difficult.
(Ms Hewitt) Clearly if you have people who are
buying or selling stocks, perhaps on the Internet, they are market
participants and, indeed, there are a number of stories now emerging
from the United States of America about people using the Internet
in order to achieve a false, entirely artificial, rise in the
price of their stocks, false information put out on the Internet
in order to raise the price of perhaps some Internet-type stock
in order that somebody can cash it in and then, of course, when
the untruth of the information is discovered, the price falls
back. They have become quite common; they are known as "pump
and dump" ploys. So there are amateur, but not necessarily
naive, participants who quite clearly should be caught by a market
Lord Fraser of Carmyllie
23. But is it still your desire, is it still
your objective, to catch Mr Hamonaka if he has never left Japan
but has nevertheless significantly distorted the London market?
(Ms Hewitt) Yes, and Sumitomo was, of course,
fined substantial fines by the American regulators for that particular
scam, that market abuse. The British regulators were powerless
because at that point, and this is the situation now, you have
criminal offences, narrow class of behaviour, wide class of persons;
you have the disciplinary regime, broader class of behaviour,
narrower class of persons, but you did not have what the market
abuse regime will provide under this Bill, which is the broader
category of behaviour and the broader group of market participants,
and I think you need that, just as they have that in the States.
24. I am aware of what Sumitomo did. Your
summary is absolutely correct. The Minister has been traditionally
British not to exercise extraterritoriality. I just want to be
clear that you do believe that it is important to achieve a degree
of extraterritoriality through this device, do you?
(Ms Hewitt) We do have global financial markets
and clearly behaviour by someone who may be physically thousands
of miles away can have a very damaging effect upon the markets
here. They are global markets. There are certainly practical difficulties
where you are trying to catch people, particularly individuals
who are thousands of miles away but we do not think that is a
reason for narrowing the scope of the Bill.
Chairman: Could we
move on to the issue of certainty.
25. Market confidence and, indeed, the requirement
of justice clearly require certainty and this is a requirement
of the Convention on Human Rights. You say in your memorandum
that the Government is satisfied that the Bill's provisions for
market abuse fully meet the Article 7 requirement for certainty.
I note here that you say that the Bill itself meets this requirement,
so you are not relying on some subsequent regulations or code
of conduct or whatever, but when I look at the Bill, and in particular
existing clause 56, I find something that is anything but certain.
It is highly subjective and it relies on the supposed attitudes
of other market participants to the release or non-release of
some information. Moreover, it does not actually criminalise anything,
it only authorises elsewhere in the Bill the FSA to fine that
person if, in their opinion, it constitutes market abuse. So I
think this is anything but clear if it is to constitute criminal
law, which you now say it is. Do you intend, therefore, to redraft
or alter this section of the Bill, and if that is so, when could
you do it because obviously there is otherwise a gap between your
intentions and what is, in fact, the case?
(Ms Hewitt) Thank you, that is an extremely interesting
and also rather comprehensive question. The first point is that
when you say we accept that this is criminal, I do just want to
stress we are not talking about a domestic criminal regime like
the normal criminal law. That is not what the market abuse regime
is. As Mr Kentridge has indicated, you can argue both ways, whether
or not even under the Convention a market abuse regime is civil
or criminal, but we think it is as well to be ultra-cautious here
and put in those extra protections. On the matter of certainty,
we believe that the provisions of the Bill do, in fact, meet the
Article 7 requirements for certainty. That refers both to the
actual words on the face of the Bill but also the requirement
on the FSA to produce a code of conduct on market abuse. The European
Human Rights Court has recognised in several cases that many laws
are inevitably widely drawn, and I think that is particularly
so when you are dealing with areas that are changing very rapidly,
and there is no doubt financial services move very fast indeed.
So we have a reasonably general set of provisions within the Bill
itself. Those are then supplemented by the requirements for a
code of market conduct and, of course, the FSA is consulting at
the moment on a draft. That code can never be completely comprehensive.
It is quite impossible to anticipate fully everything that market
participants might get up to in the years to come, but we think
that the code will provide a very valuable additional degree of
certainty beyond what would be provided if we simply relied on
the Bill and then on the development of case-law. I have to say
that was the approach that was taken in the United States of America.
You had basic mischiefs that had not been elaborated upon in any
great detail by the Securities and Exchange Commission but there
has been a build-up of case-law over 50 years. We think we can
get greater certainty and faster certainty by using the code of
conduct. Of course, we are also saying, as I explain in the memorandum,
that compliance with the express provisions of the code must be
an absolute defence to a charge of market abuse and I think, taken
together, that gives probably the highest degree of certainty
that we can achieve certainly a reasonable degree of certainty
and one which I believe is fully compliant with the Convention.
Mr Kentridge, do you want to add to that answer?
(Mr Kentridge) I do not really think so, Mr Heathcoat-Amory.
The fact is that the European Court of Human Rights has said on
many occasions that some sorts of even true criminal offences
can only be stated in general terms. The more you define it, it
has sometimes been said, the more loopholes there are. But I am
not a draftsman either. I believe that the tribunal and the court
would make sense of that definition.
(Mr Eadie) One final thing perhaps. They have
also accepted in Strasbourg that it is acceptable under Article
7, which is the nub of the Convention concern here, for relatively
broadly expressed laws to be developed by case law, and that applies
both to the development of broadly framed statutory provisions
and, indeed, to the common law itself, the classic example being
the case of marital rape which went recently to Strasbourg. The
strong complaint being made by the rapist was: "I did not
realise at the time I committed the rape that it was an offence
to rape your wife," and there was genuinely, surprisingly
perhaps, some doubt under the common law as to whether that was
the position at the date the offence was committed. Strasbourg
takes the view it is acceptable for laws of that kind to be developed
on a case-by-case basis. So they do not exclude judicial interpretation
and, indeed, development of legislative provisions.
26. Minister, could I continue a little
bit on the same topic. As far as the code is concerned, I think
we were very pleased that the Government set such importance by
it and that it will be subject to full consultation with market
participants, and also, as you have explained, that you propose
to make compliance with its express provisions an absolute defence
against proceedings. So that, on the one hand, would seem to provide
a much greater degree of clarity, but then what worries me is
that it seems to me that even though conduct might not be prohibited
by the code, it might still be found to be in breach of the statutory
precepts in clause 56. I worry how that situation might sit with
(Ms Hewitt) I think, as you suggest, Lord Trenchard,
we partly touched on that in the immediately preceding question,
the code of conduct is very important because it can spell out
specific mischiefs that do constitute market abuse and it can
also spell out, if you like, positive courses of action that would
mean somebody was not engaging in market abuse, and I think that
is essential, but it would be impossible for any code to deal
with every possible eventuality or to anticipate everything that
people might do in future. Therefore, I think the FSA must be
able, in the years to come, to proceed against people for market
abuse, as defined in clause 56, where the actions that have given
rise to the market abuse are not referred to in the code itself,
where it is silent, because otherwise we will have a situation
where somebody will think of something, a mischievous person will
think of something that is absolutely an abuse of the markets
but somehow, because it has not been dealt with in the code, the
FSA will not be able to proceed and that will be clearly an unacceptable
state of affairs.
27. I worry about that, particularly because
subsection (9) explains that behaviour includes inaction as well
as action, so I find that conceptually quite difficult.
(Ms Hewitt) The inaction could arise, for instance,
where, in order for somebody to deal fairly on the markets, they
have to supply full information to the markets. It might be information
about something that is changing within a company, and if they
do not provide that information, so inaction, depending what else
is going on, that could constitute market abuse. It may be a situation
that constitutes an abusive squeeze, where simply holding on,
refusing to close off a position or to make certain supplies available,
is an integral part of the abusive squeeze and thus the market
abuse. It is an inaction rather than a positive action but it
is nonetheless integral to the behaviour that constitutes market
abuse and the FSA must be able to deal with that.
28. Minister, we were interested that you
said that the code will provide an absolute safe harbour for those
who comply with its positive provisions, whereas in our report
we thought a qualified safe harbour depending on a person's intentions
in what they actually were doing when they complied with the strict
letter of the code. Why have you been more generous than we would
(Ms Hewitt) We have looked at this very carefully
here and we are very mindful of the desire in the industry for
as much certainty as possible as well as the requirement of the
Convention for appropriate certainty, and we felt it was right
here to say that if somebody has complied with the express provisions,
then really they should not be vulnerable to an action against
them by the FSA. Indeed, I have to say that even if we had gone
for a more qualified position, I think it is very unlikely that
the tribunal or the courts would have upheld action by the FSA
in that circumstance.
29. Where the code is silent you said that
they would not be seeking punishment of people who take reasonable
steps to comply with the spirit of the code. What do you have
in mind by "reasonable steps"?
(Ms Hewitt) We are looking at the kind of draft
provision which will take into account the situation of people
who act with due care and in good faith and the code may be silent
on the matter. Someone who acts with due care and in good faith
should not really be proceeded against for market abuse, but we
are looking at the appropriate draft provisions in this area.
30. Would you expect the FSA to issue guidance
from time to time explaining the kinds of things they would think
reasonable, and if so, would then the guidance be some kind of
safe harbour, just as the code is?
(Ms Hewitt) I think one has to draw a distinction
here between guidance and the code. I have no doubt at all that
the FSA will want to update the code from time to time, but obviously
when it does so it will go through the appropriate consultation
before it finalises any changes to the code. The question of guidance
is a rather different one and we are certainly not persuaded that
guidance from the FSA, which could be to a specific authorised
person or firm, should have the same weight as the code. In any
case, I do not think that is a matter that needs to be dealt with
on the face of the Bill itself.
Chairman: Could we
move on, finally, to the whole question of overlapping regimes.
We have some general questions about how we now work in a world
where we seem to have two approaches.
31. If an authorised person engages in market
abuse, then necessarily they will have broken the FSA's general
rules. Does that present a dilemma in terms of the distinction
you make between the two regimes, the disciplinary regime and
the market abuse regime?
(Ms Hewitt) No, I do not think it does present
a dilemma. In practice, when it comes to market abuse by authorised
persons you actually have three regimes. You have the criminal
regime, because it may be that the authorised person should actually
be prosecuted for insider trading or whatever; you have the market
abuse regime, which applies to authorised persons but also to
non-authorised participants, and then you have the disciplinary
regime. In that situation the FSA, I think, will, first of all,
have to decide whether or not a criminal offence has been committed,
and if so, whether or not a criminal prosecution will be appropriate,
but if a criminal offence and a criminal prosecution are not in
question, then they will need to look at the possibility of taking
action under the market abuse regime, and if they do so and if
they compel that individual to answer questions, then, of course,
they will not be able to use the answers that have been compelled
in proceedings for a fine. Then they have the question of disciplinary
proceedings. Now it may well be the case that an authorised person
who has committed market abuse and perhaps been fined for that
market abuse under the market abuse regime is also, in the view
of the FSA, no longer a fit and proper person to be authorised
for participation in the financial services industry, in which
case it is perfectly proper for the FSA to proceed against that
person under the disciplinary regime. What they cannot do is fine
the authorised person under the market abuse regime and then come
back for a second bite of the cherry, a second fine, under the
disciplinary regime, but they certainly can proceed under the
disciplinary regime for a suspension or a complete ban on that
person's participation in the markets. Precisely the same thing
happens in the legal profession and in the medical profession.
Indeed, Mr Kentridge gave the example of the doctor who was struck
off for conduct that, on the face of it, constituted a criminal
offence of indecent assault. I think in that case the victim did
not want to prosecute. There were no criminal proceedings but
it was totally proper for the General Medical Council to proceed
via disciplinary proceedings and strike the doctor off.
32. Do you think the Bill makes those distinctions
(Ms Hewitt) It will.
Lord Fraser of Carmyllie
33. May I ask one practical question about
this, Minister? If to Strasbourg-proof the actions of the FSA
you make attendant upon almost everything they investigate, everything
they do, and take all those steps that ensure you would not fine
someone in breach, like no longer relying on compelled statements,
do you think the disciplinary side of things is actually workable
or are they actually just going to clog up?
(Ms Hewitt) I do not think that taking proper
steps, as we are doing, to ensure that we comply with the Convention
on Human Rights Act is going to make the regime unworkable at
all. First of all, in the market abuse regime where the Saunders-proofing
will apply, the FSA will still be able to compel people to answer
questions. They will not be able to use the compelled evidence
against the individual who gave those answers if they are seeking
to fine them for market abuse, but they will be able to use the
evidence that they compelled in restitution and injunction cases,
civil proceedings. They will also be able to use the information
they obtain to suggest other lines of enquiry or to get documentary
evidence that will then be available to them, and, of course,
the evidence that is compelled from one person can also be used
against somebody else in proceedings for market abuse. On the
disciplinary side, the issue is not whether Saunders-proofing
would make the disciplinary regime unworkable. The issue is simply
that Saunders-proofing is not justifiable and that comes back
to the issue we were talking about earlier about the nature of
a disciplinary regime and the licensing of people who choose to
participate in a profession or some other authorised activity.
From a policy point of view I see no reason whatsoever why financial
traders and other authorised people should be treated any differently
from doctors or lawyers.
34. May I say, Minister, that much of what
I have heard this afternoon has set my mind at rest, these questions
of whether this is clearly compatible with the new European Court
of Human Rights obligations that we have decided to sign up to.
But I have been pushing right through this Committee's proceedings,
whenever possible, to get international comparisons. On the one
hand, I do think that in regulation matters, whatever industry
you are in, whether it is in the environmental sector or any other,
many people do not like making comparisons across regulatory regimes
or cross-national comparisons. Is there anything we can learn
from people who have signed up to the European Court on Human
Rights that have similar regulatory regimes? What is their practice?
They have been involved with that for some years, although from
what you and your two colleagues here today have been saying,
my mind has been put at rest. That is a real level of achievement.
My mind is at rest in a sense, because we must in ECHR go through
the English courts first. We are going to build up the system
gradually of what has been the real experience over a number of
years in comparable countries to our own?
(Ms Hewitt) I think your general point about the
need to learn from the regulatory regimes in other countries is
absolutely right and we also, in developing this Bill and the
policy behind it, looked to financial services regulation in other
countries as well as in our own country and tried to learn from
the good as well as the bad. When it comes to the specific matter
of the Human Rights Convention, I think you have to recognise
that the jurisprudence is developing very fast and, therefore,
rather than looking at how does the French or the Italian or whatever
regulatory system deal with the Convention, the best thing is
for us to get the best possible and the most up-to-date legal
advice on the matter and then make a judgment about how we should
proceed. As we have seen in the Oury case for whatever
reason they clearly had not anticipated that those proceedings
were going to be found wanting, although, as Mr Kentridge has
outlined, even without the Convention they would have been found
wanting under our conception of natural justice. When it comes
to hearings in front of our British courts on Human Rights Act
issues, I am sure that they will also want to look at cases that
have been settled in other parts of the European Human Rights
Convention area but, indeed, they will probably want to look elsewhere
as well, because, of course, in Canada and Australia, for instance,
they have had Human Rights Acts for much longer and there is a
developing body of jurisprudence there that can also be brought
to bear on the interpretation of the Act, but that is not specific
to financial services.
35. But are there any countries where there
has been real difficulty in running a regulatory regime like this
because of the constant problems of running into these sorts of
legal difficulties with the courts?
(Ms Hewitt) Not that I am aware of.
(Mr Kentridge) I have really not been into it
at all. I just cannot answer that.
Lord Montague of Oxford
36. May I enquire whether there is a country
which has an ombudsman scheme where we can learn whether hearings
are necessary and what effect that might have on the operation
of the existing ombudsman scheme, which, of course, is at the
moment relatively informal?
(Ms Hewitt) There is, of course, Sweden, from
which the father, the parent, of the ombudsman scheme came, but,
as I indicated earlier, the scheme will have to provide for a
fair and public hearing in order to comply with the Convention
and the FSA are aware obviously of the need for compliance and
we will expect the operator of the ombudsman scheme to make rules
for such a hearing. But I think the important thing is not to
undermine the essential nature of the ombudsman scheme to provide
for, as I said, relatively informal, non-legal proceedings so
that we can get disputes resolved.
37. Minister, I think we must let you go.
We said we would try and finish shortly after five. We are very
grateful for the evidence you have given, and your colleagues.
I think it has been very helpful. As you know, throughout this
our aim has been to try to clarify people's positions and to try
and get views to move as close as possible towards each other.
I hope we have taken another step in that direction. We will see
how some of the other people from whom we have asked for written
evidence respond to it, but I hope that we are continuing to shuffle
towards something which has maybe a wider degree of agreement
than when we started this process.
(Ms Hewitt) Thank you very much indeed and I shall
look forward very much to the Committee's next report.