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Lord McIntosh of Haringey moved Amendment No. 183WA:



(a) has engaged in market abuse, or
(b) by taking or refraining from taking any action has required or encouraged another person or persons to engage in behaviour which, if engaged in by the person concerned, would amount to market abuse,
and the condition mentioned in subsection (1A) is fulfilled,
(1A) The condition is--").

The noble Lord said: My Lords, in moving this amendment, I shall speak also to Amendments Nos. 183XA, 183YA, 183ZA, 183A, 183AA, 183AB, 183AC, 183AD, 183AE, 183AF, 183AG, 183AH,

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183AJ, 183C and 183D. I shall respond to Opposition Amendments Nos. 183WAA and 183ADA when they have been spoken to by them.

When we come to our amendments, the substantive change made by this group is to allow the FSA and the courts to order a person who requires or encourages another person to engage in market abuse to pay restitution. Clause 119(1)(b) already allows the FSA to impose a penalty or make a statement when someone does that. Of course, the FSA can impose a penalty only where it would have been market abuse if the person concerned had engaged in the behaviour themselves, rather than requiring or encouraging another to do so.

Amendments Nos. 183WA and 183AD ensure that restitution can be made in that situation. I do not believe that anyone can dispute the need for that.

The protections for reasonable belief and due diligence will also apply in that circumstance. The FSA and the courts will not be able to order restitution where the persons who required or encouraged behaviour had reasonable grounds for believing that their behaviour was not of that type, or exercised all due diligence and took all reasonable precautions to avoid behaving in that way.

Noble Lords opposite have tabled Amendments Nos. 183WAA and 18ADA which amend our amendments. We had sight of those only this morning. I would prefer that they speak to those amendments before I respond to them. I beg to move.

The Chairman of Committees: My Lords, Amendment No. 183WAA is on the supplementary sheet and it is an amendment to Amendment No. 183WA.

Lord Kingsland moved, as an amendment to Amendment No. 183WA, Amendment No. 183WAA:


    Line 4, in paragraph (b), after ("has") insert ("knowingly").

The noble Lord said: My Lords, Amendments Nos. 183WA to 183ZA give the court power, on an application by the authority, to award compensation--restitution--against someone who instigates market abuse: he "requires or encourages" the abuser.

The danger is that the court may treat the authorised person as encouraging the abuse because, without knowing about the abuse, it agrees to "approve" a client's communication for the purposes of Clause 19 without being able to discover whether it contains untrue or misleading statements.

The government amendment on restitution does not change the scope of the offence, but regrettably makes it more likely that the authority will want to hit the investment bank or stockbroker that unwittingly takes part in the market abuse. Typically, that will be where it approves, for the purposes of Section 57 of the Financial Services Act, a press release or takeover document at the request of the client. The firm is already required by FSA rules to ensure that the document is not misleading. That will be continued by

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the authority under the new regime. Neither the FSA nor the authority would bring an action against a firm if it had tried to find out the true position.

However, if the authority can now get restitution in those circumstances, so that innocent investors receive some compensation, I believe that the authority would try to do so. That is the background to our amendments. The authorised person has to know what he is doing in encouraging the commission of market abuse.

Your Lordships are well aware that the Financial Services and Markets Bill already empowers the authority to impose unlimited fines on innocent third parties who require or encourage another person to engage in market abuse. Typically, where a corporate finance firm approves for issue a takeover circular containing statements that it did not know were misleading, that phraseology is less draconian than the Government wanted initially and is a concession that the Government made at the urging of our shadow Treasury team. The authority is unlikely to impose a large fine on an innocent third party, but is much more likely to seek restitution in the circumstances of actual loss.

It is fair to say that the Opposition have so far failed to bring an intent element into the liability to require restitution. None the less, the Government have provided that the innocent third party should not have to pay compensation if he exercised all due diligence to avoid encouraging the abuse. However, he may not do enough for the defence to apply. Nevertheless, it would be unfair to require him to pay compensation if he did not know that what he had agreed to did in fact constitute market abuse.

The problem would disappear if, as we have urged, some element of intent was required before the market abuse of misleading the market was committed. Currently, the market abuser is guilty even if he did not know that he could be misinterpreted. The amendment proposes therefore that the accused should be guilty of committing or encouraging market abuse if intent can be presumed from the facts, which are then proved.

I believe that I am right in saying that Amendment No. 183 is--I hesitate to use the word "otiose" and will therefore use the expression "no longer necessary". Government Amendment No. 183YA brings in safe harbours for reasonable belief and due diligence. That is an initiative that we had requested. I can now withdraw the amendment and I thank the Government for their conduct. I beg to move.

Lord McIntosh of Haringey: My Lords, I am grateful to the noble Lord for introducing these two pairs of amendments. It may be better to consider them in that way. The first pair comprises Amendments Nos. 183A and 183B and the second pair is the two amendments to our amendments, Amendments Nos. 183WAA and 183ADA.

The noble Lord, Lord Kingsland, was quite right to observe that we have gone further than his Amendments Nos. 183A and 183B. His amendments

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would require the FSA and the courts, when deciding how much restitution a person who had engaged in market abuse should pay, to have regard to whether he had reasonable grounds for believing that his behaviour was not market abuse or whether he had taken all reasonable precautions and exercised due diligence. Having considered the issue carefully, we feel that the better approach is to provide that restitution cannot be ordered against a person in this position rather than just that "regard" should be had to these factors. Our amendments not only cover the points raised in Amendment No. 183A, but indeed go further than that. I am grateful for the noble Lord's recognition of that fact.

I cannot be so friendly about Amendments Nos. 183WAA or 183ADA which would only allow the FSA or the courts to order restitution where someone had "knowingly" required or encouraged another to engage in behaviour which would be construed as market abuse if he had done it himself. I do not know whether these amendments, which were tabled very late, were put down in response to the wholly inaccurate press comments on these matters over the weekend. I regret that the amendments raise the familiar issue of intent. If the noble Lord thinks that I shall accept them because the Opposition Treasury Front Bench in another place is moving backwards, I am afraid that I shall have to disabuse him.

"Knowingly" clearly adds little to "required" since the circumstances in which one person requires another to do something without being aware of what he is doing are likely to be rare. Nevertheless, it is conceivable that a person may negligently require another to engage in abusive behaviour in the same way as a person may negligently engage in abusive behaviour himself. The simple answer is to take care. That is why we have introduced protections for those who do so.

Knowledge is also, to a certain extent, often implicit in "encouraging". However, again in this case we do not want it to be a requirement of the regime for the FSA to have to prove someone's mental state. We have debated this matter again and again. I can do no better than to recall the example of my noble friend Lord Grabiner's much slandered six year-old son and the possibility of his arguing that he did not know that he was going to break the window at which he aimed a stone, or, in the case of "encouraging", that his giving the stone to another boy and pointing at the window did not amount to "knowingly encouraging".

"Encouraging" is not a new concept. What constitutes encouragement in a specific situation will ultimately be a matter for the courts. But it is something which those who advise the industry, when change was made to the regime in another place, signalled that they were content with. It was a change welcomed by the Opposition in another place, and indeed a change that went further than that suggested by the Opposition. Noble Lords also did not comment on this point when analogous provisions in Part VIII were debated.

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Of course, the FSA will be able to provide guidance on the market abuse regime in the code. Indeed, it is obliged to do so. And it is obliged to consult the public. If any further clarity is needed as to the situations in which someone may have action taken against them for encouraging market abuse, then this is the place for it.

We seem again to have "over-lawyering" creeping in, I am sorry to say. It is worth my reiterating that this regime is not designed to catch people out. We made that clear on many occasions. It is designed to protect markets and market users from abuse. What constitutes abuse depends on the expected standards of the market and in certain circumstances may include negligent behaviour; for example, not putting out information to the market which should be put out. That will depend on the market in question. We put in safeguards to protect those who have a reasonable belief or who take due diligence. The regime now strikes the right balance. It is effective and fair. I commend the changes to the House and urge the noble Lord, Lord Kingsland, not to press his amendment to my amendment.


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