Memorandum by Mr Michael Marks
I welcome the opportunity to provide you with
some personal observations upon the Financial Services and Markets
I should emphasise a few points before I start.
Whilst I am Chairman of LIBA and also Chairman of the European
businesses of Merrill Lynch, the comments I am making are expressed
in my capacity as someone who has been in the City for around
40 years, during which time I've witnessed a fundamental change
in the financial services industry in general and the City in
particular. Nevertheless, there are core features and virtues
of the City which have survived and which subtly bestow its distinctive
character and strength. Changes in the past have not eradicated
these core values and it is imperative that future changes don't
I should perhaps also mention that I am neither
a lawyer nor a professional regulator and so my views do not necessarily
have the forensic and technical depth that those of my colleagues
on the Panel may possess. Therefore I approach the issues as a
practitioner and one who wants to see a thriving and fair market
in which consumers get what they want and participants are able
to make a profitso far as the markets will allow!
I think that the Bill presents a very exciting
opportunity. Self regulation and the SROs have served us well,
but I agree that it is time to look at the creation of a unified
regulator. I have seen the statutory objectives and criteria which
have been set out in the Bill and they are very commendable. However,
if the Bill, when it comes out of the Parliamentary process, does
not lend itself to cost effective and straightforward implementation
then the FSA will not be in a position to meet those objectives
and criteria, however well intentioned.
Moreover the Act when it emerges has to be seen
to be right. It must inspire confidence both in consumers and
participants. And to do that it must strike various balances along
There must be the correct balance of weight
of regulation between the retail and wholesale sector.
There must be the correct balance between flexibility
There must be the correct balance between robustness
of regulatory power and the fear which will stifle the taking
of financial risk and innovation and push business offshore and
There are many balances to be struck, but the
common thread that is running through all these issues, is that
they are being determined in public and with the opportunity
for informed debate and inevitable disagreement over detail and
in some cases substantive issues. I cannot recall in my career
such an open and indepth process. This is very welcome and I wouldn't
have it any other way. However, it means that there is an even
greater responsibility on all of us to ensure that the results
make sense. Of course, not everyone is going to agree about everything
but it is clear that some real issues have emerged in the consultation
process which must be addressed in a sensible way, if the FSA
is to inspire confidence from day one.
I am glad the theme for today is Discipline,
Enforcement, the Tribunal and Market Abuse, because I detect that
this is an area where there are some real issues to be addressed.
To me there are a number of key points.
1. Have we really got the balance right between
the criminal regime and the regulatory regime? I appreciate that
there is a dilemma: on the one hand there has been a none too
brilliant record on prosecutions for insider dealing and S47 offences.
Because of the need for intent and meeting the "beyond reasonable
doubt" burden of proof, we are told that a significant volume
of prosecutions is not achievable and that therefore the deterrent
virtues of the provisions are lost. On the other hand we hear
the howls of protest that the civil Market Abuse is criminal in
naturehence the European Convention on Human Rights argumentsand
that all the criminal-type protections should follow and that
intent should be part of the "offence". We are also
told that the Market Abuse regime is not to "replace"
the criminal offences and is there to catch those things which
wouldn't otherwise be caught.
In my humble view we are in danger of getting
to a stage where there is a risk one will need a degree in law
to trade in the UK market. This could still the heartbeat of the
I think we need to accept a basic fact: an individual
who is found against under something like the Market Abuse regime
is likely (though, I concede, not inevitably) to be finished.
They will not work in mainstream financial markets in this country
again. It doesn't matter whether it is a civil or criminal code,
whether there is a fine or not. Therefore, whatever characterisation
is given to the "offence", the process must be fair
and seen to be fair if we are to deprive people of their livelihood.
I think it follows from this that the boundaries
of the acceptable have to be set as clearly as possible. My sense
is that the code supporting the statutory provision is drawn too
widely although I accept that, if we are to proceed on
the basis of a code, then there will always be a risk that its
slipstream will catch activity which with hindsight was acceptable.
Three things follow from this: first, it is
imperative that realtime guidance from FSA is forthcoming (by
the way I don't think it should be charged for!) and moreover
is bindingso that firms and individuals at least have the
opportunity to know how far they can go in their activities; second,
there should be no question that someone who has followed the
code should be subjected to "prosecution" and thirdly
the current process of consultation should flush out those areas
which might otherwise fall foul of the code and the Government
can decide whether these constitute acceptable behaviour. If they
do: make a safe harbour for them, if not leave them where they
fall. In any event let's have some clarity.
I think it also follows that there should be
some element of intent required. I understand that the FSA are
saying that they have put in a concept in the code which is tantamount
to an intent (although not as strong) with the concept of Principal
Purpose. I'm not a draftsman but surely we can find a way of putting
at least some level of intent enshrined in the Bill.
2. A second key point is the impression which
has been generated that the powers of the FSA are too oppressive.
I have a broad understanding of the kind of
powers that are proposed to be afforded to FSA and would say that
if these powers (or even a watered down version of them) are to
be conferred then we need to ensure that the natural justice and
procedural niceties are especially well enshrined. It seems to
me that some of these issues go in step with each otherthe
wider the offences or the more draconian the action or investigative
powers that can be exercised, then there is more of an imperative
to have concepts such as Intent or Binding Guidance woven into
the fabric of the regime. Also, for example, I think that the
propensity to prosecute in relation to breach of General Principles
rather than specific rules is fraught with dangers and, without
proper protections, is open to abuse.
In short: if there are to be very strong powers
then the protections must be commensurate with them.
I have focused on disciplinary matters because
that is the theme for today, but I also think that this area illustrates
the need for us to get the overall structure right. If it is too
weak and open to abuse by practitioners then consumers lose out
and in the end will seek alternative ways to save and spend their
money. If the system is capricious or oppressive then it will
drive business away from London. Whole markets can disappear in
the blink of an eye. This is not just about nationalistic view
of keeping London strong, it is about not fragmenting one of the
most powerful financial engine rooms in the world, where everyone
comes to service their financial needs.
If I were to sum up my view, I suppose I would
say, the financial services industry needs to be fair and well
regulated to provide protection where needed and a unified regulator
is a good move; but do not underestimate the need to have transparent
fairness and clarity for the participantsotherwise it might
be impossible to rebuild the incredible foundation we have in
London and which might be lost if businesses thought that it was
more convenient to carry out their activities elsewhere.
30 March 1999