Note by Lord Hobhouse of Woodborough
Thank you for inviting me to give evidence to
the Joint Committee on Thursday. Towards the end of the hearing,
Lord Lester and I were referred to a document, "FSM 91",
which we had not seen before. You invited further comments based
upon the parts of the document relevant to the evidence which
had been given. You also stressed that the Committee was concerned
to try and achieve an acceptable draft, an objective which I would
I agree that FSM 91 is most certainly relevant.
Section A addresses points raised during my evidence.
To recapitulate, the present (and only existing)
draft of Part VI proposes to punish (by way of fines) "behaviour"
which the FSA considers may affect confidence in the relevant
markets. Such a scheme for punishment brings into play a number
of principles (as well as Human Rights points) to which the drafting
of the legislation must, on that hypothesis, have regard. The
existing draft does not do this.
The previous Progress Report of March 1999 had
recognised the need for an independent and fair adjudication procedure
and therefore accepted one of the fundamental objections to the
existing draft. However a significant number of other points of
varying importance remained, some very important. My remarks concerning
cl.56 were directed to some of these.
An important point which still has to be faced
is the ambit of cl.56. Three questions can be asked: Who does
it apply to? What conduct does it punish? Will it punish innocent
The first of these questions is fundamental.
The present draft applies to anyone, wherever they may be and
whether or not they actually participate in the relevant market.
The conduct merely has to be behaviour in relation to a
relevant investment and that includes, for example, any commodity
which may be the subject of permitted trades on a futures or derivatives
market. The intention of the FSA and the Minister is, apparently,
that cl.56 should apply to "market participants", those
who "take advantage" of the market (FSM 91 §2),
"market participants", "individual player of the
market place" (Evidence 18 March pages 33-34). The present
language does not reflect this intention. It is far wider; its
effect will be indiscriminate and arbitrary. The draft code does
not (and is not appropriate to) remedy this deficiency in the
drafting of c.56. The redrafting exercise will not be too difficult
once the actual intended ambit has been thought through. Paragraph
2 of FSM 91 ("Rationale") still does not understand
the discrepancy and is an inadequate response.
The second question is related to the first.
Cl.56(1)(b) presently applies to conduct which may be wholly independent
of any market transaction to which the relevant person is a party;
for example, he may simply have market sensitive information which
he does not make public; he may as a producer or consumer simply
be resisting pressure being put on him by speculators. A definition
is needed which ties the conduct liable to be held abusive into
some market (or market directed) activity of the relevant person.
Here again the necessary redrafting exercise is not too difficult;
drafting techniques exist which can be used to provide the necessary
focus to the subclause and enable it to fulfil its purpose of
providing a workable definition (and set the limits of the FSA's
code making power).
This in turn leads on to the third questionculpability.
The Minister unequivocally rejected any concept of culpability
in her evidence (18 March pages 33-34). FSM 91, paragraph 8, however,
recognises the difficulties inherent in that view and states the
intention not to punish conduct on a no fault basis. It will be
appreciated that, if the application of cl. 56 is tightened up
so as to require some actual direct or indirect participation
in the market and the definitions of punishable conduct are redrafted
using words like "designed to" or "calculated to",
the definition of the mental element will be much easier to formulate.
It might even suffice to have a subclause stating that a person's
conduct shall not amount to market abuse if it was bona fide and
without any intent to undermine confidence in the relevant market.
Paragraphs 4 and 5 of FSM 91 include statements
which should prove useful in evolving an acceptable and effective
draft. It is recognised that compliance with the code can mean
that conduct is not abusive and it is also recognised that the
code making power is in effect a rule-making power and that therefore
the power must be properly defined, including a clear definition
of "market abuse".
Thus, my response to your question is that FSM
91 represents useful and encouraging progress. But much more needs
still to be done to recast and redraft Part VI. Time is very short.
There is still not even the beginnings of a satisfactory draft.
I hope that my contribution has increased the chances of workable
and effective outcome: ineffective or unworkable provisions will
benefit no one except those who wish to get away with improperly
manipulating the markets.
19 April 1999
14 Appendix 5. Back