Second Supplementary Memorandum by the
Financial Services Authority
1. This Memorandum deals with a number of topics
which have arisen in recent evidence where the FSA believes it
may be helpful for the Committee to have further views and background
information. The note covers the following topics:
the application of Articles 6 and
7 to certain aspects of the FSA's work (paragraphs 2-11);
defining "private persons"
for purposes of suing for damages (paragraph 12));
double jeopardy (paragraph 13);
investigation of complaints against
the FSA (paragraph 14);
the FSA's feedback statements following
consultation (paragraph 15).
A. Application of Articles 6 and 7 of the European
Convention on Human Rights (ECHR) to the proposed market abuse
regime and to FSA's regulatory enforcement activity.
2. The FSA is concerned that the provisions
of the Bill should be compatible with the requirements of the
ECHR. We agree with those witnesses who have said that the credibility
of the new regulatory regime would be seriously damaged by early
litigation successfully challenging the compatibility of the legislation
with the ECHR.
3. There are two main outstanding issues in
the context of the draft Financial Services and Markets Bill.
First, whether the power to impose financial penalties for market
abuse, and/or for breach of the FSA's rules amounts to a "criminal"
sanction for the purposes of Article 6 ECHR. Second, if so, whether
the definition of "market abuse" (together with the
proposed Code of Market Conduct) or the proposed FSA Principles
are sufficiently certain in their application to comply with the
requirements of Article 7 ECHR (the rule against retrospective
4. In drafting the Bill, the task of ensuring
ECHR compatibility falls to the Government. This section draws
the attention of the Committee to certain additional points which
they may find helpful in preparing their report.
Civil fines for market abuse, disciplinary fines
and Article 6 ECHR
5. The question here is whether the legislation
should incorporate the protections that Article 6 affords to "criminal
proceedings" in relation to the FSA's power to impose fines
or financial penalties under the proposed market abuse regime
and/or under the proposed disciplinary regime for authorised firms
and approved persons. The Treasury has indicated that it is considering
the position carefully in the light of the responses to the consultation
on the draft Bill.
6. While there are clearly arguments that the
proposed fining powers would be criminal sanctions for ECHR purposes,
it should not be assumed that any sanction which has a punitive
or deterrent effect is treated as a criminal sanction for the
purposes of Article 6. In Air Canada v United Kingdom (1995)
20 EHRR 150, for example, the European Court of Human Rights considered
the imposition by HM Customs & Excise on Air Canada of a requirement
to pay £50,000. The payment was required in order to secure
the release of an airliner which had (unknown to Air Canada) been
used for the importation of illegal drugs and them seized by Customs
& Excise. Although in that case the Government appeared to
accept that part of the purpose of the £50,000 charge was
to punish/deter laxness in Air Canada's security arrangements,
the Court of Human Rights held that the sanction was not a "criminal"
one for the purposes of Article 6. The Commission has described
the requirement to pay £50,000 as "a normal incident
of the exercise of regulatory powers which generally accompany
international air traffic". Similarly, in Ravensborg v
Sweden (18 EHRR 38) a fine for contempt of court, convertible
into a term of imprisonment in the event of non-payment, was held
not to involve a "criminal charge". In Pierre-Bloch
(21 October 1997) the Court considered a sanction which was clearly
punitive in its effectan election candidate was required
to pay to the French Treasury an amount equal to that by which
he had exceeded statutory limits on election expenditure. Although
the candidate could also have been prosecuted in the ordinary
criminal courts for precisely the same conduct, the court held
the administrative sanction was not criminal. This was partly
on the grounds that it was "in the nature of a payment to
the community of the sum of which the candidate in question improperly
took advantage to seek the votes of his fellow citizens and .
. . forms part of the measures designed to ensure the proper conduct
of parliamentary elections and, in particular, equality of candidates".
7. We do not suggest that these cases are conclusive
of the issues that arise in relation to the draft Bill. They do,
however, demonstrate that determining whether proceedings involve
a "criminal charge" for ECHR purposes is not straightforward.
It requires an examination of a wide range of different factors.
These include whether the "offence" in question applies
to a limited class (as is the case in relation to the proposed
FSA disciplinary regime) or to the population as a whole (see
Ravensborg). There are a number of cases in which the Strasbourg
authorities have held that sanctions which are imposed for the
purpose of dealing with the misconduct of a regulated profession
are nevertheless to be treated as disciplinary rather than criminal
sanctions for the purposes of Article 6. (See, for example, the
Commission's decision in Le Compte v Belgium, where the
imposition of a suspension from the right to practise medicine
following disciplinary offences was not considered "criminal").
8. There is, moreover, clear authority to suggest
that the withdrawal of a firm's authorisation would not involve
the determination of a criminal charge for Article 6 purposes
(see, for example, The Traktorer Aktlebolag v Sweden A
159 (1989)revocation of liquor licence is not "criminal").
In the context of the regulated community in particular, it would
seem odd if the less serious sanction of a financial penalty were
considered "criminal", while the more serious sanction
of withdrawal of a firm's authorisation were not.
Article 7 ECHR
9. If such sanctions were to constitute "criminal"
measures for ECHR purposes, then the principle of legal certainty
that is implicit in Article 7 would apply.
10. Striking the correct balance between certainty
and flexibility in the provisions of the legislation, the Code
of Market Conduct and the FSA's rules is of vital importanceregardless
of the strict requirements of Article 7.
11. The Strasbourg authorities have made clear
that, while the rule against retrospective criminal penalties
does incorporate the principle of legal certainty, it is acceptable
for broad provisions to be left to the courts to interpret on
a case by case basis. Thus, in the case of Handyside v United
Kingdom the statutory obscenity test in the Obscene Publications
Act (i.e., publications whose effect is such as to "tend
to deprave and corrupt" persons who are likely to read them)
was upheld as being sufficiently certain for ECHR purposes. In
that case, the Commission made clear that "the requirements
of certainty in law cannot mean that the concrete facts giving
rise to criminal liability should be set out in the statute concerned.
This is satisfied where it is possible to determine from the relevant
statutory provision what act or omission is subject to criminal
liability, even if such determination derives from the courts'
interpretation of the provision concerned".
B. Defining "private persons" for purposes
of suing for damages
12. We are aware that concern has been expressed
about the provision in the draft Bill which would allow FSA to
determine who is to be taken to be a "private person"
who may sue for damages for breach of an FSA rule. We think that
this is a helpful provision, in that it would allow us to ensure,
in the interests of firms and consumers, that the same definition
of private person is used to determine both who is a private person
protected by particular rules, and who is a private person able
to sue for breach of those (or other applicable) rules. This is
a useful contribution to our ability to distinguish between the
different levels of protection appropriate for different categories
C. Double jeopardy
13. The Committee invited the FSA to let it
have its views on the subject of double jeopardy. We have seen
HM Treasury's note to the Committee
on this subject and have nothing to add.
D. Investigation of complaints against the FSA
14. Some witnesses have suggested to the Committee
that the proposal for the FSA to be protected from liability in
damages should be counter-balanced by a strengthening of the Bill's
provisions relating to the independent investigation of complaints
against the FSA. One particular suggestion is that the independent
investigator should have power to recommend or award compensation
against the FSA. As we indicated at the Committee's hearings,
we recognise that the organisation and resources of the Complaints
Commissioner will need to be commensurate with the demands placed
upon him. But we are concerned that if the compensation suggestion
were adopted, this could lead to the same kinds of difficulties
as liability in damages before the Court. In any case where a
major institution needed to be closed, for example, there would
be complaints from consumers who lost out as a result, as well
as from commercial counterparties and others affected. This could
arise however modest the basis for complaint against the FSA,
simply because the Commissioner would provide a cost-free means
to recover loss. We are concerned that this would be likely to
reduce our readiness to take difficult decisions. We believe that
the statutory compensation scheme provides the proper safety net
for consumers in such circumstances and that commercial counterparties
should be encouraged to make their own judgments about those with
whom they deal rather than relying on the regulator. Similarly,
we think that the right mechanism for a firm to challenge a Decision
to close it down would be the independent tribunal, or an application
for judicial review of our decision by the courts. The scope for
award of damages in such circumstances could, again, impact adversely
on the FSA's decision-taking.
E. The FSA's feedback statements following consultation
15. In evidence to the Committee on 13 April,
the Chief Executive of APCIMS said that the FSA had published
21 consultative papers so far but only one feedback statement.
Details of all the FSA's consultative papers and subsequent feedback/policy
statements are set out in Annex 1 to this Memorandum. In summary,
the position is:
In July 1998 in its "Open Approach
to Regulation" the FSA set out its approach to consultation.
An extract is attached (Annex 2).
Of the 21 consultative papers published
since October 1997, the FSA has issued feedback or policy statements
in relation to seven; in relation to a further five, FSA's decided
policy has been published or communicated in some other way; and
in relation to the remaining nine, feedback or policy statements
are already in production or are promised;
in line with our commitment in "The
Open Approach to Regulation", we make available for inspection
all non-confidential responses to consultation papers.
23 April 1999
15 Appendix 62. Back