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Lord Kingsland: My Lords, I am not surprised by the Minister's reply. He, equally, will not be surprised to hear that, having read in Hansard, tomorrow morning what he has said I shall probably think it prudent to retable this amendment on Third Reading. Meanwhile, I beg leave to withdraw it.
The noble Lord said: My Lords, on Second Reading and in Committee, my noble friend Lord Lipsey and I expressed considerable reservations about the regular user test that is the foundation stone of the definition of market abuse in Part VIII of the Bill.
Our reservations derive from two characteristics of the regular user test. First, as currently formulated, the use of the concept of the regular user to define market abuse seriously weakens current defences against market abuse by authorised persons. I provided examples at Second Reading. At no time has the Minister sought to refute those examples. I must presume that he accepts their validity.
Secondly, we believe that the regular user test provides no clear standard of acceptable behaviour by any market participant, authorised or not, since the regular user of the market, albeit a reasonable person, might, in the light of longstanding custom and practice in a given market, reasonably expect behaviour to occur, even if that behaviour was not in the interests of the operation of the market as a whole.
Noble Lords may remember that in earlier debates I illustrated the latter point by reference to an analogy drawn from the game of association football. Everyone knows that shirt-pulling has become endemic in modern professional football; and yet a regular user--that is, a reasonable professional footballer--would expect his colleagues to pull shirts, even though such behaviour is damaging to the game as a whole.
Noble Lords will be relieved to know that that is the last reference I shall make to that particular analogy, but I believe that it aptly covers the case. Most worrying of all, the point made that what is customary is what is expected by the reasonable person has not been answered by the Minister at any time. I hope that he will answer that point tonight. The point that I beg him to consider is, if in the financial services industry behaviour that abuses the market were typical of the participants in that market, why would the regular user, however honourable he might be, not reasonably expect that standard of behaviour from others? Indeed, it would be irrational to do otherwise.
I had not intended to refer to the remarks made in Committee by my noble friend Lord Grabiner, as he is not here this evening. However, since he has been quoted extensively by the Minister, I feel that I must take up his arguments. My noble friend's argument was essentially that a regular user, being a reasonable person, could reasonably expect participants in the market to behave in an honourable manner and not to abuse the market; that is, a reasonable person will be a person of high standards and would expect others, too, to have high standards. I must say that at the time when I listened to my noble friend's argument, I found it a little odd. Even if the regular user is a person of high standards himself, why should he reasonably expect others to share those standards?
I have consulted colleagues at the University of Cambridge who hold appointments in law in an attempt to discover whether that is an oddity and is one of those charming foibles of English law designed to confuse non-lawyers. The consensus among those dons I consulted was that my noble friend presented a good case, but not a decisive case.
That is the problem with the Government's position on the regular user test. They have an argument, but it is not a conclusive argument. It is quite possible that, as currently formulated, their position will fail in the courts. In that case, the entire market abuse section of the Bill would collapse. I cannot for the life of me understand why the Government are prepared to take such a risk with that section of the Bill and with the reputation of financial services regulation in this country.
In Committee, the Minister kindly offered to meet my noble friend Lord Lipsey and me in order to allay our fears about the characterisation of the market abuse regime in the Bill. I am grateful to the Minister and to his officials for giving up their time to that meeting. Sadly, the meeting had exactly the opposite effect from that for which we had both hoped. I am even more convinced that Part VIII is seriously flawed. That is because up until the time of the meeting I had believed that Clause 116 provided a defence against the damaging interpretation of the regular user test to which I have just referred. As noble Lords will be aware, Clause 116 requires the FSA to produce a code containing such provisions as the authority considers will give appropriate guidance to those determining whether behaviour amounts to market abuse.
That, I hoped and believed, provided the opportunity for the authority to set standards and even to raise standards. The noble and learned Lord, Lord Fraser of Carmyllie, pointed out in Committee that there is a certain ambiguity in Clause 116. He has made that argument again this evening. The authority is to produce a code, but it is to provide guidance about the views of the regular user. That is the core of the ambiguity.
Sadly, when I put this point to the Minister and his officials they declared that there was no ambiguity because what is meant by Clause 116 is that the FSA should simply codify the views of the regular user. It should not express its own views. The Government's
That brings us back to the basic definition in Clause 115. In his defence of the regular-user test, the noble Lord, Lord Grabiner, told us that the regular user is a hypothetical individual of decent moral standards. But even a hypothetical person must draw his or her views from actual experience of the market, from the environment in which he or she works.
So let us consider how the views of a reasonable person might interact with the environment in which he or she works. Let us take as an example of a reasonable person a barrister, perhaps even a QC. Let us suppose that our barrister is an expert in tax law. Is it not reasonable to expect that our QC will, when acting for taxpaying clients, seek to identify all measures to minimise their tax liability within the bounds of the criminal law on tax evasion? That is his job. That is what he would expect a reasonable person to do. Is that not exactly how a large number of very rich people manage to pay very little tax today? Is it not that minimisation of tax payments within the law exactly what a regular and reasonable person would expect, and yet is it not clear that it is that kind of tax avoidance by the wealthy that brings the operation of the whole tax system into disrepute? That point has been well recognised by the Chancellor of the Exchequer who is now trying to correct it.
My fear is that the market abuse regime, as defined in the Bill, will have the same outcome: that the boundary to the behaviour reasonably expected by a regular user of the market will be the boundary defined by the criminal law, so that the whole attempt in this Bill to define an entirely new regime to police market abuse other than by the criminal law will fail. Noble Lords will be well aware of the fact that the criminal law regime against market abuse has not performed very well and that that failure has damaged the reputation of the City of London.
I hope that my noble friend the Minister is minded to accept at least the spirit of this amendment. If, sadly, he is not, I ask him this: would he deem acceptable behaviour which meets the criteria of Clause 115(1)(c), as currently drafted, but which is not in the interests of the market as a whole? Would he deem that acceptable? The new market abuse regime is a vital part of this Bill and I fully support the Government's objectives in framing it. Acceptance of this amendment would secure the Government's goal beyond all reasonable doubt. Rejection of it would place the Government's goal at risk. I beg to move.
Lord Lipsey: My Lords, this has been one of the livelier debates in the always lively proceedings on this Bill, featuring as it did at one stage in Committee a debate on whether this amendment would apply to financial markets the moral standards of the late Sir Stanley Matthews or of Diego Maradona.
This is the second cut by my noble friend Lord Eatwell and myself to try to improve the clause so as to make it clear that we want Sir Stanley Matthews financial markets. In our first attempt we suggested that there should be a reasonable and ethical user, but that did not meet the approval of the referee, so we are trying again with this amendment.
I cannot improve on the arguments set out so brilliantly by my noble friend. However, when we have discussed this matter with Ministers and their advisers, their general line has not been that we are aiming at the wrong point, but that the clause as drafted will broadly have the effect that we seek. If that is so, that is fine. The only point that I make is that it is not enough that it will have that effect, or that Ministers think it will have that effect, or even that if it came before a court that the court will consider that it will have that effect. It is terribly important that the regulator, who has to decide how, when and where to use the clause to cope with market abuse--to cope with Diego Maradona--believes that the clause will have that effect.
I do not easily understand why it is hard for the Government to accept this amendment if it is true that it is of nil effect. I believe that it would merely clarify the situation. But at least I ask that, in reply, the Minister gives the regulators the comfort that they require to make them confident that the clause indeed has the effect that he and the Government believe that it has and, therefore, that it can be effective in ensuring that Sir Stanley rules and not Mr Maradona.
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