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FINANCIAL SERVICES AND MARKETS BILL
Memorandum from HM Treasury to the Joint Committee on Parts
V, VI and XII of the Bill in relation to the ECHR
Introduction
1. The Joint Committee's report of 27 April invited the Government
to respond to a number of concerns which have been raised during the
Government's consultation and by witnesses to the Joint Committee
about the compatibility of the draft Bill with the European Convention
on Human Rights (referred to hereafter as the "Convention"). These
concerns have centred on the new power for the FSA to fine any market
participant, regulated or unregulated, who engages in market abuse.
The Government welcomes the opportunity to explain its position and
the extension of the period of the Committee's inquiry for this purpose.
The European Convention on Human Rights and the UK
2. It may be helpful before turning to those concerns to set out
some of the general background in this area. The Government is determined
to ensure that people's fundamental human rights are recognised and
protected by the force of law. The Human Rights Act 1998 gives effect
to the Government's manifesto commitment to incorporate the rights
and freedoms guaranteed by the Convention into UK law. This Act will
fundamentally alter the way in which the courts approach the interpretation
of statutory provisions.
3. The courts will be under a duty to interpret legislation in a
manner compatible with the Convention rights. Incompatible subordinate
legislation may be quashed in certain circumstances or declared incompatible.
Primary legislation which cannot be given a meaning compatible with
the Convention rights may be formally declared incompatible by a court.
Though such a declaration will not affect the validity, continuing
operation, or enforcement of the provision, it will trigger a new
power allowing a Minister to make a remedial order to amend the legislation
to bring it into line with the Convention rights. People who believe
that their Convention rights have been breached will be able to rely
on those rights in any legal proceedings involving a public authority.
The Human Rights Act also contains a specific requirement
for the Minister in charge of a Bill to make a statement on the compatibility
of the provisions of any new Bill with the Convention rights.
The new regulatory regime
4. When considering the design of the new regulatory regime, the
Government has therefore considered extremely carefully the question
of its compatibility with Convention rights. The Government is determined
to set up a regulatory system which will provide effective protection
for consumers and for the operation of the financial system as a whole.
The UK financial services industry is highly successful and vitally
important to the UK economy. It accounts for 7% of GDP and employs
over one million people. The financial markets support enterprise,
helping to provide funds for investment and growth. The source of
these funds is the public's savings, which are entrusted to the industry.
There is, therefore, a strong and shared interest in having clear,
robust, and effective regulation. But the Government is equally concerned
to have a system which is fair, and is seen to be fair, and which
is fully protective of human rights.
The Convention and the draft Bill
5. In considering the appropriate protections for human rights in
the context of the draft Bill, witnesses to the Committee have drawn
attention to the requirements of Articles 6 and 7 of the Convention.
These Articles draw a distinction between the determination of civil
rights or obligations and the determination of criminal charges. It
is important to note that a matter which is treated as a civil or
administrative proceeding for domestic purposes may, nevertheless,
be treated as one which involves the determination of criminal charges
for Convention purposes. What the Convention ensures is that
particular, additional, safeguards are available where what is at
issue is the determination of a criminal charge in Convention terms,
irrespective of the domestic classification of the proceedings in
question.
6. Article 6(1) of the Convention provides that in the determination
of civil rights and obligations everyone is entitled to a fair and
public hearing within a reasonable time by an independent and impartial
tribunal established by law. The draft Bill provides for this by setting
up a fully independent Tribunal to be administered under the auspices
of the Lord Chancellor's Department. Any person against whom the FSA
proposes to take regulatory action will have the right to have the
matter referred to the Tribunal to determine whether action should
be taken and, if so, what that action should be. Following consultation
on the draft Bill the Government announced that it will be making
a number of changes to the Bill to make clearer the precise nature
and role of the Tribunal. During the course of the Committee's inquiry,
the Government also had a welcome opportunity to clarify to the Committee
the interaction of the Tribunal and the FSA's internal arrangements.
The Government welcomes the Committee's broad satisfaction with these
arrangements and is giving careful consideration to its recommendations.
7. The right to a fair and public hearing before an independent and
impartial tribunal applies equally in the case of a person charged
with a criminal offence (in both the domestic and Convention sense).
However, the Convention affords such a person certain additional protections
over and above those applying in civil cases. In particular the European
Court of Human Rights has judged that answers given under compulsion
may not be used in criminal proceedings against the person from whom
those answers were compelled. As clause 104(5) of the draft Bill indicates,
the Government intends that protection should be provided against
such use in criminal proceedings under the Bill, for example in respect
of insider dealing.
8. Article 7(1) of the Convention sets out a prohibition on retrospective
criminal provision. This has been interpreted as including the principle
that an offence must be sufficiently clearly defined in law so that
an individual may foresee the legal consequences of his actions(1).
9. In considering which Convention protections it would be appropriate
to incorporate into the draft Bill the Government looked carefully
at the jurisprudence of the European Court of Human Rights.
Although the jurisprudence is still developing and may be
subject to interpretation, there are a number of factors which are
relevant to the characterisation of proceedings as civil or criminal
for Convention purposes. The first factor is the characterisation
of the proceedings in domestic law, although a civil categorisation
in domestic law is not conclusive for Convention purposes(2).
Second, there is the nature of the conduct at which the provisions
are directed and, in particular, the overlap with the criminal law.
Third, there is the question of whether the measure is directed at
the population as a whole, like tax law or road traffic laws, or whether,
on the contrary, it is aimed at a particular group of persons possessing
a special status the regulation of which is justified to preserve
the proper and orderly functioning of the group(3).
Fourth, there is the nature and level of any penalty. The more punitive
and severe the penalty, the more likely it is that the proceedings
will be characterised as criminal under the Convention.
Discipline
10. Although the Government has carefully considered the contrary
arguments which have been advanced, it remains firmly of the view
that the disciplinary regime applying to authorised firms under Part
XII of the draft Bill, and the similar disciplinary powers in respect
of approved persons under Part V, would be classified by the Courts
as involving the determination of civil rights and obligations for
the purposes of the Convention. The scope of the disciplinary regime
is limited to a defined set of persons who are part of a regulated
community; that is authorised persons and certain of their employees.
The requirement for those who choose to undertake financial services
business to become part of this regulated group is necessary for the
protection of the public. The conduct covered by the regulatory regime
is analogous to that which would be covered by regulation of a profession.
Although the Financial Services Authority can take disciplinary action
where people breach the rules, and these actions can have a deterrent
element, they only apply to a subsection of the population and are
part of a regime which is essentially protective rather than punitive.
11. The Government accepts that the nature and size of the potential
penalty are also relevant factors under Convention jurisprudence(4).
However, the fact that a fine is imposed does not in itself lead to
a conclusion that the proceedings are criminal(5).
Nor does the power to award high financial penalties (which is vital
if the objective of protecting the public is to be realised) in itself
make the provisions criminal in nature, given their essentially disciplinary
character. It is relevant in this context that there is no provision
for imprisonment in default of payment of a fine, which is on the
contrary recoverable as a civil debt under the draft Bill(6).
Market abuse
12. The main purpose of the power to impose a fine for market abuse
is also protective. There is no doubt that markets, and the interests
of those who deal on them, are damaged if abuse becomes commonplace.
The Government welcomes the fact that the Committee accepts in principle
the need for a new regime to complement the existing criminal offences.
A regime which offers an effective means of combatting abuse serves
to protect those who use the markets. The Government recognises, however,
that the likely Convention characterisation of the new market abuse
regime applying to all market participants is less clear cut than
for the disciplinary regime applying only to the regulated community.
The same factors are of course relevant. There are two main differences
which make the position less certain in respect of the market abuse
fining power. First, the market abuse regime is conceptually different
from the regulatory regime. It is not concerned with regulating the
entry to a regulated community and the conduct and standards of that
community. It applies to anyone who participates in the financial
markets, a potentially much wider group defined by economic activity
rather than by the narrower test of having privileged access to an
occupation which is regulated for the protection of the public as
a whole. The second difference is the fact that there are significant
similarities between the market abuse regime and the criminal offences
of insider dealing and market manipulation in terms of scope, content
and purpose.
13. The Government's view is that there are reasonable arguments
to suggest that the market abuse fining regime would be classed as
civil proceedings for Convention purposes. However, having considered
the matter further in the light of comments on the draft Bill and
the evidence of witnesses to the Committee, notably Lord Lester and
Lord Hobhouse, it recognises that there is a real possibility that
the market abuse fining power may be classified as criminal for those
purposes. That being so, the Government has decided to ensure that
additional Convention protections are put in place in the new Bill.
Consequences for the draft Bill
14. In order to avoid any risk of a finding that the Bill does not
fully comply with the Convention requirements, a change needs to be
made to the Bill. This is to ensure that protection against the use
of compelled statements is put in place for proceedings to impose
a fine for market abuse. Subsidised legal assistance will also have
to be made available in appropriate cases to those who do not have
sufficient means. The Government will be looking further at how this
might be achieved.
15. The Government is satisfied that the Bill provisions for market
abuse fully meet the Article 7 requirement for certainty. The European
Court of Human Rights has recognised that many laws are inevitably
widely drawn(7). This is particularly
so where an area is subject to change. Further interpretation by a
Tribunal or higher Court is not an objectionable feature. The Government
has, though, taken steps to provide greater certainty by requiring
the FSA to produce a code of market conduct which will provide examples
of the kinds of behaviours which are acceptable and unacceptable.
While the Government understands the desire for certainty in this
area, it is of the view that the right approach is to set out the
broad mischief on the face of the Bill and rely on the code, which
will be subject to full consultation with market participants, to
provide more of the detail. To set out greater detail in the Bill
would risk leaving loopholes which the unscrupulous could exploit.
16. However, the Government has considered carefully the Committee's
recommendation for introducing more certainty by making changes to
the status of the code. The Government agrees that there is scope
for making helpful changes here. It is important that only abusive
behaviour is deterred. The Government therefore is considering whether
to introduce explicit protections for people who take reasonable steps
to make sure that they do not breach the primary provisions. In addition
the Government proposes to make compliance with express provisions
in the code an absolute defence against proceedings for breach of
the market abuse provisions. The Government also proposes to clarify
in the Bill that the market abuse regime will only apply to market
participants.
17. The Government believes that with the changes proposed in this
memorandum the new market abuse fining regime will be compliant with
the Convention.
HM TREASURY
14 MAY 1999
1. Kokkinakis v Greece A 260-A (1993) 17
EHRR 397
2. Benham v United Kingdom (1996) 22 EHHR
293
3. Ozturk v Germany (1984) 6 EHRR 409;
Ravnsborg v Sweden (1994) 18 EHRR 38
4. Bendenoun v France (1994) 18 EHHR 54
5. Brown v United Kingdom (1998 unreported)
6. Brown v United Kingdom (1998 unreported)
and Air Canada v United Kingdom (1995) 20 EHRR 150
7. Muller v Switzerland (1988) 13 EHRR
212, 226 (paragraph 29); SW v United Kingdom (1995) 21 EHRR
363, 399 (paragraph 36)
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