§ Lords amendment: No. 127, in page 51, line 18, leave out subsection (3).
Mr. Deputy Speaker
With this we may discuss Lords amendments Nos. 128 to 130, 131 and the amendment thereto, 132, 133, 142, 143, 180 and the Government motion to disagree and Government amendment (a) in lieu and amendment (b) in lieu, 228, 487, 488, 489 and the amendment thereto and 490 to 501.
§ Miss Johnson
This group of amendments covers a number of different points relating to the market abuse 82 arrangements introduced by the Bill. It contains some relatively minor improvements to the market abuse provisions, which I will describe briefly. We can then debate the specific questions of the takeover panel and the amendments tabled by the Opposition to the Lords amendments.
Before discussing the detail of the Lord amendments, it is important to remind ourselves why the Government have introduced part VIII. The new market abuse regime has been recognised to be an important addition to the regulator's armoury to tackle abuse of the financial markets. It closes a gap in the protections for markets, allowing the regulator to take action against anyone, regulated or unregulated, who abuses the markets. Having well-regulated, fair and efficient financial markets is in all our interests.
I said when the Bill left the House that we had no intention of changing the substance of the market abuse provisions, which are effective and fair. I did say, however, that we might look at whether any further, more technical changes were necessary.
Noble Lords in another place supported the aim of the new regime and understood the arguments for our approach. Relatively minor but none the less important improvements were made in another place on a few fronts. I ask hon. Members to agree that those amendments should be part of the Bill.
The first improves the protections available for those who have reasonable grounds for believing that their behaviour is not market abuse, or who take care to avoid engaging in market abuse. We introduced protections along those lines in Standing Committee. The effect of amendments Nos. 127 and 131 is to improve those protections. Rather than being things to which regard must be had in determining whether behaviour amounts to market abuse, the amendments mean that the FSA cannot impose a penalty for market abuse if, having heard representations, it is satisfied on reasonable grounds that someone had reasonable grounds for their belief or exercised due diligence. That is, of course, something that the tribunal can review.
§ Sir Nicholas Lyell
The Minister might perhaps clarify the following matter. She has pointed out that, in another place, amendments were accepted that put the burden of proof on the defendant in market abuse cases. Is it still the case that one can be found guilty of market abuse without having intended to abuse the market? If that is the case and if the burden is put on the defendant, is that in conformity with the European convention on human rights?
§ Miss Johnson
May I answer the right hon. and learned Gentleman's question in a moment? The answer to his first point is yes, but I should like to answer his second point in a little more detail in a moment.
To maintain the high degree of transparency provided for in the Bill, amendment No. 133 places a duty on the authority to include in the statement issued under clause 114 on the imposition and amount of penalties, indications of the circumstances in which it will be satisfied that a person comes within the proposed safe harbours in clause 113. Amendments Nos. 489 and 496 introduce those protections into the restitution provisions as well. Amendments Nos. 490 to 493 and 497 to 501 make consequential drafting changes.
83 The other change made in another place in the area of protections was to provide that behaviour does not amount to market abuse if it conforms with rules specified by the FSA. The effect of the safe harbour put into clause 109 in Standing Committee was too uncertain in that it provided a safe harbour for behaviour that conforms with any of the FSA's rules. The provision would have extended to all rules, even completely unrelated ones. That was going too far and could have had uncertain and random effects.
The second set of changes concerned the alignment of the provisions on sanctions for abuse with those in parts V and XIV. Under the Bill as it left the Commons, the FSA could not make a public statement about someone as an alternative to imposing a penalty. Lords amendment No. 132 corrects that anomaly. Lords amendment No. 228 provides that a statement obtained under compulsory powers from a person cannot be used in proceedings against that person to make a public statement that he has engaged in market abuse.
The third set of changes involved ensuring that the provisions on those who require or encourage others to engage in abuse work as intended. The changes involved two features. The first entailed closing a potential loophole by which those who required or encouraged others to engage in abuse could escape sanction by using an unwitting third party to perform their abuse for them. Lords amendments Nos. 129 and 130 achieve that objective.
The second feature concerned restitution. The need for the change arises from the fact that someone who requires or encourages another to engage in abuse is not, under the Bill's definitions, said to be engaging in abuse. Consequently, the restitution provisions do not bite on such a person whereas, clearly, they should. Lords amendments Nos. 487, 488, 494 and 495 correct that.
The Opposition have tabled a couple of amendments—to Lords amendments Nos. 131 and 489—and I shall happily respond to their points. The amendments are very similar in form. The first is intended to extend the protection that is offered by clause 113 in relation to the imposition of penalties for market abuse, and the second is intended to have an equivalent effect on clause 370, which deals with restitution for market abuse.
The first part of each of the Opposition's amendments—that is, paragraph (c)—would provide that penalties or restitution were not payable if a person engaging in behaviour that was likely to give a regular user of the market a false or misleading impression did not intend to give such an impression or was not reckless about whether he might give anyone such a false or misleading impression.
It is difficult to see why such amendment is thought to be necessary, given that amendments made in another place would have the effect that the FSA cannot impose a penalty if there are reasonable grounds for it to be satisfied either that the person concerned believed on reasonable grounds that his behaviour did not amount to market abuse or that he took all reasonable precautions and exercised all due diligence to avoid engaging in 84 market abuse. We believe that the tests of reasonable belief and due diligence—not the tests of intent and recklessness, which the Opposition amendments would add—are the right ones.
§ Sir Nicholas Lyell
Does the Minister recognise that she is saying that she is reversing the burden of proof?
§ Miss Johnson
I do not recognise that, but, as I just said to the right hon. and learned Gentleman, I am happy to come back to the point in a moment. I think that the point he has just made is linked to the one that he made earlier.
As I said, we believe that reasonable belief and due diligence are the right tests, and that intent and recklessness—which is the force of the Opposition's amendments—are not the right tests. Let us suppose, for example, that we are dealing with a person who, not having bothered to make the inquiries that a reasonable person would have done, engages in behaviour that misleads the markets. It would be quite wrong for such a person to be given a blanket protection from the consequences of his actions, viewed from his own perspective.
The appropriate question is not what a person thinks about his own actions—which, obviously, could vary widely between individuals, depending on their level of knowledge and experience—but whether the person can show reasonable grounds for believing that his action would not be regarded as abusive by a reasonable person who uses the market regularly, or that he took the precautions and displayed the diligence that a reasonable person would expect. Those are clear and proper protections.
Conversely, the Opposition's amendments would significantly weaken the new market abuse regime. As the Opposition in another place did not return with amendments of that type on Third Reading, I had assumed that, at long last, this particular set of coach and horses had been put back in the stable; obviously I was wrong.
§ Sir Nicholas Lyell
Why is this particular set of coach and horses so different from, for example, the situation in trading standards? In trading standards legislation, one is not guilty of misleading the market unless one intended to do so. Why should such intent not have to be present in financial services?
§ Miss Johnson
I am not an expert on trading standards matters. I am also not quite clear that that comparison is one that we need to take on board now. However, as the right hon. and learned Gentleman is seeking an answer to his question on intent, perhaps I can return to that and say that intent is not a feature of the mischief of market abuse—the markets can be damaged regardless of someone's intent. The burden of proof rests with the FSA, which has to prove that someone has engaged in abuse.
We have addressed the issue of whether the protections that we have introduced—which require people to demonstrate that they are covered by them—might be regarded as shifting the burden of proof, and we have concluded that they do not. The Bill is in conformity with 85 the requirements of the European convention on human rights, and we are confident that there has been no change in that position.
§ Sir Nicholas Lyell
Could the Minister give just a short explanation of what the FSA has to prove to demonstrate that there has been market abuse? Could she give just one short example?
§ Miss Johnson
That is pretty difficult to do. What will damage a particular market depends on the standards expected of that market. That is the point of the regular user test. In certain circumstances, abuse might or might not involve a mental element. However, it is pretty hard for me to say what those circumstances might be. It is really a question for the users of the various markets to be covered by the regime.
Accepting a blanket exemption for behaviour that is not intended to distort the market would make it impossible to take action against behaviour that may damage a market in certain circumstances. It would be reckless to make such a change. If we went down the path that I think the right hon. and learned Gentleman is advocating, it would be very difficult in various ways to pursue market abuse.
§ Sir Nicholas Lyell
I am very grateful to the Minister. Are there not two defences for the financial public—the civil defence and the criminal defence? Someone who is damaged by market abuse can seek compensation and restitution, and such action does not require the same burden of proof as action against someone who is to be prosecuted for a crime of market abuse. Does the Minister not recognise those differences? Do they not have exact parallels in trading standards generally, and in the case of someone who has taken away someone else's goods in circumstances that might be a civil tort, but not a criminal wrong?
§ Miss Johnson
The right hon. and learned Gentleman causes me some concern. Market abuse is a civil offence, and I am not quite sure where the criminal part of his distinction enters into the matter. My understanding is that, in United Kingdom law as proposed in the Bill, market abuse is not a criminal matter. He seemed to connect market abuse and criminality.
§ Miss Johnson
Yes, it can lead to large penalties, but that does not necessarily make it a criminal matter. In UK law, market abuse is a civil offence, not a criminal one.
§ Sir Nicholas Lyell
The Minister cannot simply say that market abuse is called a civil offence when it has effectively criminal penalties, including unlimited fines. She cannot, like Humpty Dumpty, make words mean what she wants them to mean to that extent. Surely she recognises that the European Court of Human Rights will 86 regard such behaviour as criminal. Perhaps she could take some advice and explain later how the Bill conforms with the convention.
§ Miss Johnson
The Bill does conform. I said that market abuse was a civil offence under UK law. It may be construed as a criminal offence under the ECHR requirements, but it is a civil offence in the UK. The UK regime is non-criminal. We have introduced various protections that would be appropriate if a case was considered as a criminal matter under the ECHR only because we want to be as safe and circumspect as possible. I repeat, it is a civil offence under UK law.
The amendments also deal with market abuse by firms when control of information rules—or so-called Chinese walls—are in operation. We are well aware that appropriate protection needs to be provided. That is the point of clause 109(9), as amended. We could specify in the Bill the situation set out in the Opposition amendment, but we think that it is better to leave it to the FSA, which will have discretion to make control of information rules. It will do so and work is in hand, but the legal position, as now, is that it does not have to. Putting explicit safe harbours in the Bill rather than leaving it to the FSA to decide when safe harbours should apply would not change the position, as we shall be able to do under clause 109. Be that as it may, the point of our approach is to provide flexibility, because the FSA may want to form a safe harbour from market abuse in other areas. The obvious example is price stabilisation rules.
The FSA will have to consult on all its rules. In doing so, it may identify situations in which further protection is warranted. Equally, it may conclude that it does not want to give protection in all circumstances to everything that is done in accordance with permissive rules. Let us remember that the unscrupulous are very good at exploiting loopholes. The better approach is to leave it to the FSA to consider on a rule-by-rule basis, having regard to consultation responses.
§ Sir Michael Spicer
I am getting very confused. During her interesting exchange with my right hon. and learned Friend the Member for North-East Bedfordshire (Sir N. Lyell), the Minister said that although market abuse was a civil matter in this country, it would be treated as a criminal matter under European law. Is she saying that corpus juris has arrived already? Some of us fear that it might, but the Government's official position was that it would never arise. Will she clear that up? It would be very serious if a matter were treated under civil law here and under criminal law in Europe.
§ Miss Johnson
I did not intend to give the impression that a criminal regime would apply under the ECHR. I intended to make it plain that we have built all possible safeguards into the Bill, including establishing the independent tribunal, to ensure that every safeguard is afforded to anybody against whom a charge of market abuse is made. The Government gave extensive evidence to the Joint Committee a considerable time ago, explaining in detail our reasoning and conclusions on reporting on compliance with the convention. I am sure that the right hon. and learned Member for North-East Bedfordshire (Sir N. Lyell) is familiar with that evidence and it would be helpful for him to look at it again.
87 I was proposing to turn to the role of the takeover panel in cases of market abuse.
§ Mr. Loughton
The Minister is going back to the Burns committee, where we heard clear evidence from Lord Lester and other highly learned professionals in the area. They gave clear warnings that the clause contravenes article 6 of the European convention on human rights. Those fears have not been assuaged by the changes that have been made. Treasury solicitors had to admit that European law in this area comes about only by precedent and there are no precedents yet to suggest that the Bill will not conflict with the ECHR. How can the Minister explain that?
§ Miss Johnson
As I am sure that the hon. Gentleman is well aware, different evidence was given to the Joint Committee by different legal experts. We are content that there is no problem with the market abuse regime in relation to the ECHR. That point was made on our behalf in the evidence.
§ Mr. Loughton
Even though one of her predecessors was in charge of the Bill at the time, the Minister must admit that the Treasury's solicitor, who brought along an expert in European law, told us that it was not clear that the Bill was not in breach of the convention, because European law is built up from precedent and there is no precedent yet. She cannot give us an assurance.
§ Miss Johnson
The Bill is ECHR-compliant. There is no problem with the market abuse regime in that context.
§ Mr. Beard
The hon. Member for East Worthing and Shoreham (Mr. Loughton) has only half represented the evidence that was given to the Burns committee. I do not want to repeat all the evidence, but the conclusion was that the market abuses that were subject to relatively moderate penalties would be consistent with the convention if they went by civil procedures and levels of proof, but, as the penalties became larger, a criminal procedure would be necessary. The Bill as amended reflects that. Lord Lester's opinion was not the only one given. As the penalties are graduated, there is a need to move to criminal procedure. That is what my hon. Friend is saying.
§ Miss Johnson
I am grateful to my hon. Friend for confirming my points. He was a member of the Joint Committee and was present when the discussions took place.
The role of the takeover panel on cases of market abuse will also be of considerable interest to the House. There is much common ground on these issues. It is a common aim across the House to ensure that takeovers continue to be regulated in the same speedy and effective manner as they currently are. At the same time, the new market abuse regime needs to work as effectively and coherently as possible to prevent and deal with abuse of the financial markets. Those aims are not at issue, but how we achieve them is.
Lest there should be any misunderstanding, let me make it clear that we support the takeover panel. Its work in regulating the conduct and process of takeovers is 88 important for the effective and efficient operation of capital markets and for the protection of shareholders. We are in no doubt about that.
We also believe that it is vital that our financial markets are protected from the effects of market abuse, wherever and whenever it occurs. That is why we have introduced the new market abuse regime. Well-regulated markets attract business, which is good for the market, good for investors and good for the economy.
We do not think that these two aims are in conflict in any way. Clearly, market abuse—indeed, very serious market abuse—can occur during takeovers. It is important that proper procedures and arrangements are in place between the FSA and the takeover panel. We do not want unnecessary duplication or to create unnecessary uncertainty or the risk of tactical litigation in this sphere. We take the practical arrangements seriously. The FSA and the panel are working on operating agreements and setting out formal mechanisms for liaison and information sharing, similar to those that the FSA is working on with the investment exchanges.
The FSA and the panel are also drawing up policy statements concerning the circumstances in which the FSA or the panel would take the lead. As Lord Saatchi said in another place, the best solution is an agreement on a sensible modus operandi. We are of the view that the FSA will be able to adopt robust policy statements which mean that it will only take action against market abuse which occurs during a takeover in exceptional circumstances.
Of course people can seek judicial review if the FSA declines to take action, but as long as the FSA acts reasonably it has nothing to fear. The courts have been very clear that they will not generally intervene during the course of a takeover. Why would we expect the courts to take a different view depending on whether it was the panel that was being reviewed or the FSA?
Even if judicial review were sought, that would not cause problems for the timing of takeovers—the issue about which the panel is concerned. If the FSA does get involved, it will only do so to deal with any market abuse that has occurred or is likely to occur. There is no reason to expect it to impact on the timetable. We think that the procedures and arrangements that the panel and FSA are working on will ensure that problems do not arise, but we have accepted the need for what I might call a safety valve.
Our amendment, like the amendment passed in another place, will allow the FSA to provide a safe harbour for behaviour in conformity with the City code produced by the takeover panel. However, there is a crucial difference between our amendment and Lords amendment No. 180.
Under our amendment, the decision whether behaviour amounts to market abuse will always rest with the statutory regulator, the FSA, and, ultimately, the independent tribunal to be established under the Bill. Under the amendment made in another place, there would be circumstances in which that decision would in substance rest with the takeover panel. By providing a safe harbour for behaviour which, in the panel's opinion, conforms with the code, the amendment gives the panel the power to determine that a person has not engaged in market abuse.
The issue we face is in some ways a narrow one, but it is extremely important. Where market abuse takes place during a takeover, should the ultimate decision on whether 89 action should be taken rest with the statutory regulator, the FSA, and the tribunal or the non-statutory takeover panel? I think that the answer is equally straightforward. In what I would expect to be the very rare event of a disagreement between the FSA and the panel, it must be right that the last word should rest with the statutory regulator and the independent tribunal to be established under the Bill.
§ Mr. Flight
Under Lords amendment No. 180, the last word rests with the FSA in relation to market abuse, except for the specific territory covered by the code. Any other area in which market abuse might be committed, or where the FSA might sniff out market abuse, is entirely a role for the FSA—even while a bid is taking place.
§ Miss Johnson
The hon. Gentleman has made exactly the same point as me, although his "except" is the important point. That is the difference. It is not a big difference, but it is important to realise that we have set up a regime that is supposed to have a single definition of market abuse, to be accountable, to be statutorily underpinned and to have reference to an independent tribunal. The hon. Gentleman, with his "except", would transfer some things into an arena where none of that provision was in place.
If amendment No. 180 were allowed to remain part of the Bill—I will encourage the House to remove it—I believe that there would be important consequences, particularly in terms of the European convention on human rights, that were not appreciated by those who drafted the amendment. Giving the panel a determinative role in the question whether particular behaviour amounted to market abuse would, in effect, give it statutory functions. These functions would involve the determination of civil rights and even, possibly, criminal charges under the convention.
Throughout the passage of the Bill, Opposition Members have insisted, rightly, that in exercising such functions the FSA should be subject to comprehensive accountability arrangements, and that there should be the safeguard of full access to an independent tribunal for those accused of market abuse. We have ensured that the market abuse regime is fair, transparent and certain, with appropriate safeguards set out in the Bill. These include those safeguards to ensure compliance with the European convention on human rights that are needed where a body has a role in determining civil rights and criminal liabilities.
That does not mean that we are questioning the arrangements for the accountability of the panel in the usual context in which it operates. It simply means that those arrangements are not appropriate in this context. They were never designed to deal with the determination of whether market abuse has occurred in terms of part VIII of the Bill. Against that background, I am pleased that the Opposition appear to have had second thoughts, although, for reasons that I will explain, we cannot agree to their proposed substitute.
I refer now to Government amendment (a). If the problems which people have argued might arise do arise, the Government amendment in lieu of amendment No. 180 provides a proper and adequate mechanism for dealing with them. The FSA will, with the approval of the Treasury, be able to provide for safe harbours for all or 90 part of the City code produced by the panel. In giving such approval, the Treasury would, of course, be answerable to Parliament.
Our amendment is very similar to the amendment that Lord McIntosh tabled in another place on Third Reading, and which Lord Donaldson described as achieving "all that is necessary". However, we have given careful thought to concerns expressed about it in another place by both Conservatives and Liberal Democrats.
We have listened to those concerns and, as a result, the amendment has been further improved. As my noble friend Lord McIntosh said in another place:Given … the nature of the code and the panel's role in interpreting and applying it, I would naturally expect the FSA to take the panel's view before it decided whether behaviour fell within the safe harbour which the Government amendment would enable it to provide. It would be very foolish if it did not … I would expect the tribunal and, if the matter came before them, the higher courts, to attach due weight to the panel's views in accordance with established case law.—[Official Report, House of Lords, 18 May 2000; Vol. 613, c. 403.]The Conservative spokesman in another place, Lord Kingsland, made it clear that he would have been willing to support our amendment had we been willing to refer expressly to the City code as applied by the takeover panel. That reflects the concern, which we fully understand, that in looking at safe harbours provided by the City code, the FSA should not be able simply to impose its own interpretation, but should, in essence, be guided by the panel's interpretation.
The FSA will have arrangements for ensuring that the panel's views on whether behaviour is in conformity with the City code are sought and listened to. The panel's views will not be—and, for reasons I have explained, cannot be—determinative in law. However, they will be highly persuasive. Subsection (4) underlines this and, I hope, provides additional reassurance.
The FSA will be under a statutory duty to keep itself informed of the way in which the panel interprets and administers the relevant provisions of the code and, it follows, fully reflect that in its decisions about whether to act in cases of possible market abuse arising in a takeover.
That is the right result. To go further would be to go too far in terms of making the panel the final arbiter as regards market abuse in this area. Our amendment will ensure that if problems do arise in this area—we are confident they will not—adequate and effective safe harbours can be provided without compromising the position of the panel or the single statutory regulator, the FSA.
We cannot accept amendment (b) in lieu of Lords amendment No. 180. It is based closely on the so-called gatekeeper amendment which Lord McIntosh described in another place asthe worst of all the amendments before us.— [Official Report, House of Lords, 18 May 2000; Vol. 613, c. 414.]The amendment would prevent the FSA from acting during a takeover unless it was given permission to do so by the takeover panel, a non-statutory body. I recognise that the prohibition would be temporary, in the sense that it would last only as long as the takeover was in progress.
91 I also note that a new provision has been added requiring the panel to co-operate with the FSA in the ensuing period, although I doubt whether that adds much, since—
§ Sir Nicholas Lyell
On a point of order, Mr. Deputy Speaker. I apologise for asking again. I seek clarification. To which amendment are we referring?
Mr. Deputy Speaker
It is not for the Chair to advise the right hon. and learned Gentleman which amendment is being referred to. I have called Lords amendment No. 127, and we are discussing it along with all the other amendments that are grouped with it on the selection list. It is not for the Chair to advise on what amendments are under discussion. The Chair is confused enough as it is.
§ Miss Johnson
I hesitate to disagree with you, Mr. Deputy Speaker, but I am not confused at all. I am completely clear about what we are discussing. Having said that, however, I seem to have lost my place in my notes.
I note the new provision requiring the panel to co-operate with the FSA in the ensuing period, but I doubt whether that will add much, because that is the kind of behaviour that one would expect of a body in the panel's position when dealing with a statutory regulator.
On the other hand, I note the blanket nature of the prohibition. It would apply to each and every one of the FSA's powers, not just those in relation to market abuse. It would apply to market abuse of all kinds, no matter how trivial or how serious, and to any action instigated during the course of a takeover, regardless of whether it was likely to disrupt the timetable of the bid. I cannot believe that the Conservative party really wants the FSA to be hamstrung in that way.
I believe that it would be a mistake for the Bill to contain a provision that hands over the powers of the statutory regulator in the area of market abuse to a non-statutory regulator that is not subject to the same checks and balances. We expect the FSA to adopt a general policy of not intervening in a way that could disrupt the course of a takeover bid. That will be part of the sensible administrative arrangements to be put in place with the panel. However, it is not impossible to imagine circumstances in which an exception might need to be made—for example, if the regulator became aware of serious market manipulation that it, but not the panel, was in a position to do something about.
As a matter of principle, it would be wrong to fetter the discretion of the statutory regulator in the way contemplated by amendment (b). I commend Government amendment (a) in lieu of Lords amendment No. 180 to the House and urge the House to reject amendment (b).
§ Mr. Heathcoat-Amory
This is a very large group of amendments and has inevitably caused some confusion. It may be of assistance if I speak only to the issues concerning the takeover panel, and my hon. Friend the Member for Arundel and South Downs (Mr. Flight) deals with the other amendments.
The key issue concerns the possible conflict—and certainly overlap—between the jurisdictions of the Financial Services Authority and the takeover panel, 92 which the Government have not satisfactorily addressed. One of the City of London's great advantages is that it offers certainty, speed and flexibility in dealing with takeovers and mergers. In a previous debate, we discussed whether the United Kingdom, and London in particular, can hold its own in an international market. I believe that it can if it holds on to its traditional flexibilities in dealing with mergers and bids. That is important internationally and for the dynamism of the United Kingdom market. We have here something very precious.
The FSA is charged with dealing with market abuse and the takeover panel regulates mergers and bids. The Economic Secretary praised the takeover panel and said that she did not want to do anything to damage it. It has indeed been a success story. It was established in 1968 and is widely admired. The panel itself has raised directly with the Treasury serious concerns about the Bill, and I do not believe that she gave an adequate response.
The danger of overlap occurs in several areas. It must be objectionable in principle for someone to be vulnerable to double jeopardy. Someone abiding by one set of rules, published by the takeover panel, should not be vulnerable in relation to a second set of rules, published by a second regulator.
It must be bad for the market for uncertainties to develop about which regulator is responsible in each individual case. For instance, it would be dangerous if the FSA said that certain behaviour during a bid was abusive and the takeover panel said that it was not. Who would decide the outcome? If the matter went to appeal, it would certainly be very embarrassing if the court had to arbitrate between two different regulatory bodies. It is bad for the City and for the regulatory regime itself to have the possibility of conflict and overlap.
It must be recognised that parties to a bid can themselves seek to manipulate the regulatory process. Tactical litigation can be launched by the object of a bid in order to frustrate the whole process. The scope for that will be immeasurably greater if that party can appeal to the FSA outside the traditional authority of the takeover panel.
The Economic Secretary seemed simply to deny that there was such a problem. She suggested that any involvement of the FSA would not affect the timetable of a bid, and would not delay it because the action would simply be aimed at the market abuse. That view demonstrates ignorance of how bids progress. For instance, under the takeover code, a bidder usually has to complete the process within 60 days, or the bid lapses. So there is a limited time for the bid to be declared unconditional.
One can imagine a situation in which a hostile bidder for another company publishes a document in order to persuade independent shareholders to accept the bid. The hostile bidder might do that just before the expiry of the 60-day period. The target company might complain that the document was misleading in several material respects. At present, that issue would be considered immediately by the takeover panel, which has a reputation for dealing with such matters efficiently and swiftly, so the bid could proceed if the allegation were groundless.
However, under the Bill, the target company would be able to bring in the FSA to determine whether the behaviour in question was market abusive, and that would introduce a most unwelcome delay. Indeed, if that 93 happened, the takeover panel might have to agree to extend the bid deadline, or, even more damagingly, one of the companies concerned could apply for judicial review, if the FSA refused to examine the issues and the particulars of the case. If that led to an injunction, it would cause unwelcome delay as well as introducing new and expensive litigation into a process that, until now, has always been dealt with swiftly and efficiently.
The Minister has not dealt with the point about delay and expense. However, she did recognise that the problem might exist. That is why, in the other place, my noble Friends succeeded in passing amendment No. 180, which would provide a safe harbour. It would provide that, in a bid situation, if those concerned conformed to the City code as published by the takeover panel, that would be a safe harbour against allegations of market abuse. It is also important to recognise that, despite that provision, the FSA would remain the lead regulator and would be able to include conditions and limitations on the effect of that safe harbour. It would be the FSA that would issue a statement, modified as necessary, indicating conformity with the City code that would be a safe harbour against market abuse.
§ Mr. Nicholas Soames (Mid-Sussex)
I declare an interest in that I advise a number of companies in the City. Does my right hon. Friend agree that anything that undermines the exceptional speed and efficiency of the way in which the takeover panel works will undermine the position of London as the capital market centre of the world?
§ Mr. Heathcoat-Amory
My hon. Friend is right. It is not always understood how fast moving such bids can be. Decisions sometimes have to be taken within hours, and that cannot be done if parties to the bid could appeal to another regulator, or to a court for judicial review, which might then lead to an injunction and all the consequential delays and expense. That would undermine London's premier position as a centre in which such business can be done expeditiously and economically.
The Minister is worried about Lords amendment No. 180, because—she says—it gives too much authority to the takeover panel. It is true that Lords amendment No. 180 would give the panel the job of determining whether certain behaviour is in conformity with the City code. That is a sensible demarcation between the responsibilities of the FSA and those of the takeover panel. The FSA would still be the lead regulator and it would issue the first statement about whether the safe harbour existed. Under subsection (3) of the new clause, it would also be able to include conditions and limitations on that safe harbour.
My hon. Friend the Member for Arundel and South Downs pointed out in an intervention that the FSA will still be able to regulate and pursue market abuse outside the City code. It would not be delegating the whole issue of market abuse to the takeover panel.
We were somewhat at a loss to understand exactly what the Government object to in Lords amendment No. 180. In response, they have tabled Government amendment (a) in lieu, which would provide that the FSA must keep itself informed of the way in which the panel interprets and 94 administers the relevant provisions of the City code. In other words, the panel would not decide whether behaviour was in conformity with the code, because the authority would do that after discussions with the panel.
The Government's response is hopelessly flabby and inadequate. It would create no demarcation of responsibility or any jurisdictional boundary between the FSA and the takeover panel, because discussions would take place anyway. No one supposes that the authority and the panel would not keep each other informed, so Government amendment (a) in lieu would add nothing. However, it would still leave the FSA with the responsibility to take action over market abuse during a bid. If it had that power and responsibility, and did not exercise it, it would be vulnerable to judicial review.
It is no good having some modus operandi or self-denying ordinance whereby the authority says that normally it would leave the decision to the takeover panel. That would not wash in court. The target of a bid would allege market abuse and would ask the FSA to investigate the circumstances. If it refused, it would be vulnerable to judicial review. The FSA would always have to consider whether to exercise its powers in each case. The very fact that it would have to consider the issue would introduce a most undesirable element of delay.
The Government are apparently determined not to accept Lords amendment No. 180, but I have said enough to show that their alternative—which was apparently cooked up with the Liberal Democrats—is not a compromise but a dangerous alternative. It would leave in place the overlap between the authority and the panel, and deal a grievous blow to the United Kingdom as a place to do business. I hope that the rumours about the Liberal Democrats are not true, although they caved in on the issue in the other place. The Liberal Democrats in their places tonight owe it to the House to explain why they have had a change of heart on the issue.
Our alternative to Government amendment (a) in lieu is amendment (b) in lieu. If the Government are determined to overturn Lords amendment No. 180, our alternative would be superior to theirs, and achieve the same objectives by another route. It draws on the Datafin court case of 1986, in which the Court of Appeal ruled that the takeover panel was subject to judicial review, but that the court would not normally interfere while a bid was taking place.
Our amendment (b) in lieu proposes that the FSA step back from a bid process while it is in progress. Provided that the takeover panel agreed, the authority would be prevented from exercising its market abuse powers. The new element in the amendment was also tabled in another place but was not pressed to a Division. It would ensure that the takeover panel notified the FSA about any suspected market abuse, and co-operated fully in any subsequent action by the authority.
Crucially, under the amendment, the takeover panel would not decide what constituted market abuse. That decision would remain with the FSA but, in line with the Datafin case, the matter would be dealt with only after the bid had taken place. That alternative approach does not provide a safe harbour, but is another way to deal with the same problem. If the Government persist in overturning Lords amendment No. 180, our amendment would certainly be superior to theirs.
§ Sir Nicholas Lyell
I shall be brief. This is a highly technical subject and I shall focus on what I consider to 95 be the key elements, for fear of getting something wrong, and in order to help myself—if no one else—to see the wood for the trees.
Two matters are being debated in connection with the amendment. The first is the role of the takeover panel, as opposed to that of the FSA, in relation to takeovers, especially where the question of market abuse arises. The second is market abuse—which the Economic Secretary sometimes calls an offence and sometimes a purely civil matter—and whether it should involve criminal intent on the part of the alleged market abuser.
I have read Government amendment (a) in lieu, and believe that it is all a question of the Government trying to retain control and the whip hand in all circumstances. I hope that they recognise that, in practice, the takeover panel organises takeovers exceptionally well, and that it is necessary for it be in command of events when it is supervising a takeover. The panel's ability to supervise and control takeovers has won worldwide admiration over the past 20 or more years. I think that the Government accept that. However, although they are not content to leave matters as they are, their amendment (a) in lieu is the nearest that they dare go towards doing just that.
The amendment suggests that the last word in a takeover should be returned to the FSA. However, subsection (2) of their proposed new clause states:But the Treasury's approval is required before any such provision may be included in the Authority's code.The Minister smiles quietly at that; I am sure that her officials have told her that the Treasury must have final control over such matters. However, the amendment also provides that the FSA may include in its code an element that makes it clear that the City code—drafted and controlled by the takeover panel—shall apply to takeovers.
Subsection (3) is another delightful and revealing provision. It states:If the Authority's code includes provisions of a kind authorised by subsection (1)—that is, if the authority's code states that the City takeover panel's code shall apply—the Authority must keep itself informed of the way in which the Panel on Takeovers and Mergers interprets and administers the relevant provisions of the City Code.Goody, goody. I am glad that the authority will be required, by statute, to tell itself that it should know what it is talking about before it exercises any administrative function.
I have never seen such a provision before, but perhaps the Economic Secretary will refer to a precedent. If she does not, perhaps we can pop this precedent into other Bills as the months go by—but I do not wish to be flippant. The key point is who should have the whip hand and real control in the organisation of takeovers. The sensible and simple option is proposed in Lords amendment No. 180, which states, fairly and squarely, that the takeover panel should have control. It leaves the matter at that.
If the Government amendment is accepted, I hope that the Government will promptly take the option that they have left open and hand back effective control to the City takeover panel. However, it would be better to stick to the amendment passed in the House of Lords.
96 The second question that we are debating is whether the offence of market abuse should require intent. The FSA is entitled to impose unlimited financial penalties for market abuse, so under any reasonable interpretation, it is bound to be construed, here and in Strasbourg, as a criminal offence. If that were recognised, the Bill would be a great deal simpler, as intent would be expected and required.
The FSA seems to consider that it is difficult to convict anyone of market abuse. In the same way, it has turned out to be pretty difficult to convict people of insider trading, which is a very common form of market abuse. However, the FSA does not need the powers contained in the Bill, as not many prosecutions in this area are to be expected.
The Bill establishes an offence—civil or criminal—of market abuse. It provides that the FSA, after consultation, will draw up a code to describe what constitutes market abuse. A penalty will be incurred by anyone who commits market abuse.
I hope that in most situations, if not all, the FSA would be able to draw up a description of the types of market abuse that it wished to avoid. Rightly, it does not consider that it would have too much difficulty with that. I do not see, either, that there should be too much difficulty in convicting any experienced operator in the market who deliberately abused the market. It would be much healthier if that were considered the normal approach to take, just as it is in other questions of trading standards.
The Bill deals with trading in financial services. The market in financial services is no different from the markets in washing machines or motor cars. We are talking about practices that would amount to abuse of that market. For instance, it is a classic abuse of the motor vehicle market to change a car's recorded mileage—to "clock" the car. Proving that abuse, too, requires proof that the person involved intended to carry out the abuse. It is usually easy to show intention, because when there are prosecutions, the people involved have usually done the same thing to scores or hundreds, if not thousands, of cars, and someone has picked them up.
In serious cases of market abuse, one would expect conduct that was obviously intended to mislead the market, and lead people up the garden path, on the part of an experienced operator. It would not be too difficult to get a jury to convict. In my long experience of the Serious Fraud Office, the one element in the system that seldom causes any problem is the jury. If the Financial Services Authority tells 12 good men and women and true about a piece of crookery carried out by Mr. X or company Y, putting it in straightforward terms, and the jury is shown the facts, they will be ready to convict.
The object of criminal offences, or offences in general, is not principally to convict the one or two people who are prosecuted but to act as a deterrent to the market and to set limits and boundaries. It is far more sensible to do that in a straightforward and up-front way than in a very complicated way.
I said that I would try not to let my speech get too complicated. However, in the provisions that follow clauses 109 and 110, which I think were probably introduced by the Government in another place, 97 with agreement, such an offence starts off being described as civil. To try and get it past Strasbourg, an elaborate system is set up whereby in order to impose a penalty, one has to apply to a tribunal or the courts. The Bill is trying to set up by the back door a court system that would be much better set up by the front door.
The Government want to get the Bill on to the statute book. However, they have got this bit of it wrong; they should have been straightforward. I think that it is a good idea for a code to set out what constitutes market abuse. If the Government had brought that about, it would not be too difficult to secure convictions—but the very elaborate system set out in these provisions will go wrong. I advise the Government not to go further down that route, and, in so far as it is open to them on the amendments under consideration tonight, to correct the position.
§ Mr. Flight
May I first briefly comment on the code and the panel? However, as my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) said, I intend essentially to speak about intent in relation to market abuse.
I wish to report to our Liberal Democrat friends in particular the comments of Patrick Drayton, the head of the takeover panel, on the amendment. He says that the panel does not feel that the revised amendment addresses any of the concerns that it expressed in relation to the original. Government amendment, and that subsection (3) does not address its concerns about the amendment raised in the note that it issued.
It remains the case, under the revised amendment, that the question of whether behaviour complies with the code and hence qualifies as a "safe harbour" would fall to be determined by the FSA in the first instance. That gives rise to—this is the whole problem—the potential for different interpretations of the takeover code, with messy consequences. It will cause uncertainty while the FSA decides whether it agrees with the panel. Disagreeing will have serious consequences for the reputation of each regulator. It may impact adversely on the panel's ability to interpret the takeover code flexibly, and parties may wish to seek clearance on interpretations of the code from the panel and the FSA.
The key problem is that the Government amendment does not sort out who is in charge of a bid situation. What weight would the FSA attach to an interpretation or practice of the panel that is notified to it under subsection (3)? What would happen if the FSA disagreed with an interpretation or practice?
Given the effort that the Government are putting into this, I assume that it is not their intent to accept the European Union directive on takeovers and mergers. Under the directive, the panel and the code would be things of the past, and mergers would be governed by statutory arrangements, with a great deal less flexibility.
I should like to have a last go at intent. My right hon. and learned Friend the Member for North-East Bedfordshire (Sir N. Lyell) made the key point that, sooner or later, whether from the EU or elsewhere, the courts will determine that the offence is criminal, and intent will have to be given voice. I repeat the earlier point that, although the Government have said that it is impossible to give intent a voice, there has been no problem in the United States with the Securities and 98 Exchange Commission defining intent in relation to market abuse and what to look for as evidence of intent. Indeed, there are some provisions for doing just that.
Our attempt, in the amendment, is limited to the single limb of market abuse, consisting of giving a false or misleading impression. This is our last opportunity to include the principle of intent clearly into the Bill. For an innocent man or woman to suffer merely because someone misinterpreted what they said must be wrong. Individuals may not realise that what they said could be misleading or misunderstood. This is particularly relevant in a bid situation, when either side may make announcements.
The Minister seemed to misinterpret our amendment, which relates to amendment No. 131 to clause 113. Under our amendment, even though a person has committed market abuse, the FSA cannot impose a penalty in certain circumstances. If those circumstances are satisfied, the FSA can neither impose a penalty on the abuser nor issue a public censure. That will also be the position in relation to the requirement to pay compensation. We welcome both those concessions, which resulted from an undertaking given to the Joint Committee, but we would be grateful if the Minister would explain what happens in relation to market abuse. For example, is it treated as a disciplinary offence for an authorised firm or approved person? If that is the position, we would like to know that the FSA cannot impose a penalty under the disciplinary procedures.
The amendment would extend the exemption from a fine in two different ways. The first is to provide that a penalty cannot be imposed where the person concerned has not intended to give a false or misleading impression. That follows the criteria for the criminal offence of making misleading statements, which come within section 47 of the Financial Services Act 1986 and which are replicated in the Bill.
If somebody did not intend to give anyone a false or misleading impression and cannot be blamed for failing to realise that he might, it is surely too much of a nanny state and too unfair to subject him to any fine. The Bill provides already that the FSA's policy on fining must take into account when deciding on the size of the penalty whether the behaviour was deliberate or reckless. In that sense, the Bill demonstrates—intention is the key point—that recklessness can be recognised when it occurs. It follows that it is plain wrong to make somebody liable to a fine if he could not be expected to say something different from that which he said.
The second part of the amendment, on which I think the Minister did not comment, relates to Chinese walls. It is straightforward. As everyone will be aware, the Chinese wall is a concept within one financial services group to keep entirely separate corporate finance activity and the goings on in that area. The Government indicated in Committee in this place that, if a person employed by a firm on one side of the Chinese wall were to create a misleading impression because he did not know what was known by employees of the firm on the other side of the wall, that firm could not be guilty of market abuse. That is an important point that needs to appear in the Bill. It should not be left to the FSA to make a ruling.
The Government have amended the Bill to provide expressly, in the context of the criminal offence of making a misleading statement, that firms should not be guilty if 99 they were using an effective Chinese wall. That should therefore be spelt out expressly in the context of market abuse. We proposed a similar amendment in another place, and Lord McIntosh expressed surprise that we wanted a Chinese wall defence for individuals. The amendment before us makes our position clear.
We have suggested also an anti-avoidance provision, which would mean that the firm could still be guilty of market abuse if an individual on one side of the wall who is in possession of information tells someone on the other side of the wall to engage in the relevant behaviour, even though he does not tell him the nature of the information. Due to the speed with which we have had to table amendments, we have omitted a couple of words, which are "or requested" in addition to the requirement to engage.
As appears from amendment No. 128, the Government have amended the clause in another place in a way that we consider to be inappropriate. As a result of previous pressure on our part, the Minister agreed to introduce a provision that behaviour does not amount to market abuse if it conforms with the FSA rules. That appeared in clause 109 before it was amended in another place. As amendment No. 128 makes clear, the safe harbour for compliance with FSA rules now applies only if the rule includes an expressed provision that "behaviour conforming" does not amount to market abuse.
That leaves at large the possibility that compliance with other FSA rules may be viewed as market abuse, and that firms could be in a difficult position if they do what the FSA rules tell them. They could still find themselves engaging in market abuse. I cannot believe that the Government intended that to be the position. When we last debated the issue, we felt that we had resolved it.
We understand that the Government are afraid that a comprehensive safe harbour will validate market abuse, which is not supposed to come within it. Let us say that the rules provide that there should be best execution—that is buying or selling shares at the best price—and the firm concerned complies with that obligation but does so in a trade that in itself amounts to market abuse.
In the Government's view, the safe harbour for behaviour conforming to FSA rules will mean that a firm cannot be guilty of market abuse in those circumstances. That is a wrong interpretation; the rules do not require insider dealing to have taken place, and it cannot therefore conform with them. Firms need to know that they will not run the risk of being accused of market abuse if they do what the FSA rulebook tells them. Therefore, amendment No. 128 must be disagreed to. Similar amendments apply to restitution and clause 489.
§ Dr. Vincent Cable (Twickenham)
Several references have been made to my colleagues in the other place. Indeed, we have people there who are experienced City practitioners and lawyers. I am neither, but I shall try to interpret their approach to the problem that was brought to their attention by the takeover panel, which, as has been generally observed, was concerned about the way in which its practices should be properly incorporated into the Bill, and by independent investors who have been effectively protected by the way in which it operated.
100 Two essential problems have been adequately described. The first is duplication and overlap between the market abuse investigations and the work of the takeover panel and its City code, and the other is fairness, which the right hon. Member for Wells (Mr. Heathcoat-Amory) explained at some length. The principle of fairness means that a company that has complied in good faith with the takeover code should not be subject separately to a market abuse investigation—the problem of double jeopardy.
Our understanding is that that problem has been adequately taken on board. The Government have accepted the thrust of the criticism from the Opposition and the City that a safe harbour should be explicit in the Bill for companies that comply with the City code. Therefore, the basic point about unfairness has been adequately addressed, but that leaves a residual problem: how to deal with conflicting judgments. In other words, there can be different interpretations of compliance with the City code and its overlap with market abuse. That problem constitutes a narrow area of disagreement that still remains.
The broad proposition that guided debate in the other place was summarised by Lord Donaldson—a Cross-Bench peer, not part of the party politics on the matter. He said:My Lords, I take it that it has been generally agreed that, as a general proposition, in principle the views of the FSA on these matters should prevail over those of the Takeover Panel.—[Official Report, House of Lords, 18 May 2000; Vol. 613, c. 406.]If there is a conflict of jurisdiction and a choice has to be made, the FSA should prevail. The amendments make that clear so that the uncertainty and ambiguity about which Conservative Members have expressed concern do not arise. However, in the view of peers and the takeover panel, the interests of the panel and its operation should be properly recognised.
Our understanding is that the reference to the panel's need to keep itself informed of how it interprets and administers the provisions is sufficient. That may be flabby language, as the right hon. Member for Wells said, but it represents an attempt to find a form of words in which the FSA's primacy is clearly accepted and in which the need to make cross-reference to the code is recognised. The peers' judgment was that there was no need to raise further objections because the fairness point had been accepted, the jurisdiction had been clearly defined and the work of the takeover panel had been incorporated. Therefore, 90 per cent. of the objections of those who were concerned with code and the takeover panel had been met.
§ Mr. Loughton
I have a few brief comments in support of Opposition amendment (b) in preference to the Government's ham -fisted effort amendment (a). I take it that the Liberals support the Government's amendment as they seem to have done some strange deal in another place.
The panel of takeovers and mergers, which has had a good track record for more than 32 years, is under attack from the Government. Can the Minister give me any example from those 32 years of when the panel would have done its job better, or of when it failed in its job because it did not have another authority—such as the FSA—constantly looking over its shoulder or because 101 such an authority was in competition with the regulation that the panel was trying to impose? If the Government get their way, there will be a severe case of too many cooks spoiling the broth.
It is not only Opposition Members who say that; the takeover panel itself expressed serious concern—even after the Government cobbled together their new amendments. My hon. Friend the Member for Arundel and South Downs (Mr. Flight) quoted Patrick Drayton, the director general, whose comments on the amendment are littered with warnings of the uncertainty that will be caused. Mr. Drayton warns that the UK system will become slow and over-regulated. The uncertainty will have serious consequences for the reputation of each regulator.
Those are serious words from an organisation that has acquitted itself exceedingly well in the conduct of takeovers and mergers in the City of London for the past 32 years. My right hon. and learned Friend the Member for North-East Bedfordshire (Sir N. Lyell) has an understanding of the legal implications of the measure that is infinitely superior to that of the rest of us—as the Minister found to her cost. As he pointed out, it comes down to a question of control. The Government are obsessed that the FSA should keep control in that matter and that they should keep control of the FSA, even though there is the prospect of a serious clash—potential double jeopardy, as my right hon. Friend the Member for Wells said earlier.
Why do the Government want to denigrate the success of the panel by causing confusion as to its future role? The panel has been successful because it offers speed, certainty and flexibility in takeovers. In Committee and subsequently, Government Members gave as a reason for not splitting the roles of the chairman and chief executive of the whole authority the need to act swiftly when there were potential cases of market abuse or other issues that required action. Some of the fastest-moving aspects of the financial services industry relate to the mergers of large firms in a highly cut-throat and competitive market. They are playing for large stakes; huge fees are involved for an enormous phalanx of professionals in the City and abroad.
The reason for the great success of the takeover panel is that it exists in a spirit of co-operation with the people it supposedly regulates; it relies on a huge reputation for integrity in the City of London. This is a case of "If it ain't broke, don't fix it." Would the takeover of Mannesmann by Vodafone or the merger under way between Glaxo and SmithKline Beecham have happened as smoothly—especially as there were other suitors on the horizon—if organisations other than the takeover panel had been involved? The panel has a clearly defined code of conduct for such matters, but what would have happened if another authority had had a look-in at the feast? We know that one large takeover—the merger between British Airways and American Airlines—was frustrated because of excessive regulation, especially in Europe and America. The whole deal was called off.
There is potential for extra confusion as a result of the Government's proposals to replace the Lords amendment. We desperately need to be able to take decisions quickly. Two decision-making bodies might come up with two different decisions. That must take longer than if just one were involved and it would materially affect the outcome of any takeover that may be taking place.
102 We also need to be assured that the FSA is capable of working within the tight time scales within which the takeover panel operates; it usually makes a ruling within 60 days. If the Government amendment is accepted, the panel's decisions will no longer be final. However, we need the certainty that any decision will be final. The amendment will deter co-operation between takeover partners and the takeover panel, because the partners might fear that they may be implicated in market abuse. There will be great confusion as to whose interpretation of the takeover code is conclusive. Will it be the interpretation of the takeover panel or that of the FSA?
My biggest fear has already been mentioned. There is a real threat that parties could deliberately drag the FSA into their attempt to frustrate a bid. They could use that as a spoiling tactic to sabotage a takeover. In the world of takeovers and mergers, an unwilling party who is the subject of a takeover bid has an incentive to do just that.
All that confusion will replace the well-versed certainty and successful track record of the takeover panel. Extra overlap, over-complication and uncertainty all amount to over-regulation. As we have found out during its passage through Parliament in the past two years, that is what the Bill is all about.
What are the compensating benefits of the additional powers that the FSA will have to stick its nose into takeover panel territory? Where has the panel gone wrong? What will be better as a result of the new role that is proposed? Our amendment (b) would not mean that all powers would be given exclusively to the takeover panel. The amendment contains the phrase:Except at the request of …If the panel deems it appropriate, it could call in the FSA at an early stage. The matter would be left to the discretion of the panel; our amendment would not give it powers wholeheartedly and irreversibly. The panel would co-operate with the FSA, but it needs to be clear who has the upper hand during a sensitive takeover bid.
As my right hon. and learned Friend the Member for North-East Bedfordshire pointed out, our amendment contrasts with the meaningless waffle in Government amendment (a) which states thatthe Authority must keep itself informed.What does that mean? It means that, if a large multinational company is trying to make a friendly merger with, or a hostile takeover of, another large company, certainty and clarity will go out of the window. Only by accepting amendment (b) can we restore the credibility, confidence and clarity that the City so desperately needs and that will be such an important part of its continued success.
§ Miss Melanie Johnson
I shall deal first with the takeover panel and return to the other points later.
The hon. Member for Twickenham (Dr. Cable) is no longer here as he has had to go home because of a family illness. However, he rightly sketched out the two issues involved and pointed out that the remaining problem was overlap. He explained what would happen if there were conflict. It is interesting that the right hon. and learned Member for North-East Bedfordshire (Sir N. Lyell) admitted that overlap would not often occur. The implication of his remarks was that it would, as we believe, occur rarely. It will certainly be a rare event, so 103 the question is who, ultimately, will determine an issue if there is any dispute about it which relates to market abuse. We say, as we have always said, that the FSA must take such decisions at it is the statutory regulator and the accountable body. People have recourse to definitions of market abuse in the Bill and to the independent tribunal. Those matters contribute to the provision on the work of the market abuse regime and stop it being something that it should not be.
§ 9 pm
§ Sir Nicholas Lyell
Perhaps I did not make myself clear, but the hon. Lady has taken one part of my speech and transferred it to another. I said that there would not be many prosecutions for market abuse, which is entirely different from the turmoil that can be created by players in the market seeking to frustrate takeovers by contrasting the views of the FSA with those of the takeover panel. I certainly did not say that that would not be frequent. My hon. Friends frequently make the important point that it is one of the dangers of the current position, about which the takeover panel rightly warns.
§ Miss Johnson
I apologise if I misunderstood the right hon. and learned Gentleman. None the less, we believe that such disputes will be rare. We can be persuaded to believe that, because so far there have been few problems with judicial review—even though there is currently an overlap between the regulatory regime and the takeover panel's code, and between that code and the criminal offences of insider dealing, market manipulation and misleading statements and practices.
Those overlaps could be used in the takeover process in the same way that Opposition Members and the takeover panel worry that they could be used in the market abuse regime. To date, people have not sought to frustrate takeover bids by such means. The only thing that will change after the introduction of the new market abuse regime is the potential degree of overlap, not its nature or form.
It is hard to see how involving the FSA will have any impact on the bid's timetable. That is the panel's main concern, but no one has given a plausible explanation of the way in which that might occur. The panel said that it is worried about injunctions for market abuse, but they would be aimed at the abuse, not the merits or otherwise of the bid, and would not interfere in the takeover process. Indeed, under current provisions there has been no interference in the overlap between the takeover panel and certain areas of legislation.
I therefore presume that no has ever pressed the FSA to seek injunctions under section 61 of the Financial Services Act 1986 alleging possible breach of the market manipulation offence. That course is open to people who are in the process of takeovers, but to my knowledge it has never been taken.
§ Mr. Loughton
Surely there could be real change to the timetable for a bid if it became known that the FSA was looking into market abuse regulations. Acceptances of a takeover would inevitably fall off so that, at the first acceptance date, the required number of acceptances would not be forthcoming and the bid would be pushed 104 further back. Indeed, a takeover could be suspended if it was surrounded by uncertainty caused by the FSA, which would surely affect the timetable.
§ Miss Johnson
The hon. Gentleman used the word "surely", but he did not give any reasons why that situation should arise. Concern has been expressed that the courts will force the FSA to intervene. However, it has a stated policy of not seeking to intervene, except in exceptional circumstances. As Lord McIntosh explained in another place, it is clear to us, as it is to the FSA, that it could adopt a policy of not intervening where it thought that it was being dragged in for tactical reasons. There is no reason for it not to take that course of action. It is clear that it could adopt a policy of leaving it to the panel to take action where it is satisfied that the panel can deal with the mischief adequately.
§ Mr. Heathcoat-Amory
Did not the hon. Lady listen to my points about that? She is just reading out her brief without responding to the points that we have made. The authority's self-denying ordinance will not work. If it has the ability to intervene, it is vulnerable to a judicial proceeding that requires it to intervene. It is no good the Minister simply saying that the FSA may decide that, in general, it will not intervene. Provided that it has the power to do so, it will have to examine the circumstances when it is requested to do so, and that will cause the delay and the possibility of litigation about which we have been complaining.
§ Miss Johnson
I do not know who is not listening to whom. I have just explained that although there is already a significant overlap in legislation which could cause people to interfere in the work of the takeover panel—as the right hon. Gentleman fears might occur—that course of action has not been taken. So, there is no reason to believe that it will be taken any more often in the case of market abuse than it has in matters that might be more vigorously pursued and which certainly count as more serious legally.
§ Miss Johnson
I expect that the FSA and the takeover panel will need to work closely together to sort out the practical arrangements. Indeed, they are in the process of doing so. Those practical arrangements need to be sorted out, but I expect very little or no change in the takeover panel's ability to work. As I said in my opening remarks, none of us differs in the objective. The only question is how best to achieve it given the problems lucidly set out by the hon. Member for Twickenham.
§ Mr. Tyrie
I was trying to draw out the Minister on the point made by my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory). He said that the threat of judicial review could generate a change in behaviour and that that would lead to a change in the number of takeovers that eventually go through. Is it the Minister's considered view that there will be no change in behaviour and in the number of takeovers as a consequence?
§ Miss Johnson
I think that I have already answered that point. The right hon. Member for Wells 105 (Mr. Heathcoat-Amory) touched on the Datafin case. I cannot recall his exact remarks, but that case obviously formed the basis of the position that the courts have adopted on judicial interference in takeovers. As a result, the courts may not look kindly on parties to a bid and others involved in the bid seeking to circumvent such an approach.
Again, I refer Opposition Members to the remarks of Lord Donaldson. He said that the amendment that we tabled in the Lords, which was very similar to the slightly enhanced one before us, was all that was necessary. He has had a considerable amount to do with these matters. If we are seeking legal justification for which way things are likely to go, Lord Donaldson's views are important and should be taken into account.
Questions were asked about the way in which safe harbour would work in relation to the existing takeover panel provision. Part of Lords amendment No. 180 states:the opinion of the panel" includes any revised opinion formed by the Panel as a result of any further considerationin conformity with the City codeas applied by the Panel and as amended from time to time by the Panel.Therefore, in respect of takeovers, the panel would be able to say what is not market abuse. The crux of the issue is the fuss that would have arisen had we said that market abuse is whatever the FSA says it is, and that, at least in respect of takeovers, the FSA can change its mind case by case, without consulting anyone or being accountable to anyone. Had we made such proposals, extreme concerns would, rightly, have been expressed in Committee, in the House of Commons and in another place.
There are practical problems with the Lords amendment which have not been properly thought through. In addition, there are significant differences between Lords amendment No. 180 and the Opposition amendment in lieu, and I am not clear which is the preferred approach. The two amendments would not have the same force. The Lords amendment makes no provision for a gatekeeper role, which arises in the amendment in lieu. I am not clear how the Opposition want to pursue their case.
The right hon. and learned Member for North-East Bedfordshire asked about the takeover panel and the precedents for subsection (3) of the Government's proposed new clause, and he said that the provision is unusual. I refer him to clauses 307 and 316 of the Bill as it stands, which relate to Lloyd's and the designated professional bodies.
The hon. Member for Arundel and South Downs (Mr. Flight) asked precisely what weight the FSA would attach to the panel's rulings. We expect the FSA to attach considerable weight to them. The panel's view will be highly persuasive in takeover matters. If disagreement arises, we believe that, as the statutory regulator in respect of market abuse, the FSA's view should be the determining view; however, we also believe that disagreement is most unlikely in such cases.
We have spent a long time debating the ingredients of a good market abuse regime—one in which people clearly understand the definition of market abuse, the means by 106 which that definition has been reached, what safe harbours exist in respect of market abuse and, therefore, how they can comply with the regime and so ensure that they do not engage in market abuse. Such provisions will be considerably undermined if we accept the Lords amendment or the Opposition's amendment in lieu, as to do so would leave many issues open to further debate. In addition, there would be not one but two bodies with effective responsibility in respect of market abuse; it is easy to foresee the consequences of that.
The right hon. and learned Member for North-East Bedfordshire also raised the issue of the European convention on human rights. The ECHR institutions regard the classification of provisions in national law as not conclusive in respect of our categorisation for convention purposes. A person who engages in market abuse will not commit an offence under UK law and will not have a criminal record. That is an important point to emphasise. Intent is not a necessary element of a criminal offence, as I am sure I do not need to point out to the right hon. and learned Gentleman.
The provisions of the Bill are compatible with the European convention on human rights. They were compatible with article 6 relating to civil matters before the Joint Committee deliberated, but the changes made after the Joint Committee will provide the additional safeguards required in the regime if it were found to be criminal. Those extra safeguards make it absolutely sure that people will have recourse to the elements that will make the provision compliant with the European convention.
A number of offences contain no element of intent. That point was raised by the right hon. Member for Wells. I refer to section 4 of the Financial Services Act 1986, which covers investment business without authorisation, about which a similar point may be made.
The key differences between us are small. It is worth while running through the differences between the Lords amendments and the Opposition amendments. The amendment carried in the Lords is concerned with safe harbours and allows the FSA to provide a safe harbour for behaviour when the panel thinks it is in conformity with the code, whereas the Opposition amendment before us would provide a gatekeeper to enforcement action and would prevent the FSA from taking any action during a takeover unless the panel requested it to do so.
I have outlined why I believe that the arrangements that we have put in place for the takeover panel are the rights ones. We accept that there is a difficulty to be dealt with. We believe that we have dealt with it properly and in a way that maintains the coherence and integrity of the market abuse regime while allowing the takeover panel to continue its work, as we expect it to do, in dealing rapidly and effectively with takeovers. That is what we believe will be the upshot of the support that I hope the House will give to our amendment.
§ Lords amendment agreed to.
§ Lords amendments Nos. 128 to 130 agreed to.