Financial Services (Market Abuse)

Mark Hoban Excerpts

Tuesday 19th June 2012 Commons Chamber

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

I beg to move,

That this House takes note of European Union Documents No. 16010/11 and Addenda 1 and 2, relating to a Draft Regulation on insider dealing and market manipulation (market abuse), No. 16000/11 and Addenda 1 and 2, relating to the Draft Directive on criminal sanctions for insider dealing and market manipulation, and No. 8253/12, relating to the European Central Bank Opinion on market abuse legislation; recognises that an efficient financial market that aids economic growth requires market integrity and public confidence; welcomes the UK’s leading role in combating market abuse; and supports the Government’s decision not to opt-in to the Criminal Sanctions Directive until it is clear that related provisions within the Markets in Financial Instruments Directive Review and the Market Abuse Regulation are further progressed in order to enable the Government to evaluate the implications for the UK, and ensure high standards in tackling market abuse are maintained.

I welcome the opportunity to open the debate. It is important, before I deal with the details of the motion, for me to reinforce our commitment to ensuring that there are efficient financial markets which assist economic growth. If markets are to be efficient, however, they must command public confidence and demonstrate their integrity. Central to that is the sense that those who are trading in shares, whether they are retail customers or our largest fund managers, are doing so in possession of, or with access to, the same information. We must also ensure that markets are not manipulated against the interests of those who are trading in shares.

It is the recognition of the importance of markets that have integrity and command public confidence that has led to the UK’s leading role in tackling the problems of market abuse. We established our own civil market abuse regime in 2000, ahead of the EU market abuse directive of 2003. The Financial Services Authority has made considerable strides in recent years since launching its “credible deterrence” strategy for market abuse in 2008, particularly as a result of the financial crisis. Our no-nonsense approach to market abuse is now a regular feature of national and international news. The FSA levies increasingly large penalties, and exercises its criminal powers. Abuse of this sort will not be tolerated. In 2003, the FSA handed down fines relating to market abuse totalling just over £1 million; halfway through this year, the figure is £8.9 million. The FSA is bringing the full weight of the law against perpetrators of abuse, and that includes the £7.2 million imposed in the Punch Taverns case.

The hard-line stance that we have taken on market abuse is one of the reasons London flourishes as a global financial centre. Investors and other market participants value the cleanliness of our market, which is why they use London to carry out their business. Market abuse is a blight on financial markets. It destroys confidence. It puts typically sophisticated financial actors at an unfair advantage over ordinary investors and savers. Those who manipulate the markets or abuse their position to trade on inside information undermine the efficiency and safety of the financial marketplace.

[Mr William Cash (Stone) (Con)]

I am sure my hon. Friend is in no way trying to divert attention away from the fact that jurisdiction is now, effectively, with the European Court of Justice. I am not going to ask him to be precise, but does he not agree that for the purposes of interpreting financial services regulations within the framework of the supervisory authorities that have been created, all these matters are ultimately matters of European law as applied by our Parliament so long as it continues voluntarily to accept them?

[Mr Hoban]

I am not sure I agree with my hon. Friend. I do not want to be diverted along that path, but I point out to him that, as he will know as Chairman of the European Scrutiny Committee that put forward this motion for debate on the Floor of the House, the criminal sanctions directive acts as a minimum harmonisation directive, and this House can impose more stringent penalties than the minimum required.

[Mr Cash]

I did not talk about the extent of the criminal sanctions. I talked about the question of general jurisdiction, and I do not think that there can be any dispute about what I said.

[Mr Hoban]

My hon. Friend missed out on the opportunity that I and the hon. Member for Nottingham East (Chris Leslie) had of serving on the Financial Services Bill Committee. We spent a considerable amount of time developing the details of jurisdiction in the UK, through giving powers to the Financial Services Authority. There are areas where rules are made at a European level, but, equally, there are areas where rules are made in the UK, and it is not appropriate to say, “There’s only European law.” There is a whole raft of UK law on these matters.

To date, the UK has used the flexibility of the minimum harmonisation EU directive to create a stronger standard, applying the regime to more venues and having stronger rules. Now we have the opportunity to have a better framework applied across the whole of the EU, and that is in our interests.

It is clear that market abuse can take place beyond our borders and yet still affect securities traded within our borders. For that reason, the Government support the Commission’s objective to revise the EU market abuse framework. Improving the strength and consistency of the framework is vital to investor confidence.

There are challenges and opportunities in shifting to a regulation. There are challenges if the UK’s own practices are compromised. There are opportunities from having a more consistent and stronger EU regime and potentially reducing the cost and complexity of compliance for market actors.

Clearly, our prime objective is to ensure that the powers currently available to competent authorities are not weakened, which would damage the UK and the creditable work of the FSA. Secondly, we wish to deliver a robust framework for tackling market abuse within Europe.

Interest in changes to the market abuse framework extends beyond this House. In March, the European Central Bank published its opinion of the market abuse proposals. Its commentary focused largely on the new provision in the regulation for competent authorities to be able to delay the publication of inside information with systemic consequences. The Government echo the ECB’s support for seeking the legal framework to be improved in this respect. This is a key provision for the Bank of England and the FSA following the financial crisis and the difficulties experienced surrounding the disclosure of emergency lending assistance.

I want to outline briefly the EU market abuse package proposed by the Commission. In October 2011, the Commission published a regulation and an accompanying directive on criminal sanctions for market abuse. Those proposals together update the framework formerly established by the market abuse directive 2003, including proposing EU harmonisation of criminal law for market abuse for the first time. The legal basis for the criminal directive is article 83(2) of the treaty on the functioning of the European Union. This is the first use of the relevant provision since the Lisbon treaty was agreed. It means that the directive is subject to a justice and home affairs opt-in. The UK and Ireland have discretion on whether it should apply to them. Denmark is automatically opted out. In light of the fact that this was the first use of the article, it was important that the Government carefully contemplated the issues and came to the appropriate decision.

The European Scrutiny Committee also considered the use of the opt-in. In its 52nd report of the last Session, the Committee noted that the full potential impact for the UK of the draft directive will become certain only once negotiations are concluded. The European Affairs Committee concurred with that opinion, but we are, of course, bound by the regulation.

The Government’s decision not to opt in at this time is a reflection of the sequencing of the directive compared with related legislative proposals. The proposed directive is entirely dependent on the outcome of the market abuse regulation, and the markets in financial instruments directive, which are both in relatively early stages of negotiation. The Government believe that it is very challenging to assess the implications, scope and way in which the criminal directive may develop, given the broader uncertainty of the market abuse framework, which itself is simultaneously subject to a major review.

The key issue here is ensuring that the interaction between the criminal and administrative regimes is clear and workable for all member states. Above all, we need to address the flexibility of when to apply a criminal penalty and when an administrative penalty needs to be retained within member states’ national systems. That must be determined on a case-by-case basis, in the light of the evidence of an individual case. In addition, there was uncertainty about whether the powers of competent authorities would be weakened in respect of accessing telephone records in the regulation and, potentially, the accompanying criminal directive.

It is essential that competent authorities have the flexibility to determine the appropriate type of penalty—whether it is criminal or administrative—and the powers available to them to investigate suspected cases of market abuse. The Council has itself recognised the difficulties involved in trying to complete negotiations on the criminal directive, with linked proposals being negotiated simultaneously. Therefore, the presidency decided to pause progress on the directive, in order to wait for policy progress to be made in the market abuse regulation.

However, I note that although the Government have decided not to opt in at this stage, we have continued to participate fully in negotiations. It is important that we use our expertise in combating market abuse, including the fact that the UK already covers market abuse in its criminal law today. If we are able to do that, and further progress the related proposals in the market abuse regulation and the markets in financial instruments directive in a manner that meets our objectives, we may consider opting in to the criminal directive. We can assess this only when the trio of proposals are properly progressed.

[Chris Leslie (Nottingham East) (Lab/Co-op)]

The Minister is giving a lucid and paced description of Government policy. Let me cut to the chase. It is important that he has the opportunity to hear my question. Are we as a nation—are the Government—opting in to the criminal sanctions market abuse directive, or is he proposing to opt out of it? Which is it?

[Mr Hoban]

At the moment, let me clarify the position by saying that we have not opted in. As I was saying, we need to see how discussions on three linked legislative proposals work through before deciding whether or not to opt in, but our priority is to ensure that we have a proper market abuse regime in place—one that maintains the highest standards and ensures that the Financial Services Authority, which is responsible for this area of policy, is enabled to use its powers fully to ensure that there is confidence in the integrity of markets.

So I can reassure the House that this Government will not allow legislation on market abuse to be insufficient, and we would not opt into a directive that would undermine the FSA’s current powers in this area. I welcome the opportunity to debate this issue tonight, including the opt-in decision. This is an important issue, and it is right that hon. Members have an opportunity to debate it.

--- Later in debate ---

[Mr Hoban]

I will respond briefly to the hon. Member for Nottingham East (Chris Leslie) and to my hon. Friends the Members for Stone (Mr Cash) and for North East Somerset (Jacob Rees-Mogg).

The challenge that we face is that there are three interlocking legislative initiatives: the markets in financial instruments directive, which provides the scope of markets; the market abuse regulation, which looks at broadening the scope and is intimately linked with MiFID; and the criminal sanctions directive. Because the UK has a world-leading regime on market abuse, has historically taken a tough line and has a range of sanctions in place that few countries in the European Union can match, we are shaping the debate in this area and playing a major role in getting it right. We are trying to ensure that we maintain the high standards that the Financial Services Authority has in its investigatory powers and its sanctions.

The progress on these matters is not as quick as we would like, but that is partly because there are three interlocking initiatives. It is not quite the case that one moves at the speed of the slowest ship in the convoy on these things, but there is a challenge. The hon. Member for Nottingham East said that the matter is being passed across to the Cypriot presidency. A whole raft of things are being passed across to the Cypriot presidency. There is nothing new in stuff passing from one presidency to another. [Interruption.] The hon. Member for Nottingham East asks from a sedentary position when we will get some movement. Discussions on MiFID are proceeding and it is one of the priorities of the Cypriot presidency. That will perhaps form the keystone and get the rest of it happening.

We are reserving our position on the opt-in. It is vital to London’s continued success as the world’s leading financial centre that we have the right measures in place on market abuse. That is why we have not opted in.

[Jacob Rees-Mogg]

Will the Minister give way?

[Mr Hoban]

Very briefly.

[Jacob Rees-Mogg]

I am extremely grateful to the Minister. I have just one question. What advantage is there to opting in if the rest of Europe is going to do it anyway and we already have something better in place?

[Mr Hoban]

We have an interest in ensuring that criminal sanctions are applied across Europe if we think the directive is appropriate, because shares and instruments that are traded within our borders can be affected by market manipulation outside our borders. It is therefore important that we have a proper regime in place, but let us leave the decision whether to opt in until the three interlocking pieces that I mentioned come closer together. Then I am sure the European Scrutiny Committee will bring us back to the topic once again.

Question put and agreed to.

Resolved,

That this House takes note of European Union Documents No. 16010/11 and Addenda 1 and 2, relating to a Draft Regulation on insider dealing and market manipulation (market abuse), No. 16000/11 and Addenda 1 and 2, relating to the Draft Directive on criminal sanctions for insider dealing and market manipulation, and No. 8253/12, relating to the European Central Bank Opinion on market abuse legislation; recognises that an efficient financial market that aids economic growth requires market integrity and public confidence; welcomes the UK’s leading role in combating market abuse; and supports the Government’s decision not to opt-in to the Criminal Sanctions Directive until it is clear that related provisions within the Markets in Financial Instruments Directive Review and the Market Abuse Regulation are further progressed in order to enable the Government to evaluate the implications for the UK, and ensure high standards in tackling market abuse are maintained.