Financial Services (Market Abuse)

William Cash 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.

--- Later in debate ---

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

This is indeed an important debate. Market abuse, insider dealing and market manipulation are issues that do not get the airtime that they deserve. It is important that white collar crime and abuses of what we might call white collar financial services activities are properly attended to. We know that in recent years the regulators, or the relevant authorities, have sometimes struggled properly to prosecute or pursue issues where allegations have been made and there are difficulties in pinning down the right level of evidence. This is an important opportunity to see how, when the European Union proposes new regulations to tighten up some of the rules, the UK Government approaches such questions. I was interested to see in the Financial Services Authority’s recent annual report the quite shocking statistics on potential market manipulation that still takes place and often goes uncaptured.

The statistic that leapt out at me concerned something called APPM monitoring—I know that hon. Members enjoy their acronyms—or abnormal pre-announcement price movement monitoring. Apparently, such movements are still at a level of more than 20% in respect of announcements of mergers or acquisitions. If we look back at share transactions and other dealings, we can see that there are palpably instances when information has leaked out and people have taken advantage of information asymmetry. Such market abuses are notoriously difficult to pin down and prosecute, but they are unfortunately still a feature of many of our markets and financial services and we need to do a great deal to bear down on them.

The original market abuse directive was adopted back in 2003, but the new set of regulations proposes to try to tighten up the arrangements in a number of areas. There are gaps in the new markets that have emerged, for example, particularly in commodities trading and derivatives trading. I shall talk about those in a moment. There are problems with regulatory enforcement, where outdated arrangements are in place. There is a lack of legal certainty, particularly when issues cross nation state boundaries, and a risk of regulatory arbitrage. I was not surprised, therefore, that that was one area in which the Commission made proposals.

[Mr Cash]

In the context of acronyms, I wanted to draw the hon. Gentleman’s attention to the fact that the market abuse directive is, of course, MAD.

[Chris Leslie]

I am grateful to the hon. Gentleman for showing that sanity is sometimes tested in these debates. I should also pay tribute to his work and to that of the European Scrutiny Committee, without which many of these important debates would never materialise on the Floor of the House—even if this debate is in the middle of the football, possibly with less exposure and fewer viewers watching on BBC Parliament than might normally do so. I am sure that there will be a rerun of these proceedings and people will be able to watch them at their leisure.

What is different about the market abuse regulations? We know that a parallel criminal sanctions directive is being discussed, although the Government’s position is far from clear. They are almost saying that they will not opt in at this stage, but might change their mind later depending on a number of rather strange factors. There are important reasons why we need to tighten up the criminal offences regime for market manipulation and for insider dealing, and those important steps must be taken. I agree with some of the proposals in the market abuse regulations that will broaden the definition of insider information to cover information that is not generally available for reasons of transaction opacity.

I am particularly keen to see improvements in the market abuse regulations in areas such as commodities and derivatives trading, which were not as large and significant as they are now. About 15 years ago, some £300 million of commodities trading took place in the UK, whereas that has now increased by almost 1,000%. Billions and billions of pounds are now moving from investment-based activity to speculation-based activity. These issues are serious. One might think about speculation in metals and gold and wonder where the harm is, as that is the nature of the world we are in today. However, speculation in wheat, cocoa and other basic food and commodity substances that can have a bearing on the nutrition of many millions of people in developing countries is an issue that matters in the real world.

If there is market abuse and manipulation, it can have a serious impact on real lives. That is why it is important that when we see so many giant corporations with very deep pockets so often being accused of distorting markets and purchasing whole monthly future contracts, potentially hurting consumers in poorer countries, we should take the opportunity to ask whether we have the right market abuse arrangements in place and whether we could make changes. If companies were cornering the market in equities or listed shares it would trigger regulatory action, but when large corporations corner the market in commodities it does not. That is a bizarre anomaly and we need to modernise the arrangements.

We need to see other important changes in the market abuse regulations. How do we identify insider dealing and market manipulation? What are the rules about information being delayed before public announcements? After the financial crisis, there were serious lessons to be learned about revealing information about abuses that might have a bearing on systemically important transactions and organisations. There are some proposals in the arrangements to deal with these issues. These are very serious questions that need to be addressed.

There is a parallel proposal for a criminal sanctions directive that defines the two offences of insider dealing and market manipulation, which should be regarded by member states as criminal offences if committed intentionally. The intention is to introduce a minimum level of harmonisation for criminal sanctions and, in particular, to provide that the competent authority should have the power to impose administrative pecuniary sanctions of up to twice the amount of profit gained or lost.

There is virtue in the criminal sanctions directive and the market abuse regulations, but we are now in this rather byzantine legislative Committee treacle trying to move these issues forward. The Minister may well be personally involved in these areas—I do not know to what extent—but if hon. Members care to take the time to look at the voluminous documentation associated with this debate they will find some interesting correspondence between the Minister and the European Scrutiny Committee. The Minister will have to forgive me if I paraphrase him incorrectly, but in that correspondence he says that the Council discussions have been somewhat fractured—I think that was the word he used—as a result of the fact that the criminal sanctions directive is taken through the Justice and Home Affairs Council whereas the market abuse regulations are taken through ECOFIN.

We then have the added little twist that the Cypriot presidency is taking over on 1 July an issue that has not been resolved and is still in abeyance. The Justice Secretary attended the Justice and Home Affairs Council at the end of April, which kept open—this is where we get into Eurospeak—the “horizontal articles” for a “partial general approach”. I know that is something that Members will be familiar with. In other words, those involved were saying, “Nothing is really going to change on this particular issue. We are just going to tread water for quite some time.”

Then we have the crazy situation in which the market abuse regulation grinds slowly forward while in a parallel universe the criminal sanctions directive enters an entirely different Council Committee. One almost, but not quite, feels sorry for the Minister trying to balance or juggle this particularly tricky set of negotiations, but rather than waiting, reacting and observing the process, he needs to grip this issue by the scruff of the neck and move it forward.

Ultimately, this is the main question I want to ask him: what is he doing to move matters forward? Can he give a proper explanation of where he stands on the substantive elements of the market abuse regulations and of the criminal sanctions directive in particular? He says that it is difficult to assess the scope and implications so far because it depends on the review of the markets in financial instruments directive and various other factors. Difficult or not, he needs to set out the Government’s position on the substantive policy issues. That is what I expected him to do this evening. The issues are not rocket science. He should set out his position. Even if it is a negotiating position, I would like to know the Government’s starting point in this set of discussions. This is a poor way of making decisions.

Clear leadership is not being shown in sorting out the matter and getting a grip of the question. It is necessary to improve and modernise the regulations on market abuse because modern-day financial markets have left behind the old regime. I understand the Commission’s attempts to get some coherence and harmony on market abuse issues and to deal with the regulatory arbitrage issues that arise from time to time, but the Government must answer a number of questions. Why do they feel that they are still unable to set out their position on the substantive policy issues? When does the Minister expect some resolution of the issues? In particular, who does he think should be moving matters forward? Is he just a bystander, waiting for others to do that—the Cypriot presidency or someone else? When will he, as a Minister, show a lead, tackling market abuse, dealing with insider trading arrangements and ironing out some of these important questions? He is too relaxed and a little complacent on these questions. He needs to take charge and grasp the issue.

--- Later in debate ---

[Mr William Cash (Stone) (Con)]

I thoroughly endorse almost everything my hon. Friend the Member for North East Somerset (Jacob Rees-Mogg) has said, but I would go somewhat further, because I have a complete aversion to the whole concept of the transfer of our jurisdiction over matters affecting the City of London. I have said that for many years now. In fact, when the de Larosière report was published I wrote in the Financial Times that I saw it as a ticking time bomb, or words to that effect, and that if matters were allowed to continue we would find ourselves mopped up by European jurisdiction.

Following the statement my hon. Friend the Financial Secretary made to the House only last week, I asked a simple question: in the light of the vast amount of commitment and time that has been spent transferring jurisdiction over matters affecting the City to the European Union, how on earth will we be able to protect the City, the related single market aspects, including financial services, and matters of the kind now before the House in the market abuse directive when they are governed by qualified majority vote? Those are the realities.

The truth is that we have made the most massive strategic mistake in relation to matters of this kind, which are governed by qualified majority vote, under directives such as the MAD directive otherwise known as the market abuse directive, which was bitterly opposed by the City of London in the early part of this century. I have to say that events then turned for the worse and those proposals have now been overtaken.

Before I turn to the specifics of the matter before us, I ought to mention that the veto on the fiscal compact, which the European Scrutiny Committee said was effectively unlawful on the evidence we received, has not been followed up. The Government and the Attorney-General are clearly of the view that the agreement on the fiscal compact between the 25 was unlawful, but in reality nothing has been done. We have just had a reply from the Government to our report on the question, and on which we held an inquiry, but in no way do they continue to do anything to put to the test the illegality that lies at the heart of the fiscal compact. We are therefore still in the position whereby the Government regard the fiscal compact of the 25 as being a matter of irregularity, but they do not do anything about it.

That is a dangerous situation, and it has gone beyond that—to the fiscal union itself being promoted and advocated by the Government. That will make things even worse, with an even deeper black hole, as I said on television yesterday. The banking union proposals, which are also now being pressed upon us, will come to fruition around the time of the summit on 28 June, and I fear that we are being taken down an extremely dangerous route.

The market abuse directive before us is one example of that tendency to legislate continuously on financial services matters, and my hon. Friend the Member for North East Somerset is quite right that we could legislate for ourselves on them. Bad markets, as I have said in articles I have written in the past, are bad business, and we have at our disposal in this Parliament every means to pass legislation on our own account, without necessarily or by any means having to leave it to the European Union. I would be going beyond the remit of this debate if I went into that in any further detail, but I repudiate the idea that we cannot legislate for ourselves on such matters.

I am by no means convinced that the Government intend to make it entirely clear whether or not we will opt in, and that is the problem with the opt-in. I think my hon. Friend is of the opinion that the Government have decided that we will not. I am not sure, but I thought he said that.

[Jacob Rees-Mogg]

I am grateful to my hon. Friend for giving way. No, that is not what I think. I think that the Government have not opted in, technically, at the moment, but hope to do so in future, and I think that will be a great mistake.

[Mr Cash]

In that case we are, as so often, ad idem and in agreement, and I am glad to hear that confirmation from my hon. Friend.

This whole business has one way or another been developing over the past 12 years—and before. It has been before the European Scrutiny Committee, and we have recommended it for debate, but it has been overtaken by further developments, particularly since the financial crash, which we are now in. I am extremely doubtful about whether market abuse in itself—important as the subject matter is, and something that needs to be dealt with—is in any way a contributor to the financial mess that the European Union is in.

We are in an economic crisis, we are in a black hole, and we should have a convention at which all those matters, including directives of this kind, are put before the member states with their cards on the table. We should say unequivocally that we want a different kind of Europe and put it to them, and the negotiating position that we adopt, those red lines, should then be put to the British people. We should have a referendum on those matters to make it absolutely clear that the direction of this over-legislated, over-burdensome European jurisdiction is doing no good whatsoever to the free markets—

[Madam Deputy Speaker (Dawn Primarolo)]

Order. The hon. Gentleman took some time to set his intended comments in context, which I allowed, but I now require him to address the business before us. We do not need any more general scene-setting on his attitudes towards the European Union, so perhaps he could come back to the business before the House.

[Mr Cash]

I was referring to opt-ins, which are very much matters before us at this juncture. I am saying that—

[Madam Deputy Speaker]

Order. It is not for the hon. Gentleman to disagree with me. He thought that he was covering the subject by making general points about opt-ins, but I would like him now to refer to the documents before the House. He has been speaking for some time, and he should bring the attention of the House to his points on these documents.

[Mr Cash]

Well, to put it simply, the Committee is concerned that the Government might opt into the draft criminal sanctions directive once it is adopted. There would be a debate on that matter if they decided to do so. I do not think that we should opt in. That matter is part of the broader landscape and specific issues that are before the House.

The question of what the draft directive means by the word “intentionally” in relation to market abuse raises some very important legal issues. Then there is the question of whether the draft directive would apply automatically if there were proof of intent or whether there would be discretion to apply an administrative penalty rather than a criminal one. Those are all matters on which we could legislate on our own account if we wished to do so. I make no apology for repeating that point.

A further point concerns the practical application of the proposed new definition of “inside information”, which involves the whole issue of insider dealing. The trouble is—I say this with respect to Madam Deputy Speaker—that definitions in relation to European legislation raise the question of how this matter will be adjudicated on by the European Court of Justice. We have our own means and opportunities to pass legislation in this House that will define these questions.

[Jacob Rees-Mogg]

My hon. Friend has come to the absolute crux of the matter. Once we opt into something, it is then justiciable by the European Justice of Justice. That brings the ECJ into a role regarding our criminal law, and that is a very substantial step for the Government to be taking.

[Mr Cash]

I am deeply grateful for the support of my hon. Friend, who is also a member of the European Scrutiny Committee and who has very considerable expertise in his own right. He has developed an acute sense of British and United Kingdom interests in relation to matters of great importance to the City of London.

A further point is that there is no useful recital in the directive, as there normally would be, to indicate the parameters of the draft regulations. We are deeply concerned about that. There is no certainty that we will opt in, but that does not alter the fact that there is grave concern that we will eventually end up being told that we will do so. If that is what happens, I, for one, will undoubtedly vote against it.

The directive aims to prevent insider dealing and the misuse of financially sensitive market information in the financial markets. That cannot be separated from the broader landscape of the manner in which the European Union is interfering in matters in the United Kingdom that affect the City of London. The City of London represents some 20% of our gross domestic product. I entirely take on board the point made by my hon. Friend the Member for North East Somerset that we are at the top of the league in global financial market activity. I believe that a serious attempt is being made by other members of the European Union—with Frankfurt at No. 13—to move further up the positions. That will be done partly through regulatory collusion and the use of qualified majority voting, as Professor Roland Vaubel has indicated in his general concerns about the manner in which qualified majority voting and directives are dealt with.

The intervention of the financial crisis in 2007 delayed the implementation of the original provisions and prompted a rethink. Whether that rethink is beneficial is another issue. The new EU regulation that will replace the original directive, which is proposed alongside the new directive, provides for minimum harmonised standards of enforcement and sanction throughout the community. Although the UK Government are broadly supportive of the measures, there are procedural uncertainties, notably in the problem of aligning the three interlocking legislative measures at the same time. That has led the Government to conclude that the UK should not yet opt into the directive. I am interested to hear whether the Minister has a view on the words “not yet”. I do not think that he will commit himself at this stage, but there will be considerable difficulty and trouble for the City of London if we do opt in.

I do not believe that the directives are in the interests of the United Kingdom. We can legislate on these matters ourselves. There is much talk of fiscal union, banking union, supervisory authorities and the wholesale transfer of our jurisdiction over the City of London, which means so much to our gross domestic product and to our ability to compete internationally. That is being undermined by proposals of this kind, whether or not they are brought into effect.