HOUSE OF COMMONS
Sixth Standing Committee on Delegated Legislation
DRAFT INSIDER DEALING (SECURITIES AND REGULATED MARKETS) (AMENDMENT) ORDER 1996
Wednesday 22 May 1996
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The Committee consisted of the following Members:
Chairman: MR. JOHN MCWILLIAM
Butler, Mr. Peter (Milton Keynes, North-East)
Church, Ms Judith (Dagenham)
Cook, Mr. Frank (Stockton, North)
Corbyn, Mr. Jeremy (Islington)
Darling, Mr. Alistair (Edinburgh, Central)
Forman, Mr. Nigel (Carshalton and Wallington)
Fox, Dr. Liam (Lord Commissioner to the Treasury)
Fox, Sir Marcus (Shipley)
Howell, Sir Ralph (North Norfolk)
Jenkins, Mr. Brian (South-East Staffordshire)
Jones, Mr. Nigel (Cheltenham)
Knight, Mrs. Angela (Economic Secretary to the Treasury)
MacShane, Mr. Denis (Rotherham)
Marlow, Mr. Tony (Northampton, North)
O'Brien, Mr. Mike (North Warwickshire)
Riddick, Mr. Graham (Colne Valley)
Timms, Mr. Stephen (Newham, North-East)
Trend, Mr. Michael (Windsor and Maidenhead)
Wardle, Mr. Charles (Bexhill and Battle)
Mr. Hennessy, Committee Clerk.2 3 Sixth Standing Committee on Delegated Legislation Wednedsay 22 May 1996
[MR. JOHN MCWILLIAM in the Chair]
The Economic Secretary to the Treasury (Mrs. Angela Knight): I beg to move, That the Committee has considered the draft Insider Dealing (Securities and Regulated Markets) (Amendment) Order 1996. The order amends article 10 of, and the schedule to, the Insider Dealing (Securities and Regulated Markets) Order 1994. Article 10 of that order identifies the regulated markets that are regulated in the United Kingdom for the purposes of the territorial scope of the offence of insider dealing. The schedule to the 1994 order identifies which markets are regulated markets for the purposes of insider dealing. The list of regulated markets set out in the existing order is now out of date. It needs to be revised to take account of three new exchanges—the United Kingdom's Tradepoint Financial Networks plc, known commonly as Tradepoint, France's Nouveau Marché and the Iceland stock exchange—of the separation of the London and Irish stock exchanges, and of the closure of trading facilities in the Bordeaux, Ghent, Liege, Lille, Marseille, Nancy and Nantes stock exchanges.
Mr. Mike O'Brien (North Warwickshire): The Opposition welcome the order. It is important to ensure that such legislation is kept up to date. We welcome the widening of the scope for catching insider dealers. It is important for the remit of the legislation to cover all the various institutions, and the order will enable us to do that more effectively. Is there not a case for making insider dealing a civil matter, in the process of widening the legislation to cover more institutions? Fewer than 25 people have been convicted of insider dealing as a criminal offence, yet anyone with a cursory knowledge of share price movements knows that there are frequently suspicious price movements before announcements. I am concerned about the inadequacy of current insider dealing laws and about the lack of effective action. The burden of proof in criminal cases is, rightly, that guilt should be beyond reasonable doubt, which means that such cases are hard to prove. That is especially so in insider dealing cases, in which the shifty characters involved will do their best to cover their tracks. In civil cases the burden of proof depends on the balance of probability—a lower standard. 4 Overwhelming circumstantial evidence of irregular share dealing, which might not meet the burden of criminal proof, might meet the civil requirement. It is time to consider a civil liability for insider dealing, either instead of our parallel to the criminal offence. Obviously the activity would not then result in a conviction, and would not carry the penalties in the criminal legislation, but with sufficient regulatory sanctions it could enable an organisation such as the Securities and Investments Board much more effectively to tackle a problem that hon. Members of all parties would want to be dealt with as effectively as possible. There is widespread concern about the failure of the Serious Fraud Office to deal with the criminal matters that have come before it—there have been fewer than 25 convictions—and it is time for us to review the whole subject rather than just widening the scope of the present 6DL Insider dealing legislation. We should go beyond that, and consider whether there are ways of making the legislation much more effective by including a civil method of tackling insider dealing. We might then need to reform the regulatory system and give the Securities and investments Board powers to enforce the civil remedy. We welcome the order and the Government's proposals to amend the 1994 order, but the Government should also take our representations on board. There is a need to go further than we have before to make sure that insider dealing is properly addressed.
Mrs. Angela Knight: The hon. Member for North Warwickshire (Mr. O'Brien) made some pertinent points about the concerns many people have about insider dealing. One of the best ways to ensure that insider dealing does not take place is to have a good system of detection. As the hon. Gentleman will know, the London stock exchange recently upgraded its detection systems with new artificial intelligence equipment. Under that method, irregularities—or anything that looks like a possible irregularity— are shown up quickly. As with any prevention system, its very existence is the biggest deterrent to people who might take part in insider dealing. The hon. Gentleman asked how best civil and criminal law can be used. The low level of convictions under current insider dealing laws does not mean that the system is not working. Civil remedies are available already when the self-regulatory organisation rules have been broken. Those remedies can include damages for someone who has suffered loss and who would be able to bring a civil action against the insider dealer. The burden of proof may be less in civil or regulators's disciplinary proceedings, but proof and evidence are still required. The ability to get proof and evidence is sometimes the real difficulty. The hon. Gentleman will know that insider dealers can be very clever. That is why a good detection system is the principal defence of the system. 5 We cannot assume that civil proceedings are an easy way to bump up the number of successful insider dealing convictions. The number of convictions is not necessarily the right test. Most people do not want to be criminals, and many will be deterred by a clear statement in criminal law of society's disapproval of their conduct. If the stock exchange detects something that warrants investigation beyond what the exchange can do, it would refer the matter to the Department of Trade and Industry. If the DTI then concluded that there was not enough evidence for a criminal prosecution, it could disclose the evidence to regulators to assist their proceedings. Rightly, there is a criminal sanction; but civil actions can also be brought against the very serious offence of insider dealing.
Mr. Brian Jenkins (South-East Staffordshire): I have a quick question to which, unusually, I do not know the answer.
Mr. Peter Butler (Milton Keynes, North-East): I should not ask it then.
Mr. Jenkins: I always ask, just for information. The order contains a list of named stock exchanges. Does that mean that if the "London Stock Exchange Ltd" changed its name tomorrow to, say, the "European Stock Exchange Ltd", it would fall outside the order? Why is there no generic term for exchanges with criteria that encompass all possibilities? Then we would not have to go through the legal necessity of altering the names in legisltion. There must be an answer to that.
Mrs. Knight: The hon. Member for South-East Staffordshire (Mr. Jenkins) asks a very good question. My best answer is to refer him to the original 1994 order, which we are to amend today. The order has two distinct parts, concerning those markets that are regulated in the United Kingdom and those that are known generally as regulated markets. We have prepared changes to it to ensure that our insider dealing laws continue to operate properly. For example, not only have the London and Irish stock exchanges split since the passing of the 1994 order, but new exchanges have been forming, both in other European countries that are regulated markets, and here, to be regulated in the United Kingdom. Such developments do not take place overnight. There is a long lead time. We have a responsibility to ensure that the legislation is kept up to date, so that there will be no question as to whether new entrants to the market are covered by our insider dealing laws. The 1994 order must be amended today because of the different authorities that can regulate markets across Europe.
Mr. Tony Marlow (Northampton, North): Is not another answer to the question asked by the hon. Member for South-East Staffordshire (Mr. Jenkins) 6 that, as long as there is a Conservative Government standing up for Britain's interests, the London stock exchange will remain the London stock exchange? The Government's initiative yesterday, designed to secure Britain's interests, was outlined clearly by the Prime Minister on the Floor of the House, while the Leader of the Opposition maintains his intention of securing Europe's interests.
The Chairman: Order. The hon. Gentleman is pressing the wording of the order a little too far. Perhaps he would direct his remarks to the order, rather than to speculation about what might not be.
Mr. Marlow: Indeed, Mr. McWilliam, and the way to ensure that what that order refers to as "the London Stock Exchange Limited" is maintained, is to secure the Government's European policy, and not to follow the line of the Leader of the Opposition.
Mr. Jenkins: I thank the Minister for trying to explain the matter to me. However, being a new Member, and perhaps a little slow, I do not understand why a generic term, to cover all exchanges, was not created, instead of using specific names. I hope to deal with the issues raises by the hon. Member for Northampton, North (Mr. Marlow) shortly. I asked the question in the hope that the issue could be clarified rather than confused.
Mrs. Knight: The answer to the hon. Gentleman's question is that there is no such thing as a generic name. If we did not specify, an organisation that was not an exchange could call itself an exchange. There is a need to ensure categorically, in law, that all exchanges that are regulated in the United Kingdom or that count as regulated markets, are properly covered by insider dealing legislation. We could be vague, but the world is full of tricky lawyers. Indeed, the hon. Members for North Warwickshire is a lawyer, but as he is also my pair, I should never refer to him as tricky. He would know, and any lawyer would explain, that too much generality in the law only enables a coach and horses to be driven through it. We want to ensure that the exchanges in which dealings can take place, and which are relevant to the United Kingdom in many ways, are fully covered by our insider dealing law. I whole heartedly share the concern of my hon. Friend the Member for Northampton, North about the pre-eminences of the London stock exchange. We also believe that good contact between international regulators is needed, to encure that insider dealing and other matters are properly caught. To that end, on 4 June, we are hosting one of the committees of the International Organisation for Securities Commissions, in Edinburgh—my hon. Friend will be glad to know that the participants will be eating beef for dinner.7
Mr. Mike O'Brien: Without labouring the point, I want to refer to figures in the stock exchange's 1995 annual report. The Minister referred to the surveillance department. It investigated 1,500 unusual or suspicious trading patterns or events during the course of that year: 43 cases were referred to other regulators or agencies, including the police and the stock exchange council. The authorities will have to make a decision about whether they can take action on that, based upon the normal criteria for prosecuting—a realistic prospect of conviction based upon being able to prove a case beyond reasonable doubt. It is unlikely therefore that very many of those 43 cases will result in a prosecution. It is for that reason that we think that there is a need to look at matters again and we hope that the Government will change their mind and do so.
Mrs. Knight: I assure the hon. Gentleman and the Committee that we take insider dealing and all the various ways of handling it seriously. The 1,500 matters to which he referred are cases where the complex and, dare I say it, highly effective system for tracking irregular dealings would have told the stock exchange about an irregular dealing pattern. But life is not necessarily regular either. Therefore many of those when checked out showed nothing more suspicious than some people doing something coincidentally. 8 The stock exchange is heavily involved in the tracking system. If, for example a suspicion that some information that a company is going to announce, but has not yet announced, has started to leak out, and has caused a dealing pattern, the London stock exchange would deal with the companies and proper action would be taken. Most of the time that has the effect of bringing forward the relevant statement, but that is not necessarily insider dealing. Such is a consequence of the investigative system, which results in action taken because something has occurred in a way that was not expected. Therefore, of the many different trading patterns that are seen, the numbers that would result in a conviction for insider dealing would obviously be relatively small. However I agree with the hon. Gentleman that there is a need to make sure that both the criminal and civil sides of the system are kept fully under review. I assure him again that civil sanctions exist as I described earlier. We keep the system under review. We are absolutely committed to ensuring that our stock exchange continues to operate with the great credit that it has done in the past and that our insider dealing legislation is seen to work.
Question put and agreed to.
Resolved, That the Committee has considered the draft Insider Dealing (Securities and Regulated Markets) (Amendment) Order 1996.
Committee rose at thirteen minutes to Five o'clock.9
THE FOLLOWING MEMBERS ATTENDED THE COMMITTEE:
McWilliam, Mr. John (Chairman)
Cook, Mr. Frank
Fox, Dr. Liam
Fox, Sir Marcus
Jenkins, Mr. Brian
Knight, Mrs. Angela
O'Brien, Mr. Mike
Wardle, Mr. Charles10