8 April 2002
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12 January 2009
We have heard some high-priced, high-octane nonsense emanating from well-paid lawyers," a characteristically forthright Sir Howard Davies, chairman of the Financial Services Authority (FSA), told a City audience last month. No prizes for guessing that Davies was talking about the perceived quality (or lack of it) of legal advice on the new rules aimed at policing market abuse.
City lawyers, in turn, have hardly held back, with less than flattering observations about what they see as the manifold failings of his regime, which is designed to crack down on the misuse of information, the creation of false impressions and distortion of financial markets.
"It's like Lenin's 1922 Civil Code," Paul Nelson, a financial regulation and capital markets partner with Linklaters has been reported as saying. "Everything is prohibited unless expressly permitted." It is that kind of comment that has done so little to endear City solicitors to the FSA boss of late.
Davies was trying to allay fears in the City through his speech at the Worshipful Company of Chartered Secretaries and Administrators. "It would be in no one's interest if overblown fears of inadvertent market abuse had the effect of dampening the legitimate flow of information, which is the lifeblood of open and competitive markets," he told the audience.
He promised "to prioritise rigorously" and investigate only "those offences which are material and significant". "In simple terms, this means that, rather than chasing every small, insignificant case, we will use our resources to tackle cases of market abuse that pose a threat to confidence in the UK's financial markets," he continued.
As examples of the kind of 'high-octane' nonsense spouted by lawyers, Davies reported that some listed companies had been advised that they must alter their disclosure practices radically and say as little as possible about their future prospects. Other companies have been advised to make statements about prospective plans and confidential discussions with their bankers even before they have crystallised. The FSA, he urged, would not be pursuing "technical" infringements, nor would it be interested in taking scalps to make a point.
The charge against lawyers appears to be that they are being too cautious and literal-minded in their interpretation of the new regime. "If lawyers are giving advice that's on the cautious side, that is as much a reflection of the way in which the code is drafted," responds Nelson. "It's a combination of fluffy principles and obscure phraseology."
"If you have an entirely new regulatory system like this, with a lot of grey areas, lawyers are bound to tell their clients to tread carefully and tighten up their procedures, which is what the FSA wants to happen," says Nick Paul, a financial services partner at CMS Cameron McKenna. "It's only to be expected that lawyers will be rather cautious and warn their clients, particularly while the regime is settling down."
Davies's attack was focused on the interaction between the new market abuse regime and the longstanding UK Listing Rules, particularly in the handling of price-sensitive information relating to listed companies. "It's an area where, historically, there has been quite a gap between the strict letter of the rule and market practice in some areas," notes Paul.
It is not just the lawyers that the FSA has been encouraging to get some perspective on market abuse. Last year, Davies exhorted the City public relations industry to "stop getting its collective knickers in a twist" over concerns about how the new powers would affect the way in which companies release, for example, profit warnings. The watchdog went on to explain that its focus would be on the company, and that those who handle information in a proper manner would have "nothing to fear".
Not all lawyers are out of sympathy with Davies's most recent intemperate outburst. "It's the product of a lot of pent-up frustration at some of the more inflammatory things that lawyers have said," says one leading practitioner, name-checking Nelson and his Lenin dig as an example of unhelpful contributions. "Frankly, I don't really blame Sir Howard."
Nelson, though, remains unabashed, and like many of his peers he sees ambiguity as "endemic" to the Code of Market Conduct, which was published last year. To make his point, he quotes a section of the code (paragraph 1.5.4) concerned with false or misleading impressions: "Behaviour will amount to market abuse if the behaviour engaged in is likely to give rise to, or give the impression of, a price or value or volume of trading which is materially false or misleading [In] order to be likely, there must be a real and not fanciful likelihood that the behaviour will have such an effect, although the effect need not be more likely than not."
"I mean what the hell does that mean?" Nelson wants to know. "I haven't got a clue and no one else has."
Simon Gleeson, a partner in the banking department at Allen & Overy, believes that lawyers are not giving "bad or wrong advice". Gleeson was seconded to the FSA's market abuse team and worked on the early drafts of the code.
He argues that "the central piece" of the regime is absent from the arrangements and that there is no mechanism to determine what is and is not acceptable market practice. The fundamental concept that underlies the new offence is the hypothetical expectations of the regular market user as to what constitutes acceptable behaviour.
The code offers little more than a summary of the present law. Consequently, the market is asking lawyers what normal market practice is and, argues Gleeson, not surprisingly the response they are getting is ultra-cautious. "Lawyers are by and large not configured to say what it is," he says. "But they will say, 'If you do this and that, you'll certainly be safe'."
According to Gleeson, the main problem is "actually a failure of basic intelligence by the draftsmen who wrote the legislation on the proposition that it would be possible to establish ordinary market practice without giving any thought as to how that trick might actually be done".
Nor is the independent appeals tribunal provided by the FSA likely to come up with much useful guidance. The question as to whether tribunal hearings should be conducted in public or private was one of the more controversial episodes of the consultation process. According to Gleeson, the tribunal has been "hamstrung" by the insistence of the Lord Chancellor's Department (LCD) that its hearings should be public, and therefore compliant with the provisions of the European Convention on Human Rights relating to the right to a fair trail. "No one's going to subject themselves to the risk of being pilloried in the national press," says Gleeson. It is a "somewhat bizarre decision" of the LCD that "pretty much guarantees that there'll be no tribunal jurisprudence".
Nelson is equally as critical of the Government's stance. As he puts it: "Maybe there's a distinction to be drawn here between [the application of] human rights when you're sitting in a jail in Chile and wondering whether you're going to be banged up for the next 20 years over a case of market abuse in the City of London."
The super regulator is entering only its fifth month of operations, and so far no scalps have been taken. One headline-grabbing case that the FSA has been reported to be looking into is the £6m spread bet by Paul Davidson, the former pipe fitter known as 'the Plumber'.
According to Guy Morton, head of financial services at Freshfields Bruckhaus Deringer, this is just the sort of action that might well alarm the FSA's critics. The idea of a civil offence covering misuse of information is at least familiar from the criminal law relating to insider dealing offences; but provisions relating to distortion, misleading impression and manipulation of the market is more difficult territory.
Morton reckons that "the effects-based nature of the regime" worries "the more conservative lawyers". "In other words, the mischief is defined by reference to the effect of the behaviour and not necessarily by what was intended or foreseen," he explains. It is a strict approach that Morton reckons is "tempered" by the regular user test, equivalent to the man or woman on the Clapham omnibus indicator used in the courts, "which has the effect of reimposing some kind of mental element".
Gleeson sees the Plumber case as an illustration of the lack of clarity that exists under the new regime. It poses a problem for the investment banks involved in such arrangements. "What they do is what they've always done and act on a rule of thumb and the feeling that the head of trading has in his water about the sort of things that they can reasonably do," he says. "What's needed is something that takes [that decision] away form the head of trading's feeling in his water."
The consensus from the City firms is that Davies's recent anti-lawyer rhetoric is a bit rich given that lawyers are simply doing what their clients pay them to do - giving sensible and realistic advice in new and uncertain territory.
"The whole regime that the FSA has constructed is one based on 2,500 pages of legal rules," observes Nelson. "If you create a regime like that, lawyers are going to get involved."