Civilising the Law — The Use of Civil and Administrative Proceedings to Enforce Financial Services Law

DOIhttps://doi.org/10.1108/eb025662
Publication Date01 February 1995
Pages11-33
Date01 February 1995
AuthorBarry A.K. Rider
SubjectAccounting & finance
Journal of Financial Crime Vol. 3 No. 1 Civilising the Law
ANALYSIS
Civilising the Law The Use of Civil and
Administrative Proceedings to Enforce Financial
Services Law
Barry A. K. Rider
ENFORCEMENT AND COMPLIANCE
Enforcement as a concept imports compulsion to
comply with a particular norm. Of course, the
nature of enforcement might vary considerably
with the norm in question or society within which
action is desired. Professor Gower, in his 'Review
of Investor Protection',1 expressed the view that a
rule that could not be or was not enforced brought
the system, within which that rule was supposed to
operate, into disrepute. Whether this is true or not
may be a matter for debate. Most systems of con-
trol envisage rules that in practical terms are
unenforceable, but that are expected to have a
normative or educational effect. Such functions, in
the context of securities regulation, may be
thought to be of some significance. Thus, the fact
that simply because a rule cannot either in its
terms or in practice be sanctioned by a predictable
and determinate action intended to promote com-
pliance, does not necessarily undermine that rule
let alone the system within which it exists. To
assume without more that a rule that cannot be
enforced is not a legal rule, or to be precise a rule
of law, while no doubt appealing enough to the
positivist school of jurisprudence, is simplistic and
outdated. Furthermore, in the context of the sort
of economic regulation that we are discussing,
whether a rule is characterised as one of law or not
may or may not have significance. While there is a
problem with determining the appropriate degree
of interface between rules bearing differing qual-
ities,
purely in terms of achieving a defined
regulatory objective it might well be that a rule
which is not law in the formal sense of having
been promulgated by an authority with legislative
power, promotes a satisfactory degree of compli-
ance.
Therefore, many of the rules that pertained
prior to the creation of the regime of regulation
under the Financial Services Act 1986 were essen-
tially non-legal in the sense that they did not carry
determinate sanctions ordained by a legal process
consequent upon a violation and were not promul-
gated by an authority with legislative power.2
However, to dismiss them because they were
unenforceable at law would give a very false pic-
ture of the efficacy of what was for many years a
satisfactory regulatory structure. Even today,
although the interrelationships of legal and non-
legal rules is very much more complex, it is still
the case that significant areas of regulation have
been left to non-legal authorities.3
Consequently, to see enforcement purely in
terms of defined and predictable legal consequen-
ces is both misconceived and in the context of
securities regulation misleading. While the con-
struction and interpretation of the Code on
Takeovers and Mergers may be a matter of law for
the judge, rather than an issue of fact,4 and deci-
sions of the City Panel on Takeovers and Mergers
may be within the scope of judicial review,5 it
cannot be said that the Code has itself acquired the
status of being law. Nonetheless, as was very early
recognised in the life of the Code, enforceability of
its provisions may be necessary when its normative
effect is not of itself sufficient to ensure due com-
pliance. Hence the statement of the Panel in 1969
that 'if there is a breach of the Code, the Panel will
have recourse to private or public censure or in a
more flagrant case, to further action designed to
deprive the offender temporarily or permanently of
his ability to practice in the field of takeovers and
mergers'.6 On the whole the Panel has found its
Page 11
Journal of Financial Crime Vol. 3 No. 1 Civilising the Law
essentially extra-legal sanctions effective, at least
against those who depend on access to, or the
support of, services provided by the institutions of
the City of London. Indeed, the view is widely
taken that the absence of legal powers of investiga-
tion, intervention and sanction allows the Panel to
operate with a degree of speed and efficacy which
would not be feasible in a legal structure. In sub-
jecting decisions of the Panel to review the courts
have been particularly concerned not to interfere
with this flexibility.7 The courts have exhibited a
similar attitude to other essentially self-regulatory
authorities, such as the Stock Exchange. Thus, in
R v
International
Stock
Exchange
of The United King-
dom,8 Bingham MR observed, 'in a highly sensitive
and potentially fluid financial market,... the
courts will not second guess the informed judg-
ment of responsible regulators steeped in
knowledge of their particular market'. The courts
have shown an equal reluctance to interfere in sit-
uations of financial and commercial sensitivity
where Parliament and the City have manifestly
exercised caution.9
While with the benefit of hindsight the record
of the Takeover Panel in policing insider dealing
in the context of takeovers and mergers prior to
1980 was as successful as any other regulatory
body's,10 there was a widespread perception inside
and outside the City that self-regulation had met
its match in controlling insider abuse. On several
occasions the Panel, when conducting investiga-
tions into alleged insider dealing, admitted defeat
in the face of non-cooperation from foreign nom-
inees.11
The Panel increasingly came to the view
that legal powers of investigation were required
and it was thought inappropriate to place such in
the hands of a regulator which did not operate
with statutory authority.12 The Panel in 1973 also
called for legislation to render insider dealing a
specific criminal offence. During the 1970s a num-
ber of other influential bodies and organisations
within the securities industry also called for and
supported attempts to criminalise insider abuse.13
Whether this was because there was in fact a wide-
spread feeling within the industry that the extent
and character of insider abuse was so serious as to
necessitate such action, or whether it was because
it was the seeming inability of the self-regulatory
authorities to satisfactorily control such conduct
that allowed the media to focus so much adverse
attention on the City, remains a matter for
debate.14 Whatever the truth in Britain, it is the
case in many jurisdictions that the ability of the
system to control such abuses has proved to be an
acid test of the efficacy of the whole regulatory
structure. When insider dealing was made a spe-
cific criminal offence by Part V of the Companies
Act 1980 the Panel on the basis of legal advice
decided not to continue its investigatory role in
alleged instances of insider abuse during takeover
transactions, but simply to refer the matter to the
Department of Trade and police. Ironically, the
Stock Exchange during the 1980s sought to
become increasingly involved in policing insider
abuse and under s. 209 of the Companies Act 1989
was given authority to bring prosecutions.15
INTERMEDIATE ENFORCEMENT
Prior to the enactment of the Financial Services
Act 1986 there was a rather sharper distinction
between those regulators who operated with legal
powers and those who did not. Thus, the distinc-
tion between self-regulation and legal regulation
was perhaps a little clearer than it is today. Those
agencies having legal powers were largely agencies
concerned with the traditional enforcement of the
criminal law. Thus, it is not surprising that reg-
ulatory action prior to 1986 was either essentially
extra-legal or self-regulatory, on the one hand, or
involved a criminal prosecution on the other.
Although the Department of Trade has long pos-
sessed various statutory powers to bring civil
actions on behalf of companies or, indeed, itself to
recover certain costs, in practice these powers were
not utilised.16 Perhaps the only significant example
of what might be described as intermediate
enforcement action was the appointment of
inspectors under the relevant companies legislation
to inquire into the affairs of a company.17 Even
here,
however, there was a concern that a proce-
dure,
which had been created to ascertain facts in
the public interest, was increasingly being
employed as almost a type of administrative action
in
itself.
Public censure by inspectors became a
significant regulatory device during the 1970s and
early 1980s, albeit a very costly and often inap-
propriate one. It must be remembered that the
provisions relating to the appointment of inspec-
tors and the inquisitorial powers with which they
are entrusted were not developed to further the
investigation of criminal acts. There was consider-
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