UK regulatory reform: should the new regulators be given power to investigate possible offences under s.352 of FSMA?

Lord Turner recently informed the Chairman of the Treasury Committee that the FSA was unable to use its powers to extend an internal FSA leak inquiry to enable it to interview third parties because the leaked information was not market sensitive.

The regulator's inquiry relates to information apparently leaked to a journalist, who published it in advance of planned publication by the regulator.  This was not the first time such a leak had occurred. 

Under the European single market directives, Member States are required to ensure that regulators and their staff are prohibited from divulging confidential information, save as provided for by those directives.  In the UK, disclosure of such confidential information - other than in the circumstances provided by section 349 of the Financial Services and Markets Act 2000 (FSMA) - is a criminal offence under section 352 of FSMA. 

The regulator's powers of investigation under section 172 or 173 of FSMA enable it to require third parties to attend and answer questions in specified circumstances (including in cases involving the dissemination of inside information).  However, although those powers can be exercised to investigate a number of other offences under FSMA, they cannot be invoked in respect of an offence under section 352.  Assuming that the information was neither inside information under section 118C of FSMA, nor otherwise relevant information disseminated in contravention of section 118(4) of FSMA, the response given by the regulator to the Committee is an accurate statement of the legal position. 

It may however seem surprising, in view of the regulator's current appetite for legislative extension of its powers through the Financial Services Bill and the Banking Reform Bill, that the regulator did not take the opportunity to point out to the Treasury Committee an apparent gap in the regulator's investigation powers under FSMA.

Policy reasons may underly what at first blush might seem an omission - in section 352 cases, the regulator's staff are very likely to be amongst those who fall to be questioned in any inquiry.  The regulator and its staff are primary recipients of confidential information, although they are permitted to disclose confidential information through what are sometimes called regulatory "gateways" under section 349 and the regulations made thereunder. 

However, if it is appropriate for the regulator to investigate a leak of confidential information itself, rather than passing the matter to an independent investigator or to another authority with separate investigative powers, then the regulator surely ought to have the power to require third parties to assist and answer questions.  Otherwise the risk remains that the regulator will be unable ever to bring such inquiries to any final conclusion. 

Of course, whoever investigates such a matter would be likely to be confronted by a claim that the public interest in the protection of the journalist's source would prevent any member of the media from assisting in such an inquiry. 

In 2001, documents alleging that Interbrew was considering a bid for South African Breweries were sent anonymously to several media organisations which then reported the alleged takeover bid.  Interbrew took legal action to try to force the media groups to hand over their original copies to assist it in identifying the person who had sent the documents, which were apparently forgeries.  A high court judge and three appeal court judges ordered the documents should be handed over, and the House of Lords refused to grant the media organisations leave to appeal.  The news organisations continued to refuse to hand over the documents, arguing that they were under a duty to protect their sources.  The matter went to the European Court of Human Rights, which in 2009 held that the High Court's decision of 19 December 2001 to order disclosure of the documents to Interbrew had, in the circumstances, violated the media's right to freedom of expression as provided in Article 10 of the European Convention on Human Rights. 

It is possible that the balancing of competing public interests which led to that decision might have been different if the European Court had been considering the FSA's entitlement to production, rather than that of Interbrew.  In fact the FSA did begin an investigation into potential market manipulation - and requested voluntary production of the documents.  But before the FSA reached the point of having to test its statutory powers, Le Figaro, the French newspaper, provided two pages of the document to French authorities for forensic analysis.  Eventually the UK regulator wound up its investigation in that case, having concluded that the appropriate authorities to pursue the matter were in another country.