Ensuring due process when regulators co-operate

Summary

A recent Hong Kong judgment highlights the importance of ensuring due process when regulators exchange information with each other.

Regulatory confidentiality

In the UK a statement made to an investigator appointed by the FCA or PRA in compliance with an information requirement can be used in most enforcement proceedings within the UK. However under section 174 of the Financial Services and Markets Act 2000 (FSMA) a compelled statement cannot be used against the maker of the statement in most criminal proceedings or in proceedings in respect of market abuse. The only criminal proceedings in which the compelled statement may be relied upon is where it is alleged that the compelled statement was untrue.

The European Convention on Human Rights does not explicitly address the privilege against self-incrimination or the right to silence. Those rights have, however, been implied into Article 6  through a line of case law in the European Court of Human Rights, including notably Saunders v United Kingdom in 1996. It was then applied in the law of contracting states, including the UK.

What happens where other countries are involved and want to rely on the investigation work carried out in the UK? Confidential information gathered by the FCA/PRA can be disclosed "for the purposes of any criminal investigation whatever which is being or may be carried out, whether in the United Kingdom or elsewhere".

The better view is that if the UK regulator could not rely on compelled evidence in criminal proceedings, the same should apply to a foreign regulator to whom that evidence may be supplied. There are complex "Gateway" regulations specifying what the regulators may do with confidential information. They do not address this issue, but they are permissive rather than mandatory and under section 169(4)(d) the UK regulator is required to act in the public interest.

So the UK regulator can insist that a foreign regulator which:

• seeks the information, or
• asks the UK regulator to carry out an enquiry

should adhere to the spirit of section 174. This, in any event, follows the law and practice in extradition. A person will not usually be extradited to a country that does not respect their human rights and will not give satisfactory assurances (Soering v United Kingdom (1989)).

Hong Kong case

The human rights issue has now arisen in the Court of First Instance of Hong Kong. The case concerns the investigation of trading transactions by the Securities and Futures Commission (SFC). The SFC supplied compelled evidence to the Japanese regulators. The anonymous applicants brought judicial review proceedings. They argued that this was contrary to the SFC's statutory powers. The judge, Mr. Justice Zervos, considered that the applicants had an arguable case and gave them permission to apply for judicial review.

The SFC was not represented at this "ex parte" application and will put its case forward at a subsequent hearing. One of the issues will be whether the Japanese proceedings are to be treated as criminal or "civil", by analogy with normal enforcement powers. The judgment at the further hearing should make interesting reading. We plan to report on it in due course.

By Karen Anderson, partner and Jonathan Goodliffe, professional support lawyer, Herbert Smith Freehills LLP