moved Amendment No. 33:
Page 219, line 34, after ("2(3);") insert--
("( ) the costs and expenses incurred by the Authority in the period covered by the report, a break-down of those costs and expenses and a comparison with the corresponding costs and expenses incurred in the previous year;
( ) the fees paid to the Authority under rules made under paragraph 17 in the period covered by the report and a comparison with the fees paid in the previous year;
( ) a review of the costs incurred by the Authority in the period covered by the report in comparison with the costs incurred by regulators in other jurisdictions;
( ) the work of the investigator and any action taken by the Authority in response to criticisms of the Authority's conduct made by the investigator;
( ) the operation of the penalties scheme referred to in paragraph 16 in the period covered by the report and a comparison with the operation of the penalties scheme in the previous year;").
At present, under paragraph 10(1) of Schedule 1, the FSA must at least once a year make a report to the Treasury on the matters set out in headings (a) to (c) of paragraph 10(1). There is also a provision for the Treasury from time to time to direct on other matters on which it wishes to receive a report.
The purpose of the amendment is to spell out specific further items which we should like to see included in the FSA's report to ensure full accountability in its activities. The first section of the amendment would ensure that a breakdown of costs and expenses incurred by the FSA in the period covered by the report would be included and that a comparison would also be provided with the corresponding costs and expenses of the previous year. It is one of the most basic of the generally accepted accounting principles that readers of a financial report are provided with a comparison of performance with the previous accounting period.
The second section of the amendment states that the fees paid to the FSA under rules made under paragraph 17--these are fees paid to the FSA by authorised persons to cover the FSA's expenses--should be detailed and that a comparison with the fees paid in the previous year should also be included in the report. The purpose is to make more transparent the amount of fees paid to the FSA by the community that it is regulating and to be able to disclose how those fees have increased from one year to another.
The third additional section that we should like to see in the report is a calculation of the costs of regulation in the UK as against those incurred by regulators in other jurisdictions. The regulated community itself and many others will want to see this level of transparency and comparability.
Under the fourth section of the amendment we aim to see a description of the work of the independent complaints investigator as referred to in paragraph 8. In addition, we should like to see described the action taken by the FSA in response to any criticisms of the FSA's conduct made by the investigator following the investigation by him of complaints against the authority.
The final part of the amendment details the operation of the penalties scheme and the provision of a comparison with the previous year. We believe that these are reasonable minimum requirements for the disclosure of performance indicators by any body that performs a public duty. Certainly, they are not sufficient for the purposes of a full review of the FSA's actions, for which we must look to our later Amendments Nos. 84 and 86, but we believe that they are necessary. I beg to move.
The amendments standing in our name in the Marshalled List in this and the next group deal with two matters. The first is that the report of the FSA to Parliament should be as full as possible. Our model for the kind of report that we believe is required is that produced by the Securities and Exchange Commission to Congress as part of its annual appropriation process. We believe that that covers all the relevant information that is required in a considered and detailed manner.
Amendment No. 34, like Amendments Nos. 37 and 37A, seeks to remove the Treasury filter within the framework of the Bill in terms of the relationship between the FSA's reporting function and Parliament.
Amendment No. 36 deals with another matter which was raised briefly in an earlier debate; namely, the extent to which the practitioner and consumer panels are taken seriously. It is all very well to have such panels, the establishment of which we strongly support, but it is more important that their recommendations are taken seriously by the FSA and that everybody can see when the authority does not follow them, rather than that the panels submit proposals which simply disappear into a black hole. Amendment No. 36 would give effect to the suggestion of the Joint Committee that in its annual report the FSA should be required to state the recommendations made by the practitioner and consumer panels appointed under Clause 8 of the Bill and whether the authority has implemented them.
I was not a member of the Burns committee but I have read a good deal of its two reports in a pre-legislative context. There appears to be widespread acceptance that with a Bill of this kind that has been a most invaluable innovation. One wishes that perhaps the Government had adopted more of the committee's recommendations. We have debated some of them during the course of this afternoon and we shall come to others later. There is no doubt that, faced with a highly complex and technical Bill of this kind, the Joint Committee of the two Houses did an amazing job in an astonishingly short time. It demonstrates the value of that piece of machinery.
I believe that in part the accountability of the FSA must be to Parliament. Perhaps a report to both Houses would be very cumbrous. I do not see how the FSA could report only to this House. No doubt the other place should have an opportunity to question the chairman and others about the activities of the FSA, but the idea that there should be a Joint Committee (on the lines of the Burns committee) which has an opportunity to receive the annual report and have a session with the chairman, and no doubt one or two others, is extremely valuable. Although I do not necessarily agree with the specific amendment that is before the Committee, something along these lines is justified on the grounds that the FSA is a very large, powerful and unique body with an extraordinary range of powers and severe penalties that can be applied to individuals. I do not believe it is enough that the FSA should be accountable to the Treasury and that Treasury Ministers should then be accountable to Parliament as now. I believe that we should adopt this proposal as part of the general stiffening up of the accountability of the authority, and, therefore, I very much support it.
I should be interested to hear the reply of the Minister to the question of what should go into the report. I believe that it is very reasonable to ask for statistics which enable comparisons to be made not only with previous years but also with comparable bodies; and that there should be a separate report by the non-executive directors' committee on their view of the cost-effectiveness of the whole operation. They appear to be very valuable provisions, and I hope that the Minister is able to accept them.
I am utterly confused by the contribution of my noble friend. I thought that the Committee was considering the first group of amendments. We have not yet reached the later group. I strongly support Amendment No. 33, except that I have a slight concern about one of its proposals. If we proceeded along these lines, the general public would have greater confidence in the transparency of the authority, which is important. More importantly, it would encourage the authority to improve its performance year on year in the management of its costs. I am aware that having to produce two lines of figures giving year-on-year comparisons which enable people to see whether they are doing better or worse is a good incentive to raise the level of the game. Another encouragement is that it would be a document in the public domain and the media would crawl all over it with a fine-tooth comb, which would not be a bad idea.
One comes to the,
"review of the costs incurred by the Authority in the period covered by the report in comparison with the costs incurred by the regulators in other jurisdictions".
I am slightly concerned that the actual costs and time incurred in making a true comparison may outweigh the benefits. The comment is always made that one must take account of exchange rate movements; that perhaps one is comparing apples with pears and so on. Although it may be of great interest, one must be very careful about balancing the advantage against the cost. However, I believe that the whole of Amendment No. 33 is a great improvement on what is now in the Bill.
I believe that of far greater importance than the working methods of the consumer and practitioner panels and their reporting procedures is their independence. If they are not independent, whatever they do does not have much value. I was a member of the Joint Committee. We were careful to ensure that the two panels should be independent so that they could make whatever reports they wanted to make. We went as far as to say that the consumer panel should be financially independent and have a separate budget. Therefore, I am not sure that these amendments are important. As long as the panels are independent, they can do virtually whatever they think is necessary.
I should like to deal with Amendment No. 35 which is another amendment in the group that the Committee is considering. That amendment seeks to add two further categories to paragraph 10(2) of Schedule 1.
The first category would be reports by the practitioner panel and the consumer panel. The value of those reports would be greatly enhanced if the Minister were to accept some later amendments connected with the powers of both those panels to express their views on the various codes and guidelines to be produced by the FSA. Having a summary every year of the views of those two panels about the quality of legislation produced by the FSA would have enormous advantages for whichever parliamentary committee will consider the annual report.
The second category relates to a report from the independent complaints investigator. I place, as the noble Lord is already aware, great importance on the work of the independent complaints investigator in view of the absence of any recourse of a regulated party to the courts.
I am grateful to noble Lords for what they said about the amendments. The annual report is an important part of the FSA's accountability to consumers, practitioners and the Treasury.
Paragraph 10 of Schedule 1 already requires wide-ranging information to be in the report: the discharge by the FSA of its functions; the extent to which the regulatory objectives have been met; following amendment in another place, consideration of the principles--proportionality, the UK's competitive position, and so on--to which the FSA must have regard; and other matters as directed by the Treasury. Moreover, the annual report must be accompanied by the report of the non-executive committee and other reports or information as directed by the Treasury. So paragraph 10 is already quite prescriptive.
Amendments Nos. 33 and 35--the latter has been spoken to by the noble Lord, Lord Kingsland--would require the FSA to produce the following in its annual report: the costs and expenses incurred by the FSA; the fees paid to the FSA under paragraph 17 of Schedule 1; a review of costs incurred by the FSA compared with costs of regulators in other jurisdictions; compliance costs both compared with previous years and with other jurisdictions; the work of the complaints investigator; a report by the investigator, and any action taken by the FSA in response to criticisms by the investigator; the operation of the penalties scheme; and any report which the practitioner and consumer panel wish to include. Amendment No. 36 would require a response by the FSA to recommendations by the consumer and practitioner panels. The noble Lord, Lord Jenkin, will recognise that the amendments he supports provide the comparative statistics which he, quite rightly I think, seeks.
The last annual report of the FSA, in July 1999, already included some of this information: for example, on costs and reports by the equivalents of the complaints investigator. In its press release of 6th July 1999 which accompanied the annual report, the FSA has already committed itself to providing substantial information in its future annual report, taking account of the Joint Committee's recommendations. This includes fees and expenditure for the current and prior year, and responses to reports by the complaints investigator and the practitioner and consumer panels, meeting, I hope, the aim of Amendment No. 36.
I have the press release in front of me. The main contents proposed for annual reports in the future are under the headings: statutory objectives, policy, rule making, consultation, cost benefit analysis, regulatory issues, and accounts of authorisation of firms and approval of individuals, supervision and monitoring, enforcement action including policing the perimeter of regulated activities, cases settled or determined by the tribunal, fines and costs, significant judgments by the tribunal, work with customers to include initiatives and criteria used to assess the public awareness objective, international work and implementation of EC directives, work with other authorities, including overseas regulators, the Treasury/ Bank of England/FSA standing committee, and investigation of enforcement agencies, complaints, responses to reports by the independent complaints commissioner, the ombudsman scheme, the compensation scheme, the consumer panel, the practitioner panel, and any value for money reports produced by the Treasury, publications, information on major publications during the year, statutory accounts, of course, the report of the non-executive committee of the FSA, an assessment of regulatory burdens and compliance costs of UK markets compared with overseas jurisdictions, and changes over the year in question, operations (including human resources), and IT issues. That is quite a list. It encompasses everything included in the amendment, and quite a lot more. It will be a very hefty annual report.
For that reason, I have no objection whatsoever to the detail of the amendments proposed. They are generally well founded. But we said in response to the Joint Committee that we do not want to prescribe in legislation too much of the report's contents in case other priorities emerge in the future, and, if anything were by any chance left out and they were a few pages short of the 1,000 pages to which I imagine the report will run, since the Treasury can in any case direct the content of the report should it fail to meet users' requirements, I hope that the amendment will not be pressed. I think that we have more than met the objectives underlying the amendments.
Amendment No. 34 would have the effect of removing the Treasury's power to direct the FSA on the contents of its annual report. I do not think that that would be desirable. It would restrict Ministers' rights over what information was in the FSA's main annual public statement. I do not think it necessary to have an amendment which would allow the FSA to add material beyond that specified in paragraph 10 of Schedule 1. There is nothing to restrain the FSA from publishing separately any information which cannot be incorporated in its annual report.
It is clear that I support the objectives of the amendments. However, I believe that we have more than accomplished the objectives which noble Lords have in moving them.
Perhaps I may use the opportunity of Amendment No. 33 to make a point which I shall try to make on every possible occasion.
The amendment calls for a report on the operations of the penalty scheme referred to in paragraph 16. When I first began to read this monumental work, I had thought that with the statutory base to the FSA we should find that most market misconduct and the like was dealt with by the FSA under the terms of paragraph 16. It is a perfectly splendid paragraph; I am thoroughly in favour of it. However, it has now come to my notice that that will not happen. Only in cases where recognised investment exchanges have no jurisdiction will the FSA come in. The real question will be the extent to which the FSA, in one way or another, can require those bodies to comply with the standards imposed by Parliament on the FSA itself.
If we were to go down that route, I should want to see a report on the regulations that the FSA was imposing upon other subordinate regulatory authorities.
That is one of the reasons why we do not wish to be too prescriptive about the annual report of the FSA.
I have indicated my support for the FSA's proposals set out in its press release of 6th July 1999 and I have indicated my opposition to any attempt to take away from the Treasury its power to prescribe what shall be in the annual report.
If anything which was in the July press release, including the matters to which the noble Lord referred, were to be excluded, the Treasury would use its powers to ensure that it was included. I think that we win on that both coming and going. We provided a reserve power for the Treasury to insist on the inclusion of all issues which Members of the Committee and I want to have included, yet we have left it without too much prescription.
What would happen if the Treasury did not want to include such information and decided to obfuscate? The Treasury has occasionally obfuscated. I know that we are living in times of transparent government, but there could come a time when it might say, "We don't want those costs put in because they were pretty horrific".
I believe that the noble Baroness and I should discuss that away from the ears of officials. In such circumstances, the electorate would be entitled to vote the Government out of office.
The Minister said that the Treasury "may" direct this and that. We are saying that we want Parliament to decide and to say which items should be contained in the annual report.
I shall not go on any longer in case I bore the Committee on this point, but a strong theme is emerging in our discussions. I am happy to leave the matter to the Report stage and beg leave to withdraw the amendment.
I wanted to speak to my Amendment No. 39 in the group, but having heard the intervention of the noble Lord, Lord Jenkin, there is nothing more I need to say in support of it. He expressed our views most admirably.
I understand that Amendment No. 37 falls foul of parliamentary niceties, in that it is not the role of a Bill to dictate to both Houses how they might deal with an issue. Therefore, I shall not be surprised if in response the Minister points that out. However, it would be helpful if this House could send as strong a signal as possible about the way it wants the report of the FSA, once it arrives in Parliament, to be dealt with. Parliament has a mixed track record in fulfilling its function to examine reports.
In this area, the work of the Burns committee has shown how both Houses of Parliament working together can achieve more than the two Houses working separately. Therefore, I am keen that the substance of the amendment is carried into effect. I shall be delighted if the Minister tells me that my fears about the proprieties are misguided and that he agrees with me. In any event, it is important that the message should come out from this House that this is a sensible way to deal with a report from the FSA and, in future, similar bodies. I beg to move.
On reflection, I think that our Amendment No. 38, which is also in the group, is not as good as that tabled by the noble Lord, Lord Newby. Therefore, I am happy to associate us with everything that he said.
In a sense, these are probing amendments, because I suspect that the Minister will tell the Committee that he is not in a position to commit your Lordships' House one way or the other on a matter which is not in the Government's jurisdiction but in that of your Lordships' House.
Nevertheless, perhaps, if the Minister looks on the amendments as being probing, he will be disposed to indicate the view that the Government Benches may take to the establishment of a committee of your Lordships' House to consider the annual report. In particular, dare he say whether he would be more inclined to favour a joint committee rather than a committee either of your Lordships' House or of another place, or both sitting simultaneously?
I thank the noble Lord, Lord Newby, for his kind remarks. Perhaps my next remark is addressed to Hansard: copy and paste. I apologise for having made my speech in the wrong place.
It happens. I am grateful to Members of the Committee for the way in which they have introduced these amendments. Accountability to Parliament is a very important aspect of the FSA's responsibilities. The FSA will be more effective if it is accountable for its actions. It is a single regulator and its lines of accountability will be clearer than they were under the previous regime of multiple regulators. The general support that has been expressed throughout the passage of the Bill for the single regulator principle never becomes clearer than it has in the demands for parliamentary accountability.
The Bill makes several provisions to ensure effective transparency and accountability. The FSA is accountable to Treasury Ministers who have various rights and sanctions. They have the right to appoint and dismiss members of the FSA's board (Schedule 1); to require independent inquiries into regulatory matters of serious concern (Clause 12); and to require independent reviews of the FSA's use of resources (Clause 10).
Ministers, in turn, are accountable to Parliament. As Members of the Committee have recognised, that, of course, is not something for the Bill to specify. However, it is an important principle which underlies the provisions of the Bill. We are more than happy for Parliament to scrutinise what the FSA does, as, indeed, the Joint Committee recommended. Executive powers in relation to the FSA should rest with Ministers, who in the normal way will be accountable to Parliament for what they do in the exercise of those powers.
It is certainly not for me to say whether any committee of either House or, indeed, of both Houses should be set up. However, I believe that it is permissible for me to say that the work of the Joint Committee, with the membership and chairmanship that it had and using the procedures that it did, was enormously helpful in developing this Bill and in ensuring that it will have an easy passage through your Lordships' House, which I am sure that it will. If I am asked what the usual channels will think, I believe I can assure your Lordships that I shall speak severely to the Deputy Chief Whip and urge him that the usual channels should consider this matter very seriously!
The difficulty with Amendments Nos. 37 and 37A is that they go fundamentally against the grain of the accountability structure that I have described. The ability to give directions on the contents of the FSA annual report is an executive act which is properly exercised by Ministers, who can be held to account by Parliament for any exercise of it or failure to exercise it.
The principle which underlies Amendment No. 38 would require the Treasury to have regard to representations, reports and resolutions by either House on any report made by the authority. Although that may seem unobjectionable, it suggests that, in the absence of such a provision, the Treasury would be free to act in disregard of the views expressed by Parliament or any committee. However, that is not our position under our constitution and it would be wrong to suggest that it is.
As I said, Ministers are accountable to Parliament and they can be held to account if they fail to behave in the manner described in this amendment. They can be asked by Parliament to explain why they have not followed a recommendation and, as I hope that the Government's response to the Burns committee shows, that system is effective. We should not cast doubt on its operation here or, as inevitably would be the case if the amendment were accepted, in other areas of governmental responsibility.
As I made clear, Amendment No. 39 is less a matter for me and more one for the House and Members of another place. As I said, Treasury Ministers warmly welcome parliamentary scrutiny, whether by a Joint Committee or by other means. If the Houses so decide, we shall co-operate fully with any such scrutiny. Under those circumstances, I urge noble Lords not to press the amendment.
I take the cautious words with which the noble Lord welcomed the spirit of Amendment No. 39 as being a ringing endorsement, in spirit, on his part. We understand the form of constraints under which he operates. However, we hope that in his role as Deputy Chief Whip he will ensure that as and when this Bill becomes an Act and this matter comes before the House--
I said that I would speak severely to the Deputy Chief Whip. I did not say that he would pay any attention to what I said!
I realise that the noble Lord has a peculiar problem in this regard, and it is one that only he can resolve with his conscience. However, as I said, we hope that the half of the personage who receives the message will respond as favourably as the half who is passing it on. With that--
This amendment seeks at page 221, line 43 to leave out the expression "incidental purpose" and insert "purpose which is necessary or desirable for carrying out its functions".
As the Committee is no doubt aware, under paragraph 17(1)
"The Authority may make rules providing for the payment to it of such fees" by the regulated community
"as it considers will ... enable it--
(a) to meet expenses incurred in carrying out its functions or for any incidental purpose".
The amendment is intended simply to cut down the wide "for any incidental purpose" wording by stipulating that it must be a
"purpose which is necessary or desirable for carrying out its functions".
I beg to move.
I am sure that other noble Lords have found themselves, as I have, chairing the board committee of a regulated insurance company--in my case--or of a bank or whatever. One reaches a point on the accounts where the management says "There is nothing we can do about this. The fees have gone up 20 per cent from last year, and it was 20 per cent the year before". The board fumes and says that a stiff letter must be sent to the regulator and that this must not be allowed to continue year after year, as the company's profits have not gone up by anything like as much.
Regulated bodies feel very strongly that the regulators have not exercised sufficient self-discipline in the past. There is the feeling that the fees can be put up almost without concern simply to meet what seem to be inexorably rising costs. It is right to voice that concern here.
This is a small amendment, but it is perhaps indicative of an attitude. We really should make sure that regulators can pass on only that which is necessary and desirable, and not just any incidental expense.
The wider point is that this is of considerable importance to the regulated community. I hope that the FSA will take that on board. It was apparently not always heeded by its predecessors.
I understand the concern expressed by the noble Lord, Lord Jenkin, and I sympathise. But I do not think that the amendment achieves what he wants.
As the Bill stands, the FSA is able to raise fees to meet expenditure which it incurs in the discharge of its functions and in doing things which are incidental to the performance of those functions. This imposes an important check on the FSA's ability to raise fees, while enabling it to raise fees to cover expenditure which it incurs, for example, in connection with or in consequence of the functions conferred on it under the Bill, but which is not strictly expenditure incurred in the discharge of those functions. If the FSA is to do its job properly, it obviously needs flexibility to expend money on activities which are incidental to its central job of performing the functions conferred on it. In the FSA's case this includes international work, such as the Basle Committee and IOSCO.
The provisions of the Bill as they stand give the FSA that flexibility, and they are no different from the provisions of the Financial Services Act 1986, which was enacted by the previous government. The test imposed is essentially an objective one, which has been shown to work over the years. The amendment would introduce an undesirable element of uncertainty into the question for what purposes fees may be raised. If it is necessary for the FSA to incur expenses in carrying out its functions, that is already covered, since the expenses will be incurred in the carrying out of those functions.
I am not sure what the objective limits are if we move from a test which limits the FSA's ability to raise fees to meet expenses incurred on incidental matters to one which instead confers on it an ability to raise fees to meet expenses incurred in doing things which were desirable for carrying out its functions. What does "desirable" mean? Who is to determine what is desirable? There is an element of subjectivity here which seems inappropriate with regard to a statutory fee-raising power.
Of course, the FSA will have to justify its expenditure. Its annual report will contain a statement of its budget, and that will be subject to scrutiny by Ministers, Parliament and the annual open meeting which the Bill requires it to hold. If the directors of the FSA were to travel everywhere by private jet, if like the EBRD in its early days they were to coat the ceiling of their entrance hall in the finest Carrara marble, that would inevitably appear in due course and there would be a comeback, a rejection, because it would be evident in the annual report.
Although I respect the motives for the amendment, I do not seriously think that it would improve the wording of the Bill.
While I agree with the Minister that the word "desirable" probably opens up a problem, the phrase
"purpose which is necessary for carrying out its functions" is a neater way of saying "incidental purpose". I think that there are stronger parameters in it. That would cover the point which my noble friend Lord Jenkin made. Perception is all. People who are regulated feel very strongly that they must keep their costs to a minimum and they are constantly being regulated. But they want to know who looks after the regulator and whether he is getting away with it.
I am sure that the Minister will agree that "incidental purpose" could mean anything whereas,
"purpose which is necessary ... for carrying out its functions", is a tighter phrase.
I am sorry; I do not agree. "Incidental" has worked for 14 years. I am not aware of any complaints since the passage of the Financial Services Act 1986.
I am not as satisfied as I should like to be with the Minister's reply, but I believe that he has indicated some sympathy with the views expressed by my noble friend Lord Jenkin. In view of that, I know that he will be leaving your Lordships' House determined to look very carefully at the amendment which we have tabled to make absolutely sure that he has not got it wrong. I beg leave to withdraw the amendment.
These four amendments deal with the issue of statutory immunity. In moving Amendment No. 41, I should like to speak also to Amendment No. 42.
Amendment No. 41 deals with the issue of an agent of the competent authority. As the Bill stands at present,
"any person who is, or is acting as, a member, officer or member of staff" of the competent authority is exempt from being liable,
"in damages for anything being done or omitted in the discharge, or purported discharge, of the Authority's functions".
Paragraph 6(1) of Schedule 1 provides that:
"Those arrangements may provide for functions to be performed on behalf of the Authority by any body or person who, in its opinion, is competent to perform them".
Amendment No. 41 seeks to extend that immunity to the agent of the authority so appointed, acting on behalf of the authority.
Amendment No. 42 deals with the issue of recklessness. As the Bill stands, the statutory exemption from damages is removed only in the case of bad faith. It seems to me that that exclusion from damages enjoyed by the FSA, the manager and all the other entities covered by it, should be extended beyond just bad faith into reckless behaviour.
Recklessness would need to be proven in any action for damages against the authority or any of its agents and it may well be that the authority would be required to establish whether or not its actions constituted recklessness on the facts as they stand. I beg to move.
Perhaps I may expand on that. The reason that the courts of law have a statutory and, indeed, common law immunity is that, otherwise, there would be no end to litigation. As soon as a litigant lost his case, he would sue his counsel. When he lost that case, he would sue the solicitor who had advised him in that case; and so it would go on and on.
I believe that a considerable element of the same could be said about the FSA. It will be making judgmental decisions which may be right or wrong, with which people may agree or disagree. But disgruntled regulated or unregulated persons will be able to go to the courts and say that the FSA has been reckless, whether or not they have any justification. There will be considerable expenditure of money and a considerable diversion of management effort and the like on the part of the FSA.
Having lost in the courts, as I have no doubt they would in most cases, they will then, with the assistance of the Government's conditional fee agreement or something--or perhaps that is an irrelevance--go on to the Court of Appeal. Having failed there, they will start on the human rights ladder. The noble Lord, Lord Kingsland, is about to point out that, whereas originally I sensibly opposed the Human Rights Bill, when it came around again I supported it, but only because I believed it was the only way of controlling the press. But that is beside the point.
With regard to this point, I believe that the FSA needs immunity. The courts, of course, have immunity. Nevertheless, apart from what happens in court, if one's case is not listed or is listed wrongly or anything like that, that is a judicial function, even if it is a delegated function. Therefore, it is covered by the immunity. If one goes to the Lord Chancellor's Department, it will, in suitable cases, pay compensation. The same approach should be adopted by the FSA.
The question of immunity has been examined at length by the Joint Committee under the noble Lord, Lord Burns. It made some valuable suggestions which have been incorporated into the Bill, so far as I can read it. It is important for the good of the financial services industry, as well as for good regulation, that regulators are not deterred from taking regulatory action by the mere risk of ending up with all kinds of challenges in court. The balance in the Bill is right. It is correctly drawn.
--but I believe it is fair to say that the immunity which he described is an immunity in terms of the trial process and not in terms of work which may be carried out by barristers in the privacy of their chambers. That is an important distinction, because most of the work that will be carried out by the new authority will, of course, not be in a tribunal--so to speak--but will be carried out in the course of a normal working day, applying the vast regulatory framework with which it is endowed under the Bill.
On these Benches, we are absolutely at one with the Government in wanting to create a forceful regulatory body which can carry out an extremely difficult task in an extremely naughty world. There is no question but that the powers given are commensurate with the power of some of the financial bodies and agencies which operate in the global financial market. Having said that, we return to the question of balance and public confidence. It would not be in the long-term interests of the authority and its staff to have the extent of the immunity granted by the Bill as it now stands because, as I suspect all of us--certainly the lawyers among us--know only too well, proving bad faith is an extremely difficult test to establish. We are well aware also of the current extremely ineffectual provisions in the City which do not do their job satisfactorily.
I suggest that the addition of those words will not open the floodgates to a vast amount of speculative legal action. If one considers the purview of the old Monopolies and Mergers Commission, which had no immunity whatever--it was open to the full extent of the common law--I am not aware that it was the subject of much, if any, litigation. I believe that by adding those words we are widening in a sensible way the prospect of commencing and succeeding in an action against the authority.
During the supper break I looked up the definition of "recklessness" in Halsbury's Law. Definitions vary according to the context in which they arise. Broadly, recklessness is acting in a manner,
"which creates an obvious and serious risk" of damage to the other person. An obvious and serious risk seems to be fair, not just plain common or garden negligence.
I am sure that Members of the Committee know that bad faith is dishonesty. As I said, that is extremely difficult to establish, particularly within a bureaucracy. I suggest, therefore, that the amendment proposed, far from weakening the Bill, will strengthen it. It will give the financial community a good deal of reassurance.
The thrust of the proposed amendments is that although the claimant can sue for damages if he is the victim of bad faith behaviour and infringements of the Human Rights Act, and although in addition he is free to sue for judicial review, those remedies are insufficient. It is said that claimants should, in addition, be allowed to sue variously for negligence and recklessness, and that on that footing the FSA and its officers and staff should not be immune from liability. I respectfully agree with the observations of the noble and learned Lord, Lord Donaldson, and the noble Lord, Lord Bagri. Perhaps I may refer to the points and develop them briefly.
First, if the matters complained of by an individual complainant reveal conduct that is so unreasonable to the extent that no reasonable regulator could have acted in such a way, that is behaviour which will, by definition, be caught by the judicial review principles which are now well established and, indeed, for which many government Ministers over the years have had to pay, to the greater or more efficient performance of their statutory and other responsibilities.
There will, therefore, be a remedy which will be sufficient to ensure that the FSA will behave itself. If in the exceedingly improbable event that the FSA finds itself confronted with numerous successful applications for judicial review, it will be obvious that something has gone fundamentally wrong. I believe that the existence of a remedy of judicial review will be a sufficient control over the improbability of that sort of behaviour developing.
My second point particularly supports the observations of the noble and learned Lord, Lord Donaldson. In my view we would do a great public disservice if we agreed an amendment which turned this legislation into a paradise for lawyers. Contrary to popular belief among some lawyers, it is not the function of legislation to satisfy the hunger of lawyers. It is tolerably clear what is meant by "bad faith". It is also clear what is meant by "judicial review" and the circumstances when judicial review arises.
The problem is that once the concept of negligence is introduced into legislation of this kind, it will be--I speak from bitter experience--impossible to restrain clients who are told that they can simply complain about unreasonable behaviour as a basis for starting litigation against the FSA. There would be no end to litigation and much of that litigation would be nothing short of nonsense.
I turn to "recklessness". In my view, if that word was to be introduced, it would inevitably lead to endless litigation. In English law, notwithstanding whatever the noble Lord may have discovered in the dictionary, this is an exceedingly elusive concept.
That would depend on who was the editor of the particular volume, so I should like to reserve my position.
"Recklessness" is a very elusive word. Without wearying noble Lords with the detail, it has, first, given rise to enormous difficulty in the criminal law. Secondly, in the context of the civil law, it is usually found in discussion about what is meant by fraudulent, reckless or deceitful misrepresentations, as in making reckless statements at the point of a bargain where the provider or seller is anxious to do the deal and goes much too far in making exaggerated claims for the product. That kind of exercise is no doubt interesting, but inevitably it would involve a great deal of litigation and much activity for lawyers.
I believe that the provision would waste valuable court time; it would result in a waste of time for FSA officials; and there would be a corresponding waste of money. Finally, and most importantly of all, it would distract the attention of FSA officials who ought to be concerned with the functions and furtherance of the interests of the FSA in carrying out its statutory responsibilities.
Perhaps I may also say that I am not suggesting for a moment that the proposed amendments are not well motivated because they do have a certain superficial attraction. However, I believe that they are quite unnecessary and that it would be more appropriate for them to be withdrawn.
At this stage, I do not think that it is necessary for me to elaborate on any of the arguments that have been advanced by the noble Lord, Lord Grabiner, the noble and learned Lord, Lord Donaldson, or my noble friend Lord Bagri.
The line I should like to suggest to the Government--here I hope that I am kicking at an open door--is this. As I understand the scheme of the Bill, the "super regulator" should be the Financial Services Authority. In many respects, it wants the responsibilities imposed on it by statute to be discharged by lesser or devolved bodies; that is to say, the recognised investment exchanges. Then, when it comes to matters such as market abuse or whatever it may be, the FSA would expect those bodies to take up the investigation and the approach before the FSA itself took on those tasks. If that is the case and if I have understood it correctly, it seems to me to be entirely right that if a degree of immunity is to be granted to the FSA, it follows that the same degree of immunity should be given to the RIEs or other bodies required to discharge such responsibilities.
I hope that that is a self-evident proposition and that I have understood what the FSA and others have told me. However, if I am wrong about that, it would be helpful if the Deputy Chief Whip could explain the position. While I am not in any way threatening the Government, if he cannot do so, we shall need to explore these matters in much greater depth on Report.
I believe that the short and simple answer to this problem is that there should be an equivalence of treatment in terms of immunity. Whatever degree of immunity is conferred on the FSA, exactly the same degree of immunity should be conferred on those who might be required, under the terms of this statute, to discharge their responsibilities to ensure that the markets are properly regulated.
I too support the remarks of the noble and learned Lord, Lord Donaldson of Lymington, and the noble Lord, Lord Bagri. During the course of the Joint Committee's investigation I was fully persuaded of the case for statutory immunity on the grounds of the dangers of over-regulation.
Financial supervision requires a lot of difficult judgments and if everything the regulator does is to be subject to threats of legal action, over-regulation and excessive caution will ensue. It is already the case that, if anyone loses money because a bank or security house goes down, the first thing he does is go to the regulator for compensation. That already happens even though statutory immunity exists in relation to banking supervision.
Regulators will become enormously cautious. They will want everything checked. They will want copies and written confirmation of everything that is done. They will regulate and regulate. There is always going to be risk. The only way to avoid risk to a regulator is by pushing up the costs and making life extremely difficult. So, although the idea of statutory immunity is difficult for many of us to live with, the alternative is considerably worse.
I should like to add a few brief words. I am not sure that I go along with the noble Lord, Lord Grabiner, on the question of recklessness. I find myself nearer to the views expressed by the noble Lord, Lord Phillips of Sudbury. I did not recognise his definition of "recklessness", though it is a long time since I have had to look into a law book. The phrase that comes to my mind is that recklessness is not caring whether something is true or false.
The situation that I fear may arise is where a keen, enthusiastic regulator--a member of the staff of the regulatory body--goes into a firm, be it an insurance broker or an investment manager and his suspicions are aroused that the business is not being run properly. In that suspicious frame of mind he feels he is being obstructed because personal antagonism has arisen between him and the head of the office. He then realises that he has not got all the documents he needs to be able to conduct his investigation. He storms out and as he goes he points and says, "Make no mistake, we are going to get you".
Events continue on and finally he goes for an Anton Piller order; the bailiffs go in and all the documents have to be frozen. But it all turns out to be a mare's nest. The business was being perfectly properly run and the situation simply fell foul of human relations. That is not bad faith, but it could be recklessness. He could have got himself into the frame of mind whereby he said, "I am going to get him and hang the consequences". Is there to be no remedy for that?
That is the sort of situation which I can envisage and where, without the word "recklessness" appearing in the schedule, the wronged head of the office would only be able to throw himself on the mercy of the ombudsman. That was one of the points Mr. Herrington made when he gave evidence to the Joint Select Committee of the noble Lord, Lord Burns. If the ombudsman finds that there has been malpractice, then he can now order that there shall be compensation paid. As Mr. Herrington reminded us, that is what happened in the Barlow Clowes case. That was the other way round, of course; The regulator should have recognised that he was dealing with a fraud and failed to. A lot of people lost a lot of money as a result, so compensation was ordered and the DTI had to pay.
That would be the only other remedy available. The noble and learned Lord, Lord Donaldson, shakes his head and my noble friend Lord Bagri says no, so perhaps I had better sit down. But I envisage that kind of case, where extreme damage could be done to a firm and to its reputation and there may be no redress at all.
At the risk of trespassing on the Committee's time, perhaps I can briefly answer that if the FSA goes to the courts and asks for Anton Piller orders or Mareva injunctions or anything of that sort, it will be liable in costs. Its immunity would not extend to it then. I entirely support the point of the noble and learned Lord, Lord Fraser, in relation to devolution.
Perhaps I may add a few words on this important topic. I do so not on the question of what this would do for lawyers. Indeed, I entirely agree with the noble and learned Lord, Lord Donaldson, and my noble friend Lord Grabiner. Lawyers will be the greatest losers if this amendment is not passed. Neither my noble friend Lord Grabiner nor I will be able to show our faces in the Temple and Lincoln's Inn for weeks to come.
I do not wish to speak on that point and I do not speak as a lawyer; I speak as someone who, for a period of about three years, was chairman of a regulatory body. I wish to support, and perhaps slightly elaborate, the point made by the noble Lord, Lord Bagri. I refer to the risk of distortion of the regulatory process as a result of imposing on regulators a duty of care towards others, which is what the negligence amendment would do. But who is likely to be in their sights? The people who are most likely to sue for negligence are those who would be regulated. So this amounts to saying that the regulators owe a duty of care to avoid loss to the regulated.
As a matter of pragmatism and as a matter of theory, that seems to me to be wrong. It is wrong that the FSA should be looking at those who are to be regulated and worrying about what the consequences will be. It is wrong both in practice and in theory. It is wrong in theory because the duty--and this is the substantial point--that the authority ought to be following is not a duty to avoid loss to those who are regulated, it is a duty to support the regulatory objectives under Clause 2; namely, market confidence, public awareness, the protection of consumers and the reduction of financial crime. Anything which takes the eyes of the regulators off those objectives would be wrong. Of course, there must be limits--no bad faith and no breach of fundamental rights, such as those in the Human Rights Act. But, beyond that, those objectives should remain clear and focused. These amendments would distort and paralyse that process.
There is already a provision for judicial review. Perhaps Members of the Committee can imagine themselves in a regulatory body that lost two or three judicial reviews in a row: no one would have any confidence in you, no one would trade in your market and, indeed, no one would believe you. I believe that there is an automatic remedy in this respect. If we go in for subjective judgment about recklessness or negligence, it will open up a Pandora's box.
In view of what many noble Lords have said about these amendments--three out of four of which are tabled in my name--I feel that I ought to be making my contribution from the Opposition Front Bench under an assumed name, or at least wearing a false beard.
I should like to start by saying how profoundly I disagree with the contribution of the noble Lord, Lord Burns. He has made such a distinguished contribution to everything connected with this Bill that I find this very hard to say. All my amendments ask the FSA to do is to behave reasonably. The noble Lord said that, if the FSA was saddled with the obligations set out in these amendments, it would be immobilised. However, doctors are not immobilised just because they face an action for negligence if they commit a mistake in an act of surgery. Soldiers are not immobilised because they know that if they pull the trigger and get it wrong they may be tried for murder. Policemen are not immobilised when they rush to make an arrest. Those three professions face big liabilities if they get it wrong.
The FSA has months to plan what it is going to do--months to consider each step that it takes. Why should it have immunity in circumstances where those other bodies do not? I quite understand the concern of the noble Lord, Lord Burns, and that of the noble and learned Lord, Lord Donaldson, about endless litigation. But what about the regulated party who has been negligently or recklessly ruined by a decision of the FSA? What recourse does he have--particularly when one looks at the wholly inadequate provisions of the investigator? I think, with great respect, that there is a different context in which these amendments ought to be looked at. I hope that I may take the Committee through the three amendments.
I did not go into the issue of the complaints procedure and looking at this from the side of the party that was regulated. My comments concerned depositors and the people who carry out business with the financial institutions and the relationship they have with them. If, at any stage, anything were to go wrong with one of the financial institutions that was being regulated, there would immediately be a great outcry on the part of everyone who had lost money. They would try to use these provisions to recover their money, possibly even where they had taken a risk which they should have taken into account but which they would subsequently try to lay off on the regulator. That was the burden of my remarks. I was not so much considering the matter from the point of view of the regulated firm--which, I have argued in the past, should be dealt with by the complaints procedure--but rather from the point of view of depositors. An awful lot of depositors become evident when a financial institution gets into difficulty.
I thank the noble Lord, Lord Burns, for that clarification which raises a series of issues which I believe will be dealt with later in the Bill. My amendments focus on the position of the regulated party.
These amendments amount to three changes to paragraph 19(3) of Part IV of Schedule 1 to the Bill. The first seeks to introduce the concept of recklessness into paragraph 19(3)(a), which is, at the moment, limited to bad faith. The second seeks to add acts or omissions in breach of European Community law to paragraph 19(3)(b). The third seeks to include the provision where, in the case of the authority but not its employees, acts or omissions are shown to have been negligent.
I shall discuss the amendments in turn. In paragraph 19(3)(a) it is clear that the authority is not exempt from liability for damages if it acts in bad faith. There is some uncertainty about what the term "bad faith" means. Some have argued that bad faith here ought to be defined in the way that it is in administrative law; that is to say, someone who acts wholly unreasonably, or takes into account issues that he ought not to have taken into account, or in some other way contravenes the rules of fairness which exist in judicial review. I suspect that that is not the sense in which the courts would interpret bad faith in this context.
It seems to me that they are most likely to interpret bad faith along the lines of the tort of malfeasance in public office. As many Members of the Committee are aware, there is at present some uncertainty about the scope of that tort. But on one interpretation that tort could include reckless behaviour if by reckless behaviour is meant not caring whether or not some consequence flows from an act. Recklessness may therefore already be contained in the concept of bad faith. But in any event, in my submission there ought not to be immunity from recklessness. If the authority acts, not caring what the consequences are, I believe that that is grossly wrong and so irresponsible of an official that the authority for whom he works ought not to be protected.
Then we come to the question of the scope of the Human Rights Act. Again, I know that a number of noble and noble and learned Lords will be all too well aware of the recent case of Osman in the Strasbourg court, reversing an important decision in our courts in the case of Hill v. Chief Constable of West Yorkshire, which essentially stated that police engaged in the activities of investigating and controlling crime are not immune from actions of negligence, or, at least, that any attempt to make them immune from actions of negligence is in breach of Article 6(1) of the human rights convention.
We do not know how that decision will play in our own courts because, under the Human Rights Act, our courts are obliged only to have regard to the jurisprudence of the court in Strasbourg. They are not bound by it. I am not saying that the consequence of what is already in the Act will, in effect, make decisions by the FSA, which are negligently made, liable for actions for damages. I am saying that the scope of that provision--heading (b) of paragraph 19(3) of the schedule--is now really quite uncertain and may in fact mean that the FSA is liable for negligence.
The third part of the amendment, I say with great respect to the Minister, is surely one that he can accept. If acts or omissions are in breach of European Community law, in circumstances where European Community law under the doctrine of a case like Francovich requires damages to be paid, the FSA will have to pay damages. There can be no question one way or the other. I put it to the Minister that that is something that should, irrespective of value judgments he might reach regarding recklessness or negligence, be fairly and squarely in the Bill.
The noble Lord, Lord Grabiner, who, like the noble Lord, Lord Goldsmith, is a lion at the commercial Bar and is very familiar with the application of judicial review to commercial matters, pointed out that judicial review is available as a remedy. He is quite right about that. As he well knows, for the particular remedies that are specific to judicial review itself, you cannot get damages. You can get an injunction--although I suspect that the remedy of an injunction will not be much use to a regulated authority because, by the time it wakes up to what has happened to it, the damage will have already been done by the authority. But damages are not open to it unless it has an independent, self-standing remedy deriving from another part of English law. With great respect to the noble Lord, Lord Grabiner, he might think that judicial review helps him. However, I am not sure that it does help me in trying to achieve what I am seeking to achieve.
In sum, I would feel less evangelical about these amendments if the Minister could find his way, between now and Report stage, substantially to reinforce the role of the independent investigator. Although of course it is important that the Minister takes into account the interests of the FSA in being able to take decisions that are final, it is very important that the Minister also takes into account the interests of those who are regulated. After all, they are the individuals who have made the City of London the enormous success it is today. They need certainty and they need to be treated decently, just as much as the FSA requires them to behave decently. In my submission, the Bill does not get this balance right. Either the balance has to be right in the area we are debating now; or the Minister has to go back to the earlier part of the debate we had today and reconsider what he said regarding the complaints investigator.
I am very well aware of the importance that noble Lords opposite attach to these amendments. There have been ferocious articles in the press in the past few days inspired, or written, by the noble Lord, Lord Saatchi, which have made it clear that statutory immunity is one of the principal areas in which they think the Bill is defective. I do not deny the importance of this issue. It is a topic which was considered in detail by the Joint Committee, which broadly approved the level of immunity proposed by the Bill, subject to certain proposals to strengthen the complaints arrangements, which we have broadly followed.
Statutory immunity is not new. We are not introducing it for the first time. The Financial Services Act 1986 provided for it; the Banking Act provided for it; and the Companies Act 1989 provided for it in relation to the regulation of company auditors. The Pensions Act 1995 gives the Occupational Pensions Regulatory Authority the same statutory immunity as the FSA will have under the Bill. Indeed, the Opposition, as the Conservative government, were instrumental in introducing the immunity into the existing legislation. The immunity was supported not only by the noble and learned Lord, Lord Donaldson, but also by the late Lord Denning, among many other distinguished lawyers. The immunity which is enacted here is limited. It does not prevent action for damages where the FSA has acted in bad faith. Developments since the Financial Services Act, the Banking Act, and the Pensions Act will serve to narrow the extent of the FSA's immunity.
Under the Human Rights Act, actions for damages are permitted in respect of an act or omission unlawful under Section 6(1) of that Act. I have signed a statement saying that the Bill is compatible with the European Convention on Human Rights. Conformity with the Human Rights Act is specified in paragraph 19(3)(b) of Schedule 1. The amendment on that point is simply not necessary.
In addition, of course, the FSA will not be immune from judicial review. It is essential that we have a structure which allows the FSA to get on with its work efficiently and effectively. A strong but accountable regulator is in the interests of the industry and consumers alike. I simply do not recognise the description which has been given in the press by the noble Lord, Lord Saatchi, and journalists, of this monster which is a succubus on the financial services community. I think that I have used the word "succubus" wrongly.
I am allowed to get away with it, okay!
The success of the financial services industry in this country is dependent on effective regulation. Members of the Committee have referred to the interests of depositors. This Government are on the side of the punters. That is what we have sought to achieve in this part of the Bill. Immunity of the kind that is provided in the Bill is essential in delivering that. Without it, the FSA could be frustrated by law suits and red tape.
Frivolous litigation could be an easy ploy to distract or hinder the regulator. We have had a good deal of discussion about the definition of "recklessness". What about negligence? I noticed that the noble Lord, Lord Kingsland, did not attempt to defend the amendment which seeks to extend the protection from immunity to negligence, which is a much wider concept than recklessness or bad faith.
I obviously did not explain myself as clearly as I thought I had done. In my opening remarks I said to the noble Lord, Lord Burns, how much I regretted the fact that he felt that the FSA would be inhibited by having to face actions for negligence. I pointed out a number of examples where others who face those actions for negligence do not appear to suffer the same inhibitions. I meant to say--if I did not, I apologise--that I back 100 per cent my amendment on negligence.
I am delighted to know that the noble Lord, being in a hole, insists on continuing to dig. Earlier I used the word "succubus". I realise that I should not have done. It is a female demon believed to have sexual intercourse with sleeping men. I do not think that I quite meant that.
In an attempt to remove my own levity from the debate, I have said that we are on the side of the punters, of the depositors. But of course we are on the side of the financial services industry as well. The noble Lord, Lord Burns, made very clear at the time of his committee and a few minutes ago, that the absence of immunity could make the FSA more averse to risk; it could engender a more formalistic regulatory environment; it could lead to the FSA seeking to collect too much information, setting tougher minimum standards, avoiding giving guidance and taking longer to reach decisions than it otherwise would.
It is important that the FSA has the ability to implement the objectives and principles--especially those relating to competition and competitiveness. We want the FSA to be a dynamic regulator. That might mean taking difficult or finely balanced decisions in cases where the answers are not black and white. In those cases, the authority should not have to run the risk of being sued as well. That is why core principle No. 1 of the Basel principles concerning banking regulators recognises the need for immunity of banking supervisors. We fully support that principle, and it is enacted here.
Consumers could also suffer if immunity were cut back. They too will benefit from the FSA applying the right touch--which is occasionally the light touch--to regulated firms.
The Bill provides checks and balances on the FSA's powers. Look at the disciplinary provisions, for example. Before the FSA takes disciplinary action, it is required to issue a warning notice, to receive representations from the recipient of the warning notice and then to issue a decision notice. The person in question can then refer the matter to the independent tribunal to be considered afresh.
There are also international comparators. There are, for example, the Basel core principles, as I have said, and other jurisdictions, such as the United States and Canada, where there is immunity from suit to varying degrees.
Amendment No. 41 would extend immunity to those acting as an agent of the authority. But the Bill does not contemplate the concept of an agent of the authority. It is difficult to see why, if the authority chooses to use an agent, the Bill should confer immunity on the agent if he renders himself open to actions in damages because he fails to fulfil some duty which he owes independently. If the authority wishes itself to indemnify an agent, that is a matter for the authority.
Amendment No. 42 seeks to cut back the immunity to exclude cases where the FSA has been reckless. Distinguished lawyers on all sides of the Committee have been arguing about what is meant by "recklessness". It is a term with different shades of meaning in different contexts, but it is primarily a concept, I think, in the criminal law. I am not therefore persuaded that the amendment is appropriate.
I should not want to introduce doubt into the scope of the immunity, since it is a vital element in ensuring that the FSA is able to take difficult decisions and to make prompt and effective responses to fast moving situations. But I do not want it to be thought that the FSA has been given a licence to act recklessly by the immunity as it stands.
Amendment No. 43 draws attention to the possibility of the FSA breaching European Community law in the context of statutory immunity. But the responsibility for ensuring that proper effect is given to the UK's Community obligations is one which rests on the Government, not on the authority. For example, directives are addressed to member states and it is for the Government to ensure that proper effect is given to them. Where it is necessary for the authority to take action in order to implement a directive, the Government must ensure that the relevant action is taken. If they fail to ensure that the action is taken, then it is the United Kingdom which will be in breach of Community obligations and the Government will be the proper respondent in infraction proceedings. That is why, although the Treasury has no general power of direction over the FSA, it will have such a power in respect of international obligations. Clause 389 refers expressly to Community obligations in this context.
I hope that this persuades Members opposite that this amendment, while highlighting an important issue, is unnecessary.
Amendment No. 44--I apologise to the noble Lord, Lord Kingsland, for coming back to this--would lift statutory immunity for negligence. We believe that the FSA should be able to operate in a fast-moving environment without fear of being sued for negligence; otherwise, we believe that the balance between freedom to regulate and over-caution would be tipped too far.
The noble and learned Lord, Lord Fraser, asked specific questions about regulated investment exchanges. In line with the recommendations of the Burns committee, Clause 284 provides for such immunity in relation to actions by both non-members and members. The Bill has always provided immunity for recognised investment exchanges in relation to actions by members of the exchange. The Burns Committee recommended that the provision should be extended to actions by non-members and the Bill was amended accordingly in Committee.
In conclusion, I realise the importance that those on the Opposition Front Bench attach to these amendments. But they have been soundly thrashed from all sides of the Committee: from the Cross-Benches by the noble and learned Lord, Lord Donaldson, and the noble Lord, Lord Burns; and on their own Benches by the noble Lord, Lord Bagri. They have no friends. I recommend that they withdraw the amendments.
I found the Minister's response to the amendment totally unsatisfactory. If the arguments that have been arraigned on his side of the House and by others in this debate have any validity at all, they apply to anyone carrying out the functions of the authority. All the amendment seeks is to extend that immunity to people properly appointed by the authority to carry out its functions on its behalf. If one follows the logical extension of the arguments advanced, that must be right and proper. I give notice that we find the government response totally unsatisfactory and that we shall be returning to this point on Report.
As regards Amendment No. 42, I find my experience is somewhat intimidating and unique. I have the big guns of noble Lords who are learned in the law arrayed against me on what I thought was a sensible extension of the provision. While I do not have a great deal of experience in this matter, not being a lawyer, I probably have more experience than anyone in this Chamber of being sued. In fact, I would put money on it. The prospect and the experience are generally good for the soul. I have yet to come across a lawyer who has advised me not to take legal action.
I believe that there is a valid concern in regard to standards and behaviour, and the whole concept of the behaviour of staff in an authority. If an authority is totally immune--and it is clear that the authority will not be totally immune from damages--the young, aggressive men who go around the market-place seeking to fix problems are totally without control. There needs to be a sensible hand on the budget. Again, it would be sensible to return to this matter on Report. In the interim, I seek leave to withdraw the amendment.
Perhaps I may ask one small question on the schedule. I apologise to the Minister for not giving him notice of it. I return to the subject of fees, and my question arises in relation to paragraph 17(2):
"In fixing the amount of any fee which is to be payable to the Authority, no account is to be taken of any sums which the Authority receives, or expects to receive, by way of penalties imposed by it under this Act".
It appears that if penalties have been exacted--and I have some corporate experience of that happening--the fees which the authority then fixes take no account of what it will receive from those who suffer penalties. What happens to those amounts?
When the insurance company with which I was concerned was subject to a penalty, there was widespread comment in the press that that was not unfair; it meant that everybody else's fees would be reduced and those who had to pay penalties paid the penalties. But this particular paragraph of the schedule appears to preclude any reduction in fees to anybody else to take account of the fact that the authority may have received penalties from some of its erring customers, as it were. Is that right, or have I totally misunderstood the paragraph?
I do not believe that the noble Lord has totally misunderstood it; rather, he has read only half of it. Paragraphs 16 and 17 are a symmetrical provision. Paragraph 16(1) provides:
"In determining its policy with respect to the amounts of penalties to be imposed [on] it under this Act, the Authority must take no account of the expenses which it incurs, or expects to incur, in discharging its functions".
Paragraph 17(2) provides:
"In fixing the amount of any fee which is to be payable to the Authority, no account is to be taken of any sums which the Authority receives, or expects to receive, by way of penalties imposed [on] it under this Act".
This is a symmetrical provision which applies both ways. It is intended to ensure that the fees and penalties are related to the offence involved and the authority's expenses in running its business rather than being punitive, which would otherwise be the case.
I believe that the noble Lord misquoted the sub-paragraph. He said "penalties imposed on it", whereas the last line reads "penalties imposed by it". If the noble Lord suggests that in relation to a particular regulated person or firm the fees take no account of any penalties that it may have to pay, that is one thing. However, that is not what the sub-paragraph says. The sub-paragraph provides that in fixing the level of fees no account is taken of whatever may be received by way of penalties, which presumably is available to the authority as a source of income. I understand the Minister's point about reciprocity with paragraph 16(1), but I do not believe that that is what paragraph 17(2) says. Perhaps the Minister will look at it again or consider whether I have misunderstood it. I read the provision as meaning that the fees are fixed and no account is to be taken of the fact that there is another slug of income arising from the generality of fined firms.
The problem is that, whereas in a court of law the prosecution will never specify the penalty but merely allege that the offence is serious or otherwise, in disciplinary tribunals of this kind it is not unknown for the prosecuting authority to say that it does not believe the offence is worth more than, say, £5 or £6 million. That produces an extremely embarrassing situation for the tribunal, particularly if one visualises a suggestion that if another £1 million is added a dividend can be declared. That is a thoroughly unhelpful atmosphere. While I agree that there is a problem over what to do with the fines--above all, they must not go to the Treasury--certainly they should be divorced from the fees which are paid by the members. Perhaps a benevolent fund should be set up for that purpose. All kinds of possibilities exist. But one must not have a situation in which an authority that prosecutes its members tries to hot up the penalties in order to reduce its fees.
I believe that the noble and learned Lord confirms what I said. Incidentally, if when I quoted the sub-paragraph I was heard to say anything different from the words of the Bill the fault was my articulation. Perhaps the fault was the noble Lord's hearing, but I prefer to blame it on my articulation. The point the noble and learned Lord makes is critical. The FSA does not take account of penalty income because it has to operate a scheme to rebate penalties under paragraph 16(2) of the schedule. That was a recommendation of the Joint Committee and the Bill reflects it.
"the international character of financial services and markets and the desirability of maintaining the competitive position of the United Kingdom".
Essentially the Opposition seek to lift paragraph (e) of Clause 2(3) and add it to Clause 1 as a new paragraph (c).
Why do we seek to do so? In its present position, that provision is a factor to which the FSA must have regard. That means that it is a relevant factor, but the weight given to it is up to the FSA. For example, as the Bill is currently drafted, the FSA can take into account the desirability of maintaining the competitive position of the United Kingdom but give that factor zero weight. We believe that the issue is central to the way the FSA goes about its work. The desirability of keeping in mind the importance of the international competitive position of the City should infect every decision the FSA takes.
In the proposed new position, that is precisely what would happen. Under Clause 2(1) the Bill would read:
"In discharging its general functions the Authority must, so far as is reasonably possible, act in a way which does not unnecessarily impair the competitive position of the United Kingdom".
The Minister will recall that, at Second Reading, your Lordships' House touched on the competition provisions in the Bill. Many noble Lords may recall that competition is defined in three different ways in Clause 3: first, in the way I have just described; secondly, in terms of the importance of the FSA having regard to the desirability of facilitating competition; and, thirdly, the importance of minimising the effects on competition that might arise from the general function.
The Opposition are content to leave the question of initiating competition and fighting cartels in the clauses as drafted. Indeed, as regards fighting cartels, a new chapter in the Bill deals with the relationship between the FSA and the Director-General of Fair Trading.
But the competitive position of the City is central, because if we over-regulate we quickly lose the wealth that the City has created. In those circumstances, the benefits that consumers of financial services have gleaned from additional probity would be completely undermined by the loss of inventiveness and the inclination to take initiatives that characterised the City before the Bill came on the statute book. I beg to move.
I find this an odd amendment. Surely no Member of the Committee would dispute the importance of London, or the UK, being globally competitive in financial services. The noble Lord, Lord Kingsland, must be right in suggesting that a balance must be kept between regulation and over-regulation.
I believe that effective financial regulation is a plus, a positive, in making Britain more rather than less competitive in financial services. Of course I agree that we must avoid over-regulation. However, in his amendment the noble Lord has "lifted"--that is his word, but I should say "elevated"--the promotion of competitiveness to a position which is wrong in the context of the Bill. He has moved it to a place above and beyond the four statutory objectives of the authority. He has raised it above the objectives of ensuring market confidence, consumer protection and so forth, but surely it is already in its proper place as one of a number of factors which it is wholly desirable for the authority to take into account.
I am most grateful to the noble Lord for giving way. He will see that the regulatory objectives have their initial status under subsection (1). Therefore, competitiveness is not raised above the regulatory objectives, but is given equal status.
Most Members of the Committee will have noticed that I listed (or began to list) the regulatory objectives, and they come after the place where the noble Lord wants to insert the phrase in his amendment. However, I understand his point and I hope that he understands mine; that he is seeking to raise the matter to a position of significance which is wrong in the context of the Bill where the main objectives of the FSA are the four listed. The Opposition have no objection to them and they accept them as being perfectly proper. I believe that competitiveness, as one of the factors to avoid over-regulation which the authority should take into account, is listed in the proper place.
The noble Lord, Lord Borrie, has advanced what I would describe as a "reckless" argument. When we discussed the matter in the Joint Committee, I attempted--I must admit that I failed--to persuade the other members that the issue of the international competitiveness of the United Kingdom, rather than simply of the City of London--I stress that to my noble friend--should be included among the regulatory objectives.
As everyone seems to agree, we are attempting to achieve a "balance". Indeed, the noble Lord, Lord Borrie, used that word in addressing the Committee. If the issue of the desirability of maintaining the competitive position of the United Kingdom were to be found only in subsection (3), that would relegate it to too low a status. I say to my noble friends Lord Kingsland and Lord Saatchi that the positioning of their amendment in Clause 2 meets exactly the objective of securing a balance. I shall surrender, albeit reluctantly, my initial argument that it should be among the objectives. For my purpose, I should be content to see it fit where my noble friends have suggested that it should be placed. That seems to me to achieve exactly what we are trying to do. The last thing I want to see is the United Kingdom as a kind of "Wild West" of financial services competitiveness, like some unnamed Caribbean island where anything goes. We are not in the least bit interested in that.
The noble Lord, Lord Borrie, is absolutely right: good regulation is good for business. I have no doubt that that is correct. Although I believe that the present administration in the Financial Services Authority is well seized of the desirability of ensuring the international competitiveness of the United Kingdom, nevertheless we are putting down in statute what should be its responsibilities beyond the immediate administration. It seems to me that this is the correct place in which to put that.
In advancing the argument--I make no bones about it--it is something of a concession from the position I originally wanted to see, as the noble Lord, Lord Burns, will know from hearing me state it endlessly while we conducted our deliberations. It would achieve the desirable balance. I hope very much that the Government will appreciate that we are not trying to cause serious damage to the scheme of the first clauses of the Bill; nor are we criticising the existing approach of the Financial Services Authority. I believe that it is desirable to encapsulate in statute the balanced approach that would be best for the United Kingdom in the future.
I hope that in the fullness of time--I doubt that we shall do so tonight--we shall achieve the agreement of the Government. It must be desirable that we do not do anything that damages the international competitiveness of the United Kingdom. The noble Lord, Lord Newby, believed that the issue of the chairman and the chief executive was the most important change to be achieved in the Bill. I must say to the Committee that by a long, long way, I regard as quite the most important feature that we ensure at all times the international competitiveness of the United Kingdom.
It surprises me that the importance of this is not better understood. At the moment, not only the City of London but, dare I say it, Scotland, which perhaps commands approximately 25 per cent of financial services in the United Kingdom, are in a position of extraordinary pre-eminence and one that we cannot afford to risk losing. My hope is that if the Financial Services Authority will grasp this as being the correct basis on which to approach its general duties, the pre-eminence that we enjoy at present will not be damaged. I hope that the noble Lord, Lord Burns, and my other colleagues on the Joint Committee will recognise that, because of the elegance of the solution that my noble friends have put forward, with a degree of reluctance I depart from the original approach that I once suggested.
My noble and learned friend Lord Fraser of Carmyllie has painted a picture of himself as a lone fighter battling against vast forces, championing his cause and hoping that one day it will come right. With the greatest respect to my noble and learned friend, I believe that he under-estimates his allies. I am sure that the noble Lord, Lord Burns, will recognise that many people have voiced concern that the competitiveness objective has been downgraded in the way that it now appears in the Bill.
I turn to the Interim Report into Competition and Regulation in the Banking Sector produced by Don Cruickshank. He noted that in effect other regulators have an additional regulatory objective to promote competition, stemming from their role in relation to competition in a particular authority. However, here we are talking about competitiveness overseas--with other markets. It is in that respect that the practitioners are really worried.
"enabling the UK to remain competitive" was an essential criterion for a regulator. A large number have insisted that it is imperative that these dual considerations of competition and competitiveness be elevated to principles to make the Bill more balanced.
The National Consumer Council, the British Bankers' Association and the Association of British Insurers all made it clear to the Burns committee that an objective relating to competitiveness and competition was required urgently. The Cruickshank banking review also favoured it, summarising well the bigger issue, as follows:
"Our priority should be to develop a strategy for striking the optimal balance between competition and necessary regulation. In the search for a higher sustainable growth rate in the UK beyond a stable low inflation macro-economic climate, there is in my view nothing more worthwhile for government to do than to get this balance right."
Downgrading the competition clause so that it appears where it does in the Bill now, rather than among the principles seems to me to be doing precisely the opposite.
Apparently the Government gave a pledge to reconsider the matter were Cruickshank to take a position on the issue. I am told that there has been no response. The Treasury Select Committee in another place also agreed that there was a good case for its inclusion, and called on the Government to consider it. That is in its third report of 1998-99. It should be noted that the SEC in the United States, with which many comparisons were drawn on Second Reading and the only body with comparably large powers, is now under a duty to consider, not just to have regard to,
"whether the action will promote efficiency, competition and capital formation".
Therefore, I strongly support the amendment. My noble friend is not a voice crying in the wilderness; he is voicing the concerns of a very large part of the financial community, a voice that the Government so far do not seem to have listened to. I hope that they will listen to it tonight.
The noble and learned Lord, Lord Fraser, was quite right in arguing that he has consistently put forward this point, including to the Joint Committee, but he was a little coy as to why the Joint Committee rejected it.
The point that was made then, and is important here, was that in so many situations today the regulatory strength of the Financial Services Authority will be defined by its relationship and joint action with other regulatory authorities. This is because of the general internationalisation of financial markets today and the need for regulators to act in co-operation with one another to secure the objectives set out in Clause 2(2).
The problem with the amendment is that if it were seen that it was an objective, or indeed one of the prime responsibilities, of the FSA to promote the competitive position of the United Kingdom, the FSA's ability to persuade other regulators to act in the interests of the UK would be impaired, since they would have a reasonable suspicion that the FSA was acting to promote the UK's interests against the interests of their national markets.
I believe that the noble and learned Lord is taking his argument too far. For example, I refer to the point made by the noble Lord, Lord Jenkin. The SEC rule gives it a duty to promote competition but not a duty to promote the competitive position of the United States, which would be a quite different requirement.
I believe that this amendment switches the balance much too far. The competitive position of the UK is dealt with in the right part of the Bill. If this provision is placed as required by the amendment, it will weaken the voice of Britain in international regulatory fora.
I wonder whether some Members of the Committee fully appreciate the full hierarchical beauty of the way in which this part of the Bill is constructed. The Burns Committee appreciated that beauty and was extremely supportive of the approach which we have adopted and, in particular, was very supportive of the role which is given in the hierarchy to the competitiveness objective.
That is why I mentioned one after the other. You can appreciate the beauty and disagree with it. But the Burns Committee appreciated the beauty and agreed with it. I did not say that they were necessarily connected. I said that those two did follow in the Joint Committee report.
Clause 2 sets out the FSA's general duties. Subsection (1) makes it clear that the FSA must, so far as reasonably possible, act in a way which is compatible with its regulatory objectives and which is appropriate to meet those objectives. Subsection (2) then lists those objectives, while subsection (3) sets out a number of matters, sometimes referred to as principles--that is, principles of good regulation; I do not mean legal principles--to which the FSA must have regard in carrying out the objectives. That is the hierarchy.
The purpose of the first six clauses of the Bill is simple. We want the FSA to regulate at the right level: neither to over-regulate nor to under-regulate. The objectives and principles work together towards that end, backed by the accountability and transparency arrangements which the Bill puts in place.
The purpose of the noble Lord's amendment is to bring competitiveness as an objective higher up the hierarchy. In answering that, I can do no better than to refer to the Joint Committee report. First, the Joint Committee supported the principle that the Bill should set statutory objectives and principles to inform its behaviour as it seeks to ensure markets of integrity and to provide a yardstick for accountability. It states:
"We agree that these should be set at a high level of generality, so as to be adaptable to changing circumstances. We agree that they should apply at the level of general policy and principles, rather than applying directly to every single act and decision of the FSA. We agree that they should not be ranked".
That is in paragraph 24. Then it goes on to deal specifically with competitiveness and competition:
"We agree with the importance of maintaining and seeking the competitiveness of UK financial markets. Some of us", and presumably that is the noble and learned Lord, Lord Fraser,
"would prefer competition and competitiveness to feature among the FSA's statutory objectives".
That is the noble and learned Lord, Lord Fraser, mark 1 rather than mark 2. It goes on:
"However, the Committee is content that competition and competitiveness should remain among the principles, rather than being turned into objectives. Making competition an objective would confuse the roles of the FSA and the OFT; making the competitiveness of UK financial services an objective could damage the FSA's relations with overseas regulators", as my noble friend Lord Eatwell pointed out.
Those arguments are absolutely decisive. Nothing in what we are saying suggests that we do not have positive competitiveness objectives nor does it suggest that the Government are opposed to competitiveness. This is an area where the primary responsibility does not lie with the FSA. The international competitive position of the UK financial services industry will be maintained by the people who built it up; that is, our financial services businesses themselves.
With due respect, I do not believe that that is only in the hands of the practitioners. If one over-regulates--there is little downside for regulators in over-regulating--that adds to the burden of regulation, which adds to the cost. There is nothing the practitioners can do to reduce that cost. I do not see why we are bashful about saying that we shall improve the competitiveness of UK industry and making that an objective.
I agree entirely with that. The effect of bringing competitiveness up the hierarchy in the way that the amendments propose would be to increase the regulatory burden rather than to reduce it. I do not know whether he wishes to, but the noble Lord, Lord Bagri, is in effect supporting the point I am making.
Perhaps I may briefly make my final point. I wish the Minister would recognise the enormity of the concession I was making. Both the noble Lord, Lord Eatwell, and the noble Lord, Lord Burns, know how vehemently I argued for the international competitiveness of the United Kingdom to be placed fairly and squarely among the objectives and not to be relegated to subsection (3). What I did not recognise at the time--I wish that I had; I am quite open about that--is that I would have argued for the solution now being proposed because, dare I say it, it provides a third way. Had I known that the situation might be approached in such a way, that would have seemed to provide me with the opportunity possibly to reconcile the differing views within the Joint Committee.
I have huge sympathy and admiration for the noble and learned Lord's odyssey. But I must be concerned with the destination of the journey rather than the way in which it has been achieved. The amendments proposed would upset the delicate balance currently contained in the first six clauses of the Bill. Changing the nature of the competitiveness principle in that way would induce a positively dangerous lack of clarity as to how the duty which noble Lords propose be placed on the FSA would interact with the objectives on the one hand and the principles on the other. It would be neither an objective nor a principle.
As the Bill stands, subsection (1) places a positive requirement on the FSA to take action. That is appropriate when discussing objectives; that is, the aims of regulation. In contrast, the need to take account of international competitiveness is something which should condition the way in which the FSA goes about meeting the objectives. That is as true for competitiveness as it is for the other matters dealt with in Clause 2(3). Competitiveness is not something which stands alone. While it is important--that is why we have included it as a regulatory principle--it is not more important than, say, the need to ensure that the FSA is inhibited from over-regulating; something which is dealt with also in the principles. In fact, over-regulation in itself can be a barrier to competitiveness. That is, I believe, the point made by the noble Lord, Lord Bagri. That illustrates that competitiveness is not something which can or should be viewed in isolation. It needs to be considered alongside all the other matters dealt with in Clause 2(3).
I have made clear the importance we attach to maintaining the international competitiveness of the United Kingdom. The UK financial services industry contributes around 7 per cent of our gross domestic product; it employs over 1 million people. UK markets are world leaders with a substantial and well-deserved international reputation. That is why we have been so careful in the Bill to give the FSA the right objectives and principles and why we put in place an impressive array of accountability arrangements. I appreciate and support the outcome that the amendment seeks, but I believe that the Bill as drafted already achieves it in the right way.
Is the noble Lord seeking to insult me over my charm or the content of my speech?