Financial Services and Markets Bill

– in the House of Lords at 3:10 pm on 21st March 2000.

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Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords) 3:10 pm, 21st March 2000

My Lords, I beg to move that the House do now again resolve itself into Committee on this Bill.

Moved, That the House do now again resolve itself into Committee.--(Lord McIntosh of Haringey.)

On Question, Motion agreed to.

House in Committee accordingly.

[The CHAIRMAN OF COMMITTEES in the Chair.]

Schedule 3 [EEA Passport Rights]:

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendment No. 121:

Page 232, line 7, leave out ("its proposed main agent") and insert ("the person proposed as the branch's authorised agent for the purposes of those directives").

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

I turn to a very important part of the Bill for the financial community: the mechanisms whereby firms from other member states in the European Economic Area exercise their rights under various European directives and the treaty to carry on regulated activity on the basis of their home state authorisation. It also concerns the equivalent mechanism whereby UK firms can exercise their directive rights in other member states.

The European single market represents a great opportunity for the UK financial services industry, which is the strongest and most competitive in Europe. It also increases the openness of the UK financial markets, to the benefit of those markets and the UK consumer. The amendments in this group relate to Schedule 3, which deals with the directives. We shall turn to Schedule 4 and treaty rights when we deal with the next group of amendments.

Government Amendments Nos. 121 and 123 concern Part III of Schedule 3 which sets out the arrangements for UK firms to passport into other member states. They tidy up provisions relating to the carrying on of insurance business by a UK firm exercising EEA rights that derive from the EC insurance directives. Amendment No. 121 replaces the defined term "main agent" in the context of firms operating on an establishment basis with language consistent with that used in the insurance directives. Amendment No. 123 removes the incorrect reference to "main agent" as the arrangements for authorised agents do not apply to an undertaking operating on a services basis.

I turn to Amendments Nos. 122 and 124 tabled by noble Lords opposite. Amendment No. 122 would make it a condition for an outgoing UK firm to exercise a passport right under the ISD to provide cross-border services (that is, without a permanent establishment in another member state) of which the FSA has notified the host state regulator. Amendment No. 124 would require the FSA to pass on a notice of intention to provide services within a month and to inform the firm that it has done so as soon as practicable.

We accept that those changes would be consistent with the directives and would make our implementation of the requirements more explicit. At present, it is intended to deal with those points using the rule-making power under paragraph 19(8) of the schedule. We shall consider further whether we should make changes along those lines, in which case we should also cover the position under the second banking directive. If we make changes along those lines we would probably also delete the rule-making power as it would be unnecessary.

On that basis, I would be grateful if noble Lords would not press those two amendments.

Photo of Lord Elton Lord Elton Conservative

Can the Minister tell the Committee the time-scale of the reconsideration that may involve the abolition of the rule-making power?

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

If it were to be done by an amendment it would have to be done on Report. If it were to be done within the rule-making power we could do it at any time.

Photo of Lord Kingsland Lord Kingsland Conservative

If I understand the Minister correctly, he is inclined to accept the substance of Amendments Nos. 122 and 124 but does not wish to put them on the face of the Bill. He would rather wait until they can be implemented through delegated legislation.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

The matter is slightly more complicated than that. In the spirit of trying to be helpful, we have not yet decided whether it would be desirable to put it on the face of the Bill. We may be able to do it by using rule-making powers, but if we have to put it on the face of the Bill we are prepared to do so. Fundamentally, we agree with the objectives of the amendments and they raise a valid point.

Photo of Lord Kingsland Lord Kingsland Conservative 3:15 pm, 21st March 2000

I am obliged to the Minister. As he is aware, it is argued that both these amendments are necessary. They are not an optional extra. I see the noble Lord shrug so perhaps I should give my reasons why I think that is the case. If it turns out that the noble Lord has second thoughts, I shall wish to return to this matter on Report.

On Amendment No. 122, in our view Part III of Schedule 3 does not appear to reflect the requirements of the investment services directive. If those requirements are not complied with, the host state regulator can properly refuse to allow the passport to operate. If a United Kingdom firm thought that it was using the passport to avoid local authorisation requirements, it could be breaking the local law and, indeed, on the UK model it could find that its investment agreements are unenforceable.

That oversight relates to the notifications that need to be given under the investment services directive. Paragraph 19(1) of Schedule 3 provides that a UK firm can exercise an EEA right under the investment services directive as soon as it has given the authority notice of its intention to provide the relevant services. Only in the case of the insurance directives must it wait until the authority has given notice to the host regulator and told the firm that it has done so. With great respect to the Treasury, I believe that there has been an omission by the Government in that regard.

On my interpretation of the second-banking directive and the investment services directive, the position in relation to cross-border services is as follows: under Article 20(1) of the second banking directive a United Kingdom credit institution merely has to notify the authority and thereafter can use the passport. Article 20(2) provides that the authority must notify the competent authorities of the host member state within one month, but that is not a condition precedent to using the passport. That was confirmed by the Brussels Commission in Part C of its June 1997 guidance on the second banking directive.

However, the equivalent provision under the investment services directive--Article 18--is phrased differently. Like Article 20(1) of the second banking directive, Article 18(1) requires the United Kingdom firm to notify the authority. Article 18(2) provides that the authority must within one month notify the competent authorities of the host member state, as in Article 20(2) of the second-banking directive. However, crucially, Article 20(2) goes on to provide that the firm,

"may then start to provide the investment service in question".

That clearly means that a United Kingdom firm cannot use its passport to provide cross-border services under the investment services directive unless it has notified the authority and the authority has actually notified the competent authorities of the host member state. That is what the amendment seeks to achieve.

The second-banking directive requires that the actual notification received by the authority must be sent and the investment services directive requires that the information received must be forwarded to the host state regulator. Therefore, merely notifying does not appear to be sufficient.

Amendment No. 124 imposes the obligation on the authority to inform the host state regulator within one month, as required both by the second-banking directive and by the investment services directive, and to tell the firm that it has done so. This latter requirement is to enable the firm, if it is an ISD firm, to know that it can now use the passport because the requirement in new paragraph 19(1)(b) has been fulfilled. There is no need for the authority to notify a firm under the second banking directive; but it seems sensible that the authority should tell the firm so that the firm knows that there will be no problem when it provides cross-border services in the host member state, even though, as is made clear in paragraph 19(1)(b), the freedom to provide cross-border services does not depend on that taking place.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

I am grateful to the noble Lord for his detailed exposition of the two amendments. If I have failed to cover some of the points in my original speech, that is only because when moving my amendment I took the opportunity to speak before he had done so. However, I certainly do not claim that his amendments are not necessary and I should now like to consider how best to give effect to their substance. The noble Lord is quite right to say that we need to deal with the second banking directive at the same time. My point was only that when we are making these changes it could be that there will be other changes that we shall wish to make concurrently, including examining the possibility of doing away with rule-making powers.

The noble Lord made two points on which I should like to comment. First, as regards the risk of leaving UK consumers exposed, I should make it clear that the FSA will have the power to act if necessary, but it is only right that the main responsibility should lie with the EEA firm's home state authority. Secondly, on the question of whether the FSA can intervene against an EEA firm, the FSA can intervene using its powers in Part XII in respect of the passport activities. It can also intervene in the normal way in respect of any additional permissions under Part IV.

The noble Lord's exposition of Amendments Nos. 122 and 124 will be most helpful when we consider our next move between now and Report stage. If we may, we should like to talk to the noble Lord about this in more detail, if he can spare the time.

Photo of Lord Kingsland Lord Kingsland Conservative

The noble Lord has been most generous and I am almost entirely reassured.

On Question, amendment agreed to.

[Amendment No. 122 not moved.]

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendment No. 123:

Page 233, line 5, leave out ("or its proposed main agent").

On Question, amendment agreed to.

[Amendment No. 124 not moved.]

Schedule 3, as amended, agreed to.

Schedule 4 [Treaty Rights]:

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendment No. 125:

Page 234, line 20, leave out ("has the same meaning as in section 5(3)") and insert ("means persons who are consumers for the purposes of section 129").

On Question, amendment agreed to.

Photo of Lord Kingsland Lord Kingsland Conservative

moved Amendment No. 126:

Page 234, line 27, at end insert ("; and

"EEA credit institution" means an EEA firm falling within paragraph 5(b) of Schedule 3 whose authorisation under the first and second banking co-ordination directives covers one or more investment services (within the meaning of the investment services directive)").

Photo of Lord Kingsland Lord Kingsland Conservative

In moving Amendment No. 126, I should like to speak also to Amendments Nos. 127, 128, 130, 131, 141 and 142.

Amendment No. 126 seeks to insert into Schedule 4 (at line 27 on page 234) the above definition relating to banks that are excluded from the investment services directive because their authorisation covers one or more investment services. The reference to paragraph 5(b) of Schedule 3 is to limit the relevant definition of EEA firms to credit institutions. In fact, the United Kingdom has voluntarily granted the equivalent of the investment services directive passport to these EEA credit institutions, even though they are legally entitled only to the second banking directive passport.

The key activities which were covered by the investment services passport, but not the second banking directive passport, are the receipt and transmission of orders and the arrangement of transactions in the secondary market. These are treated as included in the receipt and transmission of orders as a result of, I believe, the 13th preamble to the investment services directive.

The Bill does not allow for the grant of this voluntary ISD passport and therefore EEA credit institutions will find the position under the Bill rather worse than they did with its predecessor, the Financial Services Act 1986, which surely was not intended.

Amendment No. 127 seeks to insert at line 37,

"except where the firm is an EEA credit institution".

This amendment seeks to provide for the voluntary investment services directive passport. I accept that it could have been put into Schedule 3 itself, but it seemed to me that this would require substantial consequential amendments to be made to Schedule 3. I hope that the Minister will find the solution suggested here more satisfactory.

Since at present the voluntary investment services directive passport requires home state authorisation to carry on the regulated activity and the bank quite clearly has no EEA right to carry on these ISD passport activities, as they are not covered by the second banking directive passport, it seems to me that the EEA credit institution complies with conditions (a) and (c) in paragraph 3(1). Therefore, all that is necessary is to exclude paragraph (b).

As regards Amendment No. 128, firms which do have an EEA right cannot use it where they are dealing or giving advice by means of a remote communication from outside the member state where the customer or counter-party resides. This results from the guidance issued by the European Commission in June 1997 on the use of the second banking directive passport and probably also applies to the use of the investment services passport, although that is not entirely clear. The second banking directive passport applies only where both parties are within the same member state. The European Commission guidance states that, in these circumstances, the credit institution will not be in the member state where the customer or counter-party is. Therefore, the credit institution needs to rely on its rights to provide cross-border services directly under Article 49 of the Treaty of Rome.

I emphasise that the Commission's guidance results from lobbying by our own Treasury and the FSA and is the consequence of that which the UK wanted to see in place; that is to say, where a bank in the United Kingdom provides services by telephone, fax or screen from its United Kingdom branch to customers or counterparties in another member state, the regulator of the United Kingdom branch is the authority and not, as the Commission previously indicated would often be the case, the regulator in that member state.

I now turn to Amendment No. 131 which is to Schedule 4, page 235, line 15, and seeks to substitute the expression "permitted" for "regulated". Paragraph 5(1), Schedule 4, provides that a treaty firm must give the authority notice of its intention to carry on a regulated activity and it cannot carry on that regulated activity for the following seven days. I am concerned that this notification requirement and corresponding delay should only apply to the activities which the treaty firm is allowed to carry out under Schedule 4. However, the expression, "regulated activity" means all the activities which need authorisation. Therefore, as written, the notification and delay requirement applies to any activity for which the treaty firm obtains authorisation under Part IV.

I turn to Amendment No. 141 to Schedule 6, page 238, line 4, which leaves out the expression "an additional permission" and inserts "permission under Part IV". This amendment and the one that follows are drafting changes. Both amendments are intended, in effect, to clarify the references to "additional permission" in paragraph 7, Schedule 4. We believe it would be more accurate to refer to a permission under Part IV rather than an additional permission. I beg to move.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords) 3:30 pm, 21st March 2000

We are all searching for the same or similar solutions on these amendments. I have a suggestion. Both the noble Lord and myself have folders. Let us take the bits out and shuffle them and see which bits come out on top.

Photo of Lord Kingsland Lord Kingsland Conservative

The noble Lord says that, and it is good to find him in such a jesting mood this afternoon. The fact is that the Opposition in another place tabled similar amendments at both Committee and Report stages in another place and did not get anything like the positive reaction that we now receive from the Minister. So it was well worth while tabling the amendments. I shall be delighted of course, in the constructive way in which the Minister is approaching the matter this afternoon, to talk to him about it at some time between now and Report stage.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

Perhaps I had better make my full speech before giving the noble Lord, Lord Kingsland, too much encouragement.

Schedule 4 enables firms from other member states to exercise treaty rights to carry on regulated activities here. The government Amendment No. 129 concerns the interaction of EEA and treaty rights under the two schedules. Amendment No. 128, tabled and spoken to by the noble Lord, Lord Kingsland, may be intended to address the same point.

At present, paragraph 3(1)(c) of Schedule 4 rules out the use of that schedule to exercise a treaty right to carry on an activity which the person has an EEA right to carry on. It does not matter for these purposes whether the person is exercising or even intending to exercise their EEA right. The provision is necessary because it is an established principle underlying the passport directives that they provide the exclusive route for exercising the rights they cover.

Member states must ensure that the rights cannot be exercised by some parallel route that bypasses the notification procedures laid down in the directives. That is what paragraph 3(1)(c) does. However, the problem with paragraph 3(1)(c) as it stands is that it refers only to an EEA right to carry on "that activity", but makes no reference to the manner in which the firms may carry on the activity in question.

Following discussions in another place--I am sorry it appeared as though there was no response--we are persuaded that, although the circumstances may be unusual or rare, it is conceivable that, as a matter of Community law, the EEA right and the treaty right that the person proposes to exercise could be parallel rights to carry on the same activity by different means. Thus the person could have an EEA right to provide services by establishing a branch in another member state or providing services within the territory of another member state. They may or may not be exercising that right, or proposing to exercise that right. But that should not stop them also exercising a treaty right, if they have one, to carry on the activity in a way that is covered by the directive. An example might be if they were proposing to provide services to persons in the UK in a way which meant that they were not regarded, under the directives, as providing those services within the territory of the UK.

Amendment No. 129 narrows the exclusion in paragraph 3(1)(c) so that it only excludes treaty rights where the manner in which a regulated activity is to be carried on in exercise of the treaty right would be the same as that covered by an EEA right that the firm has. By introducing this concept of the manner in which a firm may have a right to carry on an activity, Amendment No. 129 resolves the problem, I hope to the satisfaction of the noble Lord, Lord Kingsland. On that basis, I hope that the noble Lord will not move his amendment and support ours.

Amendment No. 130 deals with the situation where a person from another EEA member state has permission to carry on activities under Part IV but then acquires or asserts a treaty right to carry on those activities. This might occur, for example, if the home state law is changed so that the activity then becomes regulated by the home state authority. Or the person may simply not have chosen to assert their treaty right before. The amendment provides that, when the treaty right is established, the relevant part of the person's existing Part IV permission is cancelled unless the authority has some good reason for maintaining the coverage of the Part IV permission.

I now turn to the opposition amendments. Amendments Nos. 126 and 128 would disapply for EEA banks the requirement under paragraph 3(1)(b) that for a firm to enjoy those treaty rights, their home state laws must afford equivalent protection to consumers, or must meet harmonised EEA standards if there are any in the area of activity concerned.

The need to be satisfied as to the protection offered by home state law or, where there is a Community instrument setting out minimum standards, that it has been implemented, is an important condition for recognising rights under the treaty. I am grateful to the noble Lord, Lord Kingsland, for his explanation. As he said, these amendments were tabled and discussed in another place, but at that time we were at a loss to understand the aim of the Opposition in tabling the amendments. However, we can still see no reason to suspend the requirements under paragraph 3(1)(b) for EEA credit institutions. Why should this group of institutions which already enjoys rights under the directive, be able to exercise rights that go beyond the treaty?

I turn to Amendment No. 131. I can understand the concern of the noble Lord, Lord Kingsland, that paragraph 5 might prohibit the treaty firm from carrying out any regulated activity in the seven-day period after it gives notice. That would be an unfortunate result if the regulated activity was something the firm had an additional Part IV permission for, or for which they enjoyed an exemption. We feel that they have a point but need to think about the solution. We are not convinced that changing "regulated" to "permitted" fully addresses the issue as it would still leave a treaty firm unable to exercise a Part IV permission. I shall be grateful if the noble Lord does not move the amendment and we will do our best to come up with a more complete solution.

Finally, I turn to Amendments Nos. 141 and 142 to paragraph 7 of Schedule 6, which deals with the application of the threshold conditions to treaty firms. I can see that the intention is simply to align this paragraph with the previous paragraph applying to EEA firms. We will consider further whether exact alignment is appropriate given the way in which EEA and treaty firms are dealt with under the Bill.

I hope that explanation deals with this rather complex and obstruse but nevertheless important issue.

Photo of Lord Kingsland Lord Kingsland Conservative

I thank the Minister for his response. There was not perhaps quite as much there for me this time as there was in his response to the previous set of amendments. But, nevertheless, there is sufficient to enable me to say that I will read carefully what the Minister said in Hansard. I hope that between now and the Report stage there will be an opportunity for me to have a discussion with the noble Lord to see whether we can resolve the outstanding difficulties. I beg leave to withdraw my amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 127 and 128 not moved.]

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendments Nos. 129 and 130:

Page 234, line 43, at end insert ("in the manner in which it is seeking to carry it on").

Page 235, line 12, at end insert--

("(3) If, on qualifying for authorisation under this Schedule, a firm has a Part IV permission which includes permission to carry on a permitted activity, the Authority must give a direction cancelling the permission so far as it relates to that activity.

(4) The Authority need not give a direction under sub-paragraph (3) if it considers that there are good reasons for not doing so.").

On Question, amendments agreed to.

[Amendment No. 131 not moved.]

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendment No. 132:

Page 235, line 20, leave out sub-paragraph (3).

On Question, amendment agreed to.

Schedule 4, as amended, agreed to.

Clause 30 [Partnerships and unincorporated associations]:

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

Clause 30 provides that when an "authorised person" is a partnership it will not lose its authorisation merely because of a change in membership. However, it also provides that authorisation will be lost unless the members of the succeeding firm are substantially the same as those of the former firm and the new firm has taken over substantially the whole of the business of the old firm. This is necessary because, unlike limited companies, partnerships in England and Wales and Northern Ireland do not have a legal personality that is distinct from their members. When a partner joins or leaves the business, the existing partnership is technically terminated and a new partnership formed.

The intention behind the clause is that a partnership should not have to apply for authorisation simply because, for example, it was dissolved and reformed when one of its members retired in the normal course of events and was replaced by a new partner. In contrast to England, Wales and Northern Ireland, partnerships in Scotland have a legal personality distinct from their members. Despite that, a change in the composition of a Scottish partnership can sometimes result in its dissolution and reformation. Therefore, this amendment extends the coverage of the clause to partnerships constituted under the law of Scotland. I beg to move.

On Question, amendment agreed to.

Clause 30, as amended, agreed to.

Clause 31 [Withdrawal of authorisation by the Authority]:

Photo of Lord Kingsland Lord Kingsland Conservative 3:45 pm, 21st March 2000

moved Amendment No. 134:

Page 14, line 28, leave out ("This section applies") and insert ("A person ceases to be an authorised person").

Photo of Lord Kingsland Lord Kingsland Conservative

In moving this amendment, I shall speak also to Amendments Nos. 135, 136 and 146 to 150. Amendment No. 134 proposes to amend Clause 31 by deleting the expression "This section applies" and inserting the words:

"A person ceases to be an authorised person".

Amendments Nos. 134 to 136 all apply to Clause 31, which deals with the withdrawal of a person's status as an "authorised person". However, the concept of the authority withdrawing a person's status as an "authorised person" seems to me at any rate to be a hangover from the passage of the Bill in the other place. Since then, the authorisation provisions of the Bill have undergone significant amendment. In my submission, the current provisions of Clause 31 represent something of an anomaly.

In particular, Clause 29(1)(a) provides that,

"a person who has a Part IV permission to carry on one or more regulated activities", is authorised,

"for the purposes of this Act".

It follows, therefore, that if an authorised person's Part IV permission is cancelled he must automatically cease to be an "authorised person". There is no requirement on the authority to give a direction withdrawing that person's status as an "authorised person", as provided by Clause 31(2). My amendments provide instead that a person ceases to be an "authorised person" if his Part IV permission is cancelled. As a result, there is no regulated activity for which he has permission.

I turn now to Amendment No. 146, which seeks to amend Clause 42 by replacing the expression,

"it is no longer necessary to keep", with the words,

"there is no good reason for keeping".

Clauses 42 and 43 deal with a variation of an authorised person's Part IV permission either at the request of that person or upon the initiative of the authority's own powers. In both cases:

"If, as a result of a variation of a Part IV permission ... there are no longer any regulated activities for which the authorised person concerned has permission", the authority must,

"once it is satisfied that it is no longer necessary to keep the permission in force", cancel it.

It is unclear what is intended to be covered by the words,

"it is no longer necessary", in both Clause 42(4) and Clause 43(2). We have suggested alternative words; namely,

"there is no good reason for keeping the permission in force".

We believe that that form of words is preferable. It should be easier to determine whether there is good reason for keeping the permission in force, rather than trying to determine whether there is reason that makes it necessary to keep the permission in force.

Amendment No. 148 deals with Clause 45 and seeks to amend it by leaving out the expression "at the request" and inserting the words "on the application". I unashamedly admit that this is a drafting amendment. Clause 45(7) provides:

"In subsections (4) and (5) 'request' means a request of a kind mentioned in subsection (1)".

Clause 45(1) does in fact refer to two types of request. The first two lines of the subsection refer to the authority's power to,

"vary or cancel a Part IV permission otherwise than at the request of an authorised person", while reference is made in the third and fourth lines to the authority exercising its powers,

"in respect of an authorised person at the request of, or for the purpose of assisting, a regulator", outside the United Kingdom. In my submission, it would be clearer if the first use of the words "at the request" were replaced by the words "on the application", as this is a form of words used in Clause 42(1) and (2).

As far as concerns Amendments Nos. 149 and 150, these are consequential drafting amendments that are intended to make the drafting of Clause 45(4) more consistent with that in Clause 45(3). I beg to move.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

The effect of the current provisions in Clause 31 is to provide certainty as to whether a person continues to have "authorised person" status. There is a definite act of withdrawing authorisation which identifies the end of this status. The effect of the amendments proposed would be to remove the requirement for a separate administrative act. Without such a definite act, the status of a person who has had his Part IV permission cancelled would depend on whether it is true that,

"as a result there is no regulated activity for which he has permission".

I must say that that sounds simpler than the provisions in the Bill as drafted. However, there are other means by which a person may have permission to carry on a regulated activity--for example, EEA or treaty firms qualifying under Schedules 3 or 4. I am sorry to say that the effect of these amendments would be to make the question of their status unclear.

Government Amendment No. 143 does two things. First, it clarifies that the power to specify additional conditions for non-EEA insurance companies is a power for the Treasury to make orders. In practice, it is intended that this will be used in relation to persons who are not covered by the single market directives, including a general requirement on applicants from outside the UK (including EEA applicants), to reproduce existing requirements that they maintain a general representative office here.

Secondly, the amendment enables the Treasury to make orders which vary, remove or add to any of the existing conditions. This will enable the Treasury to ensure that the threshold conditions remain up to date and consistent with any changes to EC law. This is particularly important as many of the existing conditions reflect minimum requirements applicable to authorised persons covered by the directives.

Amendments Nos. 146 and 147, to which the noble Lord, Lord Kingsland, has spoken, are concerned with cases when the FSA has varied a firm's Part IV permission so that there are no longer any regulated activities which it is permitted to carry on. The authority must--I quote again what the noble Lord, Lord Kingsland, quoted--

"once it is satisfied that it is no longer necessary to keep the permission in force, cancel it".

There are all sorts of reasons why the FSA might need to keep a permission in force; for example, the firm may have contravened a requirement and be subject to some form of investigation, or enforcement or disciplinary proceedings. Alternatively, the FSA may be concerned that the firm might have contravened a requirement and may wish to satisfy itself that the firm is not trying to hide something.

There is a balance to be struck here. We do not want the FSA to keep a person's permission in force unnecessarily. On the other hand, the FSA's ability to enforce its requirements for the protection of consumers would be seriously undermined if there were no means of dealing with issues such as the ones I have described merely because a person had ceased to be an authorised person permitted to carry on any regulated activities.

The effect of the proposed amendment would be to make it easier for the FSA to keep a permission in force if it thought that there might be a good reason for doing so. However, we think that the question which the FSA should be asking itself is not whether there might be a good reason, but whether, in the light of all the information that it has about the authorised person concerned, it is necessary to continue to be able to exercise control over that person. We think that the existing wording provides the right balance in that it allows the FSA to keep a permission in force if it is not yet satisfied that a person's permission can safely be cancelled. But it does not allow it to rely solely on the possibility that there may be something it might regard as a "good reason" for keeping the permission in force.

As the noble Lord, Lord Kingsland, admitted, Amendments Nos. 148 to 150 are drafting amendments to Clause 45 which concerns the exercise of the FSA's powers in support of an overseas regulator. Amendment No. 148 would make it clear that the FSA's own-initiative power does not include cases in which an authorised person has formally applied for variation or cancellation under Clause 42. However, there may be other circumstances in which an authorised person might effectively request the FSA to vary or cancel its permission. For example, if a firm with an existing Part IV permission subsequently qualifies for authorisation under Schedule 4, Amendment No. 130, which we have just agreed, requires the FSA to cancel the firm's existing permission unless it considers that there are good reasons not to do so.

Therefore, we think that it is appropriate to use a generic description such as "request" rather than include a specific reference to an "application". However, I appreciate the intention behind the amendment and I can confirm that the reference to "request" is intended to include such an application.

Amendments Nos. 149 and 150 would also make minor drafting changes to Clause 45. Subsection (3) requires the FSA, in deciding whether or not to exercise its own-initiative powers, to consider whether it is necessary to do so in order to comply with a Community obligation. Clearly if the FSA considers that this is necessary, it must comply. In any other case, the FSA has a discretion whether to do so and subsection (4) sets out some of the matters it can take into account.

The amendment would turn subsection (4) around and restrict the circumstances in which this discretion applies to cases in which the FSA considers that compliance is not necessary. But that amendment is in our view unnecessary. Subsection (3) already requires the FSA to consider whether it is necessary to exercise its power to comply with a Community obligation. If it fails to consider this, it will be in breach of that requirement. So, in summary, we think that subsection (4) is fine as it is.

Photo of Lord Kingsland Lord Kingsland Conservative

I have learned in the course of the past two-and-a-quarter days that the Opposition have two types of amendment: those that are just wrong; and those that are right, but unnecessary.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

A considerable number of opposition amendments have been helpful; we have received them with pleasure and with thanks and we have agreed to take them away and consider them. We actually accepted one.

Photo of Lord Kingsland Lord Kingsland Conservative

These are questions of ratios and proportions. I think that I shall do my mathematics at the end of today!

I was not happy with the Minister's reaction to Amendment No. 134. I may have misheard him. However, I wonder whether he can think of an illustration of a situation in which someone ought to have his permission cancelled, but the FSA does not think that it could be safely cancelled. Did I hear the Minister right in saying that, or words to that effect? It seems to me that if someone ought to have his permission cancelled, his permission ought to be cancelled. I cannot conceive of any circumstances in which there would be flanking reasons for the FSA wishing to continue to authorise someone even though it thought that he ought not to have that status.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

I do not think that is quite the question. The point is that under the amendments the status of a person who had had his Part IV permission cancelled would depend on whether, as a result of that, there was no regulated activity for which he had permission. There are other means by which a person may have permission to carry on a regulated activity; for example, EEA or treaty firms qualifying under Schedules 3 or 4. We have to take those into account. The amendment does not provide for that additional complication.

Photo of Lord Kingsland Lord Kingsland Conservative

I thank the Minister for those comments. I shall consider his response to the amendments and I may wish to return to some of them on Report. In the mean time, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 135 and 136 not moved.]

Clause 31 agreed to.

Clauses 32 to 34 agreed to.

Schedule 5 agreed to.

Clause 35 agreed to.

Clause 36 [Exemption orders]:

[Amendment No. 137 not moved.]

Clause 36 agreed to.

Clauses 37 to 39 agreed to.

Schedule 6 [Threshold Conditions]:

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendment No. 138:

Page 237, line 25, leave out from beginning to ("the") in line 26 and insert--

("(2) In reaching that opinion, the Authority may--

(a) take into account the person's membership of a group and any effect which that membership may have; and

(b) have regard to--

(i)") £

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

In moving Amendment No. 138, I should like to speak also to Amendments Nos. 139, 140 and 145. These amendments will enable the FSA to take proper account of the risks arising from an authorised person's membership of a group. The amendments to Schedule 6 make it clear that in assessing the adequacy of a person's resources for carrying on regulated activities, the FSA can have regard to implications that group membership may have for persons who are members of a group. When making the assessment, the FSA must take account of a person's membership of the group, as defined in Clause 396, and the implications that this may have in terms of provisions against liabilities and contingencies and the means whereby business risks are managed.

The amendment to Clause 41 inserts the provision that if the authority imposes a requirement as part of an authorised person's permission to carry on particular activities under Part IV, it may frame this requirement with reference to the person's group or to members within that group; for example, by placing a limit on exposures to other members of the group, or imposing a requirement to hold more capital to reflect risks elsewhere in the group.

These are important amendments that ensure that the existing approach to consolidated supervision can be maintained in line with European Community law, the Basle principles for banking supervision, and good banking practice generally. I beg to move.

On Question, amendment agreed to.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords) 4:00 pm, 21st March 2000

moved Amendments Nos. 139 and 140:

Page 237, line 26, after ("makes") insert ("and, if he is a member of a group, which other members of the group make").

Page 237, line 28, after ("manages") insert ("and, if he is a member of a group, which other members of the group manage").

On Question, amendments agreed to.

[Amendments Nos. 141 and 142 not moved.]

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendment No. 143:

Page 238, line 15, at end insert--

("(3) "Specified" means specified in, or in accordance with, an order made by the Treasury.

. The Treasury may by order--

(a) vary or remove any of the conditions set out in Parts I and II;

(b) add to those conditions.").

On Question, amendment agreed to.

Schedule 6, as amended, agreed to.

Clause 40 [Giving permission]:

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendment No. 144:

Page 17, line 25, at end insert--

("( ) If the applicant--

(a) is a person to whom, in relation to a particular regulated activity, the general prohibition does not apply as a result of Part XIX, but

(b) has applied for permission in relation to another regulated activity, the application is to be treated as relating only to that other regulated activity.").

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

In moving Amendment No. 144, I shall speak also to Amendments Nos. 159 to 163 and Amendment No. 277A. Clause 40 sets out the authority's basic power to give permission for the applicant to carry on the regulated activity or activities to which his application relates. Under Part XIX the Society of Lloyd's is to be authorised to carry on certain regulated activities. The permission will be defined by the authority as if it had been granted under Part IV.

Under Clause 55, the FSA is able to make an order prohibiting any individual whom it considers to be unfit and not proper to perform the functions in connection with regulated activities from performing such activities. Amendment No. 144 is a technical amendment which allows a Lloyd's member to hold a Part IV permission at the same time as benefiting from the provisions of Part XIX which deals with Lloyd's. Its effect will be to reduce the activities for which Lloyd's members need to seek FSA authorisation. Thus an application to the FSA by a Lloyd's member will be treated as relating only to the regulated activity for which he is seeking Part IV permission. The amendment would introduce a provision which would be equivalent to that provided for recognised investment exchanges in subsection (3).

Amendments Nos. 159 to 163 are to Clause 55 which deals with prohibition orders. They are technical amendments extending the scope of the clause so as to ensure that the FSA has the requisite powers to prevent a person performing functions in relation to regulated activities carried on by members of a profession or persons controlled or managed by members of a profession and who benefit from the exemption under Part XX. As such, it ensures that members of professions are treated consistently with other authorised persons in respect of prohibition orders.

Amendments Nos. 159 to 162 are consequential to the changes made by Amendment No. 163. Opposition Amendment No. 277A proposes that we insert wording at the end of the definition of "exempt person" in Clause 392 so as to bring professional firms which have the benefit of the Part XX exemption within this definition. The effect of that will be to subject professional firms carrying on exempt regulated activities to the Clause 55 regime. As will be clear from Amendments Nos. 159 to 163, those amendments perform that function. I hope that the Committee agrees that that makes Amendment No. 277A unnecessary. I beg to move.

On Question, amendment agreed to.

Clause 40, as amended, agreed to.

Clause 41 [Imposition of requirements]:

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendment No. 145:

Page 17, line 43, at end insert--

("( ) A requirement may be imposed by reference to the person's relationship with--

(a) his group; or

(b) other members of his group.").

On Question, amendment agreed to.

Clause 41, as amended, agreed to.

Clause 42 [Variation etc. at request of authorised person]:

[Amendment No. 146 not moved.]

Clause 42 agreed to.

Clause 43 [Variation etc. on the Authority's own initiative]:

[Amendment No. 147 not moved.]

Clause 43 agreed to.

Clause 44 agreed to.

Clause 45 [Exercise of powers in support of overseas regulator]:

[Amendments Nos. 148 to 150 not moved.]

Clause 45 agreed to.

Clause 46 [Prohibitions and restrictions]:

Photo of Lord Kingsland Lord Kingsland Conservative

moved Amendment No. 151:

Page 20, line 45, after ("A") insert ("or contravene any other obligation or duty the institution may owe A").

Photo of Lord Kingsland Lord Kingsland Conservative

In moving this amendment, I should also like to speak to Amendments Nos. 152 to 154. As the Committee is well aware, Clause 46 concerns prohibitions and restrictions. Amendment No. 151 at page 20, line 45, states,

"after ('A') insert ('or contravene any other obligation or duty the institution may owe A')".

Clause 46 explains the consequences if the authority imposes an assets requirement (as defined in Clause 46(3)) on an authorised person--that is A--when it gives or varies a Part IV permission. Clause 46(5) excuses institutions from breach of any contract with an authorised person if the institution does what the authority tells it to do, and we want to extend this exclusion of liability. It is wrong that the institution should incur any liability to pay for complying with the authority--for example, in the case of a breach of fiduciary duty.

As regards Amendment No. 152, on page 22, line 4 of the Bill, after the word "instruction", it seeks to insert "without reasonable excuse". Clause 46 gives the authority power to impose requirements on authorised persons and to give notice of these requirements to any institution with whom the authorised person keeps account. The institution does not act in breach of any contract with the authorised person if, having been instructed by the authorised person to transfer any sum or otherwise make any payment out of the authorised person's account, the institution refuses to do so in the reasonably held belief that complying with the instruction would be incompatible with a requirement imposed by the authority.

However, if the institution complies with the instruction from the authorised person, it is liable to pay to the authority an amount equal to the amount transferred. It does not seem reasonable that the institution must be automatically liable when complying with such an instruction when it appears that the requirement imposed by the authority is not an absolute requirement. Therefore, to balance the approach adopted in Clause 46(5)(a) it would be reasonable to include the words "without reasonable excuse".

I can deal with Amendment No. 153 much more telegraphically. The amendment relates to page 21, line 15, where the expression "the liquidator" is left out and the expression "a liquidator of A" is inserted. It is a drafting amendment. Clause 46(7) refers to a "liquidator" but does not specify whose liquidator is being referred to. It is probably a liquidator of A, and hence the amendment.

Finally, I turn to Amendment No. 154. This relates to page 21, line 18, where we leave out the expression "A" and insert the expression "the Authority".

Clause 46(8) dictates the circumstances in which assets are treated as held by a person as a trustee, and so are subject to the assets requirement referred to in subsection (3). In another place, the Government argued on Report--as indeed they had in Committee--that if, as we had originally suggested, both A and the authority could notify the trustee, they both would do so and so would confuse the trustee. However, we want the authority to be included as a party notifying the trustee because otherwise, if A decides not to notify, as is quite likely, the asset requirement will not apply and investors will lose out. To avoid the Treasury's justification for refusing our amendment, therefore, we should provide that it is only the authority that notifies the trustee.

In this context, I should mention that the European Court of Human Rights has just agreed in two cases that it would make the trial unfair if any evidence was not given to a defendant, even if the evidence was subject to a public interest immunity certificate. The important thing is that disciplinary proceedings are probably within Article 6(1) of the European Convention on Human Rights, and, indeed, the Treasury confirmed in its submission to the Burns committee in May 1999 that it thought that that was the case. Article 6(1) requires that the hearing should be "fair"; and therefore these protections would apply in the case of disciplinary proceedings, at least before the tribunal. I beg to move.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords) 4:15 pm, 21st March 2000

I should say first that, since the side headings to clauses are not part of the Bill, I think the side heading to Clause 46 is misleading. The clause relates to assets management, not prohibitions and restrictions more generally.

However, I am grateful for these helpful amendments, which seek to clarify the effects of assets requirements imposed by the authority under Clause 46. The FSA may impose requirements on authorised persons either restricting the use or disposal of their own assets or requiring the transfer of their assets or investors' assets to an approved trustee. These restrictions might be imposed if the FSA has concerns about the authorised person's solvency or suspects fraudulent behaviour and the FSA wishes to safeguard the position of consumers.

The clause provides for notification to other institutions, such as a bank where the person subject to restriction has an account. It protects those institutions from actions for breach of contract if they comply with the terms of the restriction.

Amendment No. 151 seeks to extend that protection to other obligations or duties to which the institution may be subject, such as a fiduciary duty or a duty of care. We fully agree with the intention of the amendment in that the bank needs to be able to rely on the restriction as a defence to an allegation that it has acted in breach of such a duty.

I also think it is desirable that the implications should be clear, so that there is no doubt in the minds of the financial institution, the firm or of any third party as to whether the protection extends beyond contractual duties. It should not be necessary for the parties to have to obtain legal advice before complying. On the other hand, this amendment is arguably unnecessary because the existence of such a restriction would normally be recognised as a defence in equity or in tort in any event.

So I should like to consult parliamentary counsel on the exact drafting of this provision. For example, we might not want the terms of a restriction to override, say, the terms of a binding statutory obligation or duty. However, I undertake that we will consider this amendment further and, if appropriate, table an amendment on Report.

Amendment No. 152 concerns the liability which is imposed under subsection (5)(a) on a financial institution which acts in breach of a requirement notified to it by the authority. It would give the financial institution a defence to that liability if it could show that it had a "reasonable excuse" for having paid out or transferred any part of the account.

Again, I can see the intention behind the amendment. However, it is important to remember that we are not dealing here with punishment of the institution for an offence, but with safeguarding assets which may be owed to consumers or to other creditors. The effect of a breach of the requirement may well be to allow the firm subject to the restriction to dissipate its assets in a way that puts them out of reach of the firm's customers or creditors.

In such circumstances it is only right that an institution which has notice of the requirement should comply with it. Clearly there may be circumstances in which the notification has been garbled or not received, but in those circumstances no liability would attach to the institution in any event.

It is difficult to imagine any other circumstances in which the institution would have a reasonable excuse for having failed to comply with a requirement. However, even if it did, we do not think that it would be right to deprive the firm's creditors or other persons to whom the assets may properly belong. To allow institutions to look for excuses for failing to comply with requirements could seriously undermine the effectiveness of the requirements and would expose smaller institutions to undue pressure from unscrupulous and perhaps desperate firms.

Amendment No. 153, which the noble Lord dealt with in telegraphic form, is a drafting amendment. I appreciate the thinking and probably the grammatical correctness, but I do not think that there is any real doubt that the liquidator referred to must be the liquidator of the authorised person, A, and so I would ask that the amendment is not moved.

Amendment No. 154 concerns the position of a trustee appointed to hold assets pursuant to an assets requirement. Subsection (8) provides that assets will only be treated as being held in accordance with such a requirement if the authorised person has instructed the trustee to do so by written notice.

The amendment would require that notice to come from the FSA rather than the authorised person. I can see why it might be desirable in a few cases for the authority to be able to back up this notification, but I think this would cause more problems than it would solve. The requirement to transfer the assets to a trustee is imposed on the authorised person, and although the FSA must approve the trustee that the authorised person selects, it is the authorised person's obligation to transfer his assets to the trustee. He will not have complied with the requirement if he fails to notify the trustee that those assets are to be held in accordance with the requirement.

The proposed amendment raises all kinds of issues of principle and practice about the relationship between the FSA, the authorised person and the trustee. Transferring property without the co-operation of the owner of the property would be controversial. Courts can do it, but, even before the Human Rights Act, a person's right to quiet enjoyment of property has been taken very seriously.

At this point, perhaps I may say a word about the ECHR judgment to which the noble Lord, Lord Kingsland, referred. He was correct in what he said about a defendant's rights, and the arrangements under the Bill--notably for the independent tribunal--protect those rights. The SFA's actions in respect of authorised persons are generally civil, so it is not necessary in such cases to provide the criminal protections for market abuse that we have included in the Bill.

If the assets are in an authorised person's possession, then it is no use the authority telling the trustee that he must hold assets that he does not have on trust. The only way the assets will get to the trustee is by directing the authorised person to get them there. The proposal that the authority should be able to instruct the trustee that he should hold property on trust always overlooks this case.

If a third party actually has assets that belong to the authorised person in his possession, then, if it is an institution at which he holds an account, a restriction under Clause 46(3)(a) can be imposed and that person cannot deal with the assets. This limited interference with third parties reflects the special role played by banks in holding and transferring assets.

But in any other case, giving the FSA power to tell the third party what to do is not only an interference with the authorised person's enjoyment of property but a significant imposition on the third party. If the third party does not want to hold the assets on trust, the FSA would then have to go around trying to find a home for them and transferring them from one person to another on the way; or it would have to be given power over third parties to tell them that they have to have the assets and do what they are told (and what would happen if they disobeyed).

When a person becomes a trustee he is generally under an obligation to deal with property in accordance with the instructions of the owner. To interpose the FSA into this relationship would completely distort the relationship of trustee and beneficiary, and run the risk of souring the relationship. I should be surprised if there was not a lobby out there ready to make the case of what a great commercial disadvantage this would be to the trustee.

Under the current provision these questions are avoided. The FSA has powers over authorised persons who have voluntarily accepted the authority's jurisdiction over them by entering the field of financial services. The authority can direct them to do things. It can take action against them if they do not. In practically all cases it ought to be able to achieve the intended result.

The small number of cases in which this might not work or is inconvenient is part of the balance between an effective system and an intrusive one. So far, the FSA has little or no power over third parties. It does not have power to interfere with ownership of property over the head of the owner. I believe that it should stay that way.

Photo of Lord Kingsland Lord Kingsland Conservative

I shall read carefully in Hansard the Minister's response and, if necessary, return to the matter on Report. Meanwhile, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 152 to 154 not moved.]

Clause 46 agreed to.

Clauses 47 and 48 agreed to.

Clause 49 [Applications under this Part]:

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

In moving this amendment, I should like to speak also to Amendments Nos. 156, 165, 238, 239, 254 to 257 and 263.

In another place, the Economic Secretary to the Treasury made a number of commitments to review the Bill to ensure that various provisions that appeared throughout the Bill were consistent. One such commitment related to the procedures, including consultation, for the exercise of the authority's legislative powers. That matter was addressed in the Bill before it was brought to this House.

Another matter on which a commitment was given was to review the extent to which actions were qualified by the word "reasonable"--or "reasonably"--and indeed to look again at provisions where those words did not feature. We had a certain amount of fun with this subject yesterday. The Government have now completed that review and these amendments reflect that work.

During the Bill's passage through the Commons, it was suggested on a number of occasions that it would be helpful, in particular provisions of the Bill, to make an express requirement for the authority to what is required by the provision in a way that is "reasonable".

As a matter of administrative law, it is well understood that a body exercising public functions under statute must act "reasonably". That requirement will apply to the authority just as it does to other bodies, such as the Treasury or the Secretary of State. If the authority were to act in a way in which no reasonable authority would, that would give rise to a risk of challenge by judicial review.

It goes without saying, I hope, that the Government would not wish the authority not to act reasonably in carrying out the functions conferred on it by or under the Bill. Imposing express requirements for the authority to act reasonably in certain clauses might, therefore, make little real difference in the way the authority was required to act under those clauses. But at the same time, it might have the effect of casting possible doubt on the need for the authority to act reasonably in other clauses where the requirement to act reasonably was not made explicit.

Against that background, we have not sought to impose requirements on the face of the Bill for the authority to act reasonably in every particular circumstance. However, we have identified some inconsistencies of approach which the amendments seek to correct. With the exception of Amendment No. 263 to Clause 331, the effect of the amendments is to restrict the authority's ability to request information, or further information, in connection with applications for permission, approval, authorisation and recognition. The amendments have the effect of limiting requests to information that the authority may reasonably require for relevant purposes.

We believe that that is helpful, since the effect of importing a "reasonableness" test to such provisions is to qualify not so much the way in which the authority acts, but the kinds of information that may be requested. That also achieves consistency with certain other provisions where a reasonableness criterion is applied; for example, where the authority must allow a "reasonable period" for consultation, or charge a "reasonable amount" for copies of drafts and final versions of rules.

Amendment No. 263 is different only in that it applies a similar reasonableness criterion to access to information; but in that case, it relates to the access that auditors and actuaries are entitled to have to an authorised person's records and information under the arrangements in Clause 331. I commend the amendments to the Committee and beg to move Amendment No. 155.

On Question, amendment agreed to.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendment No. 156:

Page 22, line 30, leave out ("further information") and insert ("such further information as it reasonably considers necessary to enable it to determine the application").

On Question, amendment agreed to.

Clause 49, as amended, agreed to.

Clauses 50 and 51 agreed to.

Clause 52 [Procedure on exercise of the Authority's own-initiative power]:

Photo of Lord Kingsland Lord Kingsland Conservative

moved Amendment No. 157:

Page 23, line 33, at end insert--

("( ) The Authority must allow the authorised person access to the evidence which it has in relation to the matters causing it to propose to exercise the power.

( ) The Authority's procedures in relation to the giving of warning notices as determined pursuant to section 375 shall apply in relation to the giving of the notice referred to in subsection (3) as if it was a warning notice.

( ) The Authority's procedures in relation to the giving of decision notices as determined pursuant to section 376 shall apply in relation to the giving of the notice referred to in subsection (4) as if it was a decision notice.").

Photo of Lord Kingsland Lord Kingsland Conservative

In moving this amendment, I should like to speak also to Amendments Nos. 158 and 185A.

Clause 52 allows the authority to cancel or vary an authorised person's permission to carry on a particular investment activity. Under the market abuse parts of the Bill, individuals against whom the offence of market abuse is alleged are entitled to a particular form of protected procedure involving warning orders, warning notices, decision notices, and ultimately access to a tribunal. Those protected procedures are denied to authorised bodies when they themselves are pursued for one or another reason by the authority.

Amendments Nos. 157 and 158 both seek the same objective; that is, to give the protection of a warning notice to authorised parties. Amendment No. 185A seeks, on the same principle, to provide similar protection under Clause 88. Clause 88 brings in the warning notice procedures if the authority, as the competent authority, wants to impose a penalty on a listed company, or indeed other persons, for breach of listing rules. In our view, here also the decision notice protections ought to be imported into these procedures.

The Minister will be aware that there was a substantial debate on this matter in the Joint Committee. Much of it revolved around the scope of Article 6.1 of the European Convention on Human Rights. The legal arguments in support of what I seek to do in the Bill have been well rehearsed. The noble Lord will be relieved to hear that I do not intend to embark on yet another exegesis of those matters. Nevertheless, the Opposition consider this to be a vital matter and hope that the Minister has had time for reflection since his colleagues in another place dealt with these issues. I am hopeful that I may receive a better reply from him than Members of the Opposition received in another place. I beg to move.

Photo of Lord Sharman Lord Sharman Liberal Democrat 4:30 pm, 21st March 2000

I support these amendments. I am not a lawyer and I do not wish to embark upon any form of legal argument. However, I believe that these are important amendments in terms of establishing confidence in the market-place in the activities of the FSA. Where an authorised person can be accused of misbehaviour, it is vitally important, in terms of maintaining confidence in the regulator and confidence in the market-place, that it should be on the basis of relatively open government. It is fundamental that the evidence upon which an accusation is based should be available to the accused. It is more than a question of legal argument; it is a matter of establishing confidence in the regulator.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

The noble Lord, Lord Kingsland, asked me whether I had had time to reflect. I have had time to reflect but I have not had enough time to reflect. This is the point at which I completely grovel to the Committee. We announced at Second Reading our intention to bring forward amendments to rationalise the decision-making process in the Bill. I very much regret that we have not been able to bring forward these amendments in time to have them discussed at this stage of the debate. This is a highly technical area, though I recognise that it covers important issues of concern that were extensively debated in another place. It is important that we should get the drafting of these provisions right. We should not try to do it piecemeal.

Before dealing with the noble Lord's amendments, I shall briefly describe what our amendments will achieve. The amendments that we intend to bring forward will distinguish three categories of decision to which subtly different sets of procedures will apply.

First, there will be disciplinary type decisions such as decisions to impose a penalty or make a public statement about misconduct. These may be under Parts V, VI, VIII or XIV. For this category, there is no particular urgency for the decision to take effect. Accordingly, the warning notice and decision notice procedures set out in Part XXVI will apply in full. We therefore accept the thrust of Amendment No. 185A, although we hope that it will not be moved in due course pending the introduction of our own amendments.

For these disciplinary decisions there will be a right of access to the evidence relied on and to evidence considered by the FSA which might undermine its case. The decision will come into effect only when the full procedure, including any judicial stages, is complete. I hope that my confirmation of this important point deals with one of the main concerns that has been expressed about the arrangements in the Bill.

We intend that the benefit of this same procedure should also be extended to certain types of case which, although not truly disciplinary in nature, involve particularly serious action by the FSA. This will include decisions by the FSA to cancel all permission (and therefore authorisation) under Part IV, to withdraw approval or make a prohibition order under Part V, and other similar types of action in relation to collective investment schemes under Part XVII, the professions under Part XX and auditors and actuaries under Part XXII. It will also cover cases where the FSA proposes to order restitution under Part XXIII. All these cases involve serious action, but action which need not necessarily come into effect with great urgency because, for example, there are other means by which the FSA can protect consumers in the short term.

The second category will cover the remaining supervisory type decisions, such as varying permission and imposing requirements under Part IV and suspension or discontinuance of listing under Part VII. Although these decisions can have a considerable impact on the persons concerned, their main objective is to ensure that consumers are properly protected. A more flexible procedure is therefore required which will allow the FSA's decision to take effect with the urgency required by the circumstances.

For these supervisory cases, we propose to follow the procedural model already set out in Clause 314 for Lloyd's directions. The decision would take effect on a specified date, whether or not the matter had been referred to a tribunal in the meantime. In some cases it will be necessary for the decision to take effect immediately, but we will ensure that the FSA cannot set any date that comes into its head. Instead, we propose that the date would have to be reasonable having regard to the harm that might be done if the requirement did not take effect then. For example, if no harm would be done by affording a longer time for representations to be made and for the tribunal to consider the matter, the person concerned should not be subject to the immediate imposition of the requirement.

The subject of the supervisory type decision would enjoy the rights currently provided for under Part IV to know the reasons for the decision, to make representations and to refer the matter to the tribunal. However, the rights of access to evidence will not apply. That is because these decisions will often be relatively routine. Full criminal style rights of access would be excessively bureaucratic and would seriously undermine the ability of the regulator to regulate responsibly and effectively.

For that reason, we cannot accept the thrust of Amendments Nos. 157 and 158, which seek to apply too much of the disciplinary procedure to these inherently supervisory decisions. I realise that I am using new definitions which are not contained in the Bill and with which noble Lords may not be familiar.

The third category will concern the grant or refusal of applications for permission, approval and recognition in respect of, for example, applications under Part IV (permission for authorised firms), Part V (approval for individuals), and Part XVII (authorisation of collective investment schemes). Where applications are granted in full or subject to changes to which the applicant consents, there should be a fast-track notice procedure which allows the applicant to benefit from the decision at the earliest time and with the minimum of procedural formality.

Where applications are refused, granted only in part or granted subject to requirements, the applicant should be entitled to receive a warning notice setting out the reasons for the decision, the standard opportunity to make representations, a decision notice and the right to refer the matter to a tribunal if still aggrieved by the decision. However, we do not consider that it is appropriate or necessary for the right to access to evidence to apply in this category of case.

Pending completion of the procedures, the FSA's decision will stand. That will ensure that the applicant can benefit from the permission or approval to the extent that it has been granted, while also ensuring that unfit applicants cannot carry on as if their applications had been granted while the judicial process runs its course.

I grovel once more! We should have been able to bring forward these amendments in time for this debate; we have not been able to do so. I have sketched out the changes that we propose to make. I hope to table amendments shortly. Meanwhile, I hope that noble Lords will trust me when I say that our amendments will meet the point in Amendment No. 185A, although we cannot accept Amendments Nos. 157 and 158 which would go too far in applying the disciplinary procedures to supervisory decisions.

Photo of Lord Kingsland Lord Kingsland Conservative

Your Lordships will, of course, trust the Minister. We look forward to seeing the new set of amendments which the Minister will undoubtedly table at Report stage in relation to these matters.

The distinction between disciplinary and supervisory powers is a seductive one, and one is tempted to think that they are differences of kind rather than simply differences of degree. In my submission, what matters in any of these proceedings under the Bill is the effect that they will have on the individual--that is to say, the nature of the penalty and the extent to which he can adduce evidence in his defence. As matters stand, it is my contention that the difference between an authorised person effectively losing his job as a result of a supervisory proceeding under the clauses that we are now reviewing and a non-authorised person losing his job as a result of a proceeding under the market abuse provisions of this Bill is, whatever language one uses to describe the procedures, a distinction without a difference under the European convention. That is the issue.

However, I accept that we are not in a position to address this issue at Committee stage. If the Minister is considering a substantial rewriting of this part of the Bill, I would request that we be given as much time as possible to reflect upon it before Report stage.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

I give that assurance to the noble Lord. I do not believe that a substantial rewrite of this part of the Bill is required. While we are dealing here with a specific problem, it would not be described as fundamental.

Photo of Lord Kingsland Lord Kingsland Conservative

The noble Lord may find that it is fundamental to the people who are affected by this part of the Bill. Meanwhile, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 52 agreed to.

Clause 53 [Exercise of own-initiative power with immediate effect]:

[Amendment No. 158 not moved.]

Clause 53 agreed to.

Clause 54 agreed to.

Clause 55 [Prohibition orders]:

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendments Nos. 159 to 163:

Page 24, line 24, leave out ("or an exempt person").

Page 24, line 31, leave out ("or exempt persons").

Page 24, line 32, leave out ("or exempt person").

Page 24, line 36, leave out ("or exempt").

Page 24, line 41, at end insert--

("( ) This section applies to the performance of functions in relation to a regulated activity carried on by--

( ) a person who is an exempt person in relation to that activity, and

( ) a person to whom, as a result of Part XX, the general prohibition does not apply in relation to that activity, as it applies to the performance of functions in relation to a regulated activity carried on by an authorised person.").

On Question, amendments agreed to.

Clause 55, as amended, agreed to.

Clauses 56 and 57 agreed to.

Clause 58 [Approval for particular arrangements]:

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

In moving Amendment No. 164, I should like to speak also to Amendments Nos. 164A and 164B in the name of the noble Lord, Lord Saatchi. These amendments are related to Clause 58 which requires authorised persons to obtain the approval of the FSA before allowing persons to perform certain important, or controlled, functions. A controlled function would be one that involved a person in dealing with customers or their property in connection with a regulated activity, or one that involved exercising significant influence over the conduct of the authorised person, such as a senior management position.

Currently, Clause 58(1) stipulates that an authorised person must ensure that no person performs a controlled function under an arrangement of the kind to which Part V applies, such as a contract of employment or contract for services, without the approval of the FSA. That could mean that the authorised body was in breach of its duty even where it had taken all reasonable care to make sure that it complied with this requirement. For example, a firm could be caught if an unapproved employee, having been quite properly employed on functions which were not controlled functions and did not require approval, went on to perform a controlled function without the consent of the firm but in breach of the firm's internal rules. The breach would unfairly expose the firm to FSA disciplinary action and give rise to a right of action under Clause 71.

The Government believe that that goes too far and leaves authorised persons exposed even when they have done everything they could reasonably be expected to do to guard against this kind of breach. The position is different from that which would apply under Clause 55(5) which deals with the situation where a person is employed in relation to a regulated activity in breach of a prohibition order, or Clause 58(2) which deals with the situation where an unapproved person is employed by a contractor of the authorised person. In those cases the Bill provides the test of "reasonable care".

The approach is a familiar one in legislation of this kind which imposes a duty on someone. The body is required to do what it reasonably can, but leaves it some reassurance where it is unable to foresee or avoid a breach. Amendment No. 164 is, therefore, designed to give authorised persons the same assurance in respect of their own employees or contractors so that, where they have taken reasonable care to avoid a breach of this clause, they will not face disciplinary action under Clause 71.

Amendment No. 164A in the name of the noble Lord, Lord Saatchi, contains slightly different wording which is intended to achieve the same effect. I hope that Amendment No. 164 gives the noble Lord the reassurance that he seeks. Amendment No. 164B would change the prohibition in subsection (7) so that it referred instead to people "handling" the property of customers. One reason that a function may be controlled is that it involves dealing with the property of customers. Subsection (7) relates to those people who deal with the property of customers in connection with the carrying on of a regulated activity. It is right that people such as fund managers should require approval. The positions that they hold and their direct responsibility for customers' property mean that they are in a position to cause direct harm to those customers if they do not meet high standards of integrity.

The term "dealing with" takes its ordinary meaning: it means receiving, handling, investing and looking after the property of the customer in connection with the regulated activity. To amend the subsection which deals simply with the "handling" part of "dealing with" narrows it too far. These are semantic points rather than matters of very great significance. I am afraid that in this case we cannot accept the amendment. I beg to move Amendment No. 164.

Photo of Lord Kingsland Lord Kingsland Conservative 4:45 pm, 21st March 2000

Amendments Nos. 164A and 164B are both concerned with Clause 58. I should have thought that what they sought to achieve was perfectly reasonable. Amendment No. 164A deals with the problem that Clause 58(1) contains an absolute prohibition on an authorised person employing someone who has not been approved by the authority to perform a controlled function. The amendment simply seeks to provide that the authorised person will not be treated as being in contravention merely because that happens. It seems to me to be a perfectly reasonable amendment.

As to Amendment No. 164B, subsections (5) to (7) of Clause 58 set out the controlled functions. Subsection (7) refers to dealing with the property of customers. That is all very well. However, as I understand it the authority has interpreted that as covering those cases where a person acts as an investment manager. I believe that that function is caught only by subsection (6). The amendment seeks to make clear that subsection (7) relates only to the holding of physical assets; for example, keeping them in safe custody.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

I rather think that in dealing with Amendment No. 164A the noble Lord has much more succinctly and clearly described what I said at inordinate length in relation to Amendment No. 164. We look to the same end: "take reasonable care" is the same as "seek to". I prefer Amendment No. 164, not because it is all that different in effect but because it uses the same wording as appears later in the clause.

On Question, amendment agreed to.

[Amendment Nos. 164A and 164B not moved.]

Clause 58, as amended, agreed to.

Clause 59 [Applications for approval]:

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendment No. 165:

Page 26, line 33, leave out ("further information") and insert ("such further information as it reasonably considers necessary to enable it to determine the application").

On Question, amendment agreed to.

Clause 59, as amended, agreed to.

Clause 60 [Determination of applications]:

[Amendment No. 166 had been withdrawn from the Marshalled List.]

Photo of Lord Eatwell Lord Eatwell Labour

moved Amendment No. 166A:

Page 27, line 8, at end insert ("and to whether the candidate demonstrates a commitment to engage in continuing professional education and development").

Photo of Lord Eatwell Lord Eatwell Labour

The objective of Amendment No. 166A is to assist in raising professional standards in the financial services industry and, in particular, to ensure that standards of competence keep up with the changing circumstances of financial markets. Clause 60 as currently drafted is peculiarly static for what is one of our most dynamic industries.

In evaluating the characteristics of a candidate, the authority is required to consider only his or her current qualifications with no regard to any commitment to maintain competence in the future. Unfortunately, the skills, say, of 10 years ago, if someone had been authorised then, are likely to be quite inadequate for today's markets, and the skills of someone authorised today are likely to be inadequate in 10 years' time. Things move on. The amendment recognises the nature of the industry and requires that, to be authorised, candidates will make a reasonable commitment to engage in continuing professional education and development. By adding the amendment, the clause will ensure that authorised persons are committed to maintaining their competence and skills in line with the development of the financial services industry over time. I beg to move.

Photo of Lord Lipsey Lord Lipsey Labour

I support the principle of the amendment. None of us would like to be treated by a doctor who had not read a medical magazine since leaving medical school--50 years after he qualified. The same point should apply to financial advisers. Just taking the exam is not enough. To some extent the existing regulator recognised that when it decided against "grandfathering" being allowed in the industry--that is, one cannot carry on doing the job just because one has been doing it for a long time; one has to obtain the necessary qualifications. In the same way, it is right in principle that qualifications should be continually updated in the way suggested by the noble Lord, Lord Eatwell.

However, I can see some practical difficulties with the amendment. I sit on the PIA membership committee. We receive great bundles of papers for each of the applications for individual registration. If Members of the Committee think that there is a great deal of paperwork for this Bill, they should see what I receive for a PIA membership committee meeting. It is essentially a "tick the boxes" operation. The applicants state that they have the necessary exams and the necessary experience. They state that they have the right financial resources or are backed by their firms. It is rather harder to assess whether an applicant whom one will not see in person really has the continuing commitment to which the amendment of the noble Lord, Lord Eatwell, refers.

I very much hope that the Minister will accept the principle of the amendment and before the Report stage will think a little about the practical difficulties. Perhaps there is some different wording of the amendment which would achieve the objective, to which the noble Lord, Lord Eatwell, is rightly directing us, without causing the practical problems to which I have referred.

Photo of Lord Sharman Lord Sharman Liberal Democrat

I support the principle of the amendment, although I wonder whether it goes far enough. As the noble Lord, Lord Lipsey, said, demonstrating a commitment at a point in time is difficult enough. What does one do? One says "Yes, I am going to do it" and then one signs a piece of paper. Many professional bodies now require their members to demonstrate that they have maintained what is commonly known as continuing professional education. The objectives of the amendment would be well served by some form of approach which requires maintenance of authorisation by reference to continuing professional education. Nevertheless, I support the principle of the amendment. I just wonder whether it goes far enough.

Photo of The Earl of Home The Earl of Home Conservative

I support the principle of the amendment. At my bank we constantly encourage people to seek the latest qualifications. However, there are times when experience and age have to be considered because it may not interest an individual to move on to the next stage of qualification. I should have thought that it is up to the management of the institution to ensure that those people get to the right stage of qualification for the job that they are asked to do. If they have to go further, either by statute or by the wish of management, they will move forward. I think that it is best to leave it to the management of the institutions to decide the qualifications of that person and whether by going one stage further the Peter principle may apply whereby he is promoted beyond what he is capable of doing and therefore cannot necessarily give the best advice to the client.

Photo of Lord Saatchi Lord Saatchi Conservative

We have some concerns about this amendment. In order to move forward, I wish to make a suggestion about it because, as Members of the Committee have said, the principle behind it is admirable. In order to explain the suggestion, perhaps I may address some of our concerns about Clause 60 in general. One of our concerns is that Clause 60 appears to take over the responsibilities of firms and to allocate matters to the FSA which in our opinion ought properly to be the responsibility of the firms and the employer. We think that the thrust of this is strange, given the comments on page 20 of consultation paper 26, in which an earlier Treasury document, an overview of financial regulatory reform, is referred to. It states:

"Regulation of the financial services industry should be directed first and foremost at the level of the firms operating in the industry. As now, the organised firm will continue to be the entity on which rules are imposed by the FSA and which is responsible for complying with those rules and for the consequences of not doing so".

The document goes on to argue:

"That justifies the FSA regulating and authorising directors and other senior members of the firm. It could also be used to support the concept that once the FSA has authorised those senior members, the firm--i.e. its directors and senior officers--should then be responsible for ensuring that more junior middle management conform to the rules and standards required in the Bill".

We should contrast that with what appears to be happening in the Bill, especially in Clause 60. The FSA is introducing itself directly into the regulation of middle management in attempting to assess not only whether someone is a fit and proper person, by ensuring that he has no record of dishonesty or of breaking rules elsewhere, but also in trying to assess whether people are fit for the jobs and activities at a micro-level. We believe that that is probably undesirable and, as the noble Lord, Lord Lipsey, hinted, perhaps unworkable. Perhaps it would be better if the FSA concentrated on regulating the firm and ensuring that it introduces and adheres to strict internal arrangements to ensure that more junior staff conform to these standards. We have to remember that 150,000 to 200,000 people in the City will have to be regulated and approved within the meaning of the clause. Out of that total, about 10,000 people change jobs every month. There is constant movement. Therefore, this will be an active area for the FSA.

As far as we can tell, Clause 60 already gives the FSA a veto on the appointment of directors, salesmen, corporate finance managers and other senior line management. That is set out in greater detail on page 23 of consultation document 26. We believe that the problem with the clause is that the tentacles of the FSA can reach right to the heart of decision making in any business by addressing and influencing staffing and remuneration--two issues usually considered to be the function of management. In that sense it is highly intrusive and takes a great deal of justification. We believe that the Government have acknowledged that point. In consultation document 26 the Treasury stated, in its overview of financial regulatory reform:

"It is not the role of regulators to try to run regulated businesses".

It went on to say:

"The regulator clearly needs however to have some direct influence over individuals in positions of senior management responsibility".

Those are the reasons why we believe that Clause 60 has already gone a little too far. Amendment No. 166A would take the process even further. The amendment is more or less the same as one tabled by the Liberal Democrats at the Committee stage of the Bill in the House of Commons. It was not accepted by the Government. The amendment describes the matters which the FSA must take into account when considering whether to grant an application to an individual to become an approved person.

In Clause 63(13) the definition of "approved person" is,

"a person in relation to whom the Authority has given its approval under section 58".

Approved persons are the individuals employed by an authorised person to carry on the controlled functions of the authorised person. Controlled functions must satisfy one of the conditions set out in subsections (5), (6) or (7) of Clause 58.

In summary, approved persons are the individuals who, among other things, provide investment advice, carry out investment management, arrange deals and securities, deal with client assets or have management functions which allow them to exercise significant influence on the conduct of the authorised person's affairs.

The amendment would require such a person, when applying to become an approved person, to demonstrate to the FSA a commitment to engage in continuing education and development. That is, as other noble Lords have said, a laudable objective, but perhaps I may respectfully suggest that the amendment may be in the wrong place. The FSA would find it very difficult to make a judgment on a person's commitment to engage in continuing education and development. A better approach might be to require the FSA to introduce continuing education requirements for approved persons so that an approved person would run the risk of ceasing to be approved unless he maintained a certain level of continuous training.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords) 5:00 pm, 21st March 2000

The noble Lord, Lord Saatchi, has raised the ante on the amendment by calling into question not only the provisions under Clause 60(2)--it is what others were discussing--but also the whole basis of Clause 60 and, by implication, of the whole approvals regime in Clauses 58 to 62. He seems to think that Clause 60, and presumably therefore the other clauses, go too far in taking over the responsibility of firms. I think that that is what he says.

If we go back to the beginning, Clause 2(3)(b) requires the FSA to have regard to,

"the responsibilities of those who manage the affairs of authorised persons".

They will have to bear that principle in mind in developing a proportionate approach to the use of the powers under Part V of the Bill. The Bill limits the types of functions which require approval.

If we take the section under the chapeau approval, it is the authorised person who has to ensure that no person performs a controlled function. As amended now, he has to take reasonable care to ensure that this applies to contractors. There are conditions in Clauses 58, 59 and 60 about applications for approval. If we were to debate the whole issue of approval we should take a good deal longer than would be justified on this amendment.

I have a past interest, I suppose, to declare on the question of professional education and development. I was the chairman, and many years later the president, of my professional organisation, the Market Research Society. Professional education and development was one of the aspects I was most keen to develop in the society. It did not always involve qualifications. Indeed, when it involved qualifications it did not work well. It did not always involve what one might call training; and it did not always involve (although it sometimes did) a level of competence. Therefore I recognise that professional education and development as a concept may well go beyond the training, competence and qualifications mentioned in Clause 60(2).

The difficulty I have with the amendment is one which has been referred to. It refers to a commitment to professional education and development. A commitment could mean, as the noble Lord, Lord Sharman, said that the applicant ticks a box saying, "Yes, I am committed to it" and thereafter does nothing about it. So we have to think again about the wording. We have to be sure--I am not yet sure--that professional education and development as a concept adds to the other criteria set down in Clause 60(2).

Having said that, I should like to think again about the relationship between professional education and development and the other aspects before Report stage. Of course, I cannot make any commitment, but I hope that my noble friend will not press an amendment which is not acceptable at present because of the aspect of commitment, and as presently worded.

Photo of Lord Eatwell Lord Eatwell Labour

I am grateful to noble Lords who supported the principle of the amendment, although most were somewhat critical of the formulation that I chose. I am particularly grateful, if slightly amazed, at support from the noble Lord, Lord Saatchi. His earlier remarks criticising Clause 60 and preceding clauses had led me to scribble on my notes a series of colourful remarks with which to upbraid what appeared to be an attempt to weaken the regulatory process of authorisation. However, I am delighted that he went through a remarkable sea change. At the end of his speech he declared that he would be happy to see the Bill--I hope that I cite him reasonably accurately--impose continuing education requirements on authorised persons. One says, "Hear, hear". That is far stronger than I put forward from my rather timid position.

I hope that when the Minister thinks again, he will not only take my advice but also the more draconian advice of the noble Lord, Lord Saatchi, which is clearly more in tune with the goals that I sought to achieve. Given my noble friend's commitment to think again, it is only right at this stage that I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 60 agreed to.

Clauses 61 to 70 agreed to.

Photo of Baroness Turner of Camden Baroness Turner of Camden Labour

moved Amendment No. 167:

After Clause 70, insert the following new clause--

:TITLE3:REVIEW OF CONDUCT IN REGULATED ACTIVITIES

(" . The Authority may--

(a) require all authorised persons carrying on a regulated activity of a specified kind to review their conduct of the activity in relation to a specified category of consumers and report the results to the Authority; and

(b) if satisfied as a result of the review that an authorised person has contravened any requirement made by the Authority under this Act, order him to pay compensation to consumers who have suffered loss as a result of such a contravention.").

Photo of Baroness Turner of Camden Baroness Turner of Camden Labour

The Personal Investment Authority ordered a review of the selling of personal pensions when it became clear that they had been sold to many people for whom they were not suitable because their occupational pensions offered a better product. It should be said in passing that, culpable as the industry was, it nevertheless received substantial support and encouragement from government policy at the time.

More recently the FSA has started a similar review into the selling of free-standing additional voluntary contributions as top-ups for occupational pensions. These top-ups are usually more expensive for consumers than additional voluntary contribution schemes run through occupational schemes. Where it has been found that there has been mis-selling the authority has required compensation to be paid to consumers and has established the calculation to be used in deciding the sum to be paid. In most areas where individuals have been sold a product which is not suitable for them, it is up to them to seek compensation through the ombudsman if necessary. But where there is evidence of widespread systematic mis-selling to people who can easily be identified as falling within a category of consumers for whom the product in question is unsuitable, a group approach co-ordinated by the FSA is likely to be more effective to alert individuals early on that there may be problems, and to get them compensation without the duplication of effort.

The Bill allows the FSA to require an authorised person to provide information and to apply to the court for an order of restitution. The purpose of the amendment is to allow the FSA to set up a widescale review covering all authorised persons doing business in a specified area, and to work out a compensation scheme if mis-selling is revealed. I beg to move.

Photo of Lord Saatchi Lord Saatchi Conservative

The noble Baroness, Lady Turner, described her aim well and I can see what her amendment aims at. However, when I read it, it suggested something different; that if requested to do so by the FSA, authorised persons would have to prepare a report only up to their regulatory breaches.

The difficulty might be in the drafting. As it stands, the scope of the report which will be prepared under those circumstances is not specified, other than that it covers the conduct of the authorised persons' regulatory activities. The fact is that the FSA has wide powers to carry out investigations and to require authorised persons to produce information. We doubt whether the additional power is necessary.

My reading of the amendment could well be wrong, but if the result of preparing a report into a person's own affairs would be the receipt of an order requiring the authorised person to pay compensation, I doubt whether the reports would be forthcoming or have great value. I am sure that that is a function of the drafting, which perhaps I have misunderstood.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

I am grateful to my noble friend for tabling the amendment and for the way in which she introduced it. It touches on an important issue: reviews by firms of past business and the need for the Bill to ensure that it can require such reviews. The requirement is in the light of the cases of mis-selling--most notably of personal pensions--which have come to light.

The Government have been considering whether to introduce their own amendment to allow such reviews, and we welcome the matter being brought back to the Committee's attention. In Committee in another place on 4th November 1999, the Economic Secretary to the Treasury said:

"We broadly intend that, where appropriate, the basic rule-making power should cover reviews of past business, such as pensions mis-selling. We are considering whether further exchanges are needed to put that measure beyond doubt".

Having done so, we intend to bring forward our own amendment on reviews of past business, but we shall do so in Part X relating to rule-making powers. I hope that we shall be able to table those amendments speedily so that they can be debated when we reach Part X next Monday. I hope that in the light of that commitment my noble friend will not press her amendment.

Photo of Baroness Turner of Camden Baroness Turner of Camden Labour

I am delighted by my noble friend's reply. Of course I am happy to withdraw my amendment. I am pleased that the Government are giving it favourable consideration and I look forward to seeing their amendment next Monday. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 71 agreed to.

Clause 72 [The competent authority]:

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

We now come to Part VI, which is concerned with official listings. As Members of the Committee will know, the competent authority for listing is responsible for maintaining the official list of securities in the UK. Its job is to control admission of securities to the official list and to monitor and police the compliance of issuers with the ongoing requirements that have to be met by the issuers of officially listed securities.

The requirement to have a competent authority and the bulk of the requirements which issuers of officially listed securities have to meet are laid down in the various European Community directives on official listing. Of course, they antedate those directives. There is no obligation on issuers of securities to apply for listing on the official list. It is a choice that they make. Admission to the official list acts as a kind of kite-mark. If a security is on the official list, investors and potential investors know that the issuers of the securities admitted to official listing are obliged to meet, and to continue to fulfil, certain requirements, particularly concerning the release of information to the markets.

The London Stock Exchange has been the UK's competent authority since the concept was first introduced into UK law in 1984. It has performed the function well, creating and enforcing the listing rules in a way which gives confidence to investors while meeting the commercial needs of users. That is why the Bill as introduced into Parliament continued to name the Stock Exchange as the competent authority. However, last year the Exchange announced its proposal to seek to demutualise. Indeed, last Wednesday, the Exchange held its Extraordinary General Meeting and voted in favour of demutualisation.

In the light of those developments, the Government have concluded that it is no longer appropriate for them to continue to exercise the competent authority function. Indeed, the London Stock Exchange itself--I cannot over-emphasise this--suggested that that would be inappropriate. A demutualised Stock Exchange will be a for-profit organisation. Quite rightly, its focus will be on the interests of its shareholders. Clearly, if the statutory functions of the competent authority were to be exercised by a commercial for-profit company, there is the possibility of conflicts of interest, or at least the perception of them. That is especially so given the background of increasing competition between existing exchanges and with new entrants coming into the market such as Nasdaq Europe.

Therefore, the Government announced last October that they intended to transfer the competent authority function to the FSA. The Exchange's timetable for demutualisation is rapid. It is expecting that once it has reregistered as a public company, trading in its shares will begin around May. As a result, the Government decided to lay regulations under the European Communities Act to effect the transfer from the Stock Exchange to the Financial Services Authority. The target date for the transfer to become effective is 1st May. Those regulations, which were approved by another place last Thursday, will come before this House soon.

The transfer under the EC Act will, of course, relate to the existing legislation contained in Part IV of the Financial Services Act 1986. The changes we are proposing in the Bill are more far reaching in that they will apply many of the accountability and transparency arrangements which the Bill is introducing for the FSA to the competent authority and put all its powers on a statutory footing.

This group of amendments--Nos. 168, 173 to 178, 195, 196 and 278--is concerned with who the Bill should name as competent authority. We shall come to the powers and accountability arrangements of the competent authority shortly. It makes sense to appoint the FSA as the competent authority. Although the function of competent authority and financial services regulator are different, there are useful synergies. The FSA already has a great deal of expertise in the area, a strong interest in the market in officially listed investments and a strong concern to ensure that such markets are not abused and that investors are protected. Having the financial services regulator perform this role is in line with the practice in a number of other countries including France, Germany, the US and Japan.

Locating the competent authority in the FSA will also ensure that competent authority staff--there are fewer than 100--have the opportunity to develop their careers within a larger organisation. It will also mean that central resources can be shared, keeping costs down. While the provisions of the Bill do mean that the statutory framework will change, with accountability and transparency arrangements improved, the key message for issuers and potential issuers is that it will be business as usual.

The FSA, in consultation paper No. 37 on the transfer of the listing function, stated:

"The FSA believes that, following the transfer, it will be important to maintain the current level of service provided by the UK listing authority and to ensure as much continuity as possible in order to maintain current standards of investor protection and to provide access to the capital markets for issuers".

The majority of the current listing department staff, including the head of the listing department at the London Stock Exchange, will be making the move to the FSA. Neither we, the Stock Exchange nor the FSA consider that the FSA's assumption of the competent authority function will overburden it or slow down its ability to respond.

The first of the amendments in the group, Amendment No. 168, names the FSA as the competent authority. It provides that the FSA rather than the Stock Exchange will exercise the functions of the competent authority on the coming into force of Clause 72. Amendments Nos. 178, 195 and 278 then make consequential changes, removing references to the "Stock Exchange" in the Bill and replacing them, where appropriate, with references to the "Financial Services Authority".

The other amendments in the group are concerned with the provisions of Schedule 7. That schedule allows the Treasury to transfer some or all of the functions of the competent authority from whoever is exercising it at a particular point in time to another body if certain conditions are met or if it is otherwise in the public interest. We considered whether it was appropriate to keep that power in the Bill following the decision to transfer the function to the FSA. We concluded that it was. The Delegated Powers and Deregulation Committee has approved our retaining the power.

Although, as I said, there are useful synergies with the FSA's role as the financial services regulator, the listing function is distinct. Most importantly, the duties of the competent authority are not so wide ranging. Essentially, it is concerned with ensuring that issuers provide the necessary information for the market, with the bulk of the requirements laid down in the directives. It is not concerned with the conduct of an issuer's business in the way that the FSA is concerned with the manner in which authorised persons deal with their customers and with each other. Therefore, it is not a function which must be carried out by a financial services regulator. There are advantages in this and that is why we are transferring the function.

However, there are plausible alternatives, such as creating a stand-alone competent authority. Therefore, we are retaining the power in Schedule 7 to transfer the functions. However, the grounds for exercising the power set out in paragraphs 3 and 4 of the schedule are no longer appropriate. Those grounds, which concern competition, were necessary when the function was carried out by a stock exchange in a world of competing stock exchanges. However, the FSA is not a commercial body, so the concerns about possible exploitation, or the perception of exploitation, of the role do not apply.

Of course, it is possible that the FSA, as competent authority, might carry out its functions in an anti-competitive way or cause others to engage in anti-competitive practices or agreements. However, at Report stage we intend to introduce competition scrutiny arrangements along the lines of those which apply to the FSA more generally. Under those provisions it will be possible for the competition authorities to investigate the competent authority's regulatory provisions and practices. If necessary, the Treasury will be able to direct them to make changes.

Therefore, Amendments Nos. 173 and 174 delete the competition grounds and make consequential drafting changes. The Treasury will still be able to transfer the function if it is satisfied that someone else can carry out the function better, if it is otherwise in the public interest, or if the competent authority agrees to the transfer. Any order which transfers the function would need to be subject to a debate in both Houses of Parliament.

Finally, Amendments Nos. 175, 176, 177 and 196 make consequential changes to the transfer power resulting from the decision to apply to the competent authority a number of provisions of the Bill which apply to the FSA. That will ensure that if we ever transfer the function, we can continue to apply appropriate accountability and transparency arrangements to the new competent authority. I beg to move.

On Question, amendment agreed to.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendment No. 169:

Page 33, line 6, at end insert--

("( ) Schedule 6A modifies this Act in its application to the Authority when it acts as the competent authority.").

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

Amendment No. 169 is grouped with Amendments Nos. 170 to 172, 179 and 191. These amendments make changes to the accountability arrangements which surround the competent authority in the light of the transfer of function from the Stock Exchange to the FSA.

We considered the merits of possible changes on a case-by-case basis, given the different nature of the competent authority function and the fact that those responding to consultation were generally content with Part VI of the Bill when the London Stock Exchange was named as the competent authority. We concluded that it was appropriate to make some changes. Although the Stock Exchange has carried out the function in a satisfactory manner, we believe that, as a result of the transfer to a body which has not carried out the function before, it is right to import a number of statutory checks and balances into Part VI.

Therefore, Amendments Nos. 169, 170 and 172 would ensure that the provisions of the Bill which apply to the FSA in its main role would apply also when the FSA acts as a competent authority. The provisions are applied subject to modifications set out in the new schedule inserted by Amendment No. 172. That means that all the arrangements in Schedule 1 which relate to the constitution of the FSA, the role of the non-executive members of the board, arrangements for the discharging, monitoring and enforcement of functions and the FSA's status all apply to the FSA as competent authority as well.

The provisions in paragraph 7 of Schedule 1 also apply. The complaints investigator will be able to investigate complaints about the competent authority in the same way as he investigates complaints about the FSA more generally. The FSA's annual report must cover the discharge of its functions as competent authority, as must the annual general meeting provided for in paragraph 11.

Only three matters in Schedule 1 are not applied directly to the competent authority. First, the provisions of paragraph 19 on the exemption of liability from damages are not applied. As for the FSA more generally, statutory immunity for the competent authority is extremely important in ensuring that it can carry out its job effectively. Let there be no doubt about that. It is simply that that is provided for separately in Clause 97.

Secondly, the provisions of paragraph 16 on penalties are not applied. Equivalent provision is provided by Amendment No. 192, which inserts a new clause after Clause 195. We shall debate that in a later group.

Finally, the provisions of paragraph 17 of Schedule 1 are disapplied. Amendment No. 191 introduces a similar provision for the competent authority concerning fees. The new schedule also disapplies a number of subsections in Clause 2(4). The effect is that neither the objectives in Clause 2(2) nor the principles in Clause 2(3) apply to the competent authority.

When we originally drew up the provisions of Part V1 of the Bill, we considered carefully whether we should set objectives for the competent authority in the legislation. We concluded that there was no need to do so for two reasons. First, this is an area where the directives permeate all that the competent authority does. Secondly, given its ability to transfer the functions to another body, the Treasury has a different role vis-a-vis the competent authority from the one that it has in relation to the FSA generally. Therefore, we intend that, as now, the Treasury will continue to agree annually the competent authority's objectives and to hold regular meetings to assess progress. The Treasury will, of course, be accountable to Parliament for how it goes about that.

However, we did consider it appropriate to introduce principles along the lines of those in Clause 2(3) to ensure that the competent authority was subject to appropriate constraints on the manner of its regulation. Therefore, Amendment No. 171 inserts a new clause after Clause 72 which requires the competent authority to have regard to a number of matters in discharging its general functions. I shall not list them because they are broadly equivalent to the matters set out in Clause 2(3), subject to changes which are necessary to take account of the fact that the competent authority is concerned with listed securities rather than regulated activities.

That aside, the only substantive difference is that there is no equivalent to the principle concerning the responsibilities of senior management. That is because the competent authority is not concerned with the conduct of the business of issuers in the same way as the FSA, as financial services regulator, is concerned with the conduct of authorised firms.

Paragraph 3 of Schedule 7 provides that Clause 7 of the Bill, which requires the FSA to consult the consumer and practitioner panel, does not apply to the competent authority because the constituencies concerned are different. The current arrangements, under which the competent authority consults a Listing Authority Advisory Committee, composed of issuers, corporate finance practitioners and investors' representatives, work well. Proposals for new listing rules or changes to existing rules are also referred to the Listing Rules Committee for its advice prior to public consultation.

We considered that incorporating those committees into the legislation would remove the current flexibility which the competent authority has without bringing any real gain. Here, we are talking about a completely different scale of operation from the FSA generally. As I said, the competent authority has fewer than 100 staff. Almost all the listing rules are derived from directive requirements. There is no point building in bureaucratic arrangements simply for the sake of it.

However, in modifying Clause 146 as it applies to the FSA in this context, paragraph 4 of the new schedule puts a statutory requirement on the FSA, when acting as a competent authority, to consult publicly, as it does now, on changes to the listing rules and new listing rules. It will also have to consult on rules which provide for the payment of fees. The procedural requirements concerning rules set out in Part X apply also to listing rules. Public consultation is vital in exposing what the regulator is proposing to do to the widest possible scrutiny.

Paragraph 4 also concerns the ability of the FSA to issue general guidance under Clause 148 in its capacity as competent authority. Again the procedural requirements, including the duty to consult, apply in the same way to competent authority guidance as for FSA guidance more generally.

The final element in the accountability and transparency arrangements is not yet fully in place. This concerns the warning notice and decision notice procedure and rights to refer competent authority decisions to the tribunal.

Amendment No. 179 provides for a right for an issuer to refer a competent authority decision to discontinue or suspend listing to the tribunal. That is not the end of the story as regards tribunal rights. We shall be bringing forward amendments on Report to align the decision procedures we shall be applying to other FSA decisions to competent authority decisions. And we will also be giving a right to refer competent authority decisions to the tribunal. Specifically there will be a right to refer decisions: to refuse admission to listing; to suspend or discontinue listing; to impose a penalty or issue a public censure; and decisions to refuse admittance to the list of sponsors or to remove people from that list.

Taken together the changes we are making to enhance the accountability arrangements for the competent authority should provide the Committee with the assurance that the FSA will carry out the function in a way which continues to give investors confidence while meeting the needs of issuers wishing to access the capital markets. I beg to move.

Photo of Lord Sharman Lord Sharman Liberal Democrat 5:30 pm, 21st March 2000

I am rather confused by Amendment No. 171. If the Bill creates the FSA as the competent authority for listing, which I understand is required by the European listing directive, I am at a loss to understand why it is necessary to insert this clause. All the provisions of this clause are covered in Clause 2, which places a duty on the authority in carrying out its general functions. If it were the competent authority, I must assume that that would include acting as the competent authority. Therefore, it seems to me to be repetitive and I do not understand why it is necessary. Perhaps the Minister will explain that to me.

I wish also to raise a point of detail which returns to the issue of facilitating competition. Paragraph (1)(f) in Amendment No. 171 states:

"In discharging its general functions the competent authority must have regard to ... the desirability of facilitating competition in relation to listed securities".

I spent a lifetime working in areas around that and I am at a loss to understand what that means.

Does that mean facilitating competition between individual listed securities in terms of the liquidity of the market; or does it mean facilitating competition in regard to the listing of securities--that is, competition between the various types of market which might list securities; or does it mean competition in regard to the trading of listed securities; or does it mean all of those? Perhaps the Minister will help me.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

The answer to the first question requires a textual analysis between Clause 2(3) and the new clause inserted by Amendment No. 171. Doing that as rapidly as I can, I see that Clause 2(3)(b) refers to,

"the responsibilities of those who manage the affairs of authorised persons".

That is not included in Amendment No. 171. It is for that reason that the matter is dealt with in this way. I believe that the other items are the same, which is why I did not read them out. But that textual difference, apparently, makes it more convenient to deal with it by having a new clause rather than by reference back to Clause 2.

As regards the second question, the reason is that we have the power to transfer the function under Schedule 7 and it is simply a matter of drafting convenience. I believe that the note which I have been handed tells me what I have already said but I cannot read it!

Photo of Lord Sharman Lord Sharman Liberal Democrat

Will the Minister answer the point on competition which I raised?

On Question, amendment agreed to.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendment No. 171:

After Clause 72, insert the following new clause--

:TITLE3:GENERAL DUTY OF THE COMPETENT AUTHORITY

(".--(1) In discharging its general functions the competent authority must have regard to--

(a) the need to use its resources in the most efficient and economic way;

(b) the principle that a burden or restriction which is imposed on a person should be proportionate to the benefits, considered in general terms, which are expected to arise from the imposition of that burden or restriction;

(c) the desirability of facilitating innovation in respect of listed securities;

(d) the international character of capital markets and the desirability of maintaining the competitive position of the United Kingdom;

(e) the need to minimise the adverse effects on competition of anything done in the discharge of those functions;

(f) the desirability of facilitating competition in relation to listed securities.

(2) The competent authority's general functions are--

(a) its function of making rules under this Part (considered as a whole);

(b) its functions in relation to the giving of general guidance in relation to this Part (considered as a whole);

(c) its function of determining the general policy and principles by reference to which it performs particular functions under this Part.").

On Question, amendment agreed to.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendment No. 172:

Before Schedule 7, insert the following new schedule--

:TITLE3:("SCHEDULE 6A

:TITLE3:THE AUTHORITY AS COMPETENT AUTHORITY FOR PART VI

:TITLE3:General

1. This Act applies in relation to the Authority when it is exercising functions under Part VI as the competent authority subject to the following modifications.

:TITLE3:The Authority's general functions

2. In section 2--

(a) subsection (4)(a) does not apply to listing rules;

(b) subsection (4)(c) does not apply to general guidance given in relation to Part VI; and

(c) subsection (4)(d) does not apply to functions under Part VI.

:TITLE3:Duty to consult

3. Section 7 does not apply.

:TITLE3:Rules

4.--(1) Sections 140, 144, 145 and 147 do not apply.

(2) Section 146 has effect as if--

(a) the reference in subsection (2)(c) to the general duties of the Authority under section 2 were a reference to its duty under section (General duty of the competent authority); and

(b) section 95 were included in the provisions referred to in subsection (9).

:TITLE3:Statements of policy

5.--(1) Paragraph 5 of Schedule 1 has effect as if the requirement to act through the Authority's governing body applied also to the exercise of its functions of publishing statements under section 89.

(2) Paragraph 1 of Schedule 1 has effect as if section 89 were included in the provisions referred to in sub-paragraph (2)(d).

:TITLE3:Penalties

6. Paragraph 16 of Schedule 1 does not apply in relation to penalties under Part VI (for which separate provision is made by section (Penalties)).

:TITLE3:Fees

7. Paragraph 17 of Schedule 1 does not apply in relation to fees payable under Part VI (for which separate provision is made by section 95).

:TITLE3:Exemption from liability in damages

8. Schedule 1 has effect as if paragraph 19 were omitted (similar provision being made in relation to the competent authority by section 97).").

On Question, amendment agreed to.

Schedule 7 [Transfer of functions under Part VI]:

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendments Nos. 173 to 177:

Page 238, line 25, leave out from beginning to first ("that") in line 27 and insert--

("(b) the Treasury are satisfied that the manner in which, or efficiency with which, the functions are discharged would be significantly improved if they were transferred to the transferee; or

(c) the Treasury are satisfied").

Page 238, line 29, leave out paragraphs 2 to 6.

Page 239, line 27, after ("VI") insert (", IX or XXVI").

Page 239, line 28, at end insert--

("( ) for reviews similar to that made, in relation to the Authority, by section 10;

( ) imposing on the new authority requirements similar to those imposed, in relation to the Authority, by sections 143, 146 and (Authority's duty to co-operate with others);

( ) as to the giving of guidance by the new authority;

( ) for the delegation by the new authority of the exercise of functions under Part VI and as to the consequences of delegation;").

Page 239, line 43, at end insert--

(" . If the Treasury have made an order under paragraph 1 ("the transfer order") they may, by a separate order made under this paragraph, make any provision of a kind that could have been included in the transfer order.").

On Question, amendments agreed to.

Schedule 7, as amended, agreed to.

Clause 73 [The official list]:

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendment No. 178:

Page 33, line 30, leave out ("continue to").

On Question, amendment agreed to.

Clause 73, as amended, agreed to.

Clauses 74 and 75 agreed to.

Clause 76 [Discontinuance and suspension of listing]:

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendment No. 179:

Page 35, line 4, at end insert--

("( ) If the competent authority discontinues or suspends the listing of any securities, the issuer may refer the matter to the Tribunal.").

On Question, amendment agreed to.

Clause 76, as amended, agreed to.

Clauses 77 to 82 agreed to.

Clause 83 [Publication of prospectus]:

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

In moving Amendment No. 180, I should like to speak also to Amendments Nos. 197 to 201 and Amendment No. 231. These amendments make a number of relatively minor changes to the provisions on official listing and related provisions.

Amendment No. 180 deletes subsection (6) in Clause 83. That is consequential following changes made in another place and is simply tidying up.

Amendment No. 197 corrects a technical error with Clause 98. The definition of "sale" in subsection (6) should read through to both paragraphs (a) and (b) of subsection (3).

Amendments Nos. 198 and 201 are a bit of housekeeping. Schedule 10 sets out a number of cases in which offers of securities are not to be regarded as made to the public. Paragraph 8 of that schedule covers offers of securities made to a public authority while paragraph 23 covers offers made by public authorities. The amendments simply define public authorities to mean UK central government, foreign governments, UK or foreign local authorities, and any international organisation of which the UK, or another EEA state, is a member. The amendment also gives the Treasury a power to specify other bodies, should that prove necessary.

Amendments Nos. 199 and 200 make changes to Schedule 10. Paragraph 18 of the schedule deals with securities issued by charitable bodies. The amendments are intended to ensure that charities defined under Scots law are covered by that provision.

Finally, Amendment No. 231 provides that there is no right of action for breaches of listing rules under Clause 141. There is no right of action at present, but following the changes made by the new schedule we have just debated, which applies Part X to listing rules, it is necessary to disapply Clause 141. That is not to say that there is no right of action in any circumstance where there has been a breach of listing rules. Clause 86 in Part VI allows those who suffer loss because of untrue or misleading statements in prospectuses or listing particulars to seek compensation. Clause 83(5) makes actionable a failure to publish a prospectus before making an initial public offer. I beg to move.

Photo of Lord Peyton of Yeovil Lord Peyton of Yeovil Conservative

I hate to be tiresome, but could the Minister spare a moment to explain how it was that subsection (6), which he is now seeking to delete, ever appeared in the Bill?

Photo of Lord Peyton of Yeovil Lord Peyton of Yeovil Conservative

To Amendment No. 180, which states,

"Page 38, line 25, leave out subsection (6)".

I am just wondering how subsection (6), now that it is unwanted, ever got into the Bill. Perhaps I may remind the Minister that subsection (6) states,

"For the purposes of this section, sections 141 and 142 are to be disregarded".

I wonder whether they are still to be disregarded.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

Amendment No. 180, which deletes subsection (6), refers to Clause 83, which makes it a criminal offence for any person to offer certain new securities to the public if listing rules require a prospectus to be published before the securities are admitted to the official list. Prior to an amendment on Report in the Commons, the clause provided that a breach of the prohibition by an authorised person was to be treated as a breach of rules. Subsection (6) was therefore necessary to provide that no private rights of action arose as a result of a breach of the prohibition in the clause. However, in the light of the consultation responses, we amended the clause so that authorised and unauthorised persons were treated alike, both being subject to the criminal offence. As a result, subsection (6) is redundant. The noble Lord has read it correctly in relation to Clauses 141 and 142.

On Question, amendment agreed to.

Clause 83, as amended, agreed to.

Clauses 84 and 85 agreed to.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendment No. 181:

After Clause 85, insert the following new clause--

:TITLE3:("Sponsors

:TITLE3:SPONSORS

.--(1) Listing rules may require a person to make arrangements with a sponsor for the performance by the sponsor of such services in relation to him as may be specified in the rules.

(2) "Sponsor" means a person approved by the competent authority for the purposes of the rules.

(3) Listing rules made by virtue of subsection (1) may--

(a) provide for the competent authority to maintain a list of sponsors;

(b) specify services which must be performed by a sponsor;

(c) impose requirements on a sponsor in relation to the provision of services or specified services;

(d) specify the circumstances in which a person is qualified for being approved as a sponsor.

(4) If the competent authority proposes--

(a) to refuse a person's application for approval as a sponsor, or

(b) to cancel a person's approval as a sponsor, it must give him a warning notice.

(5) If, after considering any representations made in response to the warning notice, the competent authority decides--

(a) to grant the application for approval, or

(b) not to cancel the approval, it must give the person concerned, and any person to whom a copy of the warning notice was given, written notice of its decision.

(6) If, after considering any representations made in response to the warning notice, the competent authority decides--

(a) to refuse to grant the application for approval, or

(b) to cancel the approval, it must give the person concerned a decision notice.

(7) A person to whom a decision notice is given under this section may refer the matter to the Tribunal.").

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

The amendment gives the competent authority the power to require issuers to employ the services of a person known as a "sponsor". The current competent authority, the London Stock Exchange, already requires the use of a sponsor. Sponsors are a concept deriving from the listing rules rather than a requirement of the EU directives or statute. Essentially, although employed by issuers, sponsors also have the role of providing assurance to the competent authority that applicants for listing fulfil their responsibilities and have exercised the necessary due diligence; for example, in producing proper working capital statements and profit forecasts.

In order to be a sponsor at present a person has to be on an approved list maintained by the competent authority. The criteria are: being an authorised person or the passported equivalent from another member state; satisfying the competent authority that you are competent to perform the role of sponsor; and giving a commitment to discharge the sponsor responsibilities set out in the listing rules and paying the prescribed fees. At present the competent authority enters into a contractual relationship with sponsors as regards compliance with the listing rules. Now that the function is to be transferred to the FSA we consider that the better approach is to provide for sponsors in the Bill.

The new clause is a permissive one. It allows the competent authority to require issuers to employ sponsors. The FSA is currently engaging in consultation on its role as competent authority. Although that is primarily focused on the operation of the function in the period between 1st May--the target date for the transfer--and the bringing into force of the relevant Bill provisions, the FSA is seeking views from sponsors and others on the sponsor regime in general. What role sponsors should play going forward will be for the FSA to decide following consultation. The Bill allows the competent authority to continue with the regime if it thinks it appropriate. Our understanding is that the view of the London Stock Exchange and the FSA is that sponsors currently play a key role in ensuring that applicants for listing fulfil their responsibilities. Treasury officials have talked to a number of market participants who expressed the same view.

As well as allowing the competent authority to require issuers to use the services of a sponsor, the new clause will continue to allow listing rules to set out what must be done by sponsors and how; and to specify the circumstances in which a person is qualified for being approved as a sponsor. It provides also for the procedures that must be followed if the competent authority proposes to refuse an application for approval as a sponsor or to remove a person from the list of sponsors. Those procedures will be subject to change on Report to bring them into line with changes we are proposing on procedures more generally. I beg to move.

Photo of Lord Sharman Lord Sharman Liberal Democrat 5:45 pm, 21st March 2000

I should like to ask the Minister to clarify a couple of matters. I endorse his remarks in terms of the importance of sponsors and the critical role they play in listing securities. For that reason, it is critically important that the acceptance or removal of the right to operate as a sponsor is as important as many of the other regulatory actions that the FSA may take under the Bill. I understand all the requirements. The only issue on which I should like clarification is the content of the written notices of decisions; for example, do they, or is it intended that they should, give the reasons for the decisions? At the moment as it stands, there is a provision for issuing warning notices and for removing the right to operate as a sponsor or declining the right to commence operating as a sponsor. But nowhere other than where the Bill mentions a written notice of decision is there an indication that the reasons for the decision would be disclosed to the sponsor. Will the Minister clarify that point?

On Question, amendment agreed to.

Schedule 8 agreed to.

Clause 86 agreed to.

Schedule 9 agreed to.

Clause 87 [Penalties for breach of listing rules]:

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendment No. 182:

Page 40, line 2, leave out from ("that") to end of line 12 and insert ("--

(a) an issuer of listed securities, or

(b) an applicant for listing, has contravened any provision of listing rules, it may impose on him a penalty of such amount as it considers appropriate.

( ) If, in such a case, the competent authority considers that a person who was at the material time a director of the issuer or applicant was knowingly concerned in the contravention, it may impose on him a penalty of such amount as it considers appropriate.

( ) If the competent authority is entitled to impose a penalty on a person under this section in respect of a particular matter it may, instead of imposing a penalty on him in respect of that matter, publish a statement censuring him.

( ) Nothing in this section prevents the competent authority from taking any other steps which it has power to take under this Part.").

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

In moving the amendment, I shall speak also to Amendments Nos. 183 to 189, and 192. The amendments concern the action which the competent authority can take if there has been a breach of listing rules. Clause 87 provides the competent authority with a power to impose a monetary penalty on an issuer or applicant for listing who contravenes the listing rules or who is knowingly a party to the contravention by an issuer of which he is, or was, a director at the time of the contravention.

This is a new power which is being introduced to fill a gap which exists under the current legislation. At present, the only sanctions available to the competent authority in the face of a breach of the rules are to censure, publicly or privately, those concerned, or, as a last resort, to suspend or cancel listing. Suspension or cancellation is a sanction that is available only in limited circumstances. This provision will better enable the competent authority to match the sanction imposed to the gravity of the misconduct committed.

By allowing the competent authority to impose penalties on directors who are knowingly concerned in a contravention of the listing rules, it can get at the right people. Under its current powers the effect of sanctions imposed by the competent authority, which extend only to issuers, hit shareholders. Where the issuer is at fault, that is right--shareholders own the firm--but where a director is at fault, clearly the sanctions should bite on him or her.

The amendments that we propose make a number of substantive changes to the disciplinary arrangements. First, Amendment No. 182 extends the power to issue public censures to directors and former directors. At present the only sanction in the Bill available against such persons is a monetary penalty.

That is at odds with disciplinary provisions in Parts V and XIV of the Bill which allow the FSA to issue a public statement where that is the more appropriate course of action. The Bill already allows listing rules to make provision for censures to be imposed on issuers.

Amendments Nos. 183, 188 and 189 make consequential changes on the extension of the power to directors. On Report, we also intend to extend the power to issue public censures to breaches of the listing rules by sponsors as well as by directors and issuers, although we do not intend to extend the sanction of a monetary penalty in the case of sponsors.

The other amendments in this group concern the safeguards already built into the disciplinary process. Amendments Nos. 184 and 185 bring Clause 87 fully into line with Clause 65(4). At present, Clause 87 provides that the competent authority may not impose a penalty on an individual after the period of two years from when it first became aware of the contravention.

Amendments Nos. 186 and 187 make changes to Clause 89 which requires the competent authority to consult on and publish a policy statement on the imposition and amount of penalties for breaches of the listing rules. Amendment No. 186 simply aligns the language of this clause with that more generally in the Bill, which talks about the "issuing" rather than the "publishing" of statements.

Amendment No. 187 implements the Joint Committee recommendation on the factors to be taken into account when setting the level of a fine.

Finally, Amendment No. 192, which inserts a new clause after Clause 95, provides the same safeguards concerning costs and the destination of penalty income as does paragraph 16 of Schedule 1 in the case of the FSA generally. Again, that reflects Joint Committee recommendations.

Under the provisions of the new clause, the competent authority must take no account of its costs in determining the amount of penalties. Of course, the Bill states that elsewhere. It also provides that the competent authority must prepare and operate a scheme for paying out penalty income that it receives to issuers of listed securities. Again, that is comparable with provisions elsewhere in the Bill.

Together those provisions ensure that there are no incentives for the competent authority to impose inappropriate levels of penalties and that people are not deterred from pursuing their rights by the risk that they may have to bear the FSA's costs. As for the FSA more generally, the competent authority is required to consult on the details of the scheme.

One thing that is not covered here is the right to refer competent authority decisions to impose penalties and issue public censures to the tribunal. On Report, we shall introduce that right, and align the procedures with those that we shall introduce elsewhere in the Bill. As a result of the decision to give people a right to go to the tribunal, we propose to oppose the inclusion of Clause 91 in the Bill. That currently requires the competent authority to maintain arrangements for hearing appeals against its decision to impose penalties. I beg to move.

Photo of Lord Peyton of Yeovil Lord Peyton of Yeovil Conservative

I have two points that I hope the Minister can answer. I am giving him an opportunity to rest his vocal chords. It has been a while since a Bill has come before the House in which the Minister has sung solo for so long without any interruptions or contributions from any other noble Lord. I believe my noble friends are extremely restrained and courteous in their behaviour.

Photo of Lord Peyton of Yeovil Lord Peyton of Yeovil Conservative

I cannot speak for them, but I believe that that is going too far. I cannot possibly say that I am happy. I am just depressed and oppressed by the bulk of legislation with which we are faced and, as I said yesterday, the fruit that it is likely to bear in due course.

First, Amendment No. 182--I refer to the second subsection on page 12 of the Marshalled List--states:

"If the competent authority is entitled to impose a penalty on a person under this section in respect of a particular matter it may, instead of imposing a penalty on him in respect of that matter, publish a statement censuring him".

Previously was there anything to stop the authority making such a statement if it wanted to? I wonder why that provision is necessary.

Secondly, Amendment No. 183 proposes leaving out the words,

"impose a penalty on a person under subsection (1)(b)", and inserting the words,

"take action against a person under this section".

Would that alter in any way the degree of jeopardy in which the wrongdoer may find himself?

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

On Amendment No. 182, it is reasonable, as in the rest of the Bill, that the competent authority should have the option of imposing a financial penalty or stating the equivalent of a reprimand or a caution in the criminal law--"You have behaved very badly"--where a financial penalty may not be appropriate.

Photo of Lord Peyton of Yeovil Lord Peyton of Yeovil Conservative

Was there anything to stop the competent authority issuing a statement before? I do not understand why this provision is necessary.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

There is a power to make a statement about an issuer so it is not necessary for that purpose, but there has never been a power to make a statement relating to a director, and that is covered by this amendment.

The noble Lord questions the need for Amendment No. 183. The change from imposing a penalty to taking action is precisely because the options include both imposing a penalty and issuing a censure, and taking action includes both the penalty and the statement.

Photo of Lord Fraser of Carmyllie Lord Fraser of Carmyllie Conservative

I may have missed something that the Minister said; if so, I apologise. In regard to the penalties to be imposed under Schedule 1, the language in the new clause exactly reflects that. Is there some reason why that has been put in as a new clause and the other remains in a schedule? Is this just a quirk of the drafting?

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

It certainly will not be a quirk of the drafting. Believe me, there is some good reason for that on which I shall write to the noble and learned Lord.

Photo of Lord Borrie Lord Borrie Labour

Although it seems that these amendments are useful, particularly those on the statement of policy which amplifies what was in the Bill in the first place, I am still somewhat puzzled with regard to penalties. Unlike other legislation dealing with criminal or quasi-criminal penalties, such as the Competition Act 1998, why is no maximum set out in the legislation?

On Question, amendment agreed to.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendments Nos. 183 to 185:

Page 40, line 14, leave out ("impose a penalty on a person under subsection (1)(b)") and insert ("take action against a person under this section").

Page 40, line 16, at end insert ("unless proceedings against that person, in respect of the contravention, were begun before the end of that period").

Page 40, line 19, at end insert ("; and

(b) proceedings against a person in respect of a contravention are to be treated as begun when a warning notice is given to him under section 88.").

On Question, amendments agreed to.

Clause 87, as amended, agreed to.

Clause 88 [Warning notices]:

[Amendment No. 185A not moved.]

Clause 88 agreed to.

Clause 89 [Statement of policy]:

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords) 6:00 pm, 21st March 2000

moved Amendments Nos. 186 and 187:

Page 40, line 31, leave out ("publish") and insert ("issue").

Page 40, line 34, at end insert--

("( ) The Authority's policy in determining what the amount of a penalty should be must include having regard to--

(a) the seriousness of the contravention in question in relation to the nature of the requirement contravened;

(b) the extent to which that contravention was deliberate or reckless; and

(c) whether the person on whom the penalty is to be imposed is an individual.").

On Question, amendments agreed to.

Clause 89, as amended, agreed to.

Clause 90 agreed to.

Clause 91 [Appeals against penalties]:

On Question, Whether Clause 91 shall stand part of the Bill?

Clause 91 negatived.

Clause 92 agreed to.

Clause 93 [Obligations of issuers of listed securities]:

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendments Nos. 188 and 189:

Page 42, line 7, leave out from beginning to ("if") in line 10.

Page 42, line 10, after ("information,") insert ("they may include provision").

On Question, amendments agreed to.

Clause 93, as amended, agreed to.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendment No. 190:

After Clause 93, insert the following new clause--

:TITLE3:APPOINTMENT BY COMPETENT AUTHORITY OF PERSONS TO CARRY OUT INVESTIGATIONS

(" .--(1) Subsection (2) applies if it appears to the competent authority that there are circumstances suggesting that--

(a) there may have been a breach of listing rules;

(b) a person who was at the material time a director of an issuer of listed securities has been knowingly concerned in a breach of listing rules by that issuer;

(c) a person who was at the material time a director of a person applying for the admission of securities to the official list has been knowingly concerned in a breach of listing rules by that applicant;

(d) there may have been a contravention of section 81, 83 or 94.

(2) The competent authority may appoint one or more competent persons to conduct an investigation on its behalf.

(3) Part XI applies to an investigation under subsection (2) as if--

(a) the investigator were appointed under section 158(1);

(b) references to the investigating authority in relation to him were to the competent authority;

(c) references to the offences mentioned in section 159 were to those mentioned in subsection (1)(d);

(d) references to an authorised person were references to the person under investigation.").

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

In moving Amendment No. 190, I shall speak also to Amendment No. 264. This amendment introduces a power for the competent authority to appoint investigators where it appears to it that there are circumstances suggesting that there may have been a breach of the listing rules, that a person who was or is a director of an applicant for listing or an issuer was knowingly concerned in a breach or that there may have been a contravention of the criminal offences in Clauses 81, 83 or 94.

Investigators appointed under this clause have the same power as persons appointed under Clause 158 in Part XI of the Bill. The investigator can, under the provisions of Clause 162, require the person who is the subject of the investigation or any person connected with him to attend and answer questions or otherwise provide such information as the investigator may require.

The reason for putting the investigation power onto a statutory footing is twofold. First, as matters stand, the competent authority has no statutory power to require an issuer of listed securities and those involved in running the issuer's affairs to provide information where it appears that there may have been a breach of listing rules. We think that that is unsatisfactory and consider it important that the competent authority should have effective powers to police the listing rules.

Secondly, we want procedural checks concerning the conduct of investigations to apply. These are set out in Clause 161 of the Bill. Among other matters, the competent authority will be required to give written notice of the appointment of investigators to the person who is the subject of the investigation and to make the person aware of any significant change in the scope or conduct of the investigation. I beg to move.

On Question, amendment agreed to.

Clause 94 agreed to.

Clause 95 [Fees]:

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendment No. 191:

Page 43, line 1, at end insert--

("( ) applications under section (Sponsors) for approval as a sponsor; and

( ) continued inclusion of sponsors in the list of sponsors.

(2) In exercising its powers under subsection (1), the competent authority may set such fees as it considers will (taking account of the income it expects as the competent authority) enable it--

(a) to meet expenses incurred in carrying out its functions under this Part or for any incidental purpose;

(b) to maintain adequate reserves; and

(c) in the case of the Authority, to repay the principal of, and pay any interest on, any money which it has borrowed and which has been used for the purpose of meeting expenses incurred in relation to--

(i) its assumption of functions from the London Stock Exchange Limited in relation to the official list; and

(ii) its assumption of functions under this Part.

(3) In fixing the amount of any fee which is to be payable to the competent authority, no account is to be taken of any sums which it receives, or expects to receive, by way of penalties imposed by it under this Part.

(4) Subsection (2)(c) applies whether expenses were incurred before or after the coming into force of this Part.

(5) Any fee which is owed to the competent authority under any provision made by or under this Part may be recovered as a debt due to it.").

On Question, amendment agreed to.

Clause 95, as amended, agreed to.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendment No. 192:

After Clause 95, insert the following new clause--

:TITLE3:PENALTIES

(".--(1) In determining its policy with respect to the amount of penalties to be imposed by it under this Part, the competent authority must take no account of the expenses which it incurs, or expects to incur, in discharging its functions under this Part.

(2) The competent authority must prepare and operate a scheme for ensuring that the amounts paid to it by way of penalties imposed under this Part are applied for the benefit of issuers of securities admitted to the official list.

(3) The scheme may, in particular, make different provision with respect to different classes of issuer.

(4) Up to date details of the scheme must be set out in a document ("the scheme details").

(5) The scheme details must be published by the competent authority in the way appearing to it to be best calculated to bring them to the attention of the public.

(6) Before making the scheme, the competent authority must publish a draft of the proposed scheme in the way appearing to it to be best calculated to bring it to the attention of the public.

(7) The draft must be accompanied by notice that representations about the proposals may be made to the competent authority within a specified time.

(8) Before making the scheme, the competent authority must have regard to any representations made to it under subsection (7).

(9) If the competent authority makes the proposed scheme, it must publish an account, in general terms, of--

(a) the representations made to it in accordance with subsection (7); and

(b) its response to them.

(10) If the scheme differs from the draft published under subsection (6) in a way which is, in the opinion of the competent authority, significant the competent authority must (in addition to complying with subsection (9)) publish details of the difference.

(11) The competent authority must, without delay, give the Treasury a copy of any scheme details published by it.

(12) The competent authority may charge a reasonable fee for providing a person with a copy of--

(a) a draft published under subsection (6);

(b) scheme details.

(13) Subsections (6) to (10) and (12) apply also to a proposal to alter or replace the scheme.").

On Question, amendment agreed to.

Clause 96 agreed to.

Clause 97 [Exemption from liability in damages]:

[Amendments Nos. 193 and 194 not moved.]

Clause 97 agreed to.

Clause 98 [Interpretation of this Part]:

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendments Nos. 195 to 197:

Page 44, line 6, leave out ("Stock Exchange") and insert ("Authority").

Page 44, line 13, at end insert--

("( ) If, as a result of an order under Schedule 7, different functions conferred on the competent authority by this Part are exercisable by different persons, the powers conferred by section 87 are exercisable by such person as may be determined in accordance with the provisions of the order.").

Page 44, line 24, leave out ("(3)(a)") and insert ("(3)").

On Question, amendments agreed to.

Clause 98, as amended, agreed to.

Schedule 10 [Offers of Securities]:

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendments Nos. 198 to 201:

Page 244, line 21, leave out ("has such meaning as may be specified") and insert ("means--

("(a) the government of the United Kingdom;

(b) the government of any country or territory outside the United Kingdom;

(c) a local authority in the United Kingdom or elsewhere;

(d) any international organisation the members of which include the United Kingdom or another EEA State; and

(e) such other bodies, if any, as may be specified.").

Page 246, line 29, at end insert--

("( ) a recognised body within the meaning of section 1(7) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1990,").

Page 246, line 31, after ("1985,") insert--

("( ) section 1 of the Housing Associations Act 1985,").

Page 247, line 41, leave out from ("a") to end of line 42 and insert ("public authority.

( ) "Public authority" means--

(a) the government of the United Kingdom;

(b) the government of any country or territory outside the United Kingdom;

(c) a local authority in the United Kingdom or elsewhere;

(d) any international organisation the members of which include the United Kingdom or another EEA State; and

(e) such other bodies, if any, as may be specified.").

On Question, amendments agreed to.

Schedule 10, as amended, agreed to.

Clauses 99 to 105 agreed to.

Clause 106 [Sanction of the court for business transfer schemes]:

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

In moving Amendment No. 202, I shall speak also to Amendments Nos. 203 to 208 and 272. We have now reached Part VII of the Bill, which was introduced on Report in another place. It largely carries forward arrangements under Schedule 2C to the Insurance Companies Act 1982 for the transfer of insurance business from one company to another. This is something that is required by the single market directives for insurance. However, the current provisions in Schedule 2C have developed over the years and have, over that time, become unnecessarily complicated. Noble Lords might well be familiar with the concept of matters of this kind being unnecessarily complicated. They vary depending on whether the insurance business includes general or long-term insurance and whether the business is direct insurance or reinsurance. We have therefore taken the opportunity to rationalise these arrangements.

Another feature of Part VII is that it plugs a gap in existing legislation that in the past has always meant that banks have needed to resort to the Private Bill procedure in the event of a business transfer. That process often leads to a complex, burdensome and inefficient process to achieve a corporate restructuring. However, of greater concern, and the reason for making provision in a Bill related to financial services regulation, is that under a Private Act procedure the regulator does not have a suitable role in determining whether a transfer should be allowed to take place.

The Committee will wish to note that the problems that are addressed by this part are specific to the insurance and banking industries. Other companies can restructure and amalgamate with relative ease under the provisions of the Companies Act 1985. Transfers from building societies and friendly societies are provided for separately under the Building Societies Act 1986 and the Friendly Societies Act 1992. For that reason, there is no need to bring them within the scope of Part VII.

It might be helpful if I clarify that we are talking about transfer of a business from one company to another--often, though not always, when two companies within a group are being restructured. It is not directly linked to mergers and take-overs, where the ownership of the company may change, although where a take-over has occurred the new parent company may subsequently decide to amalgamate or restructure the business of its subsidiaries. Another situation where such transfers occur is when a company is failing and, in order to protect the interests of its creditors or customers, another company agrees to take over part of the business of the failing firm.

Turning specifically to the amendments, while we felt it was appropriate to introduce at as early a stage as possible the key elements of our policy in this area, it was always the case that we would need to revisit the detail of the provisions. This group of amendments, which I commend to the Committee, is a result of that further work.

It will be for the courts to decide whether to sanction a business transfer. Amendment No. 206 introduces a new clause after Clause 107 to allow a court to require that an independent actuary be appointed to report on the transfer of business from an insurance company. This is particularly aimed at circumstances where a firm is in financial difficulties and the transfer may depend on the company taking over the policies being able to reduce the amount of the liability to policyholders. In practice, the court would only sanction the transfer where the effect of the transfer was no worse than if it did not go ahead and the insolvent company was instead left to run off its business.

In considering whether to allow such a transfer, the court will need to be sure that policyholders' interests will be properly protected. This clause is designed to enable the court to take an informed decision by enabling it to secure the appropriate advice from an independent expert about any proposed reduction in benefits.

Amendments Nos. 203 and 207 give the FSA powers to issue certificates where the business of an overseas insurer is being transferred to a firm authorised and regulated in the UK. This carries forward equivalent provisions in the Insurance Companies Act 1982. The procedure will allow the FSA to confirm to an overseas regulator whether the transferee company in the UK meets the necessary solvency requirements; in short, whether it is capable of accepting the business to be transferred.

Amendment No. 202 simply makes a consequential change to Clause 106 to reflect the fact that Amendment No. 203 introduces a new part into Schedule 11, so the current reference to Schedule 11 needs to be restricted to Parts I and II of the schedule. Amendment No. 208 introduces a new clause, again carrying forward provisions currently in the Insurance Companies Act. It ensures that where an insurance business transfer has been approved in another EEA member state, the transfer will have effect in UK law in relation to relevant policies. This will mean that a person in the UK who has an insurance policy affected by such a transfer, will have their rights and obligations transferred to the new company.

As I have already mentioned, Part VII replaces provisions currently within the Insurance Companies Act 1982. Amendment No. 272 is a minor amendment reflecting that. It replaces a reference to Schedule 2C of that Act with a reference to Part VII of the Bill. The group also includes two minor Scottish amendments to Clause 107. Amendments Nos. 204 and 205 simply reflect the fact that the Scottish equivalent of an English law concept of a mortgage is a security over property. I beg to move.

Photo of Lord Peyton of Yeovil Lord Peyton of Yeovil Conservative 6:15 pm, 21st March 2000

Again, in the interests of cordiality, I should like to congratulate the noble Lord on the wonderful job that he is doing as regards rewriting this Bill. It is quite a task for him to undertake. He has all the sympathy of compassionate people like myself on this side of the Chamber.

If a Bill of this bulk is produced, it not only generates a lot of work, but also a lot of questions. We have been astonishingly restrained in not testing the noble Lord's wisdom and knowledge more severely. But I want to ask a serious question.

I understand exactly what is meant by the "Necessary margin of solvency". But how will the authority decide what that is? Will it be decided upon purely financial grounds and the amount of money involved, or upon the general appearance of the transferee which may not have made a favourable impression upon the authority? I should like some idea as to how this important point will be decided and how the amount will be arrived at.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

There can never be a single answer to that point. The "Necessary margin of solvency" is defined in sub-paragraph (6) as,

"the margin of solvency which the transferee, taking the proposed transfer into account, is required by the authority to maintain".

The noble Lord may feel that that is equivalent to the famous Groucho Marx contract in "Night at the Opera",

"The party of the first part shall hereinafter be called the party of the first part"; that is always my favourite legal maxim. But in introducing the amendments I said that the necessary solvency requirements--for example when the FSA has to confirm to an overseas regulator whether the transferee company in the UK meets those requirements--relate to whether the company is capable of accepting the business being transferred. The answer to the "Necessary margin of solvency" depends on the size of the business to be transferred. The authority must make its judgment from time to time, on a case by case basis, depending on the premium income or the claims paid. But in any case, if it is any help to the noble Lord (and it probably is not) these matters are set out in more detail in the European Community directives.

Photo of Lord Peyton of Yeovil Lord Peyton of Yeovil Conservative

I am tremendously grateful for that last piece of guidance from the noble Lord. He will not be surprised if I do not avail myself of it.

Of course I understand that the amount of money being moved will be important in deciding the margin of solvency. But what I was delicately trying to inquire into was whether the character of the transferee may be a source of concern and worry to the competent authority.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

Since we are talking about margins of solvency, we are talking about financial calculations rather than the more philosophical matters to which the noble Lord referred. If he goes on like this he will catch me out properly. He knows that perfectly well.

On Question, amendment agreed to.

Clause 106, as amended, agreed to.

Schedule 11 [Transfer schemes: certificates]:

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendment No. 203:

Page 251, line 6, at end insert--

:TITLE3:("PART III

:TITLE3:INSURANCE BUSINESS TRANSFERS EFFECTED OUTSIDE THE UNITED KINGDOM

.--(1) This paragraph applies to a proposal to execute under provisions corresponding to Part VII in a country or territory other than the United Kingdom an instrument transferring all the rights and obligations of the transferor under general or long-term insurance policies, or under such descriptions of such policies as may be specified in the instrument, to the transferee if any of the conditions in sub-paragraphs (2), (3) or (4) is met in relation to it.

(2) The transferor is an EEA firm falling within paragraph 5(d) of Schedule 3 and the transferee is an authorised person whose margin of solvency is supervised by the Authority.

(3) The transferor is a company authorised in an EEA State other than the United Kingdom under Article 27 of the first life insurance directive, or Article 23 of the first non-life insurance directive and the transferee is a UK authorised person which has received authorisation under Article 6 of either of those directives.

(4) The transferor is a Swiss general insurance company and the transferee is a UK authorised person which has received authorisation under Article 6 of the first life insurance directive or the first non-life insurance directive.

(5) In relation to a proposed transfer to which this paragraph applies, the Authority may, if they are satisfied that the transferee possesses the necessary margin of solvency, issue a certificate to that effect.

(6) "Necessary margin of solvency" means the margin of solvency which the transferee, taking the proposed transfer into account, is required by the Authority to maintain.

(7) "Swiss general insurance company" has the same meaning as in paragraph 2.

(8) "General policy" means a policy evidencing a contract which, if it had been effected by the transferee, would have constituted the carrying on of general insurance business.

(9) "Long-term policy" means a policy evidencing a contract which, if it had been effected by the transferee, would have constituted the carrying on of long-term insurance business.").

On Question, amendment agreed to.

Schedule 11, as amended, agreed to.

Clause 107 [Effect of order sanctioning business transfer scheme]:

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendments Nos. 204 and 205:

Page 49, line 13, leave out ("mortgage or").

Page 50, line 5, at end insert--

("( ) "Charge" includes a mortgage (or, in Scotland, a security over property).").

On Question, amendments agreed to.

Clause 107, as amended, agreed to.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendment No. 206:

After Clause 107, insert the following new clause--

:TITLE3:APPOINTMENT OF ACTUARY IN RELATION TO REDUCTION OF BENEFITS

(".--(1) This section applies if an order has been made under section 106(1).

(2) The court making the order may, on the application of the Authority, appoint an independent actuary--

(a) to investigate the business transferred under the scheme; and

(b) to report to the Authority on any reduction in the benefits payable under policies entered into by the authorised person concerned that, in the opinion of the actuary, ought to be made.").

On Question, amendment agreed to.

Clause 108 agreed to.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendments Nos. 207 and 208:

After Clause 108, insert the following new clause--

:TITLE3:("Business transfers outside the United Kingdom

:TITLE3:CERTIFICATES FOR PURPOSES OF INSURANCE BUSINESS TRANSFERS OVERSEAS

. Part III of Schedule 11 makes provision about certificates which the Authority may issue in relation to insurance business transfers taking place outside the United Kingdom.").

After Clause 108, insert the following new clause--

:TITLE3:EFFECT OF INSURANCE BUSINESS TRANSFERS AUTHORISED IN OTHER EEA STATES

(".--(1) This section applies if, as a result of an authorised transfer, an EEA firm falling within paragraph 5(d) of Schedule 3 transfers to another body all its rights and obligations under any UK policies.

(2) This section also applies if, as a result of an authorised transfer, a company authorised in an EEA State other than the United Kingdom under Article 27 of the first life insurance directive, or Article 23 of the first non-life insurance directive, transfers to another body all its rights and obligations under any UK policies.

(3) If appropriate notice of the execution of an instrument giving effect to the transfer is published, the instrument has the effect in law--

(a) of transferring to the transferee all the transferor's rights and obligations under the UK policies to which the instrument applies, and

(b) if the instrument so provides, of securing the continuation by or against the transferee of any legal proceedings by or against the transferor which relate to those rights and obligations.

(4) No agreement or consent is required before subsection (3) has the effects mentioned.

(5) "Authorised transfer" means--

(a) in subsection (1), a transfer authorised in the home State of the EEA firm in accordance with--

(i) Article 11 of the third life directive; or

(ii) Article 12 of the third non-life directive; and

(b) in subsection (2), a transfer authorised in an EEA State other than United Kingdom in accordance with--

(i) Article 31a of the first life directive; or

(ii) Article 28a of the first non-life directive.

(6) "UK policy" means a policy evidencing a contract of insurance (other than a contract of reinsurance) to which the applicable law is the law of any part of the United Kingdom.

(7) "Appropriate notice" means--

(a) if the UK policy evidences a contract of insurance in relation to which an EEA State other than the United Kingdom is the State of the commitment, notice given in accordance with the law of that State;

(b) if the UK policy evidences a contract of insurance where the risk is situated in an EEA State other than the United Kingdom, notice given in accordance with the law of that EEA State;

(c) in any other case, notice given in accordance with the applicable law.

(8) Paragraph 6 of Schedule 11 applies for the purposes of this section as it applies for the purposes of that Schedule.").

On Question, amendments agreed to.

Clause 109 [Market abuse]:

Photo of Lord Kingsland Lord Kingsland Conservative

moved Amendment No. 208A:

Page 51, line 1, leave out from ("which") to ("the") in line 3 and insert ("falls below").

Photo of Lord Kingsland Lord Kingsland Conservative

We now come to deal with Clause 109 and the offence of market abuse. In moving Amendment No. 208A, I shall speak also to Amendments Nos. 208B, 209A, 211A, 212A, 212B, 213A. It has always been the view of the Opposition that the problem which the offence of market abuse seeks to confront would be better confronted by changes in the criminal law. However, that approach has been steadfastly resisted by the Government. At the same time, the Government have refused to tackle the really fundamental problems connected with the offence as contained in the Bill: its territorial scope is uncertain, and its definitions are too wide and ill considered.

However, its biggest defect is, perhaps, what I would describe as its "effect-based philosophy". The offence catches individuals who unwittingly or mistakenly mislead the market. Those individuals are subject to precisely the same penalties as individuals who intend to mislead the market. The approach that the Opposition are taking, which is reflected in these amendments, is to inject into the Bill the requirement of intent and to insist that, in order to proceed for market abuse, the authority has to go to the courts.

In taking that approach, we have been greatly influenced by what happens in the United States of America. In this regard I am happy to acknowledge the help that we have received from one of the partners--a former general counsel to the Securities and Exchange Commission--at the well-known Washington law firm of Debevoise and Plimpton.

As I understand it, the position in the United States is as follows. Section 10(b) of the Securities Exchange Act 1934, and under it the Exchange Rule (10)(b)(5), are broad anti-fraud provisions that prohibit manipulative, deceptive or fraudulent conduct in connection with the purchase or sale of any security through inter-state commerce.

The United States Supreme Court has held that the Securities and Exchange Commission must establish that a defendant acted with scienter, which the court has defined as,

"a mental state embracing an attempt to deceive, manipulate or defraud".

The same standard also applies in private actions brought under the Federal securities laws alleging securities fraud. While the Supreme Court frequently notes that negligence simply will not suffice, it has left open the question of whether or not "recklessness" could constitute a mental state sufficient to establish liability under these provisions. One of the leading Federal appellate courts has defined "recklessness", in this context, as a form of intentional conduct, rather than of gross negligence.

Over the years, Section 10(b) and Rule 10(b)(5) have been used to combat various forms of securities fraud, including insider trading, accounting irregularities and market manipulation. In each case, liability under these provisions must arise from knowing or reckless conduct involving manipulation or deception. Negligence, let alone strict liability, is simply not enough.

Congress and the SEC (through its delegated rule-making authority) have addressed problems caused by the misuse of market information through detailed and sophisticated regulation. But when the use of market information may harm the operation of securities markets, they provide that a person in possession of material non-public information must do one of two things: either disclose it completely or not trade.

The SEC may initiate an enforcement action in a Federal court alleging violations of Section 10(b) and Rule 10(b)(5) thereunder. The SEC is also authorised to institute administrative proceedings alleging violations of Section 10(b) and Rule 10(b)(5). These administrative proceedings are conducted before an SEC hearing officer, an administrative law judge designated by the agency. Initial administrative decisions may be appealed to the commission itself and then, if necessary, to a Federal appellate court.

When proceeding administratively, the SEC is limited to seeking an administrative order sanctioning the alleged violator. Monetary penalties and other sanctions are available in both forms, but in administrative proceedings monetary proceedings may only be assessed against a regulated entity and its associated persons--unlike the provisions for market abuse in the Bill.

Congress has established in certain circumstances, including insider trading and SEC administrative proceedings against regulated entities, tiers of monetary penalties that vary as to the degree of harm. In order to obtain certain civil monetary remedies for insider trading, the SEC must proceed in court. Therefore, it is quite clear from American practice that the mental state required under Rule 10(b)(5) is the intention to commit a fraudulent act, albeit that "recklessness" is treated in some court decisions as intentional. Accordingly, the US equivalent of market abuse is not strict liability or negligence.

Moreover, the SEC has to go to court whether for criminal or civil fraud, although it can impose monetary penalties itself. That is the pattern which has infected the amendments that we have tabled this evening.

Amendment No. 208A deals with subsection (1)(c) of Clause 109, which refers to market abuse as behaviour,

"which is likely to be regarded by a regular user of that market who is aware of the behaviour as a failure on the part of the person or persons concerned to observe the standard of behaviour reasonably expected of a person in his or their position in relation to the market".

Our amendment redrafts that paragraph to read:

"which falls below the standard of behaviour reasonably expected of the person or persons concerned in his or their position in relation to the market"; in other words, the standard becomes an objective one.

Amendment No. 209A deals with Clause 109 (2)(b). It seeks to remove the word "likely", which appears after the reference to "behaviour", and replace it with the words,

"intended or might reasonably be presumed to be intended".

So we accept that intention can be proved by proving a series of events which, if not inevitably or completely conclusive, point beyond an appropriate degree of doubt to an offence.

Amendment No. 211A seeks to amend Clause 109(2)(c). At present the clause states,

"a regular user of the market would, or would be likely to, regard the behaviour as behaviour which would, or would be likely to, distort the market in investments of the kind in question".

The amendment seeks to add,

"and the behaviour is intended or might reasonably be presumed to be intended to cause that distortion".

In Clause 109(3) the expression,

"In determining whether behaviour amounted to market abuse by a particular person or by particular persons, regard must be had (among other matters) to the extent to which that person, or those persons", is excised and replaced by,

"A person's behaviour shall not be regarded as amounting to market abuse if he--

(a) took care to avoid engaging in market abuse; or

(b) believed that the behaviour in question would not amount to market abuse".

At the end of that final part of paragraph (b), new paragraph (c), we seek in Amendment No. 213A to add the expression,

"believed on reasonable grounds that the behaviour in question would not amount to market abuse".

Photo of Lord Fraser of Carmyllie Lord Fraser of Carmyllie Conservative 6:30 pm, 21st March 2000

Before my noble friend develops his argument--I very much wish to avoid interrupting his line of thought--it would help me to understand all of his argument, much of which I support, if I could understand the following point a little more clearly. My noble friend's Amendment No. 208A to Clause 109(1)(c) states,

"Page 51, line 1, leave out from ("which") to ("the") in line 3 and insert ("falls below").

The concept of a regular user of the market is eliminated with that deletion. However, Clause 109(2) refers to,

"a regular user of the market".

My noble friend does not seem to be concerned to remove the concept of the regular market user in that provision. I wonder whether that is intentional. If it is, I should be grateful if he could expand on that.

Photo of Lord Kingsland Lord Kingsland Conservative

It is clear that regular users of the market will sometimes need to give evidence in disputes about how the market would behave, or ought to have behaved, in a particular set of circumstances. We have no objection to that. The reason that expression was sought to be removed by Amendment No. 208A was that, used as it is by the Government in Clause 109(1)(c), it gave the offence a subjective element which we wish to exclude.

I wish to comment on one government amendment in this group before I sit down, and that is Amendment No. 214. My understanding, from what had happened in another place, was that the status of the code, which had originally been intended to be evidential, has become, in effect, a safe harbour. Therefore, if an operator in the market performed in a way which conformed precisely with the code, he or she would be safe from pursuit by the authority. It now appears, as a result of the noble Lord's amendment, that things are not so simple. As I understand his amendment, it is not enough for a particular form of behaviour to be included in the code. It appears that that form of behaviour will only provide a safe harbour to a market operator if in addition it has an expression which says that it should do so.

It is my impression--I hope that the Minister will correct me if I am wrong--that the Government are resiling from the position they took at the end of the Bill's stages in another place. It is also my view that, if the situation has changed, it appears that an operator--the Minister will correct me if I am wrong--will, on the one hand, be obliged to follow the code which, on the other hand, gives him no guarantee of a secure haven.

Throughout the financial sector great concern has already been expressed about the uncertain conditions in which operators will function as a consequence of the Bill. I hope that the interpretation that I have put on Amendment No. 214 is incorrect; because if it is not, we shall have to reconsider the code to see what additional amendments we would have to make to that part of the Bill.

I had hoped that we had reached the stage where the code was now accepted as a safe harbour and we could move on to consider improving the provisions in relation to guidance which at the moment does not provide a safe harbour. The biggest uncertainty in the City at the moment is not the price of any particular commodity or the price of any particular share but what the regulator is going to do this time next year. Certainty now is at a huge premium. My concern is that the Minister's amendment is a step back rather than a step forward in this respect. I beg to move.

Photo of Lord Eatwell Lord Eatwell Labour

I speak to my Amendments Nos. 209, 210, 211 and 213 which are grouped with the amendments that we are discussing. But, first, I wish to comment on the amendments in this group tabled by the Opposition Front Bench. At Second Reading I expressed concern that, as currently drafted, Clause 109 weakened the current protection against market abuse by authorised persons.

The Opposition amendments would severely weaken the protection of the market and, indeed, of the consumer. Not only does the noble Lord, Lord Kingsland, wish in Amendment No. 212B to degrade the standards of regulation to, "generally accepted market practice", but he also wishes to riddle the clause with the canker of intent--the noble Lord made this quite clear--knowing full well that the need to prove intent is extremely difficult. Hence their amendments would strip the regulator of most of the effective powers that he has against market abuse.

I do not think that reference to American practice in this case is relevant since the noble Lord has not argued that he wants to construct the whole highly litigious apparatus of regulation associated with the Securities and Exchange Commission and cherry pick arguments from American practice without confronting the whole structure of American practice. I feel that that does not do justice to the discussions which we have had and to the Bill as drafted. I am sure that this wrecking of the regulatory process is, let us say, unintended, but these amendments serve the interests of those who would abuse the market.

I now turn to my amendments. I shall deal first with Amendment No. 209. At Second Reading I pointed out that the regular user test proposed in Clause 109 would reduce market standards to a kind of median common denominator. Moreover, in two examples close to real cases I pointed out that the regular user test would have provided unwarranted protection for those who have been successfully prosecuted under the current regime.

Finally, the Committee may remember that, using the analogy of Association Football, I noted that the regular-user test would legitimise the orgy of shirt-pulling which disfigures soccer today because it is behaviour expected of regular professional footballers.

Amendment No. 209 deals with these problems by maintaining the role of the regular user, but adding the requirement of an expectation of "reasonable and ethical" standards. It should be noted that that is not wildly optimistic. It does not ask for high ethical standards, only those which might be expected by a reasonable person. I think of this as the "Stanley Matthews memorial amendment". It seeks to raise standards by focusing the sights of the regular user on the standards displayed by ethical participants in the market. Applied to soccer, it would eliminate rampant shirt-pulling; applied to financial markets it provides the foundation for raising standards and rescues Clause 109 from its present endorsement of low regulatory standards. Amendment No. 209 makes sense of the regular-user test.

I turn now to Amendments Nos. 210 and 211. Their purpose is to make Clause 109(2)(c) consistent with paragraphs (a) and (b) with which it is currently inconsistent. Paragraphs (a) and (b) are objective tests: of information available, in paragraph (a); and, in paragraph (b), of giving a false and misleading impression. But paragraph (c) is inconsistent because it introduces a subjective test; namely, the view of the regular user. My amendment corrects that mistake and transforms paragraph (c) into an objective test; the behaviour that would be, or would be likely to, distort the market in investments. It is not what the regular user believes would distort the market, but what would distort it. Amendments Nos. 210 and 211 make paragraphs (a), (b) and (c) consistent with one another.

I shall not speak to Amendment No. 213 as I concur with my noble friend's Amendment No. 212, which makes my amendment irrelevant. However, his replacement Amendment No. 218 contains a worrying flaw. That amendment replaces a provision which has been eliminated by my noble friend's amendment. Amendment No. 218 proposes that the authority may not impose a penalty for market abuse if,

"there are reasonable grounds for it to be satisfied", that the abuser did not believe that he or she was committing abuse, or had taken reasonable precautions to avoid abuse. The problem with that is the issue of the balance of probabilities that always arises in these particular judgments. There may be reasonable grounds to let the abuser off and there may be equally reasonable grounds for not doing so. Indeed, the balance of probabilities may be 40 per cent reasonable grounds on the side of the abuser and 60 per cent against the abuser, but under Amendment No. 218 the abuser would get off even though the balance of reasonableness was against him or her. Surely that is not right.

Photo of Lord Stewartby Lord Stewartby Conservative

Being surrounded by many who are experienced in the legal aspects of this group of amendments, I hesitate to do more than make one observation and ask a question. The observation refers to the regular user. I do not see how that can be objectively implemented. Some of what the noble Lord, Lord Eatwell, said was sensible.

As chairman of a public company, I had recent conversation with a very experienced investment manager. At the end of the discussion I was rather taken aback because he said, "Have you made me an insider?" Being a cautious chap, I did not answer the question in the way that he had put it. But it led me to ask myself questions as to how reliable the regular-user test could ever be if some of those most professionally involved with these processes may frequently come across situations which they cannot determine with certainty. After all, if one cannot determine where one stands with certainty on this kind of issue, inevitably one is undergoing a risk in the light of the provisions in the Bill. Therefore, I believe that the regular-user test needs further consideration both as regards its workability and the hazards which it puts in the way of those who operate in the market.

The noble Lord, Lord Eatwell, said that he thought this was a weakening in the defences against market abuse. Seen from the other side it could be regarded as a strengthening, but that again illustrates his point about the balance of reasonableness. It is an area where the Bill, even with the amendments which have been put forward, has not necessarily reached a lasting and satisfactory form.

I was encouraged by reading Amendment No. 218 in the name of the noble Lord, Lord McIntosh. It seemed to me that it went a long way towards dealing with the question of mens rea. I shall await his comments on that.

I am sure that the Minister is aware of the fact that the takeover panel has been concerned whether the provisions of this part of the Bill could up-end its ability to make binding decisions in the course of a takeover bid in the market. If these provisions allow the authority to decide that market abuse could arise as a result of a breach of the takeover code, that could easily lead to the threat of litigation within the course of a takeover bid. That would invalidate the non-statutory but binding activities of the takeover panel. I am sure that the Minister will have considered this issue, but I hope that during the course of his responses and contribution to this course of amendments he will be able to comment on that question.

Photo of Lord Lipsey Lord Lipsey Labour 6:45 pm, 21st March 2000

I rise briefly to speak in support of the amendments put forward by my noble friend Lord Eatwell to which I have appended my name. I repeat the general background; namely, the concern that the market abuse regime, as it stands now in this Bill--it has been considerably watered down in the process of discussion--is not strong enough. It is probably accurate to report the view of the FSA as lying in that direction and in saying that the market abuse regime under this Bill is really not a lot stronger than what exists now. As the purpose of the Bill was to crack down on market abuse, that is something of a worry.

I am wary of football analogies because I am a racing man. However, the Bill, as drafted, might be regarded as the "Maradonna Bill"; I am sure that his behaviour in scoring a goal by unconventional means at a crucial moment in an international match would have been regarded as absolutely reasonable by participants in the Argentine football team of the time. That is not an adequate justification for that being the standard set. Our amendment is designed to toughen it up in a moderate way.

Perhaps I may illustrate what I have in mind. Let us take an imaginary market, although I could put some real names to some markets. Let us imagine the "dodgy bonds futures market". As Members of the Committee will know, that market is infested with sharks, to use the phrase which my noble friend Lord Grabiner used yesterday. The average behaviour in that market is extremely poor. Insider dealing is par for the course. That would be caught by the criminal law, but as we know, criminal cases are extremely hard to conduct in this particular area.

If wrong behaviour is rife in a given market--perhaps in a new market where standards have not been improved to the normal high levels which apply in all London markets--our concern is that this clause would not catch that behaviour because it is common in the market. The effect of this amendment is that the standards set will not be acceptable to a bunch of crooks.

If the Minister cannot accept these amendments tonight, I hope that he will reflect on these points between now and Report stage--I do not think it should be a matter of tremendous controversy within the House--and then accept our amendments, in particular the one which states that the standards should be those of a reasonable and ethical person and not those prevalent in the market.

Photo of Lord Fraser of Carmyllie Lord Fraser of Carmyllie Conservative

There is some validity in the worry about the assumption that a regular user of a market--simply by reason of the frequency with which he uses the market--is a non-abusing and honourable member of that market. That assumption requires detailed consideration. Indeed, I can think of one circumstance where the difficulty was not that the abuser was an infrequent user of the market but that he used it too frequently and caused big problems.

What troubles me most is that if one envisages a circumstance where a market abuse is being investigated and the case goes before a tribunal to determine whether it is indeed market abuse, it would not be difficult to contemplate a set of circumstances where all manner of people are paraded before the tribunal to say, "I am a regular user of the market and, in my view, what is going on is perfectly acceptable. It is certainly something that has been prevalent for the 10 years in which I have been using the market". So, in those circumstances, it would seem a rather curious test to apply unless one improves it in some way--possibly along the lines suggested by the noble Lords, Lord Eatwell and Lord Lipsey. I am not entirely sure that I buy into their amendment, but I understand the intention behind it and the drift of it.

My other difficulty in regard to the issue of the importance of examining the reaction of a regular user of a market to determine whether or not there has been an act of market abuse, is the relationship between Clauses 110, 111 and 112 in regard to the code. As I understand it, this issue is causing the Financial Services Authority some alarm as well.

As I read the provisions in Clause 110, the authority must prepare and issue a code--it has no option--and, among other things, that code has to specify descriptions of behaviour that, in the opinion of the authority, amount to market abuse. It is not clear whether, in those circumstances, the authority has to make investigations to discover whether the conduct is of a kind that a regular user of the market would regard as not misleading or giving a false impression. There is absolutely no tie-up between the two. Furthermore, Clause 112(2) states:

"Otherwise, the code in force under section 110 at the time when particular behaviour occurs may be relied on so far as it indicates whether or not that behaviour should be taken to amount to market abuse".

In the way that these two sets of provisions lie alongside each other, it seems to me that there are, in a sense, two market abuses. One is a pattern of behaviour covered by Clause 109, where one examines the behaviour in the context of a regular user of the market; and the other is when the FSA looks at that conduct, regards it as being an abuse of the market, and spells it out clearly for everyone to see, saying, "If you do this, we shall regard it as market abuse". That is how Clause 112 seems to tie in. Then Clause 113 states that in those circumstances it would be open to the Financial Services Authority to prosecute for market abuse.

Clearly both propositions cannot be right. I agree with other noble Lords who have said that this is not something that we can hope to resolve tonight, but I do hope that the issue will be more carefully re-examined before Report stage in order to avoid any concern or suspicion that there may be two sets of provisions. The risk may be that if the provisions to be found in Clause 109 are to reign supreme, the FSA may as well avoid wasting its time and put out nothing. If it does not square what is already within Clause 109, it does not seem that it can expand the ambit of market abuse--which, whether or not I like it, was certainly what I understood was intended by the Bill.

Having spelt out my concerns--which I believe are shared by a number of other noble Lords--I hope that we can return to this issue on Report. Like my noble friend on the Front Bench, I am bound to say that many of the difficulties that we are now confronting would have been much more easily resolved if the criminal law on which this should be based was more clearly stated.

Photo of Lord Grabiner Lord Grabiner Labour

Perhaps I may put forward a suggestion which is not consistent with a point made by a number of noble Lords. Clause 109(1)(c) is drafted in entirely objective terms; it is not subjective at all. I emphasise the words in the first line of page 51, which states:

"which is likely to be regarded by a regular user".

That does not mean the person who is, so to speak, being charged with market abuse on a particular occasion; it concerns "a regular user"--the nominal person; the anthropomorphic version of the human being we are concerned with. In the third line, the paragraph goes on to say:

"the standard of behaviour reasonably expected of a person in his or their position".

In my view, the key to this is to be found in Clause 109(11)--to which no one has yet referred--where one finds a definition of the expression "regular user". That definition provides:

"in relation to a particular market, means a reasonable person who regularly deals on that market in investments of the kind in question".

This is a Stanley Matthews clause; it is not a Diego Maradona clause. The point about "a reasonable person" is that he does not pull people's shirts in or near the penalty area or handle the ball; he is concerned to comply with the rules of the game. The concept of the "reasonable person" is someone who complies with the rules; someone who is ethical; someone who is by definition reasonable. For those reasons I have difficulty in supporting the suggested amendments of my noble friends Lord Lipsey and Lord Eatwell. The position is adequately covered by the language of the existing drafting.

Leaving that issue aside, perhaps I may say something about "intent", a point made by the noble Lord, Lord Kingsland, in his opening remarks. It is obvious that the introduction of a subjective intent test would significantly weaken the quality of the clause in terms of the position of the authority and the protection of the market place. I readily accept that "weaken" is not appropriate when looked at from the point of view of the person being charged with wrongdoing.

However, one has to bear in mind that the conditions for the operation of Clause 109 are spelt out very clearly in Clause 109(2). We know the kinds of circumstances where this problem could conceivably arise. They are defined very precisely. If one or other of the conditions in subsection (2) are not present, one does not get into the clause at all. The context in subsection (2)(a) is effectively inside information--information that is not generally known to the market-place; and in paragraph (b) it is a "false or misleading impression" given in the market-place; in paragraph (c), distorting the market. One of those situations must be in play before there is any risk of being made the subject of an abuse charge under these provisions.

The effect of that is that someone who behaves ex hypothesi in that context in a way which engages the risk that his behaviour may be thought to offend against the legislation is someone who ought to know the consequences of his actions. It is rather like my six year-old son throwing a cricket ball in the general direction of the conservatory window. When the ball hits the window and goes through it, he protests loudly, "But, Dad, I didn't mean to do it". In those circumstances I do not have a debate with him about whether he ought to have appreciated that if he threw the ball in that direction it might go through the window and that that was indeed likely.

I suggest that in the kind of market-place with which we are concerned here, given the very specific circumstances in which such a liability could arise, the strength of the clause as drafted is that it would oblige people, where appropriate, to err on the side of caution. It means: "If there is a risk that your conduct may be likely to produce the result that you fall foul of the abuse provisions, you had better beware". We are dealing here with sophisticated people; we are not dealing with my six year-old son. In those circumstances, I have great difficulty in understanding any justification for saying to those grown-up, sophisticated people that nothing short of intention will do--in other words, "You are off the hook, notwithstanding the fact that you will be able to say, 'I did not intend to do it', but notwithstanding the fact that it would have been likely to happen had you really given your mind to the circumstances in which you found yourself that you would in fact have fallen foul of these provisions". In those circumstances, I certainly do not support such of the amendments as are inconsistent with anything that I have just said.

Photo of Baroness O'Cathain Baroness O'Cathain Conservative 7:00 pm, 21st March 2000

I am now very confused about all this. I suppose that that is not surprising. There is one thing about which I am extremely confused. It took me many years in this House to learn what a Henry VIII clause was. Now, I shall have to learn what a "Diego Maradona clause" is, and a "Stanley Matthews clause"--and the last one is the "cricket ball through the conservatory window clause". I really do not know where I shall be!

My noble friend made the point that in Clause 109 paragraphs (a) and (b) of subsection (1) were fairly specific, whereas the provision in paragraph (c) was subjective. The noble Lord, Lord Grabiner, has just said that he does not believe that paragraph (c) is subjective. I have given the matter some thought, and I believe that it is. The phrase used is:

"which is likely to be regarded by".

I am not talking about a "regular user"; we have a definition of that, and that is fine. But this provision is likely to be regarded as subjective. If it is not to be so regarded, surely it should read, "which would be regarded by a regular user as". There is further reference to,

"the standard of behaviour reasonably expected of a person in his or their position in relation to the market".

For the provision to be firm, as in paragraphs (a) and (b), surely the paragraph should read, "to observe the standard of behaviour expected of a person in his or their position in relation to the market". I still support my noble friend on this point. The provision is quite subjective and opens up an element of doubt.

Photo of Lord Phillips of Sudbury Lord Phillips of Sudbury Liberal Democrat

I should like to speak in favour of Amendment No. 209. Perhaps I may take up one or two of the points made by the noble Lord, Lord Grabiner. I was rather impressed by his six year-old son. I think he might do better on some of these ethical issues than some of the more aggressive traders in certain markets in the City do from time to time. He might have a much clearer idea of the ethics of what he was doing, if not the technical ability of the throw, than some of those whom one unfortunately has cause to meet in the City. I have worked in the City for 35 years. I cannot say that I have been in the thick of it, but I have been in enough parts of it to feel that there is a need for the bracing addition of the words "reasonable" and "ethical". I do not see any danger in those words. They will not render the clause susceptible to subjective interpretation: I disagree with the noble Baroness. Paragraph (c) must be construed objectively, and the addition of these words would continue to require the construction of the clause objectively.

Returning to the noble Lord's vivid metaphor of Stanley Matthews, Stanley Matthews died a long time ago--

Noble Lords:

No, he did not.

Photo of Lord Phillips of Sudbury Lord Phillips of Sudbury Liberal Democrat

I beg the Committee's pardon--he stopped playing a long time ago. Unfortunately, if paragraph (c) were to be applied to the professional football scene today, the noble Lord, Lord Grabiner, might have a bit of a task on his hands. To take the example of the captain of the most prestigious team in Britain, Manchester United, Mr Keane was sent off a month ago for the sixth time in his career. What would the court view as the standards of regular behaviour in the football market these days? It would certainly not be a close observance of the rules.

There are aspects of the workings of various City markets that are not clear in terms of the effect of their rules in any event: where there is a degree of latitude and where the question of good dealing and bad dealing is to be looked at in terms of the best standards and the worst standards. In relation to Lloyd's, for example, if we go back to the time when baby syndicates were almost, as some would say, the norm, how would the provision in this clause stand up? There was some extraordinary behaviour in the City in the early days of the futures markets. How would the clause stand without the addition of the words "reasonable" and "ethical"? At best, it would be highly confusing to any judge.

Photo of Lord Grabiner Lord Grabiner Labour

I am grateful to the noble Lord for giving way. I suggest that in the case, for example, of baby syndicates, had the facts had been known at the time, everyone would have appreciated that they represented a grossly improper piece of activity.

Photo of Lord Phillips of Sudbury Lord Phillips of Sudbury Liberal Democrat

I am grateful for the noble Lord's intervention; however, I believe that the facts were well known. Throughout the Lloyd's market the existence of baby syndicates was commonplace. That is the problem with which the noble Lord must contend. Amendment No. 209 makes it absolutely clear that, whether or not a practice is standard, whether or not it breaks particular rules, it is not ethical. I do not think that anyone at the time of the flourishing of baby syndicates would have stood up in public and pretended that such a practice was ethical. The amendment would put such a matter beyond doubt. I view it as an innocent amendment at worst and a useful amendment at best. Therefore, I urge the Committee to support it.

Photo of Lord Saatchi Lord Saatchi Conservative

Earlier, my noble friend Lord Peyton said that the Opposition Front Bench had shown restraint during the Committee stage today, and I was pleased to hear that.

Photo of Lord Peyton of Yeovil Lord Peyton of Yeovil Conservative

Did I hear my noble friend correctly? Did he say that I wished that the Front Bench had shown restraint? I congratulated my noble friends on the Front Bench on the incredible restraint that they had shown. I just wanted to be quite clear about that.

Photo of Lord Saatchi Lord Saatchi Conservative

My noble friend congratulated the Front Bench on showing restraint. I was pleased to hear him say that and I thank him. It is true.

As we said at the beginning of this Committee stage, we do not see a party-political advantage in the Bill and we have tried to operate in that way. But we now come to something that is of fundamental and deep concern to our Benches. My noble friend Lord Kingsland explained why. I shall try to add to that explanation and to respond to some of the remarks that noble Lords have made.

The provision in this Bill which has probably attracted the most concern from practitioners and commentators on the financial system is the one relating to market abuse. Before we jump to the conclusion that the Government have thought this through magnificently, we should remember that this is a brand new provision, not seen in any of the previous systems, and therefore quite capable of being slightly incorrect. Our Benches believe that there are two aspects of the provisions which, as currently drafted, are not quite correct. I shall focus on those two aspects. The first is that of uncertainty of outcome. The second is that of intent.

I shall deal first with uncertainty. In our opinion, "market abuse" is given too wide a definition in Clause 109 and covers a situation in which someone engages in behaviour which, were it publicly known, would damage the confidence of informed market participants that the market is true and fair. The behaviour involved in subsection (2) must, as the noble Lord, Lord Grabiner, said, be based on information which is unavailable to informed participants, but which would be regarded by them as relevant in deciding whether to enter into a transaction involving such an investment, or which would be likely to create a mistaken impression about the market for that type of investment, or which would be likely to distort the market for that type of investment. This wording is too vague and too wide. As was stated by my noble friend Lord Stewartby in relation to the regular-user test, it can attract completely opposite views. This is proof of the difficulty that lies in the present wording.

In our Second Reading debate, the noble Lord, Lord Eatwell, said--he repeated it again today--that the wording as currently drafted is too lax. If I have understood it correctly, his point is that if regular users are abusers, the regular-user test cannot be strict enough, because regular users who are abusers will obviously acquit each other of any abuse and, therefore, the clause is too weak.

On the other hand, other people take the exact opposite view. It is extraordinary that the wording of a clause of such importance can provoke such completely opposite views. The exact opposite view to that of the noble Lord, Lord Eatwell, was put forward by the Justice in Financial Services organisation. It is of the opinion that the vagueness of the clauses will potentially leave too wide a range of workers in financial services vulnerable to a charge of market abuse. The organisation, Justice in Financial Services, as I am sure the Minister is aware, made scathing criticism of this clause of the Bill. It believes that the Bill,

"will allow the FSA to impose penalties on virtually everyone, as its remit covers any utterance that could have an effect on any investment or any person's perception of any investment".

In other words, without judging which of the two views is right, surely we can come to the conclusion that the wording is such that it attracts opposite views, and that cannot be a good thing when we are dealing with an offence as serious as this one.

It is true that the Financial Services Authority has published a code of market conduct which is intended to fill some of the vacuum which we perceive exists in the generalities of this clause. It is also true that the Government have strengthened the status of the code, so that it now acts as a safe harbour. In other words, compliance with the code will mean that a firm will be taken not to have breached the general prohibition covered in the market abuse clauses.

Guy Morton, a partner in the firm of Freshfields, a top City law firm, explained to the Joint Committee that this provision left too much unclear. He is regarded as an authority on the subject, and I shall therefore quote him at some length. He told the Joint Committee:

"The main point about market abuse is the need for greater certainty in the definition, which does not seem to give us an adequately clear impression of what behaviour is regarded as objectionable.

If you look at the definition of market abuse, clause [109(1)] in particular, that is not, I submit, a prime example of something which gives people a very clear indication of what conduct is permissible".

My noble friend Lord Stewartby made a similar point. Guy Morton of Freshfields went on to say to the Joint Committee that the clause as drafted,

"is asking you to make a hypothetical judgement about the attitude of a some other described group of people to a set of behaviour. I do not think that that would give the great majority of people any clear idea of what they can and cannot do".

The noble Lord, Lord Lester of Herne Hill, took the view that the underlying provision was so vague that it would breach the requirement of legal certainty laid down by the European Convention on Human Rights. I shall also quote him at some length. He said:

"It is strongly arguable that the very high level of generality of the market abuse offences ... offends against Article 7(1) [of the ECHR] ... Not only are the offences far less clearly defined than their criminal counterparts contained in the Criminal Justice Act and Financial Services Act, but, most strikingly, the FSA's own consultation document on the proposed Code on Market Abuse illustrates the range of open questions as to whether a particular course of action not only will be but should be treated as falling within the market abuse offences".

Photo of Lord Eatwell Lord Eatwell Labour 7:15 pm, 21st March 2000

It may assist the noble Lord to know that when those gentlemen, including the noble Lord, Lord Lester of Herne Hill, gave evidence to the Joint Committee, the regular-user test was not before them. Therefore, they could not possibly have commented on it. It was introduced only at a later stage.

Photo of Lord Saatchi Lord Saatchi Conservative

That is true, on the definitions of "market abuse" that are contained in the Bill. I believe that it is nevertheless relevant to consider what they said. Our argument is that we are not convinced that what has been put there to deal with those points has achieved that which was required. In other words, the problem remains that the scope of the application of these clauses is too wide. So far, the Government have not been forthcoming on this question of certainty. They have agreed to increase the status of the code to provide a safe harbour for those who comply with it. However, the Government seem determined to keep the prohibition and do not seem able to bring themselves to reformulate these clauses in a clearer fashion. That is the first point regarding uncertainty.

The second aspect to which I wish to draw the Committee's attention was described in detail by my noble friend Lord Kingsland. It concerns the matter of intent. My noble friend Lord Kingsland described the views in America of this type of offence. He described the degree of intent required to establish a violation of the anti-fraud provisions of the United States Securities Exchange Act. He specifically drew attention to the standard regarding Section 10(b) and Rule 10(b)(5). He showed that several elements need to be satisfied to establish a violation of those provisions in America, of which one is the degree of intent required to establish a violation.

It is true, as he pointed out, that the US Supreme Court has held that the SSE, the federal agency charged with enforcing all federal securities laws, must establish that a defendant acted with a mental state embracing an intent to deceive, manipulate or defraud. Securities legislation enacted in America in 1995 requires plaintiffs in securities fraud actions to,

"state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind".

These two aspects of the present provisions of market abuse, uncertainty and the lack of an intent provision, have attracted the large number of amendments that we have put forward. We believe that these are fundamental weaknesses in the Bill, in relation to which I hope that the Government will do more than present us with the sound of their famous tape recorder.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

I am very interested in the suggestion that the Opposition Front Bench should be restrained! I am not sure whether it was really congratulation on the part of the noble Lord, Lord Peyton, but it was certainly welcomed by the noble Lord, Lord Saatchi.

I am reminded of the South African poet, Roy Campbell, and his quatrain on some modern poets:

"You praise the firm restraint with which they write--

I'm with you there, of course:

They use the snaffle and the curb all right,

But where's the bloody horse?"

Let us see how much of a horse we have to respond to this evening.

Before I deal with the government amendments and respond to the others in the group, perhaps it would be helpful to say something about the market abuse regime in general. Legislative provision to deal with it has built up as the Bill has progressed. Too often we have lost sight of the big picture by quibbling over hard cases, albeit not this evening. The aim of the market abuse regime is to enhance the protection of financial markets in the UK. It is vital that those markets are protected. Markets such as the London Stock Exchange and LIFFE ensure the allocation of resources where they are best employed and provide a mechanism for channelling funds to industry, and hedging and spreading risk. If those markets are damaged, not only will those who deal in them suffer but the markets themselves will become less efficient and less liquid. The costs of raising funds and of hedging risks will rise. Increased costs for business will lead to increased costs for consumers which, ultimately, will have an adverse effect on economic growth.

We all have an interest in making sure that these markets continue to work well. At present we protect the markets in two ways: through the criminal law and through the regulatory regime. But there is a gap in the protection. The criminal offences of market manipulation and insider dealing cover all market participants but only a narrow range of very serious behaviour. This is right. These are serious criminal offences which carry a maximum gaol sentence of seven years. On the other hand, the regulatory regime covers a wider range of behaviour but extends only to members of the regulated community. Rather than extend the criminal law to close this gap, as the noble Lord, Lord Kingsland, appears to suggest, we have decided that a more proportionate response is to extend the regulator's reach to cover those who abuse the markets, regulated or unregulated. The new regime will thus complement, not replace, the existing criminal offences.

Before I leave the point made by the noble Lord that the criminal law should be extended, perhaps I may quote paragraph 256 of the Joint Committee's report:

"We accept in principle the need for a market abuse regime that complements the existing criminal offences".

The committee did not refer to the extension of the criminal law but to a market abuse regime to complement the existing criminal offences. I thought that that was the view of the Joint Committee representing all sides of both House. Certainly, no dissenting view was expressed.

Photo of Lord Kingsland Lord Kingsland Conservative

It is true that the Joint Committee said that. However, it also recommended, as a result of its analysis of ECHR, that a defendant in market abuse proceedings should have all the protections provided by the criminal law. The noble Lord refers to market abuse in the context of the Bill, but the Joint Committee had in mind market abuse in the context of its recommendations relating to the convention.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

I shall turn to protections and the European Convention on Human Rights in due course.

An effective civil regime for tackling market abuse is, in the view of the Government, in contrast to that of the noble Lord, Lord Kingsland, long overdue. It is inevitable that a regime of this kind will give rise to new questions, particularly among the lawyers, as to exactly what is and is not caught at the margins. I intended to say that no one could seriously argue that that was undesirable, but the noble Lord, Lord Kingsland, has just done so, in which case perhaps his amendments should be much more far reaching than they are. The noble Lord appears to accept the general principle. He tinkers with the wording rather than expresses opposition in principle, which I thought was being expressed by his noble friend Lord Saatchi who was not particularly restrained about it.

Photo of Lord Kingsland Lord Kingsland Conservative

Does the noble Lord suggest that the amendments that I have tabled which incorporate intention are minor amendments?

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

I do not regard them as minor amendments, but they do not provide what the noble Lord appears to seek; namely, an extension of the criminal law rather than a civil market abuse regime.

I say to the noble Lord, Lord Saatchi, that, true enough, the Joint Committee made a number of recommendations to improve certainty in this area. We believe that we have met those concerns by the changes made in Committee in another place and the amendments that we propose today which will also improve this part of the Bill.

I turn to the group of amendments which relate to intent, which are basically Amendments No. 209A and 211A. In order to be abuse, behaviour must get through a series of tests. It must be behaviour which occurs in relation to qualifying investments traded on a market to which Clause 109 applies (subsection (1)); it must be behaviour of a type that comes within subsection (2) which, broadly speaking, is behaviour based on unavailable information (subsection (2)(a)); it must be behaviour which is likely to mislead the market (subsection (2)(b)) or behaviour which distorts, or is likely to distort, the market (subsection (2)(c)); and, finally, it must be behaviour which falls below certain expected standards. I shall return to the objectivity of those standards in a moment.

The effect of these amendments would be to make it impossible to take action where behaviour misled or distorted the market unless the FSA could prove that the behaviour was intended, or might reasonably be presumed to be intended, to have the relevant effect. Noble Lords opposite have moved a long way from the position taken by the Opposition in another place. I did not hear them say so, but that is the position. In another place the Opposition tried to make it a general requirement that only where it could be proved that someone intended to abuse the market could a penalty be imposed. They have now accepted, at least in part, our argument that markets can be damaged even when people do not intend to do so. They have not proposed an "intent" test in Clause 109(1)(c), and have left untouched the test on misuse of information in Clause 109(2)(a).

Since this is a very important point perhaps I may quote the words of the then Economic Secretary when she gave advice to the Joint Committee:

"When we are looking at the broader category of non-criminal market abuse, it must be right to look at the effects of the behaviour, not the intention behind it. What we are concerned about is the efficient operation of the market, not the moral culpability of the individual player in the market".

Confidence in the markets is affected and can be damaged by people's actions even when they do not intend to do something fraudulent. That emerges from the first report of the Joint Committee. What damages a particular market will depend on the expected standards of that market. That may or may not involve some mental element in particular circumstances. What those circumstances are is not for me to say; it is a question for the users of the various markets which are to be covered by this regime. To accept a blanket carve-out for behaviour which is not intended to distort or mislead the market would make it impossible to take action against behaviour which in practice might damage a market in some circumstances. Although I am aware of the legal implications of the word "reckless", I believe that that would be a reckless change to make.

The Joint Committee, which examined this part of the Bill in considerable depth, acknowledged the force of our arguments against requiring proof of intent. I believe that my noble friend Lord Grabiner has made that point with exceptional clarity. The Joint Committee recommended that we introduce greater certainty by providing a safe harbour for behaviour that complies with the FSA's code of market conduct. The Committee will be aware that from the outset the Bill has required the FSA to consult on and publish a code of market conduct, the purpose of which is to give people more certainty about what kinds of things are or are not abusive. Following the Joint Committee's first report, we announced that we would make compliance with things expressly permitted by the code a complete defence to the charge of market abuse. That went further than the Joint Committee's recommendation. Therefore, I cannot accept the amendments relating to intent. We propose to strengthen the protection afforded by the Bill to those who reasonably believe that what they did was not abusive--I shall deal with that when I speak to the government amendments--but intent should not be a necessary feature of a non-criminal regime that is designed to protect markets.

Photo of Lord Donaldson of Lymington Lord Donaldson of Lymington Crossbench

The Minister has said on several occasions that this is a non-criminal regime. But is it? I gather that the noble and learned Lord, Lord Hobhouse, told the Burns committee that he had no doubt at all that this is a criminal regime. I think that it is. If I, as an unauthorised person, choose to go into the market and commit market abuse, what civil obligation have I infringed? It is a criminal obligation.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords) 7:30 pm, 21st March 2000

Of course I read the memorandum to the Joint Committee of the noble and learned Lord, Lord Hobhouse, and I read the much longer submission from the noble Lord, Lord Lester of Herne Hill. The conclusion which the committee drew was not the conclusion of the noble and learned Lord, Lord Hobhouse, but the conclusion, which I thought had been accepted, that this is a matter of degree. Clearly, at one end, there is a criminal aspect to market abuse. But what we are seeking to create, and believe that we can create, is a civil regime at the other end of the spectrum.

Photo of Lord Fraser of Carmyllie Lord Fraser of Carmyllie Conservative

I am grateful to the noble Lord for giving way. He has now repeatedly gone back to the paragraph where we indicated that we wanted any regime on market abuse to complement the criminal law. I do not depart from that at all. What I want to see as clearly as possible is a proper boundary between the criminal law and the civil law. I certainly do not understand the idea that complementing the criminal law contains within it an idea that there should be an unclear overlapping between the two. I should be interested to hear from the Minister at some time what conduct he believes would be caught by subsection (2) which in no respects would ever be caught by the criminal law. Under paragraphs (a) and (b) I can envisage circumstances in which one would be caught by insider trading. The noble Lord should remember that this is a UK regulatory provision where, in terms of paragraph (b), it would not be caught by the criminal law of fraud in Scotland.

Photo of Lord Fraser of Carmyllie Lord Fraser of Carmyllie Conservative

That is exactly what we wanted to extract from the noble Lord. He has now given the game away. He is not trying to determine a precise description or a precise complementing between the criminal law and market abuse. What he is trying to achieve, and what the Government have been trying to achieve, is in some way a looser approach which gets over the problem of the difficulties that have been encountered in London in prosecuting for serious fraud, insider trading and the like. That could not underline more clearly what the noble and learned Lord, Lord Donaldson, is saying. What the Government are really trying to impose here is a criminal system or a criminal set of provisions and they think that they can get away with it by describing it as civil.

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

I was quite explicit in my opening remarks before I moved to the individual amendments. I said that there is a criminal regime. There is no doubt about that. Insider dealing and other matters are covered by the criminal law. There is no attack on that. On the other hand, there is a regulatory regime with which the rest of the Bill is concerned which does and can apply only to the regulated financial community. There is a gap here. There is an element which is not covered. There is an element of abuse which I think everyone who is objective about the matter recognises to be abuse. It is occasioned by persons who are not regulated, but it is not serious enough to be covered by the criminal law. That is the scope for the market abuse regime and that is why we and the Joint Committee have always said that there has to be a market abuse regime in addition.

I have also said--I have made it clear and have not concealed it--that there is a spectrum; that there is a point which will differ in different circumstances between a criminal regime and a civil regime. Perhaps I may give an obvious example. Even though we have put in place European Convention on Human Rights criminal protections, what is criminal for ECHR purposes is not the same as what is criminal for domestic purposes. I shall give an example of the non-criminal behaviour which we are rightly to be able to get at: a range of potentially damaging behaviour which is not the subject of an offence which it would not be appropriate to criminalise. Let us take the Sumitomo case. That involved an unauthorised person trading through authorised firms establishing large off-market positions in the copper futures market and, through his dominant position, manipulating the market and distorting the copper price. The effect on the price of copper, which was felt all over the world through contracts, was very large indeed. But a criminal prosecution was not possible. This comes right to the heart of one of the motivations for the market abuse regime.

Perhaps I may take the issue of insider dealing. Insider dealing is not referred to in the Bill. Subsection (2)(a) refers to information,

"which is not generally available to those using the market".

The new regime fills a gap beneath the criminal regime covering market abuse. The gap is that the regulators cannot take action against unregulated market participants who damage the market. We decided not to extend the boundaries of the criminal regime to deal with that because that would not have been proportionate. But the criminal offences will remain. Where criminal offences have been committed and the public interest and evidential tests for criminal proceedings are satisfied, they will be taken.

Perhaps I may deal with the government amendments. The policy has never been that this regime should capture behaviour which has an effect that no one could have foreseen. Again, I can do no better than to quote Patricia Hewitt's evidence to the Joint Committee. She said:

"We want people to act with due care when they are interacting with the financial markets, but of course we do not want to sanction people for the effects of actions that are unforeseeable. The regime is designed to protect the efficiency of markets. It is designed to deter unacceptable behaviour, not acceptable behaviour, and clearly there needs to be a degree of certainty in achieving that".

The Government will be looking at ways to ensure that people who take proper precautions to ensure that they do not commit market abuse cannot have a penalty imposed upon them.

The Joint Committee said that it was satisfied that what the Government proposed would broadly meet the recommendation in its first report for more certainty. That was in paragraph 23 of its second report. We have introduced these protections in Clause 109(3) of the Bill. That subsection provides that in determining whether behaviour amounts to market abuse, regard must be had to the extent to which the person concerned took care to avoid engaging in abuse or believed that the behaviour would not amount to abuse.

A number of amendments have been put down by noble Lords opposite and by the noble Lords, Lord Eatwell and Lord Lipsey. Perhaps I may continue to describe my amendments first. The effect of our Amendment No. 212 is just to delete that subsection. The overall effect that the amendment and our related amendment, Amendment No. 218, to Clause 113 have means that everyone ought to be in agreement about that. I have not heard anything other than that. We have decided to divorce these matters from the question of whether abuse has taken place and impose them as fetters on the FSA's powers to impose penalties or make statements. Amendment No. 218 provides that the FSA may not impose a penalty on a person or make a statement if, having considered representations, there are reasonable grounds for it to be satisfied that the person concerned believed on reasonable grounds that his behaviour did not amount to abuse or that he took all reasonable precautions and exercised all due diligence to avoid engaging in market abuse. Whether there were reasonable grounds for the FSA to be satisfied in a particular case is something which the tribunal will be able to consider.

In addition to improving the nature of these protections in line with our general approach towards certainty and transparency, we are proposing in Amendment No. 220 that the FSA will, as part of its policy statement on the imposition of penalties, have to give indications of the circumstances in which it is to be expected to regard a person coming within these protections. The FSA has to consult on and publish this policy statement.

The noble Lord, Lord Eatwell, said that Amendment No. 208 was flawed. But the reason the test is drafted in this way is so that the tribunal ultimately can decide whether there were in fact reasonable grounds for the person believing that his behaviour was not abusive. This provision does not stop the FSA from proceeding to issue a decision notice if it is satisfied that the person's grounds are not reasonable.

The effect of the amendments is to provide more effective protection against the allegation of market abuse than Clause 109(3) does at present. I hope that it meets the substance of Amendment No. 212A in the name of the noble Lord, Lord Kingsland. We have also taken the opportunity to restrict the protection to belief where there are reasonable grounds for the belief. That is in line with Amendment No. 213--I understand from what he said that the noble Lord will not pursue it--and Amendment No. 203 tabled by the Opposition Front Bench.

While referring to protection, let me deal with Amendment No. 214. Clause 109(9) already provides that behaviour which conforms with FSA rules does not constitute market abuse. We have been accused of resiling from the position that we took in the House of Commons. We believe that, as drafted, this goes too wide. Of course it is not, and never has been, our intention that behaviour in conformity with any completely unrelated FSA rules should protect a person against an allegation of market abuse. I do not believe that noble Lords opposite, or honourable Members of the Opposition, thought that that was the case. While we do not think that the provision would be read in this way, we are taking the opportunity to clarify the matter. That is the reason for Amendment No. 214. But the protection in Clause 109 still provides a safe harbour for behaviour conforming with rules such as price stabilisation rules.

We are proposing that the protection should apply only where the rule in question states that behaviour conforming with it does not amount to market abuse. The obvious examples are rules on price stabilisation and Chinese walls, but the amendment deliberately gives the FSA the flexibility to specify other rules if that is appropriate.

Finally, I turn to the amendments which deal with the reasonable regular user of the market's role in determining whether abuse has taken place. I have heard it said that we are too strict; and that we are too lax. I am glad to have the support of my noble friend Lord Grabiner, who confirms our view: that the issue is objective, not subjective. This is very much at the heart of the regime. It was, quite rightly, the subject of debate at Second Reading. I think that there may be some misunderstanding as to how it works.

The Bill as considered by the Joint Committee did not have the concept of the reasonable regular user. We introduced that following a review of the legislation in the light of the Joint Committee's concern that the definition of market abuse in the Bill lacked the necessary clarity. In carrying out this review we consulted with industry representatives and the FSA.

Let me take one step back before I describe the reasonable user test. The purpose of the regime is to protect from the effects of abuse the markets which will be covered by it. It will allow action to be taken against the bad apples who abuse the trust of other market participants whether they are regulated or unregulated. But it is not telling those markets how they should operate and what standards they should have. That is not the purpose of the market abuse regime. The then Chief Secretary made this clear when announcing the proposals in May 1998. He said:

"It is not our intention that the new regime should stop generally acceptable market behaviour--far from it. Nor do we want to deter proper innovation in the financial markets".

That is why we have those provisions in Clause 3. That must be right. Were the market abuse regime to allow the FSA to take action solely in the light of its own view of what are the proper standards, what market participants thought was right or wrong or what they thought was the best way of running their market and ensuring its liquidity and efficiency would be neither here nor there. The only relevant standards would be those of the FSA.

Let me make clear that I am not advocating self-regulation. The FSA may, of course, have a role in raising standards in markets, but only where the adoption of particular standards by market users means that there are investor protection or market confidence issues. Where that is the case, the FSA will be able to take action under its rule-making powers or under its powers to enforce the recognition requirements for exchanges.

The job of the market abuse regime is to police accepted and acceptable standards of behaviour. Of course, good markets depend on those who use them having confidence in their fairness and efficiency. So the standard of behaviour which is reasonably to be expected will be one which takes into account the need for the market to operate fairly and efficiently. That is why we introduced the regular user of the market. The view of the regular user is the view which an impartial third party who regularly uses the market would take on an objective and reasonable basis as to whether a particular person's behaviour represented a failure to observe the standard of behaviour reasonably to be expected of someone in that position. A reasonable man is someone who knows right from wrong.

Let me give a couple of examples. Let us suppose that someone is engaged in a squeeze on a commodity market. He holds a large number of contracts which require delivery of, say, a metal of a certain quality to him on a particular date; and he has control over a large amount of the supply of the metal of that quality. He takes advantage of that position to extract artificially high prices; that is, he squeezes the market. If the reasonable regular user would take the view that the squeeze fell within Clause 109(2)(c) the next question he would have to ask is whether there was a standard of behaviour reasonably expected of any person in the same position as the squeezer in relation to the market.

The hypothetical regular user addresses the question from the viewpoint of an impartial person who regularly uses the market. He does not decide whether there is a standard of behaviour reasonably expected of a person in the position of the alleged abuser by looking at the personal characteristics of the alleged abuser. That is what would happen if Amendment No. 208B were accepted. He asks himself whether there is a standard of behaviour which a person in the position of the alleged abuser is reasonably expected to observe. If the answer is that there is no such standard, then the alleged abuser will not have engaged in market abuse.

However, if the answer is that there is such a standard, then there will have been market abuse. But the question will turn in each case on whether an impartial regular user of the market would take the view that there is a reasonable expectation that a person in a particular position should not take advantage of that position to squeeze the market.

I do not think that I can bear to take the football example. I do not understand what it is about. I do not know who Stanley Matthews was. I do not understand about pulling sleeves; although I am advised that the Stanley Matthews example is very helpful to the government case.

Amendments Nos. 210 and 211, in the name of my noble friend Lord Eatwell, would remove the regular user from the condition concerning distortion of the markets in Clause 109(2)(c). If we did that, who is to judge whether the behaviour would or would not be likely to distort the market in the investment? Surely the best person to take that judgment is the regular user. He is the person who is considering whether behaviour lives up to expected standards.

Photo of Lord Eatwell Lord Eatwell Labour

If the Minister holds that view--who is to judge?--then who is to judge what gives a misleading impression in Clause 109(2)(b)? And who will judge whether or not information is generally available in the market under Clause 109(2)(a)?

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

The amendment about which we are talking does not refer to subsection (2)(a). I was talking about a misleading impression as to supply and demand for the price or value of investments of the kind in question.

I am advised that I have taken far too long already, as I appreciate. If I have not responded to noble Lords on any particular point--I have not done so on the take-over code--I shall write to noble Lords.

After serious consideration of all the amendments--it has taken far longer than the 30 minutes I have been speaking--I conclude in general that what we have done is neither too lax (as is suggested by my noble friend Lord Eatwell), nor too rigid (as suggested by noble Lords opposite), and I commend the government amendments to the Committee. I ask the Committee to reject the other amendments.

Photo of Lord Peyton of Yeovil Lord Peyton of Yeovil Conservative

I realise that for some reason or other the noble Lord is in a great hurry. I have quite a number of things I should like to say. I can be very short. If the Minister has now finished speaking, I should like, first, to add my congratulations to the Members on my Front Bench on their admirable restraint in the handling of this Bill, slightly tinged with regret at the absence of protest and unease at the length of the Bill. I believe, rightly or wrongly, that that is at the root of the Government's troubles. The more you put into a Bill, the more you try to fill every gap and provide for every possible occurrence, the more difficulties you will be in.

Perhaps I may point out to the Minister that Clause 109(11) states:

"In this section ... 'behaviour' includes action or inaction".

I could have told him that. It also states that:

"'investment' is to be read with section 20 and Schedule 2".

I suspect that most people know what "investment" means. It goes on:

"'regular user', in relation to a particular market, means a reasonable person who regularly deals on that market in investments of the kind in question".

I believe that the obesity of the Bill lies at the root of the Government's problems in handling it.

I agree that it is not a Bill which need arouse party passions, but, with reference to the amendment proposed by the noble Lord, Lord Eatwell, it will not be further improved merely by sprinkling adjectives over it. In my view, the addition of the word "ethical" will not help to stop the abuses which we all want to see stopped.

Furthermore, I am deeply indebted to the noble and learned Lord, Lord Donaldson, for his intervention. I am still far from clear as to where the boundary lies between the so-called civil market abuse regime and criminal activity, and nothing that the Minister said has explained it to me.

He must deal with it sooner or later, because I do not understand the matter. He went on to deal with the Sumitomo case, stating that the mere fact that a criminal prosecution did not follow did not mean that a criminal offence had not been committed. It seems to me that the mere use of the term "market abuse" suggests that there is some criminal conduct.

I believe that one is entitled to make some protest. It is difficult for people who are not as well prepared or briefed as Ministers to follow answers delivered at such speed. I am not sure why the noble Lord had to hurry so much, but I want to make the modest and restrained protest that what he said at that speed--he is normally very clear--was extremely hard to follow.

Photo of Lord Bagri Lord Bagri Conservative

As I know something about the Sumitomo case, perhaps I may congratulate the Minister on trying to deal with it. I know how difficult it was to deal with. That is why we welcome the extension of the market abuse regime to cover both non-authorised persons and off-exchange activity which has a manipulative effect on the exchange market.

I listened with interest to the Minister's reference to a hypothetical situation about market abuse, dealing with metal futures and so forth. It was a relevant reference as we have to deal with it almost every day.

Photo of Lord Kingsland Lord Kingsland Conservative

I want to take a few minutes to respond to the Minister's reply. I am surprised that he was not attracted by the elegance of the solution I offer in my amendments. First, we have a clear statement of the standard of behaviour; then we have the conditions under which it is capable of being broken; and to each of those conditions is attached a requirement of intention. Finally, in subsection (3), we have an absolutely clear, safe harbour. We have the standard set out, the requirement of intention, the actus reus of the offences and a clear, safe harbour. In my submission, that gives the offence of market abuse the predictability it needs if it is to survive the European convention test which will be applied to it after 2nd October.

The Minister referred to remarks made by the then Minister of State, Ms Hewitt, in another place. He quoted her as saying that what matters are the adverse effects on the efficiency of markets, not moral culpability. If that is so, why have the Minister and his Government introduced fines into the offence? If it is merely a question of effects and the efficiency of markets, why is not restitution sufficient? That would solve all the noble Lord's problems because, if there were no fines, the element of criminality would be banished from market abuse. I put it to the noble Lord that he cannot have it both ways. If he wants fines, he has to have intent, or at least recklessness, as well. The two things go together.

I was surprised that he failed to make reference to my observations about the SEC. The United States has more experience of supervising successful securities markets than any other country. It introduced the regime based upon the criminal law on the one hand and the regulated market on the other. Throughout, it has insisted that its regime is conditioned by intention and a form of recklessness which its courts say goes beyond gross negligence. The Minister did not attempt at any stage of his speech to demonstrate why that experience in the United States has no relevance whatever to the United Kingdom.

Nevertheless, despite those strongly expressed views, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 208B not moved.]

Photo of Lord Eatwell Lord Eatwell Labour

had given notice of his intention to move Amendment No. 209:

Page 51, line 4, after ("a") insert ("reasonable and ethical").

Photo of Lord Eatwell Lord Eatwell Labour

The Minister said that in his speech he did not have the opportunity to address the matters raised in my amendments. I look forward to receiving his letter on those issues. Having said that, I shall not move the amendment.

[Amendment No. 209 not moved.]

[Amendments Nos. 209A to 211A not moved.]

Photo of Lord Ampthill Lord Ampthill Crossbench

As a result of that amendment, I cannot call Amendments Nos. 212A to 213A. They have been pre-empted.

[Amendments Nos. 212A to 213A not moved.]

Photo of Lord McIntosh of Haringey Lord McIntosh of Haringey Deputy Chief Whip (House of Lords), HM Household, Captain of the Queen's Bodyguard of the Yeomen of the Guard (HM Household) (Deputy Chief Whip, House of Lords)

moved Amendment No. 214:

Page 52, line 1, leave out from ("Behaviour") to end of line 2 and insert ("does not amount to market abuse if it conforms with a rule which includes a provision to the effect that behaviour conforming with the rule does not amount to market abuse.").

On Question, amendment agreed to.

Clause 109, as amended, agreed to.

Photo of Lord Bach Lord Bach Government Whip

I beg to move that the House do now resume. In moving the Motion, I suggest that the Committee stage begins again not before 9 p.m.

Moved accordingly, and, on Question, Motion agreed to.

House resumed.