moved Amendment No. 258:
Page 156, line 36, leave out subsection (4).
This amendment was debated with Amendment No. 189. I beg to move.
moved Amendment No. 259:
Page 160, line 41, leave out paragraph (b).
I spoke to this amendment with Amendment No. 89. I beg to move.
In moving this amendment, I should like to speak also to Amendments Nos. 259PA to 259WAB. This group of largely technical amendments concerns the regulation of insurance business carried on at Lloyd"s. The amendments in this group can conveniently be sub-divided into three topics.
The first topic is the power conferred on the authority to make directions under Clause 309. Such a direction would apply to members of Lloyd's those parts of the Bill--referred to as "the core provisions"--that otherwise apply only to authorised persons.
Clause 310(1) sets out the core provisions. Amendments Nos. 259NA and 259PA add to the list a number of other provisions of the Bill: Part XIV (disciplinary measures); Part XV (compensation scheme); Part XIV (ombudsman scheme); Part XXIV (insolvency); and Clauses 371 to 374 (injunctions and restitution). We believe that these amendments complete the list of relevant provisions.
Amendment No. 259QA adds a new subsection to Clause 310 which makes it clear that in exercising its powers to apply a core provision of the Bill to a member of Lloyd's, the authority may modify the way in which the core provisions will apply. The Explanatory Notes gave an example of the practical issues that would arise if every member of a syndicate were required personally to obtain approval for retaining the services of a syndicate underwriter.
Another example might be in the case of the application of the ombudsman or compensation arrangements, where we should expect the FSA to want to specify how those arrangements would interact with Lloyd's internal mechanisms for dispute resolution between policyholders and Names, and compensation in the event of the insolvency of a Name. These are sensible bits of polishing to the provisions of the Bill which I hope will be welcomed.
Amendments Nos. 259SA to 259WA are part of the package of amendments that the Government are bringing forward to improve the FSA's decision-making procedures. Clause 314 gives the FSA powers to impose requirements on former underwriting members of Lloyd's. Former members continue to carry on insurance business until all their liabilities under the contracts that they have underwritten at Lloyd's are discharged. However, rather than requiring such persons to be authorised, which would be excessive, we have introduced these provisions which give the FSA the powers it needs to impose any requirements it considers necessary to protect policyholders.
These amendments make a small number of changes to Clause 314. The clause, which was added to the Bill at Committee stage in another place, already incorporates most of the new features which we are now introducing into other equivalent provisions elsewhere in the Bill. The amendments ensure that the procedures are consistent.
The third package within this group is also about the arrangements for giving the authority appropriate powers over former Names. The Government do not believe, as I said, that it is appropriate for former Names to have to be authorised, but it is none the less necessary for the authority to have adequate powers to protect its policyholders.
Clause 313 enables the authority to make directions that would impose specific requirements on former members. It is, if you like, a form of intervention power. However, it will be sometimes necessary for the authority to impose requirements in the form of rules--that is to say, requirements that apply across the board rather than on a case-by-case basis. Under the current arrangements introduced to apply the powers of the regulator under the Insurance Companies Act 1982, former Names are required to notify the authority of a change of permanent address. The new clause introduced by Amendment No. 259WAA would give the authority an appropriate rule-making power. The exercise of the power will be subject to the normal procedures that apply to the exercise of other delegated legislative powers in the Bill and include, for example, requirements for consultation and cost-benefit analysis.
Amendments Nos. 259RA and 259WAB are consequential on that amendment as they move the definition of "former underwriting member" from Clause 313 to the interpretation provision (Clause 315), since the definition is now needed for the purposes of Clause 313 and the new clause.
The overall effect of the changes in relation to former members of Lloyd's is to continue the arrangements already provided for under the 1982 Act. I beg to move.
moved Amendments Nos. 259PA and 259QA:
Page 162, line 5, after ("and") insert (", XXIV, sections 371 to 374 and Part").
Page 162, line 8, at end insert--
("( ) An insurance market direction may provide that a core provision is to have effect, in relation to persons to whom the provision is applied by the direction, with modifications.").
I have just spoken to these amendments. I beg to move.
moved Amendment No. 259RA:
Page 163, line 39, leave out subsection (1).
moved Amendments Nos. 259SA to 259WA:
Page 164, line 24, at end insert--
("( ) The Authority may extend the period allowed under the notice for making representations.").
Page 164, line 33, at end insert--
("( ) If the Authority decides to grant an application by A for the variation or revocation of a requirement, it must give him written notice of its decision."). Page 164, line 36, at beginning insert ("If").
Page 164, line 37, leave out from first ("notice") to end of line 38 and insert ("decides to refuse the application, it must give A a decision notice.").
Page 164, line 42, at end insert--
("( ) If an application for a variation or revocation of the requirement is refused, the applicant may refer the matter to the Tribunal.
( ) If a notice informs a person of his right to refer a matter to the Tribunal, it must give an indication of the procedure on such a reference.").
I have just spoken to these amendments. I beg to move.
moved Amendment No. 259WAA:
After Clause 314, insert the following new clause--
:TITLE3:RULES APPLICABLE TO FORMER UNDERWRITING MEMBERS
(".--(1) The Authority may make rules imposing such requirements on persons to whom the rules apply as appear to it to be appropriate for protecting policyholders against the risk that those persons may not be able to meet their liabilities.
(2) The rules may apply to--
(a) former underwriting members generally; or
(b) to a class of former underwriting member specified in them.
(3) Section 312 applies to the making of proposed rules under this section as it applies to the giving of a proposed direction under section 309.
(4) Part X (except sections 143 to 145) does not apply to rules made under this section.").
I spoke to this amendment with Amendment No. 259NA. I beg to move.
moved Amendment No. 259WAB:
Page 165, line 4, after ("2;") insert--
(""former underwriting member" means a person ceasing to be an underwriting member of the Society on, or at any time after,
Then noble Lord said: I have just spoken to this amendment. I beg to move.
On Question, amendment agreed to.
Clause 315, as amended, agreed to.
Clause 316 [Authority's general duty]:
I understand that I am now speaking to three amendments standing in my name. I shall happily be corrected, but I understand them to be Amendments Nos. 259XA, 259YA and 259ZA. I understand the Minister's desire to gallop towards a conclusion, and the idea of building up momentum is a technique that I readily accept I have previously deployed--
Proper consideration of the Bill is essential for this Government.
I am deeply honoured that the noble Lord should have intervened in that way to indicate to me that I can take as long as I wish to over this set of amendments. If he is getting up from his place to attract the attention of the Chief Whip, he need not bother. I am not going to undertake anything now that might cause him any concern.
There are a number of points relating to Part XX of the Bill that I should like to explore by means of these three amendments. As I understand it, these provisions were first introduced into the Bill at Report stage in the House of Commons. If that is correct, it seems wholly appropriate that in this Chamber some time should be taken to examine them.
This part of the Bill seems wholly appropriate and I have no fundamental difficulty with it. As I indicated when I introduced the first amendment today, a number of amendments that I have tabled have been promoted by the Law Society of Scotland. This statute will regulate investment on both sides of the Border.
So far as Scottish solicitors are concerned, there is undoubtedly a degree of tension that emerges here, not least because, as solicitors, they are governed principally by the Solicitors (Scotland) Act, and that statute has now passed to the responsibility of the Scottish Parliament. So as they conduct their ordinary business as solicitors, if that is to be changed in any way, it will not be a matter for this House or another place, but for the Scottish Parliament.
That said, it is clear to me that those who carry on investment business north of the Border, whether they are solicitors, bankers or whatever, would be exceedingly alarmed were there to be separate regimes for investment regulation on either side of the Border. I hasten to stress that I have no difficulty with that provision, provided there is the understanding that solicitors in Scotland will be statutorily governed by two separate Parliaments.
What I understood as a relatively simple arrangement has become more complicated over the past week or so. I thought that the Financial Services Authority, as Clause 316 indicates, will be required to keep itself informed about
"the way in which designated professional bodies supervise and regulate the carrying on of exempt regulated activities by members of the profession" and
"the way in which such members are carrying on exempt regulated activities".
Scottish solicitors might grumble about having two masters but that would be relatively acceptable.
Such activities are not an incidental matter because unlike solicitors in England, for more than 100 years solicitors in Scotland have not only conveyed houses, concluded contracts and made up wills but have carried out a considerable degree of investment business. They continue to do so, so that is an important aspect of their work,
I now understand that in the regulation of Scottish solicitors' exempt activities, the FSA--using one power or another conferred by the Bill--has put out to tender to a number of organisations the task of regulating solicitors in Scotland that carry on exempt regulated activities. The reasoning behind that is to keep fees down, which is not a bad idea. One of the bodies might be the Law Society of Scotland. If that were the arrangement, there would not be any difficulty or exaggerated degree of tension.
Another possibility is that the duties relating to activities that fall within Clause 316(1)(b) might be given to PricewaterhouseCoopers. That is an exceptionally good organisation. I have worked with it in the past and have no complaint about its professionalism in accounting, auditing and consultancy.
The third possibility is that the Law Society of England and Wales might be given responsibility for looking after the exempt business of solicitors in Scotland. If the Minister can assure me that is an off-the-wall proposal and that no decision is likely to be taken to give the ultimate power of regulation or oversight to the English society, I would be immensely reassured. Were such a thing to be proposed, if the Minister has not already heard the rumble of distant thunder, he shortly will.
I am exploring the matter now because I understand that a decision one way or the other is to be taken by 10th April--and I doubt that we will reach Report stage before then. I shall be grateful if the Minister will clarify the issue. I am not sure whether the matter falls within Clause 316(1)(b) or is covered by the power that we have already given the FSA in Schedule 1(6).
As to Amendment No. 259YA, when my noble friend Lord Kingsland moved an amendment not so long ago, the noble Lord, Lord McIntosh, indicated that the word "information" encompassed a wide range of material, not just documents. As one who likes an unencumbered statute book, I believe that anything that can be deleted should be deleted.
My second amendment would require the authority to apply to the courts if it wishes to obtain information. If we were to have the contained arrangement that I first understood to be the basis of Part XX, that might be excessive. If a body, however distinguished, such as PricewaterhouseCoopers--or in Scotland, the Law Society of England and Wales--is to exercise that activity, intervention by a court would seem an appropriate regulation on the possibly arbitrary exercise of power by the FSA.
If the designated professional body--which I understand to be the Law Society of Scotland--found that the arrangements were so elaborate and excessive in their regulatory burden that it wanted to get out, it should have the opportunity to say, "We are not going to permit lawyers in Scotland to carry on investment business any longer. It is too excessive a burden".
The Minister may grin. One matter that takes up an excessive amount of time at Scottish Law Society AGMs and otherwise is the onerous and proper requirement imposed upon lawyers in Scotland to contribute to a guarantee fund. If the complaint is that the burden of that fund is so heavy, solicitors in Scotland ought to have the opportunity to withdraw by their own hand from that activity. The noble Lord may be right--that they have been good at that work and there is no reason for them not to continue being good at it. But if there is an excessive degree of regulatory burden, they should at least be accorded the opportunity to withdraw from such activities themselves.
I am probing as carefully as I can and no Chief Whip needs to be worried about my intentions at this stage--but the fuller the answer that I secure this evening, the less time we will devote to the issue on Report.
I rise to speak to Amendments Nos. 259A, 259B and 259C which in effect delete subsection (7) of Clause 318. The subsection provides exemption from the general prohibition on some activities if they are the only activities carried on by a person. The amendments are directed at the problems faced by solicitor investment managers who may now find themselves at a disadvantage because they are subject to regulation by both the FSA and one of the Law Societies.
For some time a number of firms of solicitors have provided clients with professional investment services. Many clients are retired or elderly people; others act on behalf of relatives, trusts or charities. Those clients look for a seamless legal and financial service so that they do not have to waste a lot of time and money co-ordinating the help of different services. Solicitor investment managers usefully fill a gap in the market because they provide independent financial management integrated with traditional legal services. They provide a personal service, which is perhaps somewhat unusual today, and an important one. Examples of activities that would be regulated in the case of some firms and not others include: acting for clients who are trustees; providing custody service for trust share certificates; acting for clients who are executors of an estate; advising on and arranging transactions to effect bequests in wills; and the provision of custody service of share certificates during the administration period. They also advise clients in divorces and, for example, arrange the disposal of a life policy which is part of a matrimonial settlement.
If those services are regulated by the FSA in some cases and not in others, those firms which are subject to two forms of regulation will have higher costs than those which are not but which carry out exactly the same service. Many firms will be unable to sustain the increased costs compared with their competitors and will close or demerge their investment departments which carry out mainstream investment business in order to remain competitive in their core legal business. That would reduce consumer choice, because at present professional firms provide a distinctive, independent service that is not motivated by commissions. This is a personal service which is provided by a known individual, often against the background of a long-term relationship with the client. It would be rather ironic if a Bill which was intended to simplify and streamline regulation had the opposite effect.
Clauses 316 to 323 in Part XXII of the Bill provide that solicitors who conduct investment business as an incidental part of their practice are to be regulated by one of the Law Societies. However, where a firm carries out any mainstream investment business, that business, and any incidental investment business which the firm carries on, is to be regulated by both the FSA and Law Society. The Association of Solicitor Investment Managers believes that the Bill needs to be amended to deal with that anomaly. The association accepts that mainstream investment business should be within the remit of the FSA but that incidental investment business performed by solicitors as part of their legal practice should remain to be regulated by the Law Societies alone. The answer to this appears to be the deletion of subsection (7), which is what these amendments are about. I hope that the Government will give this serious consideration.
As to Amendment No. 259AC, as the Committee must by now be aware, Part XX of the Bill deals with the provision of financial services by the professions. Clause 318 sets out the conditions which must be satisfied by a member of the profession if he intends to avoid the general prohibition against carrying on regulated activities when not authorised to do so. Clause 318(3) requires that the person concerned,
"must not receive from a person other than his client any pecuniary reward or other advantage, for which he does not account to his client, arising out of his carrying on of any of the activities".
The amendment simply adds to the end of Clause 318(3) the words,
"for or on behalf of his client".
We believe that that would narrow down the current drafting and make it much clearer.
Amendments Nos. 260 to 262 amend Clause 319 in Part XX. That clause provides an exemption for the provision of financial services by members of the profession where those are not mainstream financial services and, therefore, are to be regulated (as now) by the recognised professional bodies which are described in the Bill as "designated professional bodies". Amendment No. 262 works on the same basis as the extended definition of "consumer" to include as clients beneficiaries of trusts where the professional is a trustee and provides regulated services. That gives rise to the same issues.
However, what do the Government propose to do in relation to members of the professions who do not carry out regulated activities, properly so called, at all? I am concerned here with law firms, whether UK firms or, perhaps more importantly, non-UK firms, which operate in the United Kingdom and give advice on the commercial terms of an investment transaction. For example, they may point out exposures or liabilities and by so doing in effect advise the client to enter into, or not to enter into, a transaction to buy or sell shares. I believe that that is not a regulated activity at all and therefore the exemption provided in Part XX is unnecessary. Non-UK law firms are unlikely to be members of, or regulated by, a designated professional body. American law firms are a very good example of this.
In addition, where a law firm, or indeed an accountancy firm acting as lawyers or accountants and not as corporate finance advisers, negotiates the commercial terms of an agreement for the purchase or sale of shares or options, or the terms of a class of securities, or drafts an optional agreement, it also should not be regarded as carrying on regulated activities, and therefore would not have to seek to fall within this exemption.
As I understand it, some months ago the Treasury were invited to make it absolutely clear that these activities, which are intrinsic to the profession of a corporate finance lawyer or accountant, do not involve the giving of investment advice or the arranging of transactions in the sense meant by the Bill, or the present Financial Services Act. This is particularly important as the authority, in a recent consultation paper on the exemption provided by Part XX, expressly referred to negotiating transactions as non- mainstream financial services so, implying that this activity requires authorisation unless the exemption applies, which it cannot do in the case of non-UK law firms.
Because Parliament cannot effectively debate the terms of the Treasury's regulated activities order which spells out what activities require authorisation, it is important that the Government make clear that advising on, or negotiating the terms of an investment agreement, are not financial services requiring authorisation. They do not relate to the merits of the investment as such but to the merits of the transaction for the acquisition or disposal of the investment; and do not involve persuading people to buy or sell investments because of their investment merits but merely arrange for the negotiation and exchange or execution of documentation for the purpose of sale of investments. Under the Bill that is all currently completely unclear.
The Treasury will presumably make it clear in the regulated activities order. But we cannot allow a debate on the amendment to pass without discussion on the scope of the authorisation requirement in relation to the activities relating to the transaction rather than to the investment itself without making clear that the exemption is needed only where the member of the profession is doing something which is indeed providing investment services.
It may not be subtle, but it is correct. Amendment No. 259AA is a paving amendment to allow me to introduce Amendment No. 259AB. The point is simple. At present the Bill requires that if anyone earns a commission, it must be accounted for to his client. The amendment proposes the obligation to disclose to the client such a payment in order for the client to decide whether or not he is prepared to continue with the transaction.
I understand that that is the present requirement. If I am correct, and there is an intention to change the provision, it would be useful to know the basis for proposing that change.
In dealing with the group of amendments, it is right to set out the background. The noble and learned Lord, Lord Fraser of Carmyllie, is right. The Bill was amended in another place on Report to incorporate government proposals under which professional firms which, among other things, are subject to regulation by a designated professional body and which provide financial services as an incidental and complementary part of their professional practice, will not require authorisation by the FSA. One would have thought that, on balance, the professions would have been content with that change to the Bill. Reading between the lines of the speeches to the amendment, noble Lords probably are content. The problem is that it is not always the contentedness that is demonstrated when amendments are moved.
I deal, first, with the amendments moved and spoken to by the noble and learned Lord, Lord Fraser of Carmyllie. Under Clause 316(4) each designate body must co-operate with the authority by the sharing of information and in other ways in order to enable the authority to perform its functions under Part XX. The noble and learned Lord, Lord Fraser, in his Amendment No. 259YA is proposing that the authority, for the purposes of obtaining this information, apply for an order from the court which will detail the information sought, the person to whom it is to be provided and the timescale in which it should be given. Additionally, a designated professional body which complies with such an order should not be liable in any court for any damages arising from breach of contract or tort or any obligation in restitution.
We believe that the amendment is unnecessary. Recognised professional bodies under Schedule 3, paragraph 6, to the Financial Services Act 1986 are subject to an identical requirement to co-operate with the Financial Services Authority,
"by the sharing of information and otherwise".
Clause 316(4) merely replicates the existing regime which, I understand, has not caused significant difficulty for bodies representing professional firms. I hope that the noble Lord will not move that amendment.
With regard to Amendment No. 259XA, which proposes the deletion of the words "and other ways" in subsection (4), it is important that the designated professional body's co-operation should not just be limited to the sharing of information, however wide it may be drawn, as there are other ways of co-operating. We should keep the terms of that co-operation as broad as possible in order to ensure that the provision is as effective as it can be. As I have said, the position of professional bodies in this respect will be no different from the position of professional and other bodies recognised under the 1986 Act.
In Amendment No. 259ZA, the noble and learned Lord, Lord Fraser, proposes to add the words:
"if a designated professional body wishes to cease to be designated for the purposes of this Act, it may request the Treasury to revoke its designation as a designated professional body and the Treasury shall comply with such a request".
This is clearly a complicated issue as members of a professional body which ceases to be designated will require FSA authorisation in order to offer financial services to their clients. We will need to make sure that proper arrangements are in place to cover this situation to ensure that consumers receive the right level of protection where professional firms are engaged in regulated activities.
We cannot easily foresee a situation where a designated professional body would request to have its designated status revoked. However, if that situation arose, the Government would need to assess whether it is appropriate to meet the professional body's request in the light of all the circumstances. There should be no obligation imposed on the Treasury to accede to a professional body's request automatically, given the complexity of issues that such a situation would no doubt create. I hope that the noble Lord will reflect on that answer. Of course, I understand that these are probing amendments dealing with a part of the Bill which has only recently come into existence.
I shall do my best to answer the broader question that he asked. I understand that no tender has yet been sought, but the duties to which he referred could not be delegated to the English Law Society. It could not be given such powers. I also understand that the authority can delegate the monitoring of authorised persons, which could include solicitors carrying on non-mainstream business. That comes under Schedule 1, paragraph 6(2), to the Bill. However, the FSA would retain ultimate responsibility. There are no powers to delegate under Part XX. I realise that that is not an entirely satisfactory answer to the issue he raised tonight. Therefore, having read Hansard, I should like to write to him with, it is to be hoped, a more full answer.
I turn to the two amendments spoken to by the noble Lord, Lord Taverne, who seems concerned that professional firms which offer mainstream financial advice may be subject to a double regulation by their respective professional body with regard to its provision of professional services and by the authority with regard to its provision of financial services. He fears that that might produce an undue regulatory burden on them.
Firms which conduct mainstream financial services and whose activities are not covered by exclusions set out in the draft regulated activities order will require permission from the authority to carry out both mainstream and ancillary financial services. That is on the basis that it is in the interests of consumers that an authorised firm's overall fitness to conduct financial services be assessed in the light of its activities as a whole. However, it does not follow that the authority must necessarily apply any additional burdens in respect of the non-mainstream business of authorised professional firms. They will be expected to act in accordance with their statutory duties, including the need to have regard to considerations of proportionality and competition.
The FSA indicated in one of its consultation papers, The FSA's regulation of professional firms, published in October last year, that, with regard to the provision of non-mainstream activities, it proposes, in line with the degree of risk attaching to such business, a differentiated and, where appropriate, less burdensome regime. I do not know whether those words have any comfort for the noble Lord in relation to his amendment.
I believe that his second amendment deals with subsection (5), as opposed to subsection (7), but I do not believe that he addressed that particular point in what he said to the Committee. I ask him to consider what has been said and to withdraw the amendment tonight.
I now come to the one Front Bench opposition amendment and link that with the two remaining amendments of the noble and learned Lord, Lord Fraser. First, the noble and learned Lord, Lord Fraser, proposed Amendments Nos. 259AA and 259AB, amending Clause 318, to enable professional firms to retain commissions and other benefits resulting from the introduction of their clients to third parties. Under the clause as amended by the amendment, the professional firm would still be required to disclose the commission if the firm is to benefit from the Part XX exemption.
We are not happy with this particular amendment. Commission sharing may well be appropriate in relation to authorised professional firms. However, we believe that in relation to professional firms which carry on exempt regulated activities, it is right and proper, and that firms should be barred from retaining any commission obtained from IFAs in return for referring their clients to them. We believe that, in any event, that prohibition is in line with a professional's general obligation to act in the best interests of his client where the professional is not a mainstream provider of financial services. In such cases, the source of third-party advice should be determined solely by reference to the client's needs. We believe that that is a small price to pay for the benefits bestowed by Part XX exemption. Those benefits are fairly substantial. Therefore, we oppose the noble and learned Lord's amendment.
Amendment No. 259AC in the name of the noble Lord, Lord Kingsland, proposes to insert,
"for or on behalf of his client", at the end of subsection (3). As I understand it, this is a drafting amendment and we are grateful to the noble Lord for his attempt to improve the drafting of the Bill. He obviously believes that Clause 318(3) is unclear as to whether the regulated activities which give rise to the pecuniary award or advantage must be those carried on for or on behalf of a client. We do not agree. We believe that it is clear enough, and it is unlikely that a court would construe the clause any differently. Therefore, for the moment, that remains a matter of difference between us.
I turn to Amendments Nos. 260 and 262A in the Government's name. They allow the authority to give directions in respect of the exemption to the general prohibition which is allowed to professional firms for which regulated activities are a non-mainstream activity. Amendment No. 260 brings Part XX into line with procedures set out in other parts of the Bill. It is a "tidying-up" amendment. It will require that any direction given must be published in a way best calculated to bring it to the attention of the public. It allows the authority to charge a reasonable fee for providing a copy of the direction and requires the authority to give without delay a copy of any direction to the Treasury. Those requirements will ensure consistency of procedure between directions given under Clause 319 and those given under Clauses 309 and 311, both of which are in respect of Lloyd's.
Lastly, I turn to Amendment No. 262A. This government amendment proposes that a new clause be added after Clause 323. Under this new clause, where professional firms describe themselves as professional firms carrying out exempt regulated activities or hold themselves out in a manner which indicates that they are such persons, they will be subject to a similar offence of holding out to that set out in Clause 22.
Clause 22 creates an offence of falsely describing oneself or holding oneself out as authorised or exempt in relation to a particular regulated activity. Professional firms are not subject to that offence with the result that there is currently nothing in the Bill to prevent a person holding himself out as being a member of a designated professional body nor, where a person is a member of a designated body, is there anything that prevents that person from holding himself out as being entitled to exemption under Part XX at a time when he is disqualified.
It follows that it is necessary to rectify that problem. We believe that our amendment does that. As such, it is an important, even if technical, amendment and I commend it to the Committee.
First, I thank the noble Lord, Lord Bach, for the courtesy and care with which he has responded to the amendments. Furthermore, I thank him for the acknowledgement that he has given that it is appropriate for us to explore these matters on Part XX because these provisions were first introduced into the Bill on Report in another place. I assure him that I have no intention of pursuing the amendments further at this stage.
I may wish to return on Report to the amendment on accounting and disclosure. But otherwise, I am most grateful to the noble Lord for his explanation of the thinking behind the proposals. I am grateful to him also for the confirmation that what I indicated in opening is broadly speaking correct. If my recollection is accurate, I said that it was under paragraph 6 of Schedule 1 that I understand that there may be a derogation or devolution of some power by the authority to another body.
I understand that that is a slightly delicate matter at present because it may be an issue for administrative decision and not for legislative consideration at this time. But the Government really should think very carefully about and reflect on that pattern of activity. It seems that the power of monitoring is to be given to the Law Society of England and Wales which may find that some part of investment activity by a Scottish solicitor must then be referred to the FSA which, in turn, requires the Law Society of Scotland to suspend, fine or whatever it does to that Scottish solicitor. The Government really do not appreciate what risk they are taking in the devolutionary arrangements which are presently in place.
I am grateful to the noble Lord for his offer to write to me. But I ask the Government to think about this very, very carefully indeed unless they wish to introduce a degree of instability into the recent constitutional arrangements. Having said that, I beg leave to withdraw the amendment.
I am not sure that I fully followed the Minister's reply but at this time of night one's mind is not as clear as it might be.
I do not believe that the Minister really answered the point that there is this distinction between firms which carry out mainstream activities only--and it is perfectly reasonable that they should be regulated by the Financial Services Authority--and those where an investment activity is carried on incidentally to the other legal activity. In the latter cases, there appears to be double regulation. Companies are now demerging or closing down because they find that to be an excessive burden. I am sure that that is not what the Bill is intended to achieve. It is intended to achieve a streamlining and simplification of regulation, not an increase in regulation. For that reason, I hope that the Minister will reconsider the matter. We shall look at what he says, but we may well return to the matter on Report.
moved Amendments Nos. 260 to 262:
Page 167, line 14, at end insert--
("( ) A direction under subsection (1) must be published in the way appearing to the Authority to be best calculated to bring it to the attention of the public.
( ) The Authority may charge a reasonable fee for providing a person with a copy of the direction.
( ) The Authority must, without delay, give the Treasury a copy of any direction which it gives under this section."). Page 167, line 29, after ("use,") insert ("have used or are").
Page 167, line 34, at end insert--
("( ) If a member of a profession is carrying on an exempt regulated activity in his capacity as a trustee, the persons who are, have been or may be beneficiaries of the trust are to be treated as persons who use, have used or are or may be contemplating using services provided by that person in his carrying on of that activity.").
On Question, amendments agreed to.
Clause 319, as amended, agreed to.
Clauses 320 to 323 agreed to.
moved Amendment No. 262A:
After Clause 323, insert the following new clause--
(" .--(1) A person who--
(a) describes himself (in whatever terms) as a person to whom the general prohibition does not apply, in relation to a particular regulated activity, as a result of this Part, or
(b) behaves, or otherwise holds himself out, in a manner which indicates (or which is reasonably likely to be understood as indicating) that he is such a person, is guilty of an offence if he is not such a person.
(2) In proceedings for an offence under this section it is a defence for the accused to show that he took all reasonable precautions and exercised all due diligence to avoid committing the offence.
(3) A person guilty of an offence under this section is liable on summary conviction to imprisonment for a term not exceeding six months or a fine not exceeding level 5 on the standard scale, or both.
(4) But where the conduct constituting the offence involved or included the public display of any material, the maximum fine for the offence is level 5 on the standard scale multiplied by the number of days for which the display continued.").
On Question, amendment agreed to.
Clause 324 agreed to.
Schedule 17 agreed to.
Clauses 325 to 330 agreed to.
Clause 331 [Auditor or actuary's access to books etc.]:
In moving the amendment I shall speak also to Amendment No. 263B. The Committee will be delighted to hear that these are possibly the simplest amendments that we have discussed in the whole of Committee stage. I hope that the Government have no difficulty with them. Part XXIII requires the FSA to maintain certain public records. The items of information which the records must cover are defined in Clause 337(1) paragraphs (a) to (h). However, in that list there is no requirement for the FSA to keep a record of approved persons; in other words, the individuals approved to be employed by authorised persons. Amendments Nos. 263A and 263B simply require records of approved persons to be kept, covering the name of the approved person--the people working in the company--and the name and address of the authorised person--the company itself--for which the approved person performs a controlled function. I beg to move.
Clause 337 requires the FSA to maintain a public record of certain categories of person. Of greatest importance will be the record of authorised persons, since it will enable consumers to check that the firm with which they are dealing is authorised. It includes also a number of other people and bodies subject in one way or another to oversight under the Bill, such as recognised investment exchanges. The two amendments so briefly and well spoken to by the noble Lord, Lord Saatchi, would impose requirements on the authority to maintain a public record of persons approved under Part V to perform particular functions. We do not believe that that is necessary. Clause 337 does not limit the information that may be included in the public record; it simply sets out the minimum that must be made publicly available.
I understand that the authority hopes to set up a record containing relevant information about approved persons. However, it has some concerns about the practicalities of setting up a public record of approved persons, at least in the early days. The other persons referred to in subsection (1) will, for the most part, already be established and included on the current register. It should be reasonable to expect the public record to be in good shape when this provision comes into force. It is not reasonable to think that the public record of approved persons, which will be quite different from the records currently available--where indeed they are available--can be up and running quite as quickly.
If the authority overcomes those difficulties and establishes a public record of that information, there will be a further question of how easy it will be to keep it up to date. That too will be of real concern to the authority, given that the information will need constant revision. Changes to the entries for the other persons mentioned in subsection (1) will not change on anything like such a regular basis, and so the concerns will not arise.
We are not persuaded that the need for the public register is so great in the case of approved persons. While we would expect consumers to take reasonable care to ensure that the firm with which they deal is an authorised person or within one of the other categories specified in subsection (1), we would normally expect them to want to check on a regular basis that employees of such firms have been approved under Part V. The concepts of approval and authorisation are different, as are the consequences of acting without the necessary regulatory consent.
However, the authority intends to seek to make publicly available information of the kind sought by the noble Lord. If it overcomes the practical difficulties that I have attempted to describe, we are sure that it will do so in the way suggested, but we cannot place on the authority an obligation that it may not be able to fulfil. I invite the noble Lord to withdraw his amendment.
I am pleased to hear that the Minister is willing to encourage the FSA to keep such records. I am surprised that, after all this time, this vast organisation finds it impossible to publish a record of the names of the people whom it regulates, particularly as one of its main functions is to provide reassurance to the public that people who are authorised persons or approved persons are people with whom it is safe to do business. Therefore, I find it strange that the FSA cannot cope with the administrative burden of compiling a list of names of those whom it regulates. We shall probably return to this issue. I am slightly taken aback by the answer.
Can the Minister be specific as to what the difficulty is? As almost everything is done electronically nowadays, surely when somebody is approved and the computer has the correct program, that name will appear on the public list on the website. Now that we have done away with paper, I believe that instantaneous publication is possible and that there is no difficulty.
I fear that the noble Lord is much too optimistic. Approved persons are employees and they change on a regular basis. Apart from that, I have nothing to add to the reply that I have given.
I see that the noble Lord is not inclined to answer that point, so I shall try to tempt him further. If an approved person cannot practise without approval, he cannot practise without the knowledge of the authorising body, and the authorising body cannot give approval without knowing who the individual is. Therefore, I believe that my question is relevant. In typing out the information, "You have approval", one can cause it to appear in a public list at the same time as it is put in the letter to be posted. I accept that all computers have difficulties--none more so than the ones with which I am concerned personally. I hope that I have now given the noble Lord a chance to reply to the question.
I do not believe that I am going to satisfy the noble Lord with an answer tonight. Difficulties are involved. There would be the need to include details of the person, the employer, the functions that he carries out and the type of regulated activities. At present, all that is just not possible. I could give an unrealistic answer and suggest that it was, but it is not. It is for that reason that we do not accept the amendment.
Before my noble friend replies, I must declare an interest as chairman of Coutts & Company. I am puzzled by this. We have all that information on our files and it is available to the FSA on a regular basis. I cannot see why any institution cannot tell the FSA when someone comes or goes.
moved Amendment No. 264:
Page 178, line 15, at end insert--
("( ) a competent person appointed by the competent authority under section (Appointment by competent authority of persons to carry out investigations);").
On Question, amendment agreed to.
Clause 338, as amended, agreed to.
Clauses 339 to 342 agreed to.
moved Amendment No. 265:
After Clause 342, insert the following new clause--
(" .--(1) The Authority must take such steps as it considers appropriate to co-operate with other persons (whether in the United Kingdom or elsewhere) who have functions--
(a) similar to those of the Authority, or
(b) in relation to the prevention or detection of financial crime.
(2) Co-operation may include the sharing of information which the Authority is not prevented from disclosing.
(3) "Financial crime" has the same meaning as in section 6.").
On behalf of my noble friend I should like to move Amendment No. 265. This amendment will place a duty on the Financial Services Authority to take such steps as it considers appropriate to co-operate and share information with other bodies or persons. These bodies or persons can be in the UK or elsewhere, as long as they have a function broadly similar to that of the Financial Services Authority or they have a role in relation to the prevention or detection of financial crime.
The amendment carries forward the provision in paragraph 5 of Schedule 7 to the Financial Services Act 1986 which places a similar duty on the authority. I am sure that this amendment will be welcomed by noble Lords opposite, given the remarks made by the Opposition in another place about the need for effective information sharing and co-operation in order to combat financial crime. I beg to move.
As the noble Lord has anticipated, this amendment is welcome. While looking at the legal luminaries ranged on the Government Back Benches behind the noble Lord, I should like to ask one question. Although the clause is desirable, does the noble Lord believe that subsection (2) adds anything to the provision? Does it not add only somewhat otiose, redundant and unnecessary verbiage to the Bill?
My query concerns the relationship of this clause to the Data Protection Act. When the 1986 Act just referred to by the noble Lord was introduced, the Data Protection Act was not on the statute book. However, that Act carries all kinds of restrictions on what may be disclosed. Are all the details simply swept up in the phrase, "not prevented from disclosing"? If that is the case, it seems to me that those are only a very few words to cover what may be a large swathe of information. I should be grateful for a little clarification on this point.
It would be most helpful if the noble Lord could give some consideration to the European dimension here. As he will know, a wide range of moves are presently taking place in the European Union to try to take further steps in the prevention and detection of financial crime. I hope that this new clause will enable that kind of co-operation to gather strength. However, a problem may arise in that each national jurisdiction still retains its own individual rights to prosecute.
As regards financial crime which crosses a number of boundaries, it would be helpful if the Minister could mention the latest discussions on this matter within the European Commission and the European Union. I believe that this clause will fit in neatly with some of the initiatives being taken at the present time.
I am grateful to noble Lords who have taken part in this short debate. Perhaps the best way I can answer the noble and learned Lord, Lord Fraser of Carmyllie, is to invite him to consider the comments of his noble friend Lord Jenkin of Roding as to why subsection (2) is necessary. It concerns, among other things, the Data Protection Act. I am afraid that I cannot satisfy the noble Lord, Lord Hunt, tonight, although we both considered this problem for many hours on Sub-Committee E in relation to fraud in the Community and Community funds. I hope that I may consider his remarks and write him a short letter on the latest position on this matter as far as the Treasury is concerned.
I hope that we may receive a rather longer letter on what information the authority is prevented from disclosing. I do not think that what the noble Lord said about the intervention of my noble friend Lord Jenkin of Roding relates to what my noble friend said. He said that there is substantial legislation preventing the disclosure of information by all kinds of people. All the measure we are discussing states is not that that is to be disregarded but that it is to be enforced. It states that the authority may give whatever information it is allowed to give. That comes close to being otiose. We are being required to use that word too often with regard to this Bill.
The purpose of subsection (2) is to make clear that the authority is not obliged to disclose information which it is under an obligation not to disclose. That can be information on a wide variety of matters; for example, matters which come under the protection of the Data Protection Act. I think that is about as far as I can take it this evening.
moved Amendment No. 266:
After Clause 345, insert the following new clause--
(" .--(1) This section applies where a trust deed has been granted by or on behalf of a debtor who is an authorised person.
(2) The trustee must, as soon as practicable after he becomes aware that the debtor is an authorised person, send to the Authority--
(a) in every case, a copy of the trust deed;
(b) where any other document or information is sent to every creditor known to the trustee in pursuance of paragraph 5(1)(c) of Schedule 5 to the 1985 Act, a copy of such document or information.
(3) Paragraph 7 of that Schedule applies to the Authority as if it were a qualified creditor who has not been sent a copy of the notice as mentioned in paragraph 5(1)(c) of the Schedule.
(4) The Authority must be given the same notice as the creditors of any meeting of creditors held in relation to the trust deed.
(5) A person appointed for the purpose by the Authority is entitled to attend and participate in (but not to vote at) any such meeting of creditors as if the Authority were a creditor under the deed.
(6) This section does not affect any right the Authority has as a creditor of a debtor who is an authorised person.
(7) Expressions used in this section and in the 1985 Act have the same meaning in this section as in that Act.").
Amendments Nos. 266 to 271 make technical changes to bring this part of the Bill into line with Scots bankruptcy law--about which I know nothing! Amendment No. 272 is a drafting change resulting from earlier amendments to Part VII of the Bill.
Amendment No. 266 is necessary because in England, Wales and Northern Ireland insolvency law provides that an individual who is unable to pay his debts may apply to the court for a moratorium during which he may prepare a proposal to his creditors for settlement of his debts. While this is in force the person is protected against the presentation of a bankruptcy petition.
If an authorised person wished to enter into such an arrangement this would clearly be of interest to the FSA. Therefore Clause 345 gives the FSA various rights in these circumstances, including the right to be heard by the court when the authorised person applies for such a moratorium.
Scotland has a separate law of bankruptcy which makes no provision for individual voluntary arrangements. It does, however, provide for a broadly equivalent procedure: that is to say, a voluntary trust deed for creditors within the meaning of Section 5(4A) of the Bankruptcy (Scotland) Act 1985. The purpose of the trust deed is to allow a person who cannot pay his debts to hand over his assets to a trustee, who will then arrange a settlement with his creditors as an alternative to sequestration in the courts. I hope that the noble and learned Lord, Lord Fraser, will agree that that is an accurate summary of the situation.
The new clause after Clause 345 is intended to provide the FSA with similar rights in respect of voluntary trust deeds entered into by authorised persons in Scotland as it has in respect of individual voluntary arrangements in England, Wales and Northern Ireland.
Amendments Nos. 267 to 271 are also concerned to ensure that the FSA has equivalent rights in Scotland as in the rest of the UK. Clauses 360 and 361, which these amend, deal with the FSA's rights in respect of the bankruptcy or sequestration of authorised persons. In England, Wales and Northern Ireland it is possible to take bankruptcy proceedings only against individuals. In Scotland, however, it is possible to take bankruptcy proceedings against other kinds of entities, such as partnerships, under Section 6 of the Bankruptcy (Scotland) Act 1985. These amendments ensure that the FSA has the same rights in respect of such persons as it does in respect of individuals.
Amendment No. 272 makes a drafting change to Clause 363, which deals with the insolvency of insurance companies. This is necessary to take account of amendments we have made to Part VII of the Bill. I beg to move.
moved Amendments Nos. 268 to 271:
Page 188, line 19, at end insert ("; or
(c) under section 6 of the 1985 Act for the sequestration of the estate belonging to or held for or jointly by the members of an entity mentioned in subsection (1) of that section").
Page 188, line 22, after ("individual") insert ("or entity").
Page 188, line 29, at end insert ("or entity").
Page 188, line 39, at end insert--
("( ) "Entity" means an entity which--
(a) is, or has been, an authorised person; or
(b) is carrying on, or has carried on, a regulated activity in contravention of the general prohibition.").
On Question, amendments agreed to.
Clause 361, as amended, agreed to.
Clause 362 agreed to.
Clause 363 [Continuation of long term business while in liquidation]:
moved Amendment No. 273:
Page 192, line 4, at end insert--
("( ) In the application of subsection (6) to Scotland--
(a) in paragraph (a)(ii) for "which the Authority has power to prosecute under this Act" substitute "mentioned in paragraph (a) or (b) of section 384(1)"; and
(b) in paragraph (b) omit "which the Secretary of State has power to prosecute under this Act".").
In moving Amendment No. 273, I shall speak also to Amendments Nos. 274 and 275.
This part of the Bill gives the FSA and the Secretary of State rights, in certain circumstances, to take out injunctions or interdicts against persons carrying on financial services business and to seek restitution orders against persons engaged in such business. These amendments make technical changes to bring these provisions into line with Scots law.
Clauses 367, 369 and 371 each include a power to take action when a person commits, or may be about to commit, offences created under other legislation which the FSA or the Secretary of State has the power to prosecute--in other words, the offence of insider dealing or an offence under the money laundering legislation.
So far as concerns England, Wales and Northern Ireland, this is satisfactory because the FSA and the Secretary of State have such prosecution powers. In Scotland, however, neither the FSA nor the Secretary of State has powers to prosecute these or any offences because the Lord Advocate is the sole prosecuting authority. The amendments are intended to take account of this by making direct reference to subsection (1) of Clause 384, where the offences which the FSA has the power to prosecute are set out. I beg to move.
moved Amendment No. 274:
Page 193, line 39, at end insert--
("( ) In the application of subsection (9) to Scotland--
(a) in paragraph (a)(ii) for "which the Authority has power to prosecute under this Act" substitute "mentioned in paragraph (a) or (b) of section 384(1); and
(b) in paragraph (b) omit "which the Secretary of State has power to prosecute under this Act".").
On Question, amendment agreed to.
Clause 369, as amended, agreed to.
Clause 370 [Restitution orders in cases of market abuse]:
In moving this amendment, I wish to speak also to Amendment No. 274B. Clause 370 allows the court to impose restitution orders in cases of market abuse. The amendment seeks to bring in the element of intent. It follows the wording which the Government themselves introduced in the case of penalties. We want that to apply equally to restitution because that can be just as open-ended as a financial penalty. The "presumed to have intended" language is to help with proving the intention.
I turn now to Amendment No. 274B. Clause 371 is concerned with the power of the authority to apply restitution in accordance with Clause 370, which, as we have seen, allows the court to impose restitution orders in cases of market abuse. This amendment also seeks to bring in the element of intent. I beg to move.
Where someone has engaged in market abuse Clause 370 allows the courts to order restitution to be paid to those who have lost out as a result of the abuse. Clause 371 gives the FSA itself a similar power to make restitution orders where the market abuse has been engaged in by an authorised person.
In deciding how much it is just for the abuser to pay by way of restitution, the courts and the FSA have to have regard to extent of the loss or other adverse effect. These amendments would require the courts or the FSA to have regard to the extent to which the market abuse was intended, or might reasonably be presumed to have been intended. I am afraid that this is something which I cannot accept. Intent is not a necessary feature of market abuse. We debated this point when we were considering Part VIII of the Bill. The reason for this is clear: the damaging effects of an abuse do not depend on the state of mind of the person concerned, but on the impact it has on markets and consumers. As the noble Lord, Lord Grabiner, said most succinctly when we debated the market abuse provisions last week,
"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'".
He went on to say that he had great difficulty,
"in understanding any justification for saying to those grown-up, sophisticated people that nothing short of intention will do".--[Official Report, 21/3/2000; col.216.]
I entirely agree with those points.
The same arguments as regards intent apply in the case of restitution as they do in the case of the market abuse penalty provisions--indeed, more so. That is not to say that intention or recklessness is irrelevant in the case of market abuse penalties where deterrence is the key concern. There are degrees of culpability, and the fact that someone may have intentionally engaged in abuse is relevant to this. That is why Clause 114, which deals with the FSA's policy on the amount of penalties which can be imposed for abuse, requires the FSA to take into account the extent to which the behaviour was deliberate or reckless.
The situation with restitution is quite different. A restitution order is intended to restore any loss which may have been incurred by others as a result of the abuser's actions. The position here is the same as with breaches of FSA rules which lead to loss for consumers. A failure, for example, to observe a rule which results in a loss to consumers may not be something which an authorised person intended to do; however, it would be wrong if in such circumstances the consumer could not get his or her money back. I have to oppose the amendments.
I am no doubt mistaken, but what puzzles me is that the noble Lord refers to restitution, and indeed the rubric of the clause refers to restitution orders. Restitution has nothing to do with punishment; it is about paying back someone who has lost something. However, at the end of subsection (1)(a) is the word "or". The subsection states that,
"The court may, on the application of the Authority, make an order under subsection (2) if it is satisfied that a person has engaged in market abuse and ... that profits have accrued to him as a result; or"--
The restitution order appears to be penalising the person or organisation, whether or not the offence has been deliberate, for doing something to his or its own benefit.
Subsection (1)(b) relates to loss suffered by other persons. But it appears from paragraph (a) that there is no need for loss to have been suffered by other persons; merely that the gains have been made improperly. I suppose it can be said that, if someone has gained something improperly, there must have been a loser. But in this case it seems that it is not necessary to identify the loser; otherwise, why are the two factors not linked by "and" rather than "or"?
I asked why the provisions are not linked by "and", in which case there would have to be a loser as well as a gainer; whereas with the use of the word "or", there is a gainer in paragraph (a) and a loser in paragraph (b), and they are separated by "or".
The noble Lord did answer his own question. He said that if someone has made a profit, someone has made a loss: that is within paragraph (a). The other option is complementary and not otherwise.
It does not feel very complementary at the moment. If I buy a motor car, there is a profit for the person who made the motor car and there is no loss to me, unless I have been overcharged. It is perfectly possible to make profits without there being losers. I still maintain that this is a very puzzling piece of drafting.
It is not necessary for someone to make a profit from abuse. The important thing is that someone may make a loss, and that may occur under the provisions of either, not necessarily both, of the paragraphs. If I crash my car when I am driving carelessly and I demolish the wall of someone's house, should I only be liable to pay for restoring half the wall because I did not intend the damage? It does not make sense. These amendments are about the amount of restitution. They suggest that it should be governed by intent; we are saying that it should not be governed by intent but by the loss.
I think the point my noble friend has expressed so eloquently is that the word "restitution" is used here to cover in law both the notion of restitution and the notion of compensation. Compensation compensates someone for a loss suffered as a result of someone else's action; restitution relates to any improper profit that a person might have made as a result of that action, even if another person suffered no loss.
What my noble friend is saying is that there might be circumstances in which a person not only commits an action which causes loss to someone, and is therefore liable to compensation, but also profits from that action; and in those circumstances, under the rules proposed by the Government, he ought both to compensate and to restitute. My noble friend is saying that the clause does not allow for that; it only allows a person to pay restitution or compensation. Of course, it is possible that I have misunderstood my noble friend; but I believe that is what he was saying.
The provision does not say anything of the sort. It says that these are not mutually exclusive circumstances in which there might be a need for restitution. Perhaps I may give examples. Someone might not make a profit from abuse but it might cause loss to others. In the Sumitomo scandal, for example, the abuser actually lost money. The abuse procedures would now catch him; the existing law does not. The profits may have been made at the expense of those of other market users, even if--strictly speaking--there was no loss. It is clear from subsection (8) that restitution must be either to a person from whom the profits enjoyed by the abuser arose or to the person who lost. In the first case there will have been profits earned at the expense of someone else; in the second, an actual loss. Both are covered by the amendment.
If the clause contains a provision that is purely punitive, the question of intent is not put out of court by the Minister's arguments. He said that with restitution, the question of intent does not arise. The Minister, having backed into a wall while driving carelessly, would have to pay the full sum of repairs, whether or not they were caused intentionally. I accept that, but the drafting of Clause 370(1)(a) makes it clear that there can be cases where profits have accrued and one or more persons have not suffered loss. They are isolated by the word "or". That being the case, the implication is that there are cases where people may not suffer loss as a result of pure profit. We are saying that a person, having acquired profits improperly, should be punished for so doing--and that if it is a question of punishment, intent is relevant to the quantity of the punishment. That is all that I am trying to say. I am sorry that it is so difficult to get that across.
Then the noble Lord is criticising the Opposition amendments, not the Bill--which is clear that either profits have accrued or someone has suffered loss. One or the other, not both. If the word "and" were used, it would have to be both--and that would be restrictive. It has nothing to do with restitution, which is to make up a loss. A loss could either be a real loss or a diversion of profits from one person to another. I do not see the difficulty.
The noble Lord, Lord Elton, is right to refer to the word "or". There are situations in which no individual can establish and prove, as a matter of cause and effect, that he has suffered loss as the result of a market abuse. However, there are situations where someone guilty of market abuse has obtained profits as a result and ought to be required to disgorge them--even though no individual can establish a precise loss. The general body of market users relevant to the situation would enjoy the benefit under the later subsection. That seems a perfectly good provision.
moved Amendment No. 275:
Page 195, line 25, at end insert--
("( ) In the application of subsection (5) to Scotland, in paragraph (b) for "in relation to which this Act confers power to prosecute on the Authority" substitute "mentioned in paragraph (a) or (b) of section 384(1)".")
On Question, amendment agreed to.
Clause 371, as amended, agreed to.
Clause 372 [Warning notices]:
This group contains a number of further amendments to clarify the warning notice and decision notice procedure and provide a more consistent approach to the rights of third parties. Dealing shortly (I hope) with each amendment, Amendment No. 275TA in Clause 375 responds to points raised by members of the Opposition in another place and requires a warning notice to state the action which the authority proposes to take. We believe that that is already implicit in the Bill but agree that it is better to put the matter beyond doubt.
Amendment No. 275XA in Clause 375 enables the authority to extend the period for making representations. This will allow the authority to respond to any legitimate difficulties that the person concerned may have in making his representations within the period specified. The existing provision is too restrictive in this respect.
Amendment No. 275YA deletes the words "carry out its proposal" in subsection (4) of Clause 375. Those words give the impression that the authority can give effect to its proposal at the end of the warning notice stage. That is not the Government's intention. We propose to substitute the words,
"give the person concerned a decision notice", to make clear that the next stage is for the authority to issue a decision notice. Alternatively, the authority may decide to issue a notice of discontinuance.
Amendment No. 275D in Clause 376 is a highly significant amendment. Its effect is to restrict the action that the authority may then go on to include in a decision notice. It must be action that is taken under the same part of the Bill. Thus, a proposed financial penalty under Part XIV may be reduced or replaced with a public statement, but the authority cannot move from, say, a warning notice that proposes disciplinary action under Part XIV for a breach of rules to a decision notice which raises allegations of market abuse under Part VII. The authority needs some flexibility, but the person concerned is entitled to the protection of the proper notice procedures being followed: a set of proceedings begun for one purpose should not be the subject of a complete change of character half-way through.
Amendment No. 275G in Clause 376 makes clear that, having issued a decision notice, the authority can agree with the person concerned to substitute a different decision notice. This will enable the person to settle a case without pursuing a reference to the tribunal, although he will not lose the right to refer the matter just because he has agreed a different action with the authority. This ensures that there is the necessary flexibility in the procedure to achieve sensible outcomes to cases without requiring the person or the authority to incur unnecessary costs. It also enables the authority to state clearly if, for example, the grounds put forward in support of a reference to the tribunal cause it to believe that a lower penalty than originally proposed is appropriate. In such a case the person concerned can agree to the serving of a further decision notice while continuing to contest even the reduced penalty, which means further clarity for everyone.
This is not a device to enable back room deals to take place. We are conscious of the need for transparency, on which the Joint Committee had very clear views. Even if a deal is struck on the steps of the courthouse, the final stage in the process will still be the issuing of either a final notice or a notice of discontinuance. If it is a final notice, the authority will be under the same obligation as under the existing provisions of the Bill to publish appropriate information about the decision reached. If the end result is a notice of discontinuance, publication may take place only with the consent of the person concerned.
The new clause on third party rights, Amendment No. 275L, rationalises the existing provisions dealing with the rights of third parties identified in warning or decision notices in a way that is prejudicial to them. These provisions were designed to deal with cases where there is some wrong-doing alleged on the part of a third party who is not himself the subject of action by the FSA. For instance, in disciplinary cases under Part XIV, it was felt that action might be taken against a firm for reasons which implied that there had been some failing by one of its directors or employees; or in market abuse cases, where other parties might well have been involved in the transactions giving rise to the allegation that market abuse has been engaged in.
The provisions give third parties, who are identified in prejudicial terms in the reasons for a warning or decision notice, the right to receive a copy of the notice, and to make representations or refer the matter to the tribunal in the same way as the person who is the subject of the FSA's proposed action. We took the view that although these rights create an administrative burden for the FSA, they are necessary to give the third party the right to defend himself against any implied blame arising from the reasons given for the action. Thus the new clause on third party rights will apply to a wide range of disciplinary-type cases. This is the effect of the other new clause which sets out the application of the clause on third party rights. This applies the third party rights to a large number of cases.
We also propose to apply these rights where it is proposed to cancel an authorised person's permission under Part IV. We shall table a further amendment to this effect when we table our amendments to that part on Report. However, we do not consider it appropriate to impose these requirements for the more routine types of regulatory decision, where the matter at issue is not some wrong-doing, but whether conditions are met, or consumers' interests are at risk. Thus they do not apply to refusals of applications, variations of permission, or approval or imposition of requirements on such permission or approval, whether under Part IV or some other part of the Bill.
As a consequence a number of provisions in other parts of the Bill, such as Clauses 372(3) and 373(3) in respect of restitution under Part XXV, can be omitted. That is the effect of the consequential amendments, Amendments Nos. 275RA and 275SA. Some other similar provisions earlier in the Bill will also need to be removed in due course Amendments Nos. 275VA, 275WA and 275E are further consequential amendments to Clauses 375 and 376 which reflect the new clause on third party rights. I beg to move.
We have no amendments in this group. However, I have some views on the government amendment, if I may be allowed to express them.
Clauses 375 and 376 set out the procedural requirements relating to warning notices and decision notices. These include giving the firm or approved person subject to the notices access to the evidence on which the FSA relied. However, in our submission, these parties should also have access to any helpful evidence even though the authority may not want to surrender it. Under English law, this is required in criminal cases, but--so the Government tell us--not in civil cases.
However, two recent European Court of Justice cases held that the specific protections in Article 6.3 are only examples of the "fair hearing" requirement in Article 6.1 and that these included the right to see all the evidence unless, in a public interest immunity case, the court itself saw it first. Those cases are respectively, Rowe and Davis v. the United Kingdom, Jasper v. the United Kingdom, and Fitt v. the United Kingdom, the judgments in all those cases being delivered on 16th February 2000.
As regards Amendment No. 275G, the Government propose to add three new subsections, (8), (9) and (10), on page 198, line 6. The purpose of the amendment is, to us, unclear. It appears to give the authority the ability to issue, with the consent of the firm or the individual concerned, a second "further" decision notice modifying the effect of the first decision notice.
If the purpose of that is to allow the FSA and the recipient scope to renegotiate the terms of the disciplinary action after the issuance of the first decision notice, we would have no difficulty with it in principle. However, we would be concerned if the procedure were to be used to exert pressure on firms or individuals to rescind their decision to refer the matter to the tribunal. Can the Minister confirm that these amendments do not have the effect of diluting the existing safeguards provided under Clauses 375 and 376?
As regards Amendment No. 275J, the Government have introduced a new clause about decision notices. As I understand it, they are setting out the provision which we want; which is, that the authority cannot issue a notice for payment until the time for referral to the tribunal has passed without a reference, or, if there is a reference, until it has been finally disposed of.
However, there seems to be no provision to the effect that the existing notice for payment provisions do not apply; in particular, the provision of a notice for payment of a market abuse penalty (I refer to Clause 118) and the notice for payment of restitution (I refer to Clause 374). The new clause provides only that the FSA must issue a final notice in all decision notice cases. However, it seems that there is nothing to stop the authority acting on a decision notice given under earlier clauses such as those I have mentioned. Clause 202 is now deleted, but it related only to notices for payment of a penalty imposed under Clause 199--and the fact that it has been deleted does, indeed, imply that the new clause has not ousted the existing clauses.
As regards Amendment No. 275K, I do not understand why the person who has received a warning or a decision notice cannot publish it. Surely at the very least he should be allowed to publish it to his legal advisers or accountants. That ought to be an easy matter for the Government to deal with.
Amendment No. 275L has the effect that the defendant's right to see evidence is excluded in relation to both Clauses 51 and 52. I can see no reason why in such cases the firm should not be entitled to have access to the authority's evidence. In addition, it may as a consequence be intended that the authority should not be required to keep the investigation separate from the enforcement function. Again, I can see no reason why that should be the case. It is those two consequences of being supervisory-type decisions which should not be allowed to apply in relation to Clauses 51 and 52.
The Government have indicated in their note to amendments that they want to have a short form authority enforcement procedure in what they call "supervisory-type decisions". These are decisions where they believe that a more flexible procedure is required, which in particular allow the authority's decision to take effect on a specified date, including the date on which the notice is served. The fact that the notice is referred to the tribunal does not appear to affect that. Why are the Government including among the supervisory-type decisions the authority's decisions to vary permissions and impose requirements under Part IV in relation to Clauses 51 and 52? I can well see why an immediate decision is needed in the case of Clause 53, which gives the authority power to exercise its own-initiative power to cancel or amend a permission (or to impose a requirement or prohibition, which again acts as a limitation on the permission) on its own initiative without having to comply with its due process.
In that case, there will be, ex hypothesi, a danger to consumers. However, there is no such emergency in the two other cases where the authority makes decisions in this context. The first is in Clause 51, where the firm has approached the authority and the authority wants to refuse the application. Here, clearly, there can be no question of any need to exercise the power "with immediate effect". In addition, the authority is given the right to exercise its own-initiative power to cancel or change a firm's permission where the emergency situation in Clause 53 does not apply.
The exercise of the own-initiative power may be very prejudicial to the firm, as it will stop it carrying on a particular type of business which it currently carries on, or impose on it what may be substantial limitations on the way that it can carry on its business. As there is no threat requiring the authority to exercise its own-initiative power "with immediate effect", it seems to me, at any rate, that there is time to go through the proper procedures.
I believe that Amendment No. 275N is in the next group. Therefore, I shall pause for appropriate reflection.
I was fascinated and intrigued by the expert analysis of this field by the noble Lord, Lord Kingsland. I believe that he strayed into one or two amendments that are not in this group. He will forgive me if I do not reply to every one of the excellent points that he made. I should certainly need to look at Hansard for a long time before I could answer him satisfactorily. However, I shall do my best in terms of one or two--
I understand entirely that the Minister may feel unable to reply to Amendment No. 275J. I could not find it in the group. Indeed, I could not find it anywhere in today's groupings. It may well be that the matter was dealt with on a previous Committee day. However, in the context of the set of amendments, I felt it appropriate to deal with that point.
We understand that it was debated with Amendment No. 241N.
I do not, and the noble Lord made the point that Amendment No. 275N is in the next group and will no doubt be answered.
Amendment No. 275G is in this group. It concerns the opportunity for the authority to vary a decision notice that does not dilute anyone's rights because it is subject to requirement for consent. As regards final notices, we have previously said, and I repeat, that they will replace the Part V and Part VIII penalty notice provisions. We shall oppose those provisions on Report.
The Government's amendments to Clause 377 apply the separation requirement to supervisory decisions as well as those subject to warning and decision notices. That is the extension we thought that the Opposition sought, although the nature of those decisions requires some limited provision for urgent circumstances.
I guarantee that I shall look carefully at the other comments and questions which the noble Lord asked during his response to the amendments which I moved and shall write to him in due course.
moved Amendment No. 275TA:
Page 196, line 25, at end insert--
("( ) state the action which the Authority proposes to take;").
On Question, amendment agreed to.
moved Amendment No. 275UA:
Page 196, line 28, leave out paragraph (c) and insert--
("( ) state whether section (Access to Authority material) applies; and
( ) if that section applies, describe its effect and state whether any secondary material exists to which the person concerned must be allowed access under it.").
In moving this amendment, I shall speak also to Amendments Nos. 275ZA, 275A, 275C, 275N, 275NA, 275NB and 275NC. They are not all government amendments, but would noble Lords opposite prefer me to deal with their amendments now or wait until they have spoken to them? I am in their hands.
I recognise Amendment No. 275A tabled by noble Lords opposite. It goes too far, but as my colleagues said in another place when responding to an identical amendment, we have been considering further amendment to the provisions concerning access to the evidence relied on by the FSA.
That further consideration was prompted by representations made to us by the Law Society after the Bill had been introduced in another place and was already being debated in Committee there. The concern of the Law Society was that the FSA could, if it was minded to do so, selectively rely on evidence, such as expert witness statements, that pointed in different directions.
We accepted that point, and have been actively engaged in finding a solution. The result of those considerations are the amendments before the Committee. In all those cases to which the full disciplinary-type procedure applies-- which includes market abuse, cancellation of permission, issuing a prohibition order and all those types of decision to which my noble friend Lord Bach referred in relation to third party rights--we are proposing a considerable enhancement to the right of access.
Not only will there be a right of access to the evidence the FSA is relying on, but there is in addition to be a right of access to material that the FSA has considered in arriving at its decision or which it has obtained in the course of investigating the matter and which it considers might undermine its case.
That test is modelled on the disclosure rules that apply in criminal proceedings--I am not getting any attention from the crowded Opposition Front Bench--under the Criminal Procedure and Investigations Act, though adapted to reflect the fact that the FSA is not simply an investigatory or prosecuting body, but one with broad supervisory responsibilities. The FSA will potentially hold a large amount of evidence in relation to an authorised person that could be said to relate to the matter covered by a notice without being particularly germane to it.
It would be excessively bureaucratic if the FSA were required to assess all the information it might hold for various purposes which may be said, in some loose sense, to relate to a matter covered by a warning notice. That is why the secondary material which must be considered for granting access is deliberately restricted to matters considered by the FSA in taking the decision or obtained in the course of investigating the matter with which the notice is concerned. Without that, the extensive access requirements that we are proposing would hopelessly disadvantage the regulator.
I wish to make it clear that we would not normally apply such onerous access requirements to a regulatory body and we certainly do not regard that as a precedent for other areas. But we are conscious that the FSA is a body exercising a necessarily wide range of powers and we are sensitive to the concerns that have been expressed. We have concluded, therefore, that an approach modelled on the criminal procedures is appropriate and justified here. However, it would not be appropriate or desirable to extend those rights across the full range of FSA decisions. The disclosure rules on which they are modelled are designed for cases where there is some mischief alleged. That translates readily enough into market abuse and the various disciplinary powers.
We propose also to extend those rights where the FSA is proposing to take the ultimate step of cancelling a person's authorisation under Part IV or approval under Part V or to issue a prohibition order under Part V or Part XX. But we do not consider it appropriate or desirable to apply those rights to the majority of supervisory decisions, many of which will be relatively routine, or to the determination of applications for new or increased permission or approval, recognition or authorisation. In those cases the FSA is not judging whether X has done Y, but whether the FSA is satisfied that X meets standard Z.
Applying the rights of access to all those decision-making procedures would be excessive and would unduly interfere with the ability of the FSA to respond prudently and sensitively to the very different circumstances which different supervisory cases will present. I should add that the rights of access will apply at both the warning and decision notice stages--a further enhancement on the position under the Bill as it stands--because we have no wish to deprive a person of the opportunity to see the evidence in order to assess whether or not to refer the matter to the tribunal, irrespective of whether the person had previously taken the opportunity in order better to inform their representations.
We have also made provision dealing with the issues of public interest immunity and commercial sensitivity, as we said in another place that we would. Finally, we have provided that the third parties whose interests may be prejudiced by the reasons given in a warning or decision notice will also enjoy rights of access to the relevant evidence.
I turn to Opposition Amendments Nos. 275NA, 275NB and 275NC which focus on an important and interesting aspect of the new, wider access rights set out in the new clause. Subsection (2) ensures that the FSA is able to consider how similar or comparable cases have been dealt with in order to ensure proper consistency in its proposed actions and penalties, without thus opening up sensitive commercial details about other businesses to scrutiny by the subject of the action currently proposed. If action is being taken against a person X, it is no business of X's whether or not similar action was previously taken against another person, Y.
Indeed, the action in the earlier case may not have been pursued, in which case it would be unfair to reveal details of what had been proposed to another person without consent. I can see that noble Lords opposite appreciate that thinking, but they propose through Amendment No. 275NA that there should be a right of access to the material considered for comparative purposes so long as the material can be made available without disclosing the other person's identity. I cannot agree. Even if it was sufficient not to disclose Y's identity--and in many cases I doubt whether that would be sufficient to avoid revealing sensitive information about identifiable other persons--I do not accept that X has any business knowing what was or was not decided in the case concerning Y. I certainly do not see the need to require the FSA to give access to such material, which could involve a lot of additional cost in terms of editing documents.
There will, however, be considerable material in the public domain to assist X in determining whether the action proposed is in line with general FSA policy and practice. First, where the FSA proposes to impose a financial penalty under Parts VIII or XIV it will be required to have regard to its published statement of policy. The tribunal will also be able to refer to the relevant statement, and the person subject to the proposed decision, X, will be able to refer to it too.
Secondly, if the action against Y proceeded, and any consideration by the tribunal or higher court has been completed, details of the case would have been made public under the new clause on final notices and X would have access to those details. If the action was still subject to reference to the tribunal it would hardly be right to disclose any details about it, anonymous or not.
Finally, the FSA has already proposed that from the bringing into force of this legislation, the FSA annual report will include accounts of enforcement action taken, including in particular details on cases settled or determined by the tribunal; financial penalties imposed and costs awarded; and significant judgments by the tribunal.
Amendment No. 275NB simply says that subsection (2) does not prevent the FSA from providing a summary of the principal characteristics of those cases. Let me assure the noble Lord, Lord Kingsland, that as currently drafted, subsection (2) does not prevent that. As I have indicated, we expect that the FSA will publish some information along those lines in its annual reports.
Subsection (3)(b) enables the FSA to withhold material where providing access would be unfair given the likely significance of the material to the current case, weighed against the potential prejudice to the commercial interests of another person.
Again, the Opposition suggest that there should be a requirement to permit access to the material if the identity of the other person or persons could be withheld. That goes too far. The FSA is required to come to a conclusion about the fairness of providing access to the material. If the material can be made available in a way that is not unfair, the FSA should do so. However, requiring the FSA to provide access where, despite withholding the identities, it is still unfair to do so, would be wrong.
So again I cannot accept this amendment. The necessary discretion is already provided for. Overriding it may lead to unfair and unintended results. In resisting these amendments, I have sought to make clear that I am not disagreeing with the noble Lords that the FSA should consider whether the objections against disclosure can be satisfactorily overcome, but the new clause strikes the right balance already. I beg to move.
This time my intervention will be mercifully telegraphic. The Government have provided that in certain cases the authority may refuse access to particular material, for example, material subject to legal privilege and where access would be unfair. That is set out in the Government's notes under the heading "Access to Authority Material".
Earlier this evening I referred to the Rowe and Davis case in which judgment was handed down in February this year. In that case we see that even public interest immunity certificates cannot make the hearing fair if evidence is withheld. However, in two other cases involving the United Kingdom that were brought before the European Court of Human Rights--Jasper and Fitt--the court held that the hearing could be fair even if evidence was withheld under public interest immunity certificates provided that, as I understand it, the judge sees the evidence and the defence is told that evidence is being withheld and is given a summary of it.
Am I entitled to conclude that that is intended to happen if the authority holds back evidence? Will the authority notify the defendant that it is withholding evidence and give the reasons for doing so? As the Government understand it, is that the current position?
moved Amendments Nos. 275VA to 275ZA:
Page 196, line 29, leave out subsection (2).
Page 196, line 36, leave out ("or copied").
Page 196, line 37, at end insert--
("( ) The Authority may extend the period specified in the notice.").
Page 196, line 39, leave out ("carry out its proposal") and insert ("give the person concerned a decision notice").
Page 196, line 40, leave out subsection (5).
On Question, amendments agreed to.
Clause 375, as amended, agreed to.
Clause 376 [Decision notices]:
moved Amendment No. 275B:
Page 197, line 5, leave out (", or not to take,").
This amendment was debated with Amendment No. 274N. I beg to move.
moved Amendment No. 275C:
Page 197, line 6, after ("relates") insert--
("( ) state whether section (Access to Authority material) applies; and
( ) if that section applies, describe its effect and state whether any secondary material exists to which the person concerned must be allowed access under it;").
On Question, amendment agreed to.
moved Amendments Nos. 275D and 275E:
Page 197, line 10, at end insert--
("(1A) If the decision notice was preceded by a warning notice, the action to which the decision notice relates must be action under the same Part as the action proposed in the warning notice.").
Page 197, line 11, leave out subsections (2) and (3).
On Question, amendments agreed to.
moved Amendment No. 275F:
Page 197, line 36, leave out subsections (5) to (7).
On Question, amendment agreed to.
moved Amendment No. 275G:
Page 198, line 6, at end insert--
("(8) The Authority may, before it takes the action to which a decision notice ("the original notice") relates, give the person concerned a further decision notice which relates to different action in respect of the same matter.
(9) The Authority may give a further decision notice as a result of subsection (8) only if the person to whom the original notice was given consents.
(10) If the person to whom a decision notice is given under subsection (8) had the right to refer the matter to which the original decision notice related to the Tribunal, he has that right as respects the decision notice under subsection (8).").
On Question, amendment agreed to.
Clause 376, as amended, agreed to.
moved Amendment No. 275H:
After Clause 376, insert the following new clause--
:TITLE3:NOTICE OF DISCONTINUANCE
(" .--(1) If the Authority decides not to take--
(a) the action proposed in a warning notice, or
(b) the action to which a decision notice relates, it must give a notice of discontinuance to the person to whom the warning notice or decision notice was given.
(2) But subsection (1) does not apply if the action proposed in a warning notice was the refusal of an application made by the person to whom the notice was given.
(3) A notice of discontinuance must identify the proceedings which are being discontinued.").
This amendment was spoken to with Amendment No. 241N. I beg to move.
moved Amendment No. 275J:
After Clause 376, insert the following new clause--
(" .--(1) If the Authority has given a person a decision notice and the matter was not referred to the Tribunal within the period mentioned in section 124(1), the Authority must, on taking the action to which the decision notice relates, give the person concerned and any person to whom the decision notice was copied a final notice.
(2) If the Authority has given a person a decision notice and the matter was referred to the Tribunal, the Authority must, on taking action in accordance with any directions given by--
(a) the Tribunal, or
(b) the court under section 128, give that person and any person to whom the decision notice was copied a final notice.
(3) A final notice about a statement must--
(a) set out the terms of the statement;
(b) give details of the manner in which, and the date on which, the statement will be published.
(4) A final notice about an order must--
(a) set out the terms of the order;
(b) state the date from which the order has effect.
(5) A final notice about a penalty must--
(a) state the amount of the penalty;
(b) state the manner in which, and the period within which, the penalty is to be paid;
(c) give details of the way in which the penalty will be recovered if it is not paid by the date stated in the notice.
(6) In any other case, the final notice must--
(a) give details of the action being taken;
(b) state the date on which the action is to be taken.
(7) The period stated under subsection (5)(b) may not be less than 14 days beginning with the date on which the final notice is given.
(8) If all or any of the amount of a penalty payable under a final notice is outstanding at the end of the period stated under subsection (5)(b), the Authority may recover the outstanding amount as a debt due to it.").
This amendment was spoken to with Amendment No. 241N. I beg to move.
moved Amendment No. 275K:
After Clause 376, insert the following new clause--
(" .--(1) Neither the Authority nor a person to whom a warning notice or decision notice is given or copied may publish the notice or any details concerning it.
(2) A notice of discontinuance must state that, if the person to whom the notice is given consents, the Authority may publish such information as it considers appropriate about the matter to which the discontinued proceedings related.
(3) A copy of a notice of discontinuance must be accompanied by a statement that, if the person to whom the notice is copied consents, the Authority may publish such information as it considers appropriate about the matter to which the discontinued proceedings related, so far as relevant to that person.
(4) The Authority must publish such information about the matter to which a final notice relates as it considers appropriate.
(5) But the Authority may not publish information under this section if publication of it would, in its opinion, be unfair to the person with respect to whom the action was taken or prejudicial to the interests of consumers.
(6) Information is to be published under this section in such manner as the Authority considers appropriate.
(7) "Notice of discontinuance" means a notice given under section (Notice of discontinuance).
(8) "Consumers" means person who are consumers for the purposes of section 129.").
On Question, amendment agreed to.
moved Amendments Nos. 275L and 275M:
After Clause 376, insert the following new clause--
("Third party rights and access to evidence
. Sections (Third party rights) and (Access to Authority material) apply to--
(a) a warning notice given in accordance with section 56(1), 62(3), 66(1), 88(1), 116(1), 200(1), 248(1), 272(1), 322(1), 335(2) (whether as a result of subsection (1) of that section or section 242(1)) or 372(1);
(b) a decision notice given in accordance with section 56(3), 62(4), 66(4), 88(4), 117(1), 192(3)(a), 201(1), 248(2), 272(2), 322(3), 335(3) (whether as a result of subsection (1) of that section or section 242(1)) or 373(1).").
After Clause 376, insert the following new clause--
:TITLE3:THIRD PARTY RIGHTS
(" .--(1) If any of the reasons contained in a warning notice to which this section applies relates to a matter which--
(a) identifies a person ("the third party") other than the person to whom the notice is given, and
(b) in the opinion of the Authority, is prejudicial to the third party, a copy of the notice must be given to the third party.
(2) Subsection (1) does not require a copy to be given to the third party if the Authority--
(a) has given him a separate warning notice in relation to the same matter; or
(b) gives him such a notice at the same time as it gives the warning notice which identifies him.
(3) The notice copied to a third party under subsection (1) must specify a reasonable period (which may not be less than 28 days) within which he may make representations to the Authority.
(4) If any of the reasons contained in a decision notice to which this section applies relates to a matter which--
(a) identifies a person ("the third party") other than the person to whom the decision notice is given, and
(b) in the opinion of the Authority, is prejudicial to the third party, a copy of the notice must be given to the third party.
(5) If the decision notice was preceded by a warning notice, a copy of the decision notice must (unless it has been given under subsection (4)) be given to each person to whom the warning notice was copied.
(6) Subsection (4) does not require a copy to be given to the third party if the Authority--
(a) has given him a separate decision notice in relation to the same matter;
(b) gives him such a notice at the same time as it gives the decision notice which identifies him
(7) Neither subsection (1) nor subsection (4) requires a copy of a notice to be given to a third party if the Authority considers it impracticable to do so.
(8) Subsections (9) to (11) apply if the person to whom a decision notice is given has a right to refer the matter to the Tribunal.
(9) A person to whom a copy of the notice is given under this section may refer to the Tribunal--
(a) the decision in question, so far as it is based on a reason of the kind mentioned in subsection (4); or
(b) any opinion expressed by the Authority in relation to him.
(10) The copy must be accompanied by an indication of the third party's right to make a reference under subsection (9) and of the procedure on such a reference.
(11) A person who alleges that a copy of the notice should have been given to him, but was not, may refer to the Tribunal the alleged failure and--
(a) the decision in question, so far as it is based on a reason of the kind mentioned in subsection (4); or
(b) any opinion expressed by the Authority in relation to him.
(12) Section (Access to Authority material) applies to a third party as it applies to the person to whom the notice to which this section applies was given, in so far as the material which the Authority must disclose under that section relates to the matter which identifies the third party.
(13) A copy of a notice given to a third party under this section must be accompanied by a description of the effect of section (Access to Authority material) as it applies to him.
(14) Any person to whom a warning notice or decision notice was copied under this section must be given a copy of a notice of discontinuance applicable to the proceedings to which the warning notice or decision notice related.").
On Question, amendments agreed to.
moved Amendment No. 275N:
After Clause 376, insert the following new clause--
(" .--(1) If the Authority gives a person ("A") a notice to which this section applies, it must--
(a) allow him access to the material on which it relied in taking the decision which gave rise to the obligation to give the notice;
(b) allow him access to any secondary material which, in the opinion of the Authority, might undermine that decision.
(2) But the Authority does not have to allow A access to material under subsection (1) if the material is excluded material or it--
(a) relates to a case involving a person other than A; and
(b) was taken into account by the Authority in A's case only for purposes of comparison with other cases.
(3) The Authority may refuse A access to particular material which it would otherwise have to allow him access to if, in its opinion, allowing him access to the material--
(a) would not be in the public interest, or
(b) would not be fair, having regard to--
(i) the likely significance of the material to A in relation to the matter in respect of which he has been given a notice to which this section applies; and
(ii) the potential prejudice to the commercial interests of a person other than A which would be caused by the material's disclosure.
(4) If the Authority does not allow A access to material because it is excluded material consisting of a protected item, it must give A written notice of--
(a) the existence of the protected item; and
(b) the Authority's decision not to allow him access to it.
(5) If the Authority refuses under subsection (3) to allow A access to material, it must give him written notice of--
(a) the refusal; and
(b) the reasons for it.
(6) "Secondary material" means material, other than material falling within paragraph (a) of subsection (1) which--
(a) was considered by the Authority in reaching the decision mentioned in that paragraph; or
(b) was obtained by the Authority in connection with the matter to which the notice to which this section applies relates but which was not considered by it in reaching that decision.
(7) "Excluded material" means material which--
(a) has been intercepted in obedience to a warrant issued under any enactment relating to the interception of communications;
(b) indicates that such a warrant has been issued or that material has been intercepted in obedience to such a warrant; or
(c) is a protected item (as defined in section (Protected items)).").
This amendment was spoken to with Amendment No. 275UA. I beg to move.
I have not spoken to these amendments and I am delighted to do so now. Amendments Nos. 275NA, 275NB and 275NC are our amendments which to seek to amend the new clause in Amendment No. 275N. They would require the authority to disclose additional information which the authority could withhold under subsections (2)(a) and (b) of the new clause, and under subsection (3)(b). Amendments Nos. 275NA and 275NC concern information which can be disclosed without identifying the person concerned--that is to say, a person other than the person against whom the authority action is being taken. I beg to move.
I spoke to these amendments, with the agreement of the Opposition Front Bench, at inordinate length. But clearly we are not meeting each other in debate. Perhaps I can undertake to write to the noble Lord or even meet him to discuss the details, in the light of what I said at length and what he said rather more tersely.
moved Amendment No. 275P:
Page 198, line 9, after ("of") insert ("--
( ) supervisory notices; and
In rising to move Amendment No. 275P I shall be more cautious. I shall speak to the government amendments and let the Opposition move their amendments. We can vary these procedures as it suits us. I shall speak to Amendments Nos. 275Q, 275R, 276, 276ZA and 276AA at the same time.
Clause 377(2) requires the authority to have procedures designed to ensure that the final decision giving rise to a warning or decision notice is taken by someone not involved in gathering the evidence. This subsection was introduced in response to a recommendation of the Joint Committee that the Bill should enshrine the role envisaged for the FSA's "Enforcement Committee". It deliberately leaves open the form that this separation must take, so as not to set the FSA's current administrative procedures in stone. It is right that it should be able to change them from time to time in the light of experience and in line with best administrative practice.
As Clause 377 is currently drafted, this separation requirement would apply only to decisions which give rise to a warning notice and a decision notice. This covers disciplinary type decisions and decisions to revoke authorisation, approval and so forth, and decisions to refuse (or not fully grant) applications.
The Government's Amendments Nos. 275P, 275Q and 275ZA apply the important principle of separation also to supervisory decisions such as decisions to vary Part IV permission. I believe that that goes beyond what was required to meet the concerns of the Joint Committee, but they should be all the more welcome to the Committee for that.
However, this extension raises new issues. We are all conscious of the need to ensure that the authority is able to act speedily when necessary in order to ensure that consumers are not put at risk. That concern has lain behind many of these procedural changes. Amendment No. 275R therefore allows the authority's procedures to provide for a supervisory decision to be taken by an appropriately senior person within the authority even though he may have been involved in some way in gathering the evidence, if this is necessary in order to avoid harm to the interests of consumers which might be caused if the decision was delayed whilst it was considered by a separate person.
It is of course important that this should not mean that decisions are taken by someone unsuitable within the authority. Accordingly, the amendment goes on to provide that the person must be of a level of seniority appropriate to the importance of the decision, and this level of seniority must be specified in the published procedure on which the authority is required to consult by Clause 378.
The "supervisory notice" category is defined by Amendment No. 276AA to cover notices issued in relation to decisions taken to intervene in relation to a collective investment scheme under Clause 250; to suspend promotion of an overseas collective investment scheme under Clause 261; to intervene in relation to an overseas scheme under Clause 273; or to impose a requirement on a former underwriting member of Lloyd's under Clause 314.
We will bring forward amendments at Report to extend that to include the procedures applicable for varying an authorised person's Part IV permission, for discontinuing or suspending the listing of any securities under Part VI, or for imposing requirements under Part XIII on an incoming firm. We did not insert the references to these new clauses at this stage because some of the new clauses themselves need to be added on Report.
The remaining government amendment in this group, Amendment No. 276, is a minor drafting point. I beg to move.
As regards Amendment No. 275R, this amendment inserts a new subsection, subsection (2A) in Clause 377. It sets out a requirement that the authority must determine the procedure it is to follow in relation to the giving of warning and decision notices, to which are now added supervisory notices as defined in Amendment No. 276AA.
The most important part of this procedure is that the decision that gives rise to the obligation to give a notice is to be taken by a person not directly involved in establishing the evidence on which the decision has been based. In other words, the investigatory function is to be separated from the enforcement function. As I understand it, Amendment No. 275R will provide an exception to this principle. The exception will be that in the case of supervisory notices, the decision to issue the notice can be taken by the same person investigating, if the authority thinks that this is necessary in order to protect the interests of consumers, and if the person taking the decision is of a sufficiently senior level.
I can see the sense in this procedure, which the Government have indicated will apply only where it is necessary for the authority to act swiftly in emergencies. However, although the authority may need to take the enforcement decision quickly, I think that it would be perfectly appropriate to urge the Government also to provide that, once the enforcement decision has been taken, a separate senior official of the authority should review that decision internally and be empowered to reverse it. Presumably the emergency would then be over and therefore the normal procedures would apply, albeit retrospectively.
I emphasise that our Amendment No. 276A is still needed. It relates to Clause 377(9) which provides that the FSA's failure to follow its published procedures does not invalidate the notice given. In other words, the person who decided to issue the notice could be the same person who investigated the circumstances, even though new subsection (2A), which we have discussed, does not apply.
I understand that the Government have justified subsection (9) by saying that it is needed to correct clerical and minor inaccuracies; this is because they do not want the whole regulatory procedure to be invalidated for this reason. However, there is no limitation to clerical or other minor errors. That is why we must insist that the provision applies only if the failure is not material and does not, as it were, prejudice the person who receives the notice. This seems to me to play fair with both the authority and the defendant.
It may be helpful if, before the noble Lord, Lord Saatchi, moves the opposition amendment, I respond to the point that has been made about Amendment No. 275R. The noble Lord has made what appears to me to be a perfectly legitimate point. He has recognised the need for swift action in such cases and has suggested that subsequently there should be a review by another senior person. Perhaps I may say, first, that we are referring only to supervisory cases here, not to regulatory cases.
Nevertheless, I should like to think about the practicality of the noble Lord's suggestion for a review. Without making any commitment at this stage, perhaps I may talk to him further on the matter between now and Report stage.
I wish to speak to Amendment No. 276A. Clause 377 requires the FSA to set out procedures in relation to the giving of warning notices and decision notices. In particular, the clause separates the people who investigate from the people who decide on enforcement, which is as it should be. However, subsection (9) then allows the FSA to ignore its own procedures, which is not as it should be. So far, the Government have refused to delete subsection (9) or limit it to situations where the firm is not unduly prejudiced. The Government, I believe, think that subsection (10) solves our problem. However, we disagree because we find that that works only if the authorised firm appeals. Therefore our amendment seeks to deprive the FSA of the right to ignore its own procedures except in minor clerical cases.
I shall respond to Amendments Nos. 276YA and 276A. Subsection (9) of Clause 377 does not excuse the FSA from the need to take care in following its published procedures. It is important that these procedures are transparent and fair. It is also important that people can rely on their being followed.
However, subsection (9) is needed in order to ensure that the tribunal procedures, which are designed to test out the merits of the decision, cannot be hijacked by lengthy arguments on prior procedural details. For example, it would be ridiculous if a person could argue that some minor deviation in the way that a notice was drafted meant that the notice was ineffective, that the tribunal could not determine the merits of the case and that the whole procedure had to be started afresh. It would be worse still if this meant that the person was able to ignore an important supervisory notice that varied his permission or otherwise required him to behave, or refrain from behaving, in a certain way.
In this latter situation, the arguments might potentially not be raised at the appropriate time, but months or even years later when the FSA sought to take further action against a firm which had ignored an earlier FSA decision. We would not want a minor clerical error in the drafting of a notice to be the ground for reopening a decision.
As the Government explained in another place, where the FSA has failed to follow its procedures, the appropriate course is for the tribunal to proceed to hear the case, exercising its unfettered discretion to consider the merits of the FSA's decision.
The tribunal is a first instance tribunal. The tribunal's own fair procedures should rectify any failure by giving the person a fresh chance to have a fair hearing. It is right that its consideration should overtake the FSA's consideration, including any earlier procedural errors that may have been made by the FSA. Subsection (10) makes that explicit.
moved Amendments Nos. 275Q, 275R and 276:
Page 198, line 11, leave out ("a warning notice or decision") and insert ("any such").
Page 198, line 13, at end insert--
("(2A) But the procedure may permit a decision which gives rise to an obligation to give a supervisory notice to be taken by a person other than a person mentioned in subsection (2) if--
(a) the Authority considers that, in the particular case, it is necessary in order to protect the interests of consumers; and
(b) the person taking the decision is of a level of seniority laid down by the procedure.
(2B) A level of seniority laid down by the procedure for the purposes of subsection (2A)(b) must be appropriate to the importance of the decision.").
Page 198, line 14, leave out ("publish") and insert ("issue").
I beg to move Amendments Nos. 275Q to 276 en bloc.
moved Amendment No. 276ZA:
Page 198, line 27, leave out ("warning notice or decision").
On Question, amendment agreed to.
[Amendment No. 276A not moved.]
moved Amendment No. 276AA:
Page 198, line 29, at end insert--
("( ) "Supervisory notice" means a notice given in accordance with section--
(a) (Procedure on giving directions under section 250 or varying them on Authority's own initiative)(3), (6) or (7)(b);
(b) (Procedure on giving directions under section 261 or varying them on Authority's own initiative)(3), (6) or (7)(b);
(c) (Procedure on giving directions under section 273 or varying them on Authority's own initiative) (3), (7)(a) or (9)(a) (as a result of subsection (8)(b)); or
(d) 314(2) or (4).").
On Question, amendment agreed to.
Clause 377, as amended, agreed to.
Clause 378 agreed to.
Clause 379 [Misleading statements and practices]:
[Amendments Nos. 276AB and 276AC not moved.]
Clause 379 agreed to.
Clauses 380 and 381 agreed to.
Clause 382 [Offences by bodies corporate etc.]
As the Committee is aware, an English limited partnership is not a legal entity and therefore each partner is treated as committing an offence committed by any of them while acting as a partner. Subsection (3) therefore provides for exemptions. The amendment makes sense of subsection (3). Conversely, it is ridiculous to think that there are exemptions for partners of any partnership provided only that the offence is committed in England.
So far as concerns Amendment No. 276C, subsection (4) is the opposite of subsection (3). It surely relates to a Scottish limited partnership, which is a legal entity. This is why the liability provisions are set out in the same language as those for a body corporate in subsection (1). Again, it does not make any sense that any kind of partnership will have its partners liable on this basis provided only that the offence is committed in Scotland. I beg to move.
These amendments seek to replace the definition of a partnership "in" England or Scotland with the formula of a partnership "constituted under the laws of" England or Scotland.
I am grateful to the noble Lord for bringing forward these amendments. I can see that there might be some confusion as to whether what is being referred to in subsections (3) and (4) is the "nationality" of the partnership--that is, whether it is constituted under English, Scots or Northern Ireland law--or the territory in which the offence may have been committed.
Unfortunately, I am unable to accept the amendments as they stand. Although they would leave the Bill in a form which might cover partnerships formed in any part of the UK, they would not cover a partnership constituted under the laws of a foreign state. Since it is possible for such partnerships to do business in the UK, and to commit offences in the UK, it is clearly necessary that the Bill should enable us to deal with such persons.
I can assure the noble Lord, Lord Kingsland, that we are aware that there is a problem and that we intend to bring forward amendments which will deal with the problem he has identified.
Let me assure the noble Lord that I went further this time than I went last time.
moved Amendment No. 276D:
After Clause 388, insert the following new clause--
(" .--(1) The Treasury may by order--
(c) modify Schedule 4 so as to provide for Gibraltar firms of a specified description to qualify for authorisation under that Schedule in specified circumstances;
(d) modify section 258 so as to make provision in relation to collective investment schemes constituted under the law of Gibraltar;
(e) provide for the Authority to be able to give notice under section 258(2) on grounds relating to the law of Gibraltar;
(f) provide for this Act to apply to a Gibraltar recognised scheme as if the scheme were a scheme recognised under section 258.
(2) The fact that a firm may qualify for authorisation under Schedule 3 as a result of an order under subsection (1) does not prevent it from applying for a Part IV permission.
(3) "Gibraltar firm" means a firm which has its head office in Gibraltar or is otherwise connected with Gibraltar.
(4) "Gibraltar recognised scheme" means a collective investment scheme--
(a) constituted in an EEA State other than the United Kingdom, and
(b) recognised in Gibraltar under provisions which appear to the Authority to give effect to the provisions of a relevant Community instrument.
(5) "Specified" means specified in the order.
(6) "UK firm" and EEA right" have the same meaning as in Schedule 3.").
I gave notice of this amendment in the Second Reading debate. This is a new clause which has been introduced to take account of several matters arising from Gibraltar's status within the European Economic Area.
The provisions of the treaty relating to the right of establishment and the freedom to supply services apply to Gibraltar. However, Gibraltar is not a separate member state in its own right, but its nationals have rights to passport into other member states on the basis that it is part of the UK for these purposes.
Because of this unique status, there is no Community obligation to provide the passporting mechanism between the UK and Gibraltar. However, it has been the established policy of the previous Government and of this one to provide for an "internal passport" between Gibraltar and the UK for the activities covered by the passport directives, as and when we are satisfied with the relevant regulatory standards in Gibraltar. The clause provides the necessary mechanism for this. It carries forward existing provisions (subsection (1)(a)) in the relevant regulations which give the Treasury the power to extend the passport arrangements to Gibraltar firms which are covered by one of the single market directives.
At present, if they comply with the relevant notification procedure, Gibraltar insurance companies are allowed to passport their services into the UK. Similarly, Gibraltar credit institutions are allowed to passport into the UK for the provision of banking services. But this does not yet extend to investment services; investment firms have not yet been granted the right to passport into the UK. The Gibraltar insurance companies and credit institutions which benefit from this passport will continue to do so. Further passport rights will be granted as and when we are satisfied with the relevant regulatory standards in Gibraltar. As now, the passport will be optional and not an exclusive route to authorisation. Gibraltar firms will still have the option of seeking Part IV permissions.
The clause also enables the Treasury to enable firms from other EEA states which have exercised passport rights to branch or provide services into Gibraltar to then exercise those rights in relation to the United Kingdom proper without going through the full directive notification requirements. The phrase "or otherwise connected with Gibraltar" ensures that the power is broad enough to cover such firms. Without this, we might be in breach of our obligations under the directives.
The clause also gives the Treasury the power under subsection (1)(b) to extend the application of Schedule 4 so that a Gibraltar firm can exercise treaty rights if it is authorised by the Gibraltar competent authority and the relevant conditions in Schedule 4 are met. Subsection (1)(c) gives the Treasury the power, by order, to extend the application of Part III of Schedule 3 in relation to the exercise by UK firms of rights to establish branches or to provide services into Gibraltar in accordance with the equivalent provisions under Gibraltar law.
Subsection (1)(e) enables the Treasury to modify the provisions of Clause 258 so that the authority can refuse to admit a collective investment scheme from another member state if the way in which it proposes to market its units is incompatible with requirements imposed in Gibraltar in the general good. This is necessary to accommodate the possibility that a collective investment scheme from another member state may acquire an automatic right to sell units in Gibraltar once it is recognised by virtue of Clause 258. The clause will confer no new rights on Gibraltar firms until the relevant powers are exercised, but existing rights will continue. I beg to move.
I am sure that this is welcome in Gibraltar. My only concern is with subsection (3) and the definition of "Gibraltar firm", which means,
"a firm which has its head office in Gibraltar or is otherwise connected with Gibraltar".
That seems to be a term almost without boundary. It could have a partner living in Gibraltar; it could have a branch office in Gibraltar; it could have been, as my noble friend put it, elsewhere constituted or incorporated under the law of Gibraltar. I wonder whether there is anywhere in the Bill, or there is going to be anywhere in the Bill, a more precise definition of what this means.
I have attempted, but clearly not successfully, to set this out. The clause enables the Treasury to enable firms from other EEA states which have exercised passport rights to branch or provide services into Gibraltar to then exercise those rights in relation to the United Kingdom proper without going through the full directive notification requirements. The phrase "or otherwise connected with Gibraltar" ensures that this power is broad enough to cover such firms. Without this, we might be in breach of our obligations under the directives.
moved Amendment No. 276E:
After Clause 389, insert the following new clause--
.--(1) Subject to subsection (2), the Authority may adopt a policy that it will not exercise its powers under sections 113, 120, 368 and 370 in respect of conduct which is not in conformity with the City Code except following a request by the Panel that the Authority consider whether to exercise all or any of these powers.
(2) Subsection (1) does not apply in respect of behaviour which satisfies the condition in section 109(2)(a).
(3) The Authority may adopt the following policy in respect of the exercise of its powers under section 368(1) to (3), namely that, in any case where the Authority is of the opinion that--
(a) any application or proposed application by the Authority for any order or interdict under that section, or
(b) the making, confirmation or continuance of any order or interdict made under that section, may materially affect the timetable or outcome of an offer to which the City Code applies, the Authority shall consult the Panel--
(i) before making or proceeding further with the application, and
(ii) (in any case where the Authority forms such opinion after an order or interdict has been made) before making any further representations to the court seeking the confirmation or continuance of the order or interdict.
(4) Where the Authority has adopted a policy within subsections (1) or (3), such policy shall be recorded in a statement issued under this section and the provisions of section 114(6) to 114(8) shall apply to a statement issued under this section.
(5) The Authority shall not exercise its powers under sections 113, 120, 368 and 370 in a manner which is not in accordance with any statement of policy issued under this section.
(6) The provisions of this Act which refer to the Panel or to the City Code shall not be construed as imposing any statutory duty on the Panel and no such duty shall be imposed on the Panel by reason of anything done or not done by the Authority or the Panel under or in connection with such provisions.
(7) Neither the Panel nor any person who is, or is acting as, a member, officer, member of staff or agent of the Panel is to be liable in damages for anything done or omitted which is or may be connected in any way with the exercise or purported exercise of any duty, power or function of the Authority under this Act unless the act or omission is shown to have been in bad faith.
(8) In this section--
"conduct which is not in conformity with the City Code" means conduct of a person which, in the opinion of the Panel, does not conform with the responsibilities imposed on that person by the City Code (as applied by the Panel);
"offer" has the meaning given in the City Code, as determined by the Panel.").
In moving this amendment, I wish to speak also to Amendment No. 276F. The amendments concern the Panel on Takeovers and Mergers. Amendments Nos. 277A and 277C add consequential definitions of the City code and the panel to the definitions contained in Clause 392. I gather that the Treasury says that it does not want the FSA's powers to intervene in cases of market abuse to be fettered in any way by the takeover panel. The reason given is that it is believed that in the regulation of market abuse, self-regulation has failed and needs to be replaced by statutory regulation. These amendments would avoid the FSA being drawn into takeover regulation, which I am told is an outcome that Treasury officials and the FSA say they desire, and they would eliminate the danger of possible damage by the unintended consequence of regulatory overlap between the two bodies.
I cannot dispute that there have been significant failures in the self-regulation of financial services--famously, in the case of the insurance markets. Meanwhile, the Takeover Panel's non-statutory regulation of takeovers, which at its heart includes the regulation of behaviour which creates a misleading impression or distorts the market, has been effective. That is widely recognised in the City. I also acknowledge the view that the current legal framework under the Criminal Justice Act has been ineffective in deterring or punishing the misuse of unpublished information. But our amendments would not impact in any way on the manner in which the new FSA market abuse regime would address that.
The Treasury says that it does not want to create the unusual situation of a non-statutory body being responsible for deciding in respect of certain abuses whether and when action could be taken under a statutory regime. It is true that, while the panel does not have statutory functions, it nevertheless has statutory recognition; for example, as a body to which disclosures may be made under Section 180 of the Financial Services Act 1986. It also has statutory underpinnings; for example, through the endorsement of the takeover code under Section 47A of the same Act. The courts have taken the view that the panel performs a public duty. In due course, when the European takeover directive is adopted and implemented in UK law, the panel will, like the FSA today, be a private body with statutory functions.
Therefore, we believe that the best way to safeguard effective takeover regulation while also enabling the FSA to administer the market abuse regime consistently across all markets, is to amend the Bill in two ways: first, behaviour which complies with the takeover code would not constitute market abuse--that is, it would be a safe harbour; secondly, in cases of non-compliance with the takeover code, the panel would have the ability to pass serious cases to the FSA based on criteria and parameters which should be pre-agreed between the panel and the FSA, for the FSA to consider whether market abuse had occurred and whether to take further action. But other than in those circumstances, the FSA would not intervene directly. That is what our Amendments Nos. 276E and 276F achieve. I beg to move.
The Government should consider this amendment in a positive way. The Bill as drafted may well adversely affect the effectiveness, credibility or authority of the Takeover Panel and the City take-over system that has operated for some 30 years. The difficulty with the Bill as drafted is that there is an overlap between the market abuse powers of the Financial Services Authority under the Bill and the role of the Takeover Panel under the self-regulatory code which has operated to ensure fair and equal treatment and that best business standards are observed during a takeover. Under the terms of the Bill, many breaches of the code will also amount to market abuse.
The great advantage that many people have seen of the code system over the years is that it is flexible and speedy, and it enables decisions which are made speedily to be both binding and final. The virtues of those factors were, for example, recognised by the Court of Appeal in the well known Datafin case in 1986. I am sorry that the noble and learned Lord, Lord Donaldson, who presided over that court is not in his place. Briefly, the courts then decided that they were not, for good reason, willing to intervene contemporaneously with anything to do with a take-over while the bid was being conducted. They would intervene, in the courts' own words, historically but not contemporaneously, so that the matter could be determined on a rapid basis. That decision, some 14 or 15 years ago, forestalled the very bad possibility of tactical litigation in which a party to a bid might use judicial review proceedings simply as a ploy, which was not helpful to anyone concerned. The virtues of self-regulation have been recognised by the present and past Governments in their relationship with and attitude towards intended European Union directives from Brussels.
If the panel's decision is no longer binding and final because somebody could seek--for meritorious or unmeritorious reasons--a different decision from the FSA, the virtues of speed and finality could be lost. If the authority, without any statutory power, were to leave things to the panel and reject claims of market abuse, the FSA could be subject to judicial review on the ground that it has improperly fettered its own discretion. The Bill gives the authority discretion. It does not have a statutory power to exercise a self-denying ordnance. The amendment would add a useful self-denying ordnance.
Even if the Government do not think that the drafting is precisely right, the amendment recognises the principle of trying to avoid a duality of authority and the risks of tactical litigation--which would put the clock back after many years in which governments and the courts have recognised the present system as useful.
The letter that I assume we have all received from the Director-General of the Takeover Panel makes a persuasive case. The amendments seem to meet the problems set out in that letter--to which the noble Lord, Lord Borrie, referred. I hope that the Government will take account of them but I trust that the amendments as drafted are not the last word. It took me a long time to understand what was being said, for example, by Amendment No. 276F--which lacks the eloquence that is generally present in the Bill.
We have certainly paid close attention to the case that has been made. I had the pleasure of meeting the Director-General of the Takeover Panel and his colleagues with my noble friend Lord Richard. Also, a number of meetings have taken place between the panel and Treasury officials.
There is not too much between us. Neither we nor the FSA want the authority pulled into the tactical manoeuvring of parties to takeover battles. It is important that the interests of shareholders are not unnecessarily affected during takeover bids. That can be achieved through the FSA's enforcement policies and code of market conduct. The amendments acknowledge that there may be times when it will be appropriate for the FSA to intervene during or after a takeover, to take action against those who have engaged in or are engaging in market abuse.
Broadly speaking, these amendments would allow the FSA to adopt a policy that in takeovers it would take action in market abuse cases only where the Takeover Panel requested it to do so. The panel has indicated that it would, for example, seek to involve the FSA where its own rulings were not complied with or it believed that a penalty might be merited. Given that all sides acknowledge that there will be occasions when it is appropriate for the FSA to take action under its market abuse powers, the key question is: who should take that decision? We firmly believe that the decision in a particular case should rest with the statutory regulator charged by Parliament with the responsibility to tackle market abuse across the board.
The fundamental theme of the Bill is that all financial regulation, including self-regulation, should be brought within the umbrella of the Financial Services Authority. We cannot accept that it is right for the FSA to adopt a policy of exercising its market abuse powers in the case of a takeover only on the say-so of the panel. We are setting up the FSA as the single statutory regulator of the financial services industry. What the FSA does is conditioned by the objectives and principles given to it by Parliament, among them the protection of consumers and the maintenance of market confidence. In the area of market abuse we are giving it new powers to protect the financial markets and extending its reach to cover both regulated and unregulated persons. Together with that, it has statutory powers of investigation which enable it to compel people to answer questions.
While the Takeover Panel does a satisfactory job in regulating the conduct and process of takeovers, it is a very different body. The remit of the panel is much narrower than that of the FSA and is concerned with the interests of the shareholders of companies involved in takeovers--and why not? That is perfectly reasonable. There are good reasons for maintaining the current non-statutory approach to the regulation of takeovers. We want the process to be as quick and efficient as possible. But as far as concerns market abuse, the last word should rest with the body to which Parliament has given the job of tackling it. There are interests at stake other than those of the shareholders and the various parties to a takeover: the interests of other market participants and the market as a whole. Concerns about fairness and efficiency are at the heart of what we are doing.
Having said that the issue is narrower than may have appeared from the debate which has taken place, I hope that the Committee will not pursue the amendment and will allow the FSA, the Treasury and the Takeover Panel to continue the discussions which are in course at the present time.
Can the Minister say whether there may be a conflict of interest in a case where a company which is subject to a takeover bid appeals to the FSA after the Takeover Panel has made an adjudication? That may be a more disadvantageous situation than the previous regime where the Takeover Panel makes a judgment. The whole regulatory framework may be more complicated, leading to delays in bid situations.
This is a complex and important matter. I hope that my noble friend will be able to provide noble Lords with an opportunity to debate this matter at a later stage when we are not quite as tired and anxious to conclude, as I am for one.
I am grateful to all noble Lords on all sides of the Committee who have supported these amendments. We shall return to this matter at Report stage. This issue is much too important to debate at a quarter to 12, and perhaps we shall have another opportunity to debate it at a later stage. I beg leave to withdraw the amendment.
moved Amendment No. 277:
After Clause 391, insert the following new clause--
("Limitation on powers to require documents
.--(1) A person may not be required under this Act to produce, disclose or permit the inspection of protected items.
(2) "Protected items" means--
(a) communications between a professional legal adviser and his client or any person representing his client which fall within subsection (3);
(b) communications between a professional legal adviser, his client or any person representing his client and any other person which fall within subsection (3) (as a result of paragraph (b) of that subsection);
(c) items which--
(i) are enclosed with, or referred to in, such communications;
(ii) fall within subsection (3); and
(iii) are in the possession of a person entitled to possession of them.
(3) A communication or item falls within this subsection if it is made--
(a) in connection with the giving of legal advice to the client; or
(b) in connection with, or in contemplation of, legal proceedings and for the purposes of those proceedings.
(4) A communication or item is not a protected item if it is held with the intention of furthering a criminal purpose.").
Amendment No. 277 was debated with Amendment No. 89. I beg to move.
This amendment was debated with Amendment No. 226D. I beg to move.
moved Amendment No. 278:
Page 208, leave out lines 32 and 33.
This amendment was debated with Amendment No. 168. I beg to move.
In moving the amendment, I speak to Amendment No. 278D. Amendments Nos. 278B and 278BA are, I think, consequential and supplementary provisions. On Amendment No. 278C, it is our view that the Treasury should be made subject to the same objectives as the authority. Only that will enable persons successfully to lobby the Treasury not to impose the authorisation requirement where that is not necessary to protect investors and to provide exemptions from the financial promotion regime.
Amendment No. 278D would require the Treasury to consult when exercising its power to make regulations or orders under the Act. Noble Lords are probably aware that a similar amendment was tabled previously in relation to particular powers of the Treasury to make orders. If the authority wishes to make rules, it has to go through a consultation procedure. But the Treasury does not have to do so. Many believe that it should have to undergo the same procedure. I beg to move.
The new clause introduced by Amendment No. 278C is concerned with the constraints on the Treasury when exercising its delegated legislative powers conferred by the Bill. Amendment No. 278D takes a slightly different route but essentially that, too, is directed at restricting the exercise of powers by the Treasury.
I understand the thinking behind Amendment No. 278C. It is certainly not the Treasury's practice or intention to make regulations that are not necessary for a particular purpose, nor to make regulations that would in any way seek to damage competition, competitiveness or innovation. However, the difficulty with a provision such as this is that its effect cannot really be determined until the powers under the Bill are being exercised. For example, there could be a difficulty if we were required by EC directives or treaties to include within the regulated activities order something that we were not entirely persuaded on consumer protection grounds merited being subject to regulatory burdens.
From time to time, we all know that unforeseen circumstances arise that need to be dealt with. By their nature, we cannot predict what these will be or when they will arise. However, the Bill states clearly, so far as possible, what the relevant powers to make regulations and orders are for and how they are to be used. Many of the powers are very narrow in scope.
Amendment No. 278B is a consequential amendment to Clause 402 to ensure that the restrictions that would be introduced by Amendment No. 278C would apply equally to orders under Clause 402.
I hope that I can give the noble Lord reassurance about Amendment No. 278BA. I shall be plain and up-front about it. Part of the reason for having a provision along the lines of Clause 402--it is a fairly common Bill provision--is to enable the government of the day to cope with things that could not have been envisaged at the time the legislation was enacted, or matters of such detail that it would have been inappropriate for them to feature in a Bill. That is particularly important in a Bill of this length and complexity which is designed to enable the effective regulation of dynamic and diverse markets.
Amendment No. 278D seeks to impose on the Treasury obligations to consult on draft secondary legislation. Members of the Committee will be well aware that the Treasury has undertaken a number of consultation exercises on its proposed exercise of powers under the Bill. However, we must not lose sight of the reason for subjecting the authority to consultation and cost-benefit requirements. That reason is because the Bill will confer on the authority delegated powers to make legislative provision without parliamentary scrutiny. Of course, the same is not true in the case of the powers conferred on the Treasury. Secondary legislation will be made subject to parliamentary scrutiny. Therefore, we argue that the amendments are unnecessary. Normal parliamentary procedures provide adequate protection. I hope that the noble Lord will consider my reply and not press his amendments tonight.
The Government have tabled amendments in response to one of the recommendations of the Delegated Powers and Deregulation Committee. Clause 36 confers on the Treasury a power by order to exempt persons from the general prohibition under Clause 17. An exempt person would not, therefore, need to be authorised to carry on regulated activities.
The Bill as it stands would make an order under Clause 36 subject to the negative resolution procedure. The effect of the amendments is to require an affirmative resolution procedure in one of two cases. The first case is the first order made under the powers in Clause 36. This will ensure that there is opportunity for a proper debate on the persons who are to be exempted from regulation at the time the Bill is brought into force. A second case, which was not a matter that the Delegated Powers and Deregulation Committee addressed, is when the Treasury makes a further order under Clause 36, the effect of which is to remove an exemption. We believe that an affirmative resolution procedure should additionally apply in that case because the effect of such an order is to extend the scope of regulation.
The proposals therefore parallel the procedures that would apply to the making of the first order, defining "regulated activities" under Clause 20, and subsequent orders which add new activities. We thank the Delegated Powers and Deregulation Committee for the valuable role it has played in scrutinising the delegated legislative powers conferred by the Bill. That committee made a number of helpful recommendations which the Government were pleased to accept. I beg to move.
moved Amendment No. 278G:
Page 214, line 35, at end insert--
("(4A) This subsection applies to an order under section 36 if--
(a) it is the first order to be made, or to contain provisions made, under that section; or
(b) it contains provisions restricting or removing an exemption provided by an earlier order made under that section.").
On Question, amendment agreed to.
Clause 404, as amended, agreed to.
[Amendment No. 279 not moved.]
Clauses 405 and 406 agreed to.
Clause 407 [Minor and consequential amendments, transitional provisions and repeals]:
Amendments Nos. 280 and 281 are the first of the transitional provisions that we have introduced to the Bill. Amendment No. 280 is a paving provision to introduce new Schedule 18A regarding transitional provisions. Amendment No. 281 is the start of the transitionals schedule. It inserts into the Bill provisions which deal with the transition from the current regulatory structure under the Financial Services Act 1986 to those to be established under the Bill.
Under the 1986 Act, the authority has responsibility for recognising the self-regulating organisations for the purposes of Section 8 of the Act and Schedule 11 to the Act in relation to friendly societies. It also has a continuing responsibility in relation to the supervision of organisations which are recognised under those provisions. Firms are able to carry on investment business on the basis of an authorisation conferred by the 1986 Act on persons who are members of an SRO recognised under the Act.
The transition to the new regulator is, of course, well under way. Responsibility for banking supervision was transferred to the authority in 1998. Responsibility for the supervision of insurance was transferred in 1982 and has been contracted out to the authority by the Treasury. Similarly, the authority is supporting the Building Societies Commission, the Friendly Societies Commission and the Registry of Friendly Societies in relation to credit unions in performing their statutory functions, again, on a contractual basis. The authority has also entered into arrangements with the three self-regulating organisations--PIA, IMRO and SFA--for which it performs many functions, also under contract. The staff of those organisations have already transferred, for the most part, to the FSA.
The need for a transition provision of this kind is particular to the recognised SROs. To a large degree, it is a result of the legal status of those organisations. Provision is needed because they are self-regulating organisations, the members of which are the regulated community. As the date for the commencement of the Bill approaches, there will be an increasing need for the authority to be able to exercise close control over the affairs of those organisations so as to ensure the smooth handling of the final stages of the transition. The authority will need to be able to do that consistently with the provisions of the 1986 Act, which currently do not envisage the kind of relationship that will be required. It is also important that the directors of the SROs do not do anything that puts them in breach of their statutory obligations; for example, under the Companies Acts.
This provision will help to achieve what is needed. It will, for example, with the consent of the SROs, allow the authority to begin to appoint directors to those companies so that it can better co-ordinate the transition from the old system to the new. I beg to move.
moved Amendment No. 281:
After Schedule 18, insert the following new schedule--
:TITLE3:TRANSITIONAL PROVISIONS AND SAVINGS
1.--(1) No new application under section 9 of the 1986 Act (application for recognition) may be entertained.
(2) No outstanding application made under that section before the passing of this Act may continue to be entertained.
(3) After the date which is the designated date for a recognised self-regulating organisation--
(a) the recognition order for that organisation may not be revoked under section 11 of the 1986 Act (revocation of recognition);
(b) no application may be made to the court under section 12 of the 1986 Act (compliance orders) with respect to that organisation.
(4) The powers conferred by section 13 of the 1986 Act (alteration of rules for protection of investors) may not be exercised.
(5) "Designated date" means such date as the Treasury may by order designate.
(6) Sub-paragraph (3) does not apply to a recognised self-regulating organisation in respect of which a notice of intention to revoke its recognition order was given under section 11(3) of the 1986 Act before the passing of this Act if that notice has not been withdrawn.
(7) Expenditure incurred by the Authority in connection with the winding up of any body which was, immediately before the passing of this Act, a recognised self-regulating organisation is to be treated as having been incurred in connection with the discharge by the Authority of functions under this Act.
(8) "Recognised self-regulating organisation" means an organisation which, immediately before the passing of this Act, was such an organisation for the purposes of the 1986 Act.
(9) "The 1986 Act" means the Financial Services Act 1986.
:TITLE3:Self-regulating organisations for friendly societies
2.--(1) No new application under paragraph 2 of Schedule 11 to the 1986 Act (application for recognition) may be entertained.
(2) No outstanding application made under that paragraph before the passing of this Act may continue to be entertained.
(3) After the date which is the designated date for a recognised self-regulating organisation for friendly societies--
(a) the recognition order for that organisation may not be revoked under paragraph 5 of Schedule 11 to the 1986 Act (revocation of recognition);
(b) no application may be made to the court under paragraph 6 of that Schedule (compliance orders) with respect to that organisation.
(4) "Designated date" means such date as the Treasury may by order designate.
(5) Sub-paragraph (3) does not apply to a recognised self-regulating organisation for friendly societies in respect of which a notice of intention to revoke its recognition order was given under section 11(3) of the 1986 Act (as applied by paragraph 5(2) of that Schedule) before the passing of this Act if that notice has not been withdrawn.
(6) Expenditure incurred by the Authority in connection with the winding up of any body which was, immediately before the passing of this Act, a recognised self-regulating organisation for friendly societies is to be treated as having been incurred in connection with the discharge by the Authority of functions under this Act.
(7) "Recognised self-regulating organisation for friendly societies" means an organisation which, immediately before the passing of this Act, was such an organisation for the purposes of the 1986 Act.
(8) "The 1986 Act" means the Financial Services Act 1986.").
On Question, amendment agreed to.
Schedule 19 [Repeals]:
I should be very unpopular if I spent long on this amendment. I tabled it in a spirit of inquiry as it seemed to me that the current legislation which we are discussing now makes the apparatus set up under the Insurance Brokers (Registration) Act 1977 superfluous. Since I tabled it, I understand that the Government are of the same mind and are intending to repeal that Act.
I am glad that they have this opportunity to do so because, while it was still active, it was a difficult anomaly in the self-regulatory field in which I acted and I should not wish that anomaly to persist and annoy in years to come. I shall listen with great interest to the Minister's reply.
I would like to thank the noble Lord, Lord Elton, for moving this helpful amendment. I can assure him that the Government are happy to accept the amendment in principle. He may have been told that before the amendment was called. Indeed, the Government have already announced their intention to repeal the 1977 Act as part of their reform of the financial services regulatory structure. However, I would ask that the matter is not pressed further at this stage.
The council is a statutory body, and it is therefore necessary to make provision for dealing with its abolition in statute. However, there are certain transitional matters arising from repeal that we need to ensure are adequately addressed. We will need, in particular, to consider whether we need to make provision to deal with any assets and liabilities that the council may have, and to deal with any contracts or litigation that arise.
I hope the Committee will understand that the final shape of transitional and consequential provisions depends on the substantive provisions in the Bill. My noble friend's officials are currently discussing the associated transitional issues with the council. Those issues are complex but they are technical rather than substantive. However, the Government accept the point in principle and will bring forward appropriate amendments as part of their package dealing with repeals. Once again, we express our thanks to the noble Lord.