moved Amendment No. 151A:
After Clause 135, insert the following new clause--
:TITLE3:LONG-TERM INSURANCE BUSINESS RULES: REPRESENTATION OF POLICYHOLDERS
(" . The Authority shall make rules requiring an authorised person who is a body corporate who has permission to carry on regulated long-term insurance business to secure that the composition of the body's Board of Directors is such as to give a fair degree of representation to with-profit policyholders.").
My Lords, in moving this amendment I have to declare an interest in that my family and I are with-profit policyholders in proprietary life assurance companies. The purpose of the amendment is the protection of with-profit policyholders, who currently have no representation on the boards of life assurance companies. I raised this issue at Committee stage and the noble Lord the Minister has been kind enough to meet me and write to me outlining the Government's approach. However, I still cannot feel that with-profit policyholders have adequate protection, and I should like to pursue the matter further.
Without troubling your Lordships at too great length, let me just briefly outline the cause of my concern. From time to time the directors of life assurance companies are faced with conflicts of interest as between shareholders and policyholders. In such cases the directors, who are accountable to the shareholders who elect them, will tend to concern themselves with the best interests of shareholders rather than of policyholders, who have nobody to represent their interests.
As I did with my previous amendment, I will illustrate this type of conflict by reference to the Prudential, which is the largest life assurance company in the country, repeating that in so doing I am not suggesting that the Prudential acts differently from some other companies; nor am I seeking to personally impugn any of its directors. The Prudential board was recently faced with the decision of how to deal with the £2 billion compensation for losses arising from the mis-selling of personal pensions by salespeople whom the company had failed to properly train or control.
The company had two options. The first one was for the board to accept responsibility for the mis-selling and to write off the losses against shareholder profits. That would have wiped out entirely its profits for about two years which, to put it mildly, would not have been an attractive strategy to report to shareholders. It was, however, an option followed by at least one other with-profits company. The other option was simply to write off the losses against the orphan estate, which consists of surplus assets, the ownership of which is unclear as between shareholders and policyholders.
Faced with this very clear conflict, the board adopted the orphan estate option, with the consent of the DTI. In making this decision there was of course no one at board level to argue the case for policyholders and their interests. Had there been such representation, just some of the questions which would surely have been posed would have included the following. Was the board not responsible for the losses? Should not the shareholders, having elected the board, bear the losses? How could the chief executive of the Prudential for several years aggressively deny that this massive mis-selling had taken place? Why had the DTI and, more recently the Treasury, not followed the agreed practice of consulting the policyholders before agreeing to the orphan estate being used for this purpose?
They might also have asked whether the reasonable expectations of Prudential policyholders had been met and whether the company's affairs had been managed ethically and competently. The Institute of Actuaries in 1993 had defined that as a key part of the primary expectation of policyholders. Finally, they might have asked: how could the Prudential, at a time when it was writing off a loss of £2 billion, for which the board was accountable, justify to policyholders reducing their balances, yet at the same time increasing dividends to shareholders?
It is not just the losses arising from the mis-selling of personal pensions which the Prudential policyholders would wish to query at board level. At the moment the Prudential is selling very large volumes of with-profits, single-premium bonds and paying extravagant commissions at a rate of up to 6 or 7 per cent on the bonds. It is the view of some actuaries that these sales enable the Prudential to give shareholders indirect access to the orphan estate and that in time the orphan estate will be eroded in order to maintain bonuses on these bonds. If there were directors elected by policyholders who would be expected to represent the interests of both shareholders and policyholders, they would want to question the unlimited marketing of such bonds and whether, if such extravagant commissions were not paid in order to buy business, policyholder bonuses might be higher.
I should like to round off the illustration of potential conflicts faced by the Prudential board by reference to what is left of the Prudential's orphan estate after the £2 billion depletion. Here we know that the Prudential is engaged in discussions with the Treasury about the orphan estate's attribution as between shareholders and policyholders, claiming that the vast majority of the orphan assets has come from shareholders. These discussions have been proceeding in great secrecy for approximately four years, but shareholders are denied any information whatsoever on the grounds that it is price sensitive information. If policyholder elected directors were present at board meetings, they would have brought pressure on the board to clarify to policyholders within a reasonable period what its intentions are so that their interests could be protected. They would also question whether the information is really price sensitive and for how long the defence of price sensitivity can be used as a means of avoiding the disclosure of essential information to policyholders. The Minister's views on this price sensitivity issue would be greatly valued.
I submit that there is a clear case for directors elected by policyholders on the boards of life assurance companies. The examples I have illustrated are not isolated cases affecting a handful of policyholders. Industry-wide we are talking about £20 billion of orphan estates and the best interests of millions of policyholders.
There is an obvious and recent precedent for my amendment. The Pensions Act 1995 provides that members of pension schemes are entitled to nominate one-third of the boards of their pension funds. During the debate relating to these issues the opposition, now the Government, argued for even greater member representation--50 per cent. Additionally, in the draft regulations recently published on stakeholder pensions, specific limitations are proposed on with-profit funds which are to be ring-fenced and which prevent any transfers to shareholders other than clearly stipulated maximum costs. I suggest that it is self-evident that with-profit policyholders--they include millions of personal pension investors--require similar protection, particularly in the light of the conduct of life assurance companies in the recent past.
Finally, I should like to put a question to the Minister. Does he accept that with-profit policyholders need protection; and how does he distinguish the case for protecting the interests of with-profit policyholders from that of protecting members of pension schemes and stakeholder pension members in the way described? I beg to move.
My Lords, perhaps I may speak on behalf of the noble Lord, Lord Phillips of Sudbury, who has to chair a meeting.
The key question the amendment raises is how to ensure that the rights and interests of with-profit policyholders are dealt with. It is an extremely serious issue, as the noble Lord, Lord Joffe, made clear, which has not been dealt with adequately by many market participants up to this point. I suspect that it is easier to deal with such representation on the board of a mutual than a plc without opening up a wide range of other groups which might be represented on the board of a plc. I am full-square behind the amendment. It is a serious issue which is not adequately addressed in all cases under current regulation. I look forward to hearing the Minister's response on how the Government might strengthen the position of with-profit policyholders in future.
My Lords, first, I declare an interest as chairman of a friendly society and a member of the Association of Friendly Societies.
The key point of the debate is the difference between proprietary companies and mutuals. After all, the leading life with-profit policy organisation in this country is a mutual. While past performance is no guidance for future performance, if one looks at the performance of the top 10 with-profits life companies one will find that something like eight of them are mutuals. The consumer choice is there in the first place. The consumer chooses whether to invest in a with-profit policy in a proprietary company in the full knowledge that the success of that company will be shared between the with-profits holder and the shareholder. If they want to benefit from the whole of the profit, they should join those of us who are in the mutual movement.
My Lords, I am very tempted by the noble Lord, Lord Naseby, as one who has been--I have declared this interest to the House on another occasion--a with-profit policyholder in two mutual companies both of which decided to demutualise, against my vote. I have my own feelings on this matter. The Government's view is one which I think would be shared by the noble Lord, Lord Naseby: that there is a role for more than one form of governance in the insurance industry; and that there is a role for mutuals as well as proprietary companies. However, perhaps we are straying beyond the confines of the Bill.
We had a useful debate in Committee on the subject of the orphan estates of long-term insurers. In responding to that debate, I was able to give some assurances about the arrangements for the regulation of relevant business now under the Insurance Companies Act 1982, and how the FSA would be able to continue to maintain similar levels of protection using the powers conferred on the FSA by the Bill. Therefore I shall not rehearse the arguments that I put forward in Committee, nor the detail of the arrangements I described.
It was clear from our debate that a major concern was the transparency of the arrangements and the information provided to with-profits policyholders. The noble Lord, Lord Joffe, referred to that again in describing the case of the Prudential. Greater transparency is something that the FSA will be able to require using its powers under the Bill. It would be premature for me or for the FSA to say that it will do so. The FSA must come up with proposals for rules and consult on them, but I can say that it is something the FSA is considering.
Before I respond to the amendment, I should like to pick up a couple of points made by the noble Lord, Lord Joffe. I express my gratitude to him for sending a copy of his argument to me in advance. It is certainly the case that information is available to support the information sent to policyholders in the annual bonus notices. I may have given another impression at Committee stage. It may have been possible to construe my response to imply that the Treasury regulations require that information be sent to policyholders. If that were the case, I apologise. Let me explain my point so that the position is clear.
The Treasury requires a bonus notice to be given but it does not specify the information that has to be provided. However, substantial information must be published annually by insurance companies: their annual report and accounts; the regulatory return (it is still often called the DTI return); and the report of the appointed actuary. That information can be obtained from the company or Companies House.
The noble Lord, Lord Joffe, spoke in some detail about the particular company, the Pru. Since we are debating a Bill, I do not think that I should discuss the rights and wrongs of anything done by a specific company. However, perhaps I may say a word about where the Pru has got to in its proposals. I understand that it is proposing to make an attribution of the orphan estate from which the Pru would be able to make compensation claims. The appropriate share would go to policyholders.
As regards further distributions, the fact is that the Pru is not yet at the consultation stage. It would first need to obtain the approval of the regulator for the overall plan. There is not much point consulting if the FSA will reject the plan after consultation. I do not know whether that helps the noble Lord, Lord Joffe, but I took seriously his point about negotiations taking place for four years with nothing being said to with-profits policyholders.
The issue of pensions mis-selling goes wider than the Pru and the Government sought to address it soon after coming to office. Your Lordships will recall Mrs Liddell, when she held the post, severely calling insurance companies to account for pensions mis-selling and she demanded rectification.
There is a relationship between pensions mis-selling and orphan estates, but the position varies between firms. The matter must be considered on a case-by-case basis. However, as the matter has been raised I want to trail arrangements which will come later in today's proceedings. Perhaps I may address my comments in particular to my noble friend Lady Turner who expressed concern about the matter.
Amendments Nos. 212 and 222 provide a framework for reviews of past business if something along the lines of pensions mis-selling were to happen again. That is for a later debate, but having regard to the prominence given to the issue by the noble Lord, Lord Joffe, that may be helpful.
The subject of the amendment, while it also relates to the question of with-profits life insurance policies, is different from the issue debated in Committee. It seeks to ensure that the interests of the policyholders may be properly represented on the board of the company concerned.
It is not true to say that the board considers only the interests of the shareholders and that no one is available to represent the interests of policyholders. The regulator will for the most part be there to ensure that he represents the interests of the proverbial man on the Clapham omnibus and to ensure that he is properly taken into account by the company.
The amendment raises some technical difficulties because in our view it would confer a power on the authority which would not be appropriate. It goes way beyond matters of regulation and is more a matter of corporate governance.
I accept that Part V of the Bill gives the FSA certain powers in relation to the membership of the boards of authorised firms, which will allow the FSA to intervene in specific cases in order to protect the interests of policyholders: for example, to prevent a person who is unfit to be a director of an authorised firm from holding such a position; or to ensure that the board has an appropriate balance of expertise and experience and of executive and non-executive members. But there is a world of difference between an intervention power of that kind and a statutory prescription that a particular category of stakeholder should always be represented on the board.
Therefore, that is not a power which I would wish to see conferred on the FSA; nor do I believe that it is truly a financial regulatory issue. Therefore, it would be outside the scope of the Bill. Against that, I accept that the arrangements are not entirely without precedent. The Pensions Act 1995 makes arrangements allowing pensioners to be trustees of a pension fund. But in that case the assets are held in trust for pensioners, so the case for pensioner directors is stronger.
Therefore, I would not rule out the possibility of a provision on the statute book that would have the effect of requiring policyholder representation on the board of a company whose business included with-profits long-term insurance. However, it seems to me that that is a question best considered in the wider context of the company law review and not financial regulation.
On the basis that the issue will be considered in the context of the company law review currently being carried out by the Department of Trade and Industry, I regret that I invite the noble Lord, Lord Joffe, to withdraw his amendment.
My Lords, I am grateful to the Minister for his careful consideration of the amendment. As regards the distinction between mutual and with-profits companies, I fear that the mutuals are fast disappearing and that choice will soon be very limited. But that is not the main thrust of my case.
I am encouraged by the Minister's comments on the company law review and his clear acceptance that there is some merit in the points raised, in particular transparency from the point of view of policyholders. Having regard to that and the urgent need to get the Bill on the statute book in as short a time as possible, I beg leave to withdraw the amendment.
moved Amendment No. 152:
Page 68, line 24, leave out ("subsection (4) applies") and insert ("subsections (3) and (4) apply").
My Lords, Amendment No. 152 makes a minor yet necessary consequential change to Clause 140. As the House will recall, subsection (3) was inserted in Committee to enable the authority to exercise its powers under Part IV (permission to carry on regulated activities) or Clause 65 (disciplinary powers with regard to approved persons) at the request of the take-over panel. That will specifically enable the panel to invoke the authority's disciplinary powers with regard to approved persons in addition to its powers referred to in subsection (4); namely, Parts XIII, XIV and XXV. This further amendment is consequential on the introduction of subsection (3) and I commend it to the House. I beg to move.
My Lords, the clause refers to the power of the authority to endorse rules made by the take-overs and mergers panel. The amendment is to subsection (6) and makes clear that subsection (3) applies to the rules, as amended from time to time by the panel, as well as subsection (4). Both allow the authority to take enforcement action at the request of the panel and we are happy with the amendment.
moved Amendment No. 153:
Page 69, line 33, leave out from ("communication") to end of line 34 and insert ("by them, or their approval of the communication by others, of invitations or inducements--
(a) to engage in investment activity; or
(b) to participate in a collective investment scheme.").
My Lords, in moving Amendment No. 153, I shall speak also to Amendments Nos. 154, 155 and 167. Clause 142 confers the power on the authority to make rules applying to authorised persons in relation to the regulation of financial promotions under Clauses 19(1) and 234(1). Clause 263, to which Amendment No. 167 applies, empowers the authority to suspend the promotion of an EEA scheme to the public where it appears that the operator has contravened the authority's financial promotion rules.
Amendments Nos. 153, 154 and 155 are technical amendments to Clause 142 restricting the application of the rule-making power set out in this clause. Amendment No. 153 to subsection (1) and Amendment No. 154 to subsection (2) are drafting changes which pave the way for the substantive Amendment No. 155.
Amendment No. 155 inserts a new subsection after subsection (2), ensuring that the authority may only regulate communications made by authorised persons which, if they were made by unauthorised persons without the approval of an authorised person, would contravene Clause 19(1), and communications which may be made by authorised persons without convening Clause 234(1).
The effect of this is that an authorised person will not be subject to rules made under the clause when he makes a communication which falls outside the scope of the controls applying to unauthorised persons imposed by Clauses 19 and 234. The Government are also proposing that a technical amendment--Amendment No. 167--be made to Clause 263(1) in order to delete the express reference to invitations and inducements,
"of a kind mentioned in Section 234(1)", in that subsection. Given that authorised persons cannot make the kind of invitations or inducements referred to, the deleted words are unnecessary and have therefore been removed. I commend all the amendments to the House. I beg to move.
My Lords, our understanding is that Amendments Nos. 153 to 155, which affect Clause 142, relate to the authority's power to impose financial promotion rules on FISMA-authorised firms and are technical only. Therefore, they are quite acceptable.
So far as concerns Amendment No. 167, as the Minister explained, Clause 263 relates to the power of the authority to give a direction under that clause. Even though the fund is recognised, and so for marketing purposes is treated as an authorised unit trust and therefore outside the marketing restrictions in Clause 234(1), that power enables the authority to require that the restrictions none the less apply. The authority can do that only if the operator of the recognised scheme--typically the manager of a non-UK open-ended investment company--has failed to comply with the FSA's financial promotion rules.
We have only one query relating to this issue. The amendment seems to provide that the invitation or inducement covers the redemption of shares as well as their promotion. The Government may like to consider that point before Third Reading.
moved Amendments Nos. 154 and 155:
Page 69, line 37, leave out paragraph (b).
Page 69, line 38, at end insert--
("( ) Subsection (1) applies only to communications which--
(a) if made by a person other than an authorised person, without the approval of an authorised person, would contravene section 19(1);
(b) may be made by an authorised person without contravening section 234(1).
( ) "Engage in investment activity" has the same meaning as in section 19.").
On Question, amendments agreed to.
moved Amendment No. 156:
After Clause 143, insert the following new clause--
(".--(1) The Authority may make rules ("control of information rules") requiring an authorised person ("A") to withhold information from a person ("B") for or with whom he does business in the course of carrying on any regulated or other activity.
(2) Control of information rules may--
(a) require the withholding of information which A would otherwise have a legal obligation to disclose to B;
(b) require A to restrict or prevent the passing of information within his business.
(3) Subsection (1) applies only in relation to information obtained from a person other than B in the course of the carrying on by A of any activity, whether it was obtained by A, by an approved person or by any other person.
(4) "Approved person" has the same meaning as in section 63.").
My Lords, in moving Amendment No. 156, I shall speak also to government Amendments Nos. 157 and 218. I shall respond to anything that is said about opposition Amendment No. 157VA in due course when the amendment has been spoken to.
Amendment No. 156 inserts a new clause after Clause 143 giving the FSA the power to make rules which require an authorised firm to operate Chinese walls restricting or preventing the flow of information within a firm and dealing with the disclosure of certain information. These are called the "Chinese walls rules", which is not the easiest thing to say!
Chinese walls are simply established arrangements in the form of procedures, systems, management and physical location which act as barriers within a firm to ensure that information which is generated within one part of the firm or obtained from a client in one part of the firm does not penetrate another part of the firm. They are important for a number of reasons. They provide a mechanism for authorised firms to function as multi-disciplinary operations. Of course, a major point of the Bill is that it responds to the fact that much financial service activity is now multi-disciplinary.
"Chinese walls are widely used in organisations which provide financial services ... they are essential if the industry is to operate in its present form with multi-functional investment houses performing a wide range of services".
Those rules will continue to protect the interests of the clients of such a firm by ensuring that information which relates to a particular person in relation to a particular activity does not reach another part of the firm. They also protect the firms themselves, establishing a firm regulatory framework within which the firm must control the flows of information, both internally and externally.
The other two amendments in the group are consequential changes. Amendment No. 157 allows the authority to modify or waive control of information rules provided that the procedure set out in Clause 144 is followed; that is, rules made under the proposed new clause are treated in the same way as other rules referred to in Clause 144(1). Amendment No. 218 simply provides a definition in Clause 407 of control of information rules.
I should add that, in response to concerns raised by the City Liaison Group, the Government are currently reviewing whether adjustments to this clause would be desirable. We aim to report back on this issue at Third Reading if, indeed, it is considered that they would be desirable. I beg to move.
My Lords, I may take a little while both in responding to the government amendment and in speaking to my own, for which I apologise in advance.
Amendment No. 156 is headed "Control of information" but, as the Minister said, should really be headed "Chinese walls". Chinese walls are of great help to investment firms because, on the one hand they give the advantages of being in a single corporate entity but, on the other, allow the separate parts of that entity to be treated as different in law. As your Lordships are well aware, the purpose of that is to ensure that knowledge in one part of the firm, behind the Chinese wall, should not infect the other part of the firm in front of the Chinese wall.
That is crucial; because the walls protect the firm from having to use information that it receives confidentially from one client for the benefit of another. They help firms to deal with conflicts of interest and the strict application of fiduciary duties by which all advisers, brokers and investment managers are bound. They also protect the firm against charges of insider dealing and, I trust, market abuse. In addition, they protect the firm from contravening FSA rules which apply when it knowingly does something if the individuals that know are behind the Chinese wall and what is done is done by people in front of the Chinese wall without any cross-contamination.
As I understand it, the Chinese wall is acceptable to regulators and included in the authority's core conduct of business rules. Yet the government amendment does not provide for it at all. The amendment merely empowers the authority to make rules which require any authorised person to withhold information. That would impose an intolerable burden on small firms where there is no effective Chinese wall because none can be constructed; staff will have to segregate information in their minds and not mention it to employees who work alongside them.
So far as I am aware, the authority does not have any such rule at the moment; nor, indeed, do the SROs. Indeed, I cannot believe that the authority would want to introduce such a rule. The current provision for Chinese walls is in Section 48(2)(h) of the Financial Services Act, which empowers the authority to make rules which either enable or require information to be withheld. At the very least, Amendment No. 156 should cover both aspects.
The role of Chinese walls has, of course, changed quite a lot since the Financial Services Act was passed in 1986. In particular, the authority's rules must now cover the right not to use information held by a firm. As a matter of agency law, any information which a firm has about one client, at least arguably, is required to be used also for the benefit of all other clients. In other words, there is a requirement to abuse the inside information. I give just one example. If a firm is about to launch a bid on behalf of one client, it knows that the shares in the target company will go up in value. Therefore, it is required by agency law to buy shares in the target company for all its other clients. Clearly, that is an intolerable situation. Moreover, it is classifiable as illegal insider dealing.
The amendment must be expanded to cover permitting or requiring not only the withholding of controlled information but also the use of that information. The rules must provide that a firm is not required to use information held on the other side of the Chinese wall. That reflects the existing practice of investment banks and stockholders, and probably everyone else as well. Normally there are provisions in the client agreement which allow that to happen. However, it would be extremely helpful and perhaps--I go further--essential that the authority's rules should also allow the non-use of information held behind the Chinese wall.
Our Amendment No. 157VA seeks to solve these problems. This new clause is concerned with the position of authorised persons who comply with control of information rules as defined in government Amendment No. 156 but who also owe their customers fiduciary duties to make disclosure of information in the possession of the authorised person. Control of information rules recognise the concept of Chinese walls which are, as we have already noted, a common feature of the financial services business.
For present purposes, the starting point is April 1992 when the Law Commission produced a long and detailed consultation paper on the topic of fiduciary duties and regulatory rules. The paper considered the impact on fiduciary duties of compliance with regulatory rules, particularly in the context of the regulatory regime established under the Financial Services Act 1986.
One of the matters considered was whether compliance with regulatory rules, which permitted the establishment of Chinese walls, ousted the usual fiduciary duties of disclosure and avoidance of conflicts of interest which would normally have applied.
The Law Commission's consultation paper was followed in December 1995 with its report on the consultation. The Law Commission concluded on the issue of Chinese walls at paragraph 16.6 that:
"We believe that it is essential to remove any doubts, however tenuous, about the legal efficacy of the practice of withholding information by means of a Chinese wall which complies with the regulatory requirements as a method of managing conflicts of interest and duty. The Chinese wall is an essential device for the operation of the modern financial conglomerate; and the determination of its effectiveness should not be left to the uncertainties of litigation".
The Law Commission's recommendation for resolving the doubt was that:
"There should be legislative provision that a firm shall be protected from liability where (i) information is withheld from a customer (or is not available for the customer's use) pursuant to a Chinese wall arrangement which complies with the regulatory requirements; or (ii) a firm places itself in a position where its own interest on one side of a Chinese wall which fulfils regulatory requirements conflicts with a duty owed to the customer of a department on the other side of the Chinese wall, and as a result of the Chinese wall neither department knows of the firm's conflicting interest or (iii) a firm owes conflicting duties to the customers of different departments on different sides of a Chinese wall which fulfils regulatory requirements, and as a result of the Chinese wall neither department is aware of the conflict".
The Law Commission also recommended that what constitutes a Chinese wall for the purposes of the legislative provision should be laid down by the authority pursuant to delegated powers under Section 42H of the Financial Services Act 1986. That is effectively the same as the power of the authority to make control of information rules under the new clause introduced by the Government's Amendment No. 156.
The Law Commission made a number of other recommendations concerning Chinese walls and included in its report a draft clause which it was intended should be incorporated in the Financial Services Act which met the requirements of its legislative approach to dealing with the matter. In July 1998, when the Treasury issued the draft of the Financial Services and Markets Bill for consultation, the Treasury's overview of financial services regulatory reform, it stated at paragraph 5.11:
"We intend that the Bill as introduced into Parliament will ensure that compliance with the FSA rules relating to Chinese walls which manage or avoid conflicts of interest and help prevent insider dealing will protect a firm not only against criminal liability but also against civil action for breach of duty. This will mean that firms are not put at risk of legal challenge where they comply with these important regulatory requirements".
So clearly, in July 1998, the Treasury thought that a provision in the Bill to deal with Chinese walls was necessary. Although the Government at this late stage have tabled an amendment providing for control of information rules it is, if I may say so, of considerable surprise that, given the background to the matter, the Government do not propose to implement the Law Commission's recommendation by including in the Bill an appropriate provision. That is despite the firm statement of intention to do so in the Treasury's consultation document on the draft Bill.
Our Amendment No. 157VA is a redraft of the Law Commission's draft clause set out in its report, amended to take into account the differences between the provisions of the Financial Services Act 1986 and the provisions of the Bill. It may not be perfect in every way but we should like to know why it is that the Government do not propose to table an amendment of their own to reflect the Law Commission's proposal. Has something happened to change the Treasury's thinking on the matter? Do they think the Law Commission is wrong and, if so, why is the Law Commission wrong? A huge amount of work has been done by the Law Commission on this issue and a long consultation process has occurred. In our judgment, it would be most unfortunate if this opportunity for dealing with the issue, one way or another, was not taken.
Finally, I turn to a question of drafting in relation to the Government's amendment. It provides that its provisions should apply only in relation to information obtained from a person other than the client. However, corporate finance advisers and private equity firms would dream up their own ideas about prospective deals and would work on them accordingly. That information would not be obtained from anyone else and, therefore, the Chinese wall provisions will not apply. The amendment deals with information about clients but not information about deals. Those are my submissions.
My Lords, it is clear from what the noble Lord, Lord Kingsland, said that we are both trying to do the same thing but we are trying to do it in rather different ways. We are both trying to ensure that there is proper protection for an enforcement of Chinese walls and I was perhaps unwise enough to call the Law Commission report of 1995 into aid in the context of saying how important Chinese walls are. That shows that we agree about that at any rate.
So the noble Lord is now saying that our amendments are unsatisfactory; that they do not make comparable provision with Section 48(2)(h) of the Financial Services Act 1986 and he is asking me what has changed since the Law Commission produced its report in 1995 and since we indicated at the beginning of the consultation process on this Bill that we wished to introduce amendments to give effect to that.
I concentrate on the noble Lord's amendment because it makes the position clear as to why and how things have indeed changed.
Amendment No 157VA proposes that a person who is subject to control of information rules incurs no liability to a person for or with whom he does business in the course of carrying out any regulated activity in the circumstances set out in subsection (1) of the proposed new clause. We do not believe that amendment is necessary because we do not think that a person who has acted in accordance with statutory rules which require him to act in a particular way will be liable to a civil suit.
The Law Commission produced a report in 1995 arguing that there should be an express defence in legislation for any civil liability incurred by an authorised person who has acted in conformity with FSA "Chinese walls" rules. We undertook to address that concern in the consultation document published with the draft Bill to which the noble Lord, Lord Kingsland, referred. On balance, however, the Government believe that express provision for a defence from civil action is not necessary.
Since the Law Commission reported, and, indeed, since the consultation document published with the draft Bill, there have been developments in case law which, although not directly dealing with financial services firms, did address the issue of civil liability and procedures for dealing with conflicts of interest. The most important case here is the 1999 case of Prince Jefri Bolkiah v KPMG.
In the light of the statements of the Judicial Committee of this House in this case, it is the Government's firm belief that the courts would be unlikely to hold that someone could successfully sue an authorised person for breach of fiduciary duties where the authorised person has complied with FSA rules, which, of course, are made under Parliament's delegated statutory powers.
The Law Commission and many in the City Liaison Group, which includes the representatives of several City law firms, tend to agree with us that an explicit defence is not necessary here. In addition, there is concern that express provision could cast doubt on the current position in relation to rules made under the Financial Services Act 1986. Such a defence could also have implications in relation to the effect of compliance in other areas with rules made by the FSA under its statutory powers. The new clause has been recast so that rules will require an authorised firm to do various things.
Where an authorised person has no choice other than to comply with statutory rules, he cannot be subject to civil liability for anything that he does in accordance with those rules. Therefore, we resist the Opposition amendment.
moved Amendment No. 157:
Page 70, line 3, at end insert--
("( ) control of information rules;").
On Question, amendment agreed to.
Clause 144 allows the authority in particular circumstances to direct that all or any of the rules set out in subsection (1) are not to apply to an authorised person or will apply to an authorised person with such modifications as the authority may direct.
That appears to be a useful provision which provides flexibility for the authority to modify or waive rules. However, subsection (4) reduces that flexibility considerably. In particular, the authority cannot use the power to waive or modify rules unless it is satisfied that compliance with the rules would be unduly burdensome or would not achieve the purposes for which the rules were made.
It seems to us that the circumstances in which the authority will be able to use its power to give directions under this clause will be rare. That is a shame. We were promised a flexible regulation, but being realistic, subsection (4) removes the benefit of flexibility that the clause could have provided. In Committee we tabled amendments with a view to increasing the authority's flexibility, but your Lordships will recall that our amendments were rejected.
The only amendment in this group that attempts to introduce a small element of increased flexibility is Amendment No. 157LA. That amends subsection (4)(a) by adding the words,
"or would be unlikely to".
Therefore, the authority could give a direction if it were satisfied that compliance with the relevant rules was unlikely to achieve the purposes for which the rules were made.
The other amendments concern the practical operation of the clause. We propose that, first, the authority should be obliged to determine applications under Clause 144 within 30 days; secondly, that the authority should be obliged when considering an application to take into account the nature of the authorised person's business and the person with whom the authorised person carries on or intends to carry on business; thirdly, that the FSA should be obliged to give an explanation of its decision if it decides not to give a direction; and fourthly, that the authority's power to revoke a direction already given should be subject to at least seven days, prior notice to the authorised person concerned unless the interests of consumers require otherwise.
Clause 153 is the important clause as it provides for the giving of guidance by the authority. Amendment No. 157WA deals with a relatively small but nevertheless important point. Under Clause 153(4)(c) the authority may make a charge for the giving of guidance irrespective of who requested the guidance.
We believe that for authorised persons and approved persons who are liable to be disciplined and who are liable to incur penalties if they breach the rules, it is wrong in principle that they should be charged for guidance on the rules. Such persons should be entitled to an explanation without charge.
Amendment No. 157XA would amend Clause 153 by providing that compliance by an authorised person of the FSA's guidance would not be treated as contravening the rules to which the guidance relates. If an authorised person, for example, seeks and obtains from the authority guidance on a particular rule, and acts in compliance with that guidance, he should not be treated as contravening the rule to which the guidance relates.
The Economic Secretary to the Treasury, the honourable Ms Melanie Johnson, in Committee in another place, said that she would be surprised if, in those circumstances, the authority itself would take disciplinary action against the authorised person if it proved to be the case that the authority's guidance was defective in some way or other. It would certainly be reasonable to expect that. However, our concern relates to Clause 146 under which a private person could still take action against the authorised person in the circumstances that I have described. That does not seem to us to be reasonable or to represent good regulation.
If authorised persons act in compliance with guidance, issued by the authority, they must be confident that they will not find themselves subject to actions for damages to private persons. The action for damages available to a private person under Clause 146 is subject to the defences and other incidents applying to actions for breach of statutory duty. Perhaps the Minister can tell the House whether an authorised person who, in good faith, acts in accordance with the authority's guidance would have such a defence. If such a defence is available, there can be no objection to the amount. If such a defence is not available, that confirms the need for the amendment. I beg to move.
My Lords, the first five of these amendments relate to Clause 144. I do not believe it was clear from listening to the noble Lord, Lord Kingsland, that Clause 144 is concerned with the power of the authority to waive or modify certain kinds of rules as set out in subsection (1). In other words, this is a clause that brings flexibility and realism to what may otherwise be a more rigid and threatening regime. All the amendments to Clause 144 ought to be seen in that light.
We are not happy with the amendments to Clause 144. On Amendment No. 157KA, the authority may not give a direction under Clause 144 unless it is satisfied that the various factors under subsection (4) have been met as well as the publication criteria under subsection (7).
Meeting all these requirements may involve the authority in a lengthy investigation, especially where the authorised person provides a wide range of financial services. Of course the authority will want to consider each application carefully in order to ensure that it reaches the right decision. For that reason, it cannot be sensible to bind the authority to determine all applications received under Clause 144 within the time-scale proposed in the amendment.
However, the authority has already stated in its September 1999 policy statement, The FSA's approach to giving guidance and waivers to firms, that it will develop,
"response standards to underpin the efficient operation of the waiver mechanism under the new legislation".
I hope that that will satisfy the noble Lord, Lord Kingsland.
Amendment No. 157LA, to which I believe the noble Lord, Lord Kingsland, attaches more importance, proposes to amend subsection (4)(a) so that the authority may not give a direction unless it is satisfied that compliance by the authorised person with the rules, or with the rules as unmodified, would be unduly burdensome or would not achieve, or would be unlikely to achieve, the purpose for which the rules were made. The "unlikely" element is introduced by the amendment.
We are certainly not keen on this amendment. If all that the authorised person has to do is to demonstrate that compliance with the rule would be unlikely to achieve the purpose for which the rule was made, there is a distinct risk that the authority may issue a waiver or modification where it later turns out that compliance with the rule did in fact achieve the purpose for which the rule was made. At the same time, it is unclear how "unlikely" would work. Who is to judge whether a rule would be unlikely to achieve the purpose for which it was made? Should it be the authority, the applicant, or is it to be judged objectively on the basis of what a reasonable man may think? If that is the case, it is not at all clear from the way in which the amendment has been drafted. I am sorry, but the amendment is defective.
Amendment No. 157MA will oblige the authority to take certain specified matters into account--among other things, an authorised person's clients and business--when it considers whether to issue a waiver or modify a rule. I said in Committee that, while the onus is on the applicant to show that the criteria set out in subsection (4) are met, the authority has already indicated in its policy statement, to which I have already referred, that,
"it will apply its general requirements in a way that allows them to be tailored to fit the circumstances of particular firms in accordance with its commitment to a flexible and differentiated risk-based approach".
That is in line with the statutory objectives set out in Part I of the Bill, specifically in Clause 5, under which the authority must have regard to the differing degrees of experience and expertise that different consumers may have in relation to different kinds of regulated activity.
Amendment No. 157NA proposes to impose a requirement on the authority to give reasons in writing to an applicant whose application for a waiver or modification has been rejected. We believe that this would involve excessive bureaucracy. Imposing an absolute obligation of this nature on the authority is counter-productive and may distract the authority from meeting its regulatory objectives.
The same is true of Amendment No. 157PA. The range of circumstances in which revocations may be required will be very different. We would expect that where it can, the authority would give notice of such a revocation in order to allow the firm to arrange its affairs accordingly. As with the amendment to which I have just spoken, we do not want an extra layer of bureaucratic controls that always require the authority to give reasons.
Of course there will be cases where it will be in the interests of consumers that fast action is taken. I see that that has been recognised in new subsection (9B). However, I do not see that we need to legislate about any of this since we shall be simply stating what we would expect to happen in practice anyway. I am afraid that we are not sympathetic to any of the amendments to Clause 144.
Perhaps I may turn to Amendment No. 157XA. That would have the effect, in Clause 153, that where an authorised person acts in compliance with guidance issued by the authority, he shall not be treated as contravening a rule to which such guidance relates,
"or as thereby contravening rules".
As a claim for breach of statutory duty cannot be brought by a third party unless a rule has been contravened, this will in fact disapply Clause 146 which is concerned with action for damages in cases where guidance has been issued by the authority and relied on by an authorised person.
As regards proceedings brought under the Bill, as long as a person has acted in compliance with current written guidance in circumstances contemplated by the guidance, the authority will not take regulatory action against him. That is confirmed by the FSA in its policy statement, The FSA's approach to giving guidance and waivers to firms. Similarly, with regard to the Bill's criminal sanctions, reliance on FSA guidance will serve as a ground for the due diligence defences under Clauses 22 and 23.
However, the Government maintain their belief that reliance on FSA guidance should not be able to block an action for damages for breach of statutory duty, even where the guidance has been published and/or takes the form of general guidance. We must preserve the principle that third parties, in particular private consumers, should not be deprived of the opportunity for redress where they suffer loss at the hands of an authorised person as a result of that person's contravention of the rule. A consumer's potential for loss, we believe, remains unaffected by the publication of the guidance, especially where guidance merely provides an interpretation of the rule, rather than an interpretation of the conduct in relation to the rule.
The Government believe that guidance should continue to have an informal status which reflects what the word "guidance" means. Rendering guidance enforceable will have the effect of giving it the status of rules. The customer of the authorised person would have been deprived of his right of action even though a particular rule had in fact been broken. From that customer's point of view, it looks as though the guidance is given more weight than the law contained in the rule. Going down this track would have important adverse consequences for authorised persons. It would be possible to change the effect of the rule without going through the necessary consultation procedures. Furthermore, it may be that the authority, conscious of the enhanced formal status of guidance which would be conferred by this amendment, may be less inclined to issue guidance. This could impact heavily on authorised persons who may wish to rely on guidance in the authority's proceedings.
However, that is not to say that guidance is not important. A court, in adjudicating a claim for breach of statutory duty, will have regard to the defendant's reliance on general, published FSA guidance--although this will depend heavily on the circumstances of the case--in assessing liability or quantum of damages. It is highly relevant. I hope that that provides the noble Lord, Lord Kingsland, with some comfort and that he will not press the amendment. Perhaps I may also say that we have written to the City Liaison Group about this point.
Amendment No. 157WA proposes a new subsection to follow subsection (4)(c) in Clause 153 which empowers the authority to make a reasonable charge for guidance where that guidance has been given in response to a request made by any person. The amendment provides that subsection (4)(c) does not apply if the request is made by or on behalf of an authorised person or an approved person within the meaning of Clause 63(13).
Frankly, I do not understand this amendment. The subject of fees was raised in Committee in another place where the Opposition proposed the deletion of subsection (4)(c). As the Economic Secretary said at the time, it is clear from the authority's published policy statement, to which I have referred, that,
"individual guidance will continue to be given on a relatively informal basis and without charge".
I hope that this will persuade noble Lords that the amendment should not be pursued.
I regret that I must be so negative about these amendments, but I am afraid that we shall not be able to accept any of them.
My Lords, I found the experience of listening to the words of the Minister on these amendments extremely distressing. I shall look very carefully at the response of the noble Lord to the amendments that we tabled to Clause 144 in the hope that I might glean something positive from what he said.
As far as Clause 153 is concerned, in particular Amendment No. 157XA, it was plain that the Minister's reaction was totally intransigent. This is a matter to which we are certain to return at Third Reading. At that point we shall seriously consider testing the opinion of the House.
The Minister is well aware that, in continuing to ensure that the City remains a creative part of the economy, it is absolutely crucial that the balance between sensible regulation, on the one hand, and a sufficient margin for enterprise on the other, is kept. In our view, the opinions that the Minister has expressed on guidance in relation to providing a safe harbour upset that balance. In those circumstances, it is a matter to which we shall return. In the mean time, I beg leave to withdraw the amendment.
My Lords, in moving Amendment No. 157QA, I shall speak also to Amendments Nos. 172A, 173A, 174A, and 175A to 175C.
Amendment No. 157QA is a small amendment to Clause 147 and seeks to remove the words, "made by the Authority", which feature after the word "rule". The reason is simple. The word "rule" is defined by Clause 407(1) as,
"a rule made by the Authority under this Act".
Therefore, it would seem that the words, "made by the Authority" in Clause 147(1) are--dare I say it?--otiose.
Amendment No. 173A to Clause 322, seeks to insert the words,
"or retain with the consent of", after the word "to" at page 171, line 37. As your Lordships are well aware, Part XX of the Bill deals with the provision of financial services by members of the profession. Clause 322 sets out the conditions which must be satisfied by a member of a profession if he is to avoid the general prohibition against carrying on regulated activities when not authorised to do so. If that exemption is to have some use, it must be possible to satisfy the conditions.
Our concern relates to Clause 322(3) and the requirement 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".
"any pecuniary reward or other advantage", are very widely drawn and would cover virtually any benefit; for example, they could cover the payment of a person's bill by a third party. How will all that work in the context of partnerships, particularly large ones which carry on a wide range of services?
Amendment No. 173A is a small attempt to assist firms to be able to satisfy the condition in Clause 322(3) by providing that the condition can be satisfied if the client consents to the retention by the relevant person of the pecuniary reward or advantage.
Amendment No. 172A is a government amendment relating to the exemption in Part XX for members of regulated professions who are carrying on regulated activities which are incidental to the carrying on of professional services. The amendment, as we understand it, limits the exempt or regulated activities to activities exempted by Part XX, which is welcome.
Amendment No. 175A seeks to amend Clause 322. Here the Part XX exemption applies only if the regulated activities carried on by the professional are all exempted by Part XX. The amendment recognises that the professional may be an exempt person for other reasons--typically where he is an appointed representative--and allows the Part XX exemption to apply even where he carries on regulated activities outside Part XX, if he carries them on as an exempt person. That amendment is also welcome. Amendment No. 175B seeks to amend Clause 327. It is consequential on Amendment No. 175A and is also completely acceptable.
I am pleasantly surprised to observe that Amendment No. 175C was tabled by us. In Committee, the Minister may recollect that I raised the question of whether the Treasury would be required to make it clear, in its regulated activities order, that merely advising on the legal implications of an investment transaction--typically an agreement for the acquisition of shares--and arranging for the documentation to be entered into, including negotiating its terms, should not be treated as investment advice or arranging deals for the purposes of authorisation. Amendment No. 175C provides for that exemption and, I readily admit, is in the nature of a probing amendment, enabling me to make this point again as the Minister will be only too well aware that there was no response from the Government in Committee.
The need for this exemption applies to all corporate financial legal advisers, but is particularly important in the case of non-UK law firms. Most of such firms, and in particular American, Australian and Canadian firms, and firms from continental Europe, establish their London offices to advise on corporate finance transactions, rights issues, placings and bond issues. None of those firms can take shelter under the Part XX exemption because they are not subject to regulation by the Law Society. That is why it is so important to make it clear that, as I believe is the law anyway, those activities which relate to the transaction in which an investment is bought or sold rather than to the investment itself, are not regulated activities.
It should be clear that activities which relate to investments, but are certainly not investment activities requiring authorisation under the Bill, do not need to be restricted in the way required by Part XX or to be subject to regulation by the Law Society and indirect oversight by the authority. I beg to move.
My Lords, let me start with Amendment No. 157QA, which seeks to ensure that a person will not be guilty of an offence by reason of a contravention of a rule, regardless of which body authorised the rule. In particular, the intention is to ensure that a professional firm which seeks to benefit from the regime under Part XX of the Bill does not commit an offence if it carries on or holds itself out as carrying on an activity other than one which it may carry on under rules made as a result of Clause 327(3).
Any provision which had the effect intended would undermine an important effect of Clause 322(5). This subsection provides that a professional firm, seeking to benefit from the Part XX exemption, will need to ensure that it does not carry on, or hold itself out as carrying on, a regulated activity other than one which rules made as a result of Clause 327(3) allow it to carry on.
The noble Lord, Lord Kingsland, made the point about US law firms. I have the relevant copy of Hansard in front of me. I believe I answered the point then, but I shall certainly attempt to answer it now. Part XX exemption is available to members of designated professional bodies only. As it is not a legal requirement that US law firms--I suppose that that is true of Australian and Canadian firms, although I am not familiar with that issue--should register with the Law Society of England and Wales in order to provide professional services in the United Kingdom, it is unlikely that US law firms will be members of a designated professional body and so they will be unable to benefit from Part XX exemption. Therefore, if they wish to conduct a regulated activity which is excluded under the Regulated Activities Order, they will need to be authorised by the FSA.
As regards investment business, which is what I believe the noble Lord, Lord Kingsland, was speaking about, there is no current intention that the position under the Regulated Activities Order should be any different from the position under the Financial Services Act. It is difficult to see why US law firms should require authorisation under the Bill if they do not require it now under the Financial Services Act. If there are concerns on that score they can be considered in the context of our proposals for the Regulated Activities Order. I suggest that they do not need to be covered on the face of the Bill.
I return Amendment No. 157QA. I said on 18th April at Report stage that, where a breach of Clause 322(5) prohibition occurs, it is important that the offending firm be subject to the authorisation offences set out in Clause 21. That also applies to "holding out". We cannot risk professional firms giving the impression that they are free to operate outside the regime for which Part XX of the Bill makes provision. The Opposition's amendment is clearly intended to counter these effects.
It is important to recognise that professional firms are being treated no differently from other firms which conduct regulated activities, but which are not authorised by the FSA. I hope that the noble Lord will not pursue that amendment.
I turn now to government Amendments Nos. 172A, 174A, 175A and 175B. I was grateful for the support for Amendments Nos. 175A and 175B. These are four amendments to Part XX of the Bill to allow professionals who are carrying out exempt regulated activities also to be exempt persons under the Bill. These are raised in response to concerns recently expressed by the Institute of Chartered Accountants. It is a new issue which has been brought to our attention; namely, that a professional firm carrying out exempt regulated activities under Part XX will be prevented from taking advantage as an exempt person of the exemption set out in Clause 37. We have concluded that Part XX should not have the effect, in keeping with our overall approach throughout the Bill, to provide for a proportionate regulatory regime while maintaining a suitable degree of consumer protection. So we are amending Clause 322 so that a professional firm carrying out exempt regulated activities under Part XX of the Bill will not be held to be in breach of the prohibition. We propose to amend Clause 322(7) so that where a professional firm carries on exempt regulated activities under Part XX, it may also carry on activities as an exempt person at the same time.
We are also amending Clause 327 so that the professional body rule-making requirement does not extend to regulated activities conducted by professional firms as exempt persons under the Bill. As the noble Lord, Lord Kingsland, recognised, the final amendment is a technical one to the definition of "exempt regulated activities".
I turn now to the opposition Amendments Nos. 173A and 175C. The protection of consumers requires specific criteria to be met. One of these is that professional firms should not receive any benefit as a result of carrying on a regulated activity other than from clients. That is in line with a professional's general obligation to act in the best interests of his client. A professional, in considering what should be the source of any third party advice to his client, should refer solely to what his client needs.
Amendment No. 173A would allow professional firms to benefit from a commission-sharing arrangement with an independent financial adviser, when the client consents. I am sure that professional firms will always want to be seen acting in their client's best interests. However, this amendment will raise doubts about whether a client is being best served where, for example, he is steered towards an independent financial adviser who has a commission-sharing arrangement with the professional concerned rather than with one who does not. I do not believe that that is desirable.
Amendment No. 175C raises an important issue; namely, what should be the status of professionals under the new regime when providing advice on, or negotiating the terms of, an investment agreement on behalf of their clients. The noble Lord, Lord Kingsland, raised this matter at Committee stage. There is a debate on which investments and activities should be regulated. That relates to Clause 20 of the Bill and, more specifically, the Regulated Activities Order.
I hope that the House will be reassured by the fact that the draft order, which we circulated in February last year, proposes a number of exemptions which will benefit professionals as well other financial services providers. There will be a chance to debate the draft Regulated Activities Order as it is subject to the affirmative resolution. We shall clarify in due course whether the activities covered by the amendment fall within any or all of these exclusions. In the meantime I hope that it will be recognised that providing an exemption that benefits professionals solely as regards specific regulated activities will put professional firms at a competitive advantage over other financial services providers and could impact heavily on consumers. We cannot support that amendment either.
My Lords, this clause concerns the consultation procedure which the authority must follow when proposing to make rules. One of the requirements is the preparation of a cost benefit analysis, which must accompany the draft of the rules when it is published for consultation.
The first of our amendments, Amendment No. 157RA, would require the cost benefit analysis to include an explanation of the methodology employed in carrying it out. I assume that there cannot be any objection to giving an explanation. There will be a methodology and it would be simple enough to set that out. It would be helpful to those considering the draft rules to know what methodology was employed and therefore what factors the authority has taken into account in determining the costs and benefits of the draft rules.
We believe that one particular benefit that the authority should consider is the increase in business activity, if any, which is expected to arise if the proposed rules are made. Rules tend to restrict the way in which a person can behave. No doubt regulators see their function in terms of controlling the behaviour of those whom they regulate. In our view it would be unfortunate if the natural tendency of regulators to control, and therefore to restrict behaviour, was not counterbalanced by a requirement at least to consider the impact of their rules and regulations on business activity.
We, on this side of the House, believe that good regulation should enhance business activity. The purpose of Amendment No. 157TA is to require, as part of the cost benefit analysis to be carried out by the authority, an analysis of any increase in business activity which is expected to arise if the proposed rules are made. We have used the words "any increase" as we recognise that there may be no increase in business activity. But the provision would require the authority to apply its mind to the issue.
Amendment No. 157SA concerns Clause 151(7), which excludes the obligation on the authority to consult on proposed rules where the authority considers that the delay involved in carrying out the consultation would be prejudicial to the interests of consumers. In these circumstances, the amendment would require the authority to publish, first, a cost benefit analysis; secondly, an explanation of the purpose of the proposed rules; and, thirdly, an explanation of the authority's reasons for believing that making the proposed rules is compatible with its general duty under Clause 2, at the same time as, or as soon as practical, after the relevant rules are made. The fact that the authority can make rules without consultation in certain circumstances should not remove the authority's obligation to deal with these particular matters in relation to the rules in question.
Amendment No. 157UA to Clause 152 addresses a rather different issue. We are concerned that many of the authority's rules will escape the discipline of the cost benefit analysis requirement because they will not be made under Clause 151 and will be "grandfathered" under transitional provisions. When he replies, perhaps the Minister will be kind enough to clarify the position on the "grandfathering" of existing rules.
Our other area of concern is that rules that have been made through the consultation process, including a cost benefit analysis, may cease to be appropriate over time. There does not appear to us to be any mechanism in the Bill for the review of such rules. The Minister will recall that the Opposition tabled a provision in Committee which would have obliged the authority to review and consult on existing rules three years after they were made. We were told that that would impose too great a burden on the authority.
Our proposed amendment to Clause 152 is a much more modest proposal. It simply requires a cost benefit analysis to be carried out as soon as practicable after the third anniversary of the making of any rule. There would be no obligation to consult, but the regulated community would have the comfort of knowing that the rules which govern and regulate its activities would be scrutinised in the context of a cost benefit analysis on a regular basis. We believe that every three years is a more than reasonable period for these purposes. I beg to move.
My Lords, we have considerable sympathy with the principal purpose of this clause; namely, that the authority should publish rules in draft, seek comments on them and then explain its view on the comments received. I explained in Committee the difficulty that we have with cost benefit analysis in this context. Frankly, it is almost impossible for such an analysis to be rigorous or even, in most cases, of any value whatever. Therefore, I wish briefly to comment on three of the amendments before us.
Amendment No. 157RA is an extremely small amendment. I hesitate to say that it is almost certainly otiose, but I suspect that it is. Amendment No. 157TA seems to me to exemplify the problem with cost benefit analysis in these cases. If the amendment were carried, someone would be asked to speculate--it cannot be anything more than that--on any increase in business activity that is expected to arise if the proposed rules are made. The judgment of Solomon would be nothing compared to the task of the poor character who would have to speculate on the benefits that might accrue from the passing of a rule, the main purpose of which might be to prevent certain kinds of action rather than to promote them. So we do not support this amendment.
Therefore, a fortiori, we find Amendment No. 157UA--a watered-down variant of the amendment to which I spoke in Committee--equally unacceptable. It suggests that a procedure with which we have considerable difficulty should be repeated unnecessarily. In the circumstances, we cannot support this amendment.
My Lords, the phrase "cost benefit analysis" has crept into commercial jargon in recent years to a most unfortunate extent. It is quite meaningless, unless you have a clear definition of the costs and an equally clear definition of the benefits that are to be set against them. It has been thrown about so often to justify whatever the thrower wishes to justify that it has no reasonable translation into anything meaningful. It would be very regrettable if the phrase were left in the Bill without the addition of the amendment proposed, which would ensure that the methodology used in such calculations would be clearly shown. Without such an addition, it will be a meaningless symbol.
My Lords, I found the last two speeches from the noble Lords, Lord Newby and Lord Boardman, to be extremely refreshing. The phrase "cost benefit analysis" trips off the tongue. One hears it all the time. During the Second Reading the other day of the Utilities Bill, my noble friend made a point that I believe would be most relevant to this debate; namely, that it is easier to establish the cost side of the matter than it is to establish the benefit side. Anyone who has an anti-regulatory philosophy like the noble Lord, Lord Kingsland, is bound to want a cost benefit analysis every week or, if possible, every month.
It is very easy to establish the pound sign as regards the costs involved, but it is much more difficult to establish the nature of the benefits. When you set the two alongside each other, you often get set out very neatly on one side the sign that the accountants can understand--the pound sign and the costs--while on the other are the benefits such as greater competition, more choice and more understanding by the public of the information that they receive. The provision of that information has a cost, but it is very difficult to put a pound sign against it.
I felt that I should make those comments because the last two speeches highlighted the matter. I listened to several of the speeches made by the noble Lord, Lord Kingsland, this afternoon, so I am perhaps feeling slightly depressed because so few other voices have been heard. I was very glad to hear the last two noble Lords speaking as they did.
Indeed, my Lords, and that applies to my noble friend. I bear the scars of cost benefit analysis. I used to bank with the National Westminster Bank when I was in business. My branch manager, or my business centre manager as he became, used to demand proof for all the forecasts that I made. He told me that I must do it by way of cost benefit analysis. I promptly asked, "What do you mean?"--but I shall not go into the detail of his response. It was probably while the noble Lord, Lord Boardman, was chairman of the National Westminster Bank, or soon afterwards. I, too, am glad that the duologue between myself and the noble Lord, Lord Kingsland, has been broken. Thank goodness for that!
The amendments now before us would change Clause 151, which sets out the consultation procedures that the FSA must follow when making rules. This is an extensive consultation procedure, which we have strengthened during the course of the Bill's passage through Parliament. It is only right that we should do so because the FSA must consult widely among the regulated community when making rules. Perhaps I may explain why, in the Government's view, two of the amendments are unnecessary and why the others are inappropriate.
Amendment No. 157RA would require the FSA to publish an explanation of the methodology that it uses when it publishes a cost benefit analysis. There are already safeguards on this in the consultation process. The cost benefit analysis is published alongside the draft rule. The FSA must give notice that representations about the draft rule may be made to the FSA. Moreover, the FSA must have regard to these representations and must, in general terms, publish an account of them and its response.
Let us suppose that the FSA made a rule that specified only in vague terms that the benefits outweighed the costs. I cannot imagine that it would take long for it to receive representations that the costs and benefits had been insufficiently justified; in other words, the incentives are already there for the FSA to explain how it arrives at the costs and benefits of any rules, with all the qualifications that have been made about the difficulties of establishing benefits.
While still on cost benefit analysis, I should point out that the Government have said on a number of occasions that we do not believe it appropriate to specify on the face of the Bill the methodology used. I said in Committee--this will teach me to make jokes--that,
"those who conduct such analyses, such as the consultancy divisions of some major accountancy firms-- making sure that the noble Lord, Lord Sharman, was present--
"frequently change their methodologies because a good number of them do not work ... We do not believe that we should prescribe details of that kind in a Bill which must survive for a number of years to come".--[Official Report, 27/3/00; col. 566.]
Allowing for my levity, the principle remains the same. If we were to specify that any increase in business activity be included as one of the benefits from a proposed rule, we would freeze cost benefit analysis and we would not have the flexibility of adopting the right kind of cost benefit analysis for the right purpose.
I turn to Amendment No. 157UA which requires the FSA to carry out a cost benefit analysis of rules three years after they have been made. I notice that the noble Lord, Lord Kingsland, has not specified that the methodology should be included in this three yearly review. The noble Lord, Lord Kingsland, seems to think that our objection to this amendment, or to the comparable amendment in Committee, is that it would create too great a burden. That is not our objection. Our objection is that the amendment would require a blanket approach to review each and every rule every three years. That means an awful lot of unnecessary work. Not every rule will need reviewing, and of those that do, for some three years will be too long to wait for a review, for others it will not be long enough.
As I said to the noble Lord, Lord Saatchi, in considering a similar amendment in Committee,
"The potential to create bureaucracy is created precisely by this amendment. The amendment would place a huge strain on the authority and divert time and money away from its proper business--regulating--but it would also have knock-on effects on the regulated community and consumers. The regulated community would have to pay the costs of the review and consultation, and consumers would have to put up with the disruption involved".--[Official Report, 27/3/00; col. 566.]
That is exactly comparable to what would happen if we had a review after a statutory period rather than when it is necessary and, for example, when the consumer and practitioner panels decide that a review is necessary after they have performed their functions of considering the effectiveness of existing rules.
I turn finally to Amendment No. 157SA. This seeks to change subsection (7) of Clause 151. This subsection allows the FSA not to comply with the consultation procedures in Clause 151 when the delay involved in doing so would be prejudicial to the interests of consumers. This is a clever amendment because it does not dispute the need for the FSA to override procedures, but asks that it publish the information required for consultation--a cost benefit analysis, an explanation of the purpose of the proposed rules--on or as soon as practicable after making the rule.
However, Clause 151 is about the FSA's consultation procedures. The cost benefit analysis and other material are to help inform consultees about the proposed rule. It seems a little bureaucratic to ask the FSA to provide supporting material for a consultation process which has been overriden.
There are legitimate concerns about the FSA providing a justification for its rules, even for those which have to be drawn up quickly. It may in the event be able to provide the information sought by the amendment when the rule is made. However, we certainly do not favour imposing a requirement on the FSA to provide supporting material after the event. I do not know whether my response will depress or distress noble Lords, but I am afraid that none of the amendments that I have addressed will work.
My Lords, I think that everyone would agree that cost benefit analysis has its weaknesses. However, I, for one, cannot understand how cost benefit analysis can be undermined by the publication of the methodology which was used in making that analysis. I can see only that that could enhance its quality. What possible objection can the Minister have for not publishing the methodology used to compile a particular cost benefit analysis? I am forced to the conclusion that the only motive the Minister can have is to disguise the quality of the evidence, whatever that evidence may be.
The Minister must accept that the money used to pay the authority comes from the City. It does not come from the taxpayer. The City is entitled to know whether that money is being used helpfully or otherwise. It is entitled to know whether the burdens it is required to bear as the result of what the authority is doing to it yield useful results. That can be done only if the methodology by which the FSA goes about its rule-making procedure is clearly understood. In my submission the Minister's response to the amendments is totally unacceptable. In those circumstances I wish to test the opinion of the House.
moved Amendment No. 157YA:
After Clause 154, insert the following new clause--
:TITLE3: ("CHAPTER IIA
:TITLE3: POLICIES RELATING TO TAKEOVER REGULATION
.--(1) Subject to subsections (2) and (3), the code issued under section 116 may state that behaviour of a person which is in conformity with the City Code does not amount to market abuse.
(2) Subsection (1) does not apply in respect of behaviour which satisfies the condition in section 115(2)(a).
(3) A statement made under subsection (1) may include such conditions and limitations as the Authority considers appropriate, including conditions and limitations concerning the categories of behaviour and classes of person covered by the statement.
(4) If a person behaves in a way which fulfils the requirements of any statement included pursuant to subsection (1) in the code issued under section 116, that behaviour of his is to be taken, for the purposes of this Act, as not amounting to market abuse.").
My Lords, I hope I will be forgiven if I detain your Lordships' House for a few minutes in order to give the background to this group of amendments. I do that because when we discussed similar amendments on the last day of the Committee stage it was very late at night--I think it was nearly midnight. I think it is fair to say that the amendments evoked some sympathy from noble Lords on all sides of the House. Therefore we want to visit them in a little more detail today. We brought forward two amendments in Committee. We are again bringing forward two amendments, but in a slightly modified form. I shall explain the modifications in a moment.
We said that we believe that the best way to safeguard effective take-over regulation in the City, while also enabling the FSA to administer the market abuse regime across all markets, was to amend the Bill in two ways. First, so that behaviour which complies with the take-over code would not constitute market abuse--that is, it would be what is called a "safe harbour"; and, secondly, in cases of non-compliance with the take-over code, the panel would have the ability to pass serious cases to the FSA. This would be based, we hoped, on criteria and parameters, which we believed could be pre-agreed between the panel and the FSA, in order that the FSA could 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 was the point of our second amendment. In other words, we were trying to say that the panel would be the initiator; it would be, if you like, the gatekeeper.
But at the time the Treasury stated that it did not want to create what it thought would be 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. The position then was that the Treasury stated that it did not want the FSA's powers to intervene in cases of market abuse, as it saw it, to be fettered in any way by the existence of the Takeover Panel. The reason the Treasury gave was that it believed that self-regulation had failed in the regulation of market abuse and needed to be replaced by statutory regulation. That was the point of the Government's objection to our two amendments.
I am pleased to say that since then there have been many discussions among all the parties--the Treasury, the Financial Services Authority and the Takeover Panel--but I am disappointed to report to your Lordships' House that, despite the best efforts of all the parties concerned, they have not been able to reach an agreement. Therefore, we are having to return to these points again. Although the three parties do not appear to have reached agreement on the way forward, apparently some things have been agreed between them. What seems to have been agreed is that the panel system of regulation is acknowledged around the world as successful and effective. The Government's approach to the European 13th company law directive on takeovers--known as the takeover directive--makes clear that they share that view and do not wish to alter the current system.
It also seems to be agreed by the panel, the FSA and the Treasury that there is a significant overlap between the panel's regulation of takeovers and the FSA's responsibility for the new market abuse regime under the Bill. It is also agreed by the three parties that regulatory overlap is undesirable. The panel, the FSA and the Treasury are apparently also in agreement that the panel's regulation of takeovers should not be undermined and that the FSA apparently does not wish to be drawn into takeover regulation in parallel with the panel.
There, I am afraid, the points of agreement end and the points of disagreement begin. We understand that it is the panel's view that the Government's proposals in the Bill as it now stands will,
"seriously undermine effective takeover regulation as they are likely to lead to delay and will cause damaging uncertainty".
The panel also states that:
"They are also likely to lead to increased litigation".
With respect to the panel, it is agreed among all the parties that its reputation is excellent. Therefore, it is worth spending a moment looking at what the panel is saying in those quotations because they are serious and worrying charges.
It is certainly in no one's interest for one regulator to be critical of the regime of another regulator in this country if only because, human nature being what it is, the other regulator is likely then to return the compliment. That is surely not the path that we want to go down. Therefore, with the hope of bringing harmony where there is discord, if I may use a famous phrase, our new amendments have now been modified to reflect the debate in Committee and in the hope that they may in this form attract more government support.
First, our provision relating to the need for consultation by the FSA with the panel prior to any exercise of its powers which might impact on a bid has been removed. We have done that because the FSA has now offered to make a public statement which confirms that it will do just that. Secondly, a new subsection has been included in each clause to give the FSA an overriding power to impose limitations and conditions on the practice of the Takeover Panel's City code. We understand that it is desirable to give maximum flexibility to the FSA to carry out its remit. For example, if a bidder were to make a misleading statement which had an impact on the share prices of every company in the same sector as the target, the FSA should be free to take action against the bidder under the market abuse regime without the need for a request from the panel. Our proposal, which is that the FSA will have an ability to impose conditions or limitations on the conduct of the code, would allow the FSA to do that. Under these amendments, the FSA will be able to bypass both provisions--the safe harbour provision and the gatekeeper provision--if it feels that it urgently has to do so. The key point is that in the real world the panel is making dozens of rulings every week on the application of the City code and it constantly gives informal guidance to those who seek advice on its code. Apparently, its decisions sometimes have to be made in a matter of minutes.
The Takeover Panel as presently constituted is able to do that because interpretation of the City code is not a matter of law. The City code is no more than a number of general principles which are expressed in broad terms and are what a "reasonable person" or, if your Lordships prefer, a "regular user" would regard as good standards of commercial behaviour. These are applied by the panel in accordance with their spirit--in other words, to achieve their underlying purpose--and the panel can relax or modify the effect of their precise wording accordingly. The panel looks to see that the spirit is observed as well as the letter and the panel can modify or relax a rule if it considers that in the particular circumstances of the case the rule would operate unduly harshly or in an unnecessarily restrictive or burdensome manner.
That is why we believe that our amendments are consistent with the definition of market abuse in the Bill which we have now settled after lengthy debate. We have agreed that conduct is not market abuse unless it is likely to be regarded by a regular user as a failure on the part of the person concerned to observe the standard of behaviour reasonably expected. That can be applied perfectly well to the current panel procedures which we wish to preserve precisely because it is unlikely that a regular user would regard a person who has complied with his City code responsibilities as having failed to observe this standard of behaviour.
Unless conduct which conforms with the City code has the scope to create a safe harbour, which is the thrust of our first amendment, there will be scope instead for tactical complaints to the FSA during takeover bids, tactical attempts to review the FSA's decision and tactical potential for delaying the bid process. Our amendments remove those possibilities. They also remove the need for the FSA to consider complaints made to it. They also remove the possibility that the FSA may actually and publicly have to disagree with the panel. We should not provide scope for disaffected parties in a bid to make tactical complaints to the FSA regarding the panel's decisions. If they could do that, the FSA would need to give sufficient consideration to those complaints to be able to demonstrate if challenged, as it might be, that it had approached with an open mind the question of whether or not it needed to exercise its powers. In any event, the whole process of the FSA considering these matters is likely to cause delay simply because the involvement of two regulators will inevitably be slower than one. Will the FSA be able to make its decisions in the kind of timescales to which the panel operates?
Perhaps I may give an example. Consider what would happen if we open up in the Bill, as would be the case without our amendments, the possibility for tactical applications for judicial review of the FSA's decisions on the exercise of its enforcement powers in a hard-fought takeover battle. If the FSA does not exercise its powers, it may be reviewed on the basis that it has fettered its discretion. If it does exercise its powers, it may be reviewed on the basis that it has frustrated legitimate expectations. Either way, there is the potential for delay and confusion at a critical moment in the lives of corporations and individuals.
In conclusion, I hope that the Minister will either shortly accept the amendments or, better still, will announce that, as a result of his offices, agreement has been reached on a sensible modus operandi between the Financial Services Authority and the panel. I beg to move.
My Lords, I find this to be one of the most vexing issues raised by the Bill, because one starts out with a large degree of common ground, as the noble Lord, Lord Saatchi, has outlined. First, it is clear that any overlap between the panel and the FSA in relation to market abuse should be minimised. Secondly, it is common ground that the panel does extremely valuable work, and does it extremely well, and that nothing in the Bill should undermine that work in that the FSA should not seek to duplicate the work of the panel. Thirdly, it is common ground that if the panel system fails, the FSA's powers may well be needed. But at that point the common ground breaks down.
The amendments seek to deal with the problem by, first, extending the safe harbour provision in Clause 18 to behaviour conforming with the City code and, secondly, seeking to introduce a gatekeeper provision, so that where a person has not followed the City code the FSA cannot exercise its powers under the market abuse regime, except following a request by the panel.
Both amendments seek to avoid confusion, and both would, I suspect, largely achieve that objective. Unfortunately, I am not sure that both would produce the correct result. Of the two amendments, I am sympathetic to the first. It is difficult to see an argument for pursuing someone who has complied with the City code in the circumstance in which safe harbour provisions already exist in relation to the market code that is to be introduced under Clause 16. If there is a safe harbour for the market code, the argument for having a safe harbour for the City code is extremely strong.
The second amendment causes us more difficulty. We have had significant and long discussions with both the FSA and the Takeover Panel on the issue. The Takeover Panel's view in a nutshell is that without the amendment there would be delay and a loss of effectiveness of the regulation of market abuse. The FSA's view is that if the amendment is agreed to there will be delay and a loss of effectiveness in the regulation of market abuse. Faced with those two strongly held views, our principal concern is that if the amendment were to be carried it would debar the FSA from taking action in any case where it believed there could be market abuse in the context of a merger. That seems an undesirable fettering of the role of a principal and primary regulatory body.
I am slightly concerned also about the way in which the Takeover Panel envisages the amendment operating. The first line of Amendment No. 157ZA contains the dread word "may". The amendment states that the authority "may adopt a policy". My understanding of the way in which the panel sees the amendment operating, were it to be carried, is that, before it came into effect and before the "may" became "shall" or "have to", there would need to be agreement on a policy statement as to how the two bodies would work together, a statement would need to be inserted into the market code, and operating arrangements would need to be agreed between the two bodies. Furthermore, if such a provision came into force, the FSA would have the right at some point to withdraw its agreement to the operation of the amendment. That is my understanding of how the panel sees the proposal working.
This seems to be a model. The best approach, as the noble Lord, Lord Saatchi, has said, would be for the FSA, the panel and the Treasury to produce a code of practice covering all these issues and in particular the circumstances in which the FSA might seek to intervene, and equally the circumstances in which the panel would take the lead and the FSA would not seek to intervene. In some senses that seems to be the approach that has been successfully followed by the Treasury, the Bank and the FSA in dealing with systemic risk: a policy document rather than a statement on the face of the Bill dealing with how the three bodies, all of which have a role to play in respect of systemic risk, will deal with circumstances which, in the area of mergers and takeovers, can require action to be taken very quickly. Were such an agreement to be drawn up, it would greatly reduce the likelihood and scope for judicial review, which is understandably a concern as matters stand.
Talks have been under way for some time to achieve such an agreement but they have yet to reach a positive outcome. My preference would be for the Treasury, in time-honoured fashion, to get a grip on all these matters and seek to achieve a quick agreement which would allay the fears of the panel without completely preventing the FSA from having any powers of initiative. The talks have been continuing, but, given what I have heard from the participants, without any great sense of urgency. It is the fact that there is no agreement in this area, when there has been agreement in such areas as systemic risk, which causes the problems with which we are now grappling. It would have been far preferable had such an agreement been reached by now, or if it could be reached by Third Reading. I suspect that that is wishing for the moon. However, I should welcome an assurance from the Minister that efforts to achieve an agreement will be intensified, with the Treasury taking a more proactive stance on this most vexatious matter.
My Lords, I should remind the House that I have an interest in this area as a practitioner in mergers and acquisitions and as someone authorised by the FSA. All noble Lords will have seen the material circulated by the Takeover Panel. The panel is clearly concerned about these matters. I support my noble friend Lord Saatchi in these amendments because I believe that they deal with a serious issue.
I once saw a cartoon showing two Treasury officials standing outside their department in Whitehall--I hasten to add that it was while we were in government, but I am sure nothing has changed--and one was saying to the other, "Well, that's all very well in practice. What's wrong with it in theory?" I have the impression that one of those officials was responsible for drafting parts of the Bill. I give way to the Minister who I am sure is about to show his knowledge of philosophy.
My Lords, I would merely say that it is not Treasury officials; it is Wittgenstein.
My Lords, if the Minister has not learnt by now that Treasury officials were weaned on Wittgenstein, then I am very concerned indeed.
The key element is that the proposed market abuse regime would undoubtedly undermine the Takeover Panel. What has driven this proposal is the idea of having to achieve consistency. Perhaps the Minister can say who came up with the other cliche that if it is not broken we should not try to fix it. The system as it operates at present is certainly not broken; it works extremely well, and in circumstances that are often complex and require action very quickly and sometimes in the early hours of the morning, such are the extraordinary ways in which takeovers and mergers are carried out.
If the Takeover Panel had got into difficulties or had failed, one could understand the reason for this move to destroy an effective system of self-regulation. The truth is that the panel is well-established--over 30 years--and is well respected. It has the experience, ability and technical knowledge to react quickly and decisively, and also the ability to apply its rules to accommodate changing market circumstances.
Although I declared an interest, I see that at the end of the day if there is any confusion in this area it is advisers, lawyers and others who will make substantial sums of money from the fees that will be generated in order to deal with the chaos that has been caused.
The real beneficiaries of an effective takeover panel and system of regulation are shareholders. The job of the Takeover Panel is to ensure that shareholders' interests are looked after, that they are treated equally and that there is an overall framework for the conduct of takeovers. It is extraordinary that in undermining the Takeover Panel and compromising the system of takeover regulation the proposed market abuse regime should defeat the fundamental purpose of this Bill: effective regulation. That is what we have now. If one has two authorities with jurisdiction in an area, there is no doubt that there will be cause for confusion, delay and uncertainty. The benefits of speed and certainty of decision will be lost if ultimately the FSA has the ability to intervene during a bid.
In his opening remarks my noble friend referred to the opportunity for tactical manoeuvre if there is uncertainty in the regulatory regime. There are all kinds of very clever people in the City who earn substantial sums by exploiting precisely that opportunity. To create a statutory regime of this kind alongside the Takeover Panel will afford opportunities for judicial review and tactical delay, none of which will be in the interests of shareholders.
If the Minister is not now in a position to accept this amendment perhaps he will look at it again. In the context of takeovers it is essential to create a clear and legally secure boundary between the jurisdiction of the Takeover Panel and that of the FSA. I believe that that is in the interests not only of shareholders but the credibility of this Bill and the FSA itself. As my noble friend observed, the standing and reputation of the FSA, which are essential for the purpose of this Bill, will not be enhanced if it is drawn into controversial and protracted disputes involving complex takeover situations.
My Lords, I have known the Takeover Panel for many years, even in the days when its chairman was the noble and learned Lord, Lord Shawcross. Since then the Takeover Panel has had other distinguished chairmen. For many years I sat on that panel. I very much regret that the Takeover Panel has been hooked on to the FSA. The Takeover Panel has worked brilliantly in the most controversial areas where lawyers have not been allowed to participate. That is not a blessing with which all lawyers agree. However, it has the considerable advantage of enabling the panel to get things done speedily. Quite often the announcement of a controversial takeover will be made early in the morning and the panel meets during the day or night. A decision will be made and the code honoured, and that has been one of the great successes of the City. I very much regret that the Takeover Panel is to become bogged down in what is bound to be a mass of bureaucracy, legal cases and time-consuming arguments as a result of involvement in this Bill.
The amendment moved by my noble friend is intended, and rightly so, to reduce the amount of interference in, and give greater freedom to, the Takeover Panel. I applaud it. In many ways I should like it to go further. I support the point just made by the noble Lord, Lord Newby. If the Takeover Panel and FSA can agree with the Treasury on a system which is a continuation of what has happened in the past the panel will be able to hear the facts. Businessmen and others who understand what is at stake can reach a rapid decision, which has always turned out to be to the advantage of the shareholders concerned, rather than become involved in long drawn out litigation, as is inevitable when these matters are hooked on to the Bill. I support my noble friend's amendment, although I should like the Takeover Panel to be removed altogether. I understand that that now cannot be. I hope that the system can be given the degree of flexibility which this amendment provides to enable the panel to prosper and serve the industrial sector of this country well in the years ahead.
My Lords, I have not had the long experience of the Takeover Panel that other noble Lords, such as the noble Lord, Lord Boardman, have had. The panel swam into my ken when a company called Datafin applied for judicial review of the Takeover Panel. The argument in that case was a fascinating one. It was said on behalf of Datafin that one could not have a body of that kind with powers of life or death, albeit indirectly, over people operating in the City without some external control by the law. As I recall, the noble Lord, Lord Alexander of Weedon, appeared for the Takeover Panel. He said that, first, there was no jurisdiction to review the Takeover Panel judicially because it had no statutory base. In that he was plainly right, although it was not a very appealing argument. Secondly, the noble Lord argued that the Takeover Panel could not operate if there was a possibility of the courts intervening, particularly bearing in mind that the Takeover Panel could on occasion work at lightning speed. He asserted that it would be prevented from so doing if there was an application pending before the courts.
In that case the court decided to ignore the argument that it had no jurisdiction and indulge in a little judicial engineering, in which I take some pride. We decided that the panel could be judicially reviewed but that it never would be in the course of a bid unless the conduct of the panel had been previously condemned by the court in leisurely proceedings following a bid. I believe that that was a very good approach, and the courts have followed it ever since on the rare occasions that anyone has sought to involve them. The involvement of the courts inevitably leads to every kind of tactical manoeuvre and will kill almost any bid stone dead. I am sure that the courts retain that policy at the present time.
However, we must do something about the FSA. If one studies the amendments in broad brush outline, not in detail, one finds that they achieve exactly what the courts have achieved. There is a safe harbour for someone who complies with the City code, and for the moment that is it. If the FSA disagrees it will say to the Takeover Panel that it has got it wrong. One of the great features of the panel is its ability, without the intervention of government or either House of Parliament, to alter the City code. I expect that, as a result of discussions, the City code would be altered and in future the safe harbour would be removed. That was exactly what the courts decided in Datafin and what they have done ever since. If it appears to the FSA that the Takeover Panel is being singularly unresponsive, which is a very unlikely event, it can alter its policy so that the matter is taken on board straight away, and Parliament will give it the authority to do so.
It has been suggested that there should be a code devised by the parties to decide when the safe harbour applies or the FSA should exercise its discretion. I do not think that can be done, because the situations are so varied that you will always be legislating for the train which has already left the station. It really would not work. This, I think, would work. Perhaps there are refinements which could be introduced but, apart from anything else, it is important that the authority should have statutory power to adopt a policy of masterly inactivity, which of course is provided by the second amendment.
If you do not have that, you will have trouble with people going to the courts and saying either that they have confined their discretion in a way that is impermissible or that they have never thought about the matter at all. They need that even if they get nothing else, and I hope that the House, if its opinion is tested, will insist on putting these amendments into the Bill.
My Lords, in considering the very illuminating remarks of the noble and learned Lord, Lord Donaldson, I hope that the Minister will consider the nature of events with which the Takeover Panel is customarily involved. My noble friend Lord Boardman has already alluded to this and I have seen it at first hand as a member of the panel in the past.
The fact is that to think of the panel as exercising the functions of a justice of the peace or a judge is to misunderstand the work that it does. The panel is more in the position of a tennis umpire who has to make immediate decisions which need to be upheld and which need to be practical. That is exactly what the panel is designed to do and what it cannot do if another authority is at any stage able to interpose and stop the game. It would be as absurd for that to happen in a takeover battle as it would be on the Centre Court at Wimbledon
In thanking the noble and learned Lord for making this so clear, I ask the noble Lord, Lord Newby, if he has a moment, to consider whether it is right for the parties which are to be regulated by this legislation actually to make it impossible to perfect the legislation by a failure to agree on how it should operate. I endorse his request that the greatest pressure should be brought to bear on those who need to declare their position on the way it will work so that that agreement shall be available before Third Reading and so that the second of these amendments--or something very like it--can also be incorporated. I can see no reason for delaying the first.
My Lords, I rise briefly to support my noble friend Lord Saatchi and others who have spoken about the need to resolve this matter. I have read and re-read the comments of the noble Lord, Lord McIntosh, in Committee. He said then that he did not really like the amendments because of their general approach to the Bill, but that he accepted that there was a problem here which needed to be addressed.
The difficulty in which your Lordships' House finds itself now is that we have no idea how the Government think that this issue should be resolved. It is recognised by all parties that there is an issue here which needs to be resolved, but we have reached the last day of the Report stage on legislation which over many months has been under intensive discussion and consideration in another place and in this House; yet we do not seem to be any further forward on getting an idea of how the Government or the FSA think that this issue should be dealt with.
I think the very least that the noble Lord owes us tonight is a commitment to produce the Government's view on how this matter should be dealt with before we get to Third Reading. Nobody is going to pretend that specific amendments tabled by Opposition Members on technical issues are necessarily going to be all that they should be; nor that they should necessarily be incorporated into a complex Bill of this kind as they stand on the Marshalled List.
However, I do not think that anyone denies that the situation, if not resolved, will lead to a frustration of much of the work and functions of the panel. As a number of your Lordships have said, there are two ways in which the panel's proceedings could be frustrated. One is by the injection of uncertainty. If the say-so of the panel on a matter of dispute is not to be the substantive decision on that, uncertainty could be introduced. Delay is the other danger, and I feel that is the one that would actually be more frequently used. In the very highly charged circumstances of a contested takeover bid, one of the few weapons which the target may have is to spin out the matter in the hope of causing more uncertainty among investors.
It is not just the interests of shareholders which may be damaged by this, but also the interests of the market as a whole. The market's functioning can be damaged by prolonged uncertainty, particularly when major companies are involved, in a way which can actually lead to the opportunity for market abuse elsewhere. The doubt about the status of a transaction is one of the circumstances in which malpractice may appear.
We are all in this House absolutely committed to dealing with issues of market abuse. We realise that there is a potential conflict here between statutory powers of a reserve form in the hands of the Financial Services Authority and the need for speed and decisiveness by the panel in the heated circumstances in which it is called upon to operate.
This has been a very good-natured debate, but I should not want the Government to feel that the good nature with which the debate has been conducted means that there is not here a very serious issue which has not so far been dealt with and on which, by this stage in the Bill, we ought to have had much more specific guidance from the Treasury Bench. I hope that the noble Lord who responds will be able to give us at least greater insight into the Government's thinking on the way they will deal with this. Better still, I think it should amount almost to a minimum commitment that something very much more specific will made available to your Lordships before Third Reading. It may be that the suggestions of the noble and learned Lord, Lord Donaldson, could be built on by the Government and formulated in a way which would fit these particular circumstances. That something needs to be done is, I think, undeniable. I think that that is the feeling in all quarters of your Lordships' House. I very much hope that the Government will find it in them to speed up the consideration of this issue and that they will come forward with a workable solution.
My Lords, I do not want to detain your Lordships for too long. My sight of the Takeover Panel has principally come from my work as a barrister practising to some extent in a field where the Takeover Panel operates. As the noble Lord, Lord Boardman, has said, that has not included my being allowed to appear in front of the Takeover Panel. I hope that that sort of custom will not be allowed to extend to other bodies.
As a result of having seen the way the Takeover Panel operates, I recognise that it is an effective and most important part of the operation of the financial community. Therefore, having taken note of the concerns expressed by the panel, I have had concerns about whether, without some degree of clarification of the ambit and the respective areas in which the two bodies will operate, it may undermine the operation of the panel.
I am not sure that some of the concerns are necessarily expressed correctly; there may be more fear than there needs to be. However, I share the concerns of others who would have liked to see some agreement reached by which the respective functions of the two bodies would be clarified.
I agree with the noble Lord, Lord Newby. I do not see immediately enormous harm in Amendment No. 157YA. Under Clauses 116 and 118 the Bill already recognises that the authority may state in a code that certain behaviour described by it will not amount to market abuse. Under Clause 118 someone who behaves in the way described will be protected from a charge of market abuse. It might be said that it is already open to the authority, therefore, to issue a code in which, if it is of that opinion, it states that conduct which complies with the City code would not amount to market abuse.
If the authority is able to do that under the Bill as drafted, it might be argued that it is unnecessary to add this provision. On the other hand, it would send a clear message that that kind of behaviour would not amount to market abuse; and that would be helpful. As drafted, the amendment does not require the authority to reach that view; it gives it the power to state that in a code, and subject to such limitations as the authority thinks fit.
I have more difficulty with the second amendment. I understand the argument raised by the Minister in Committee: that this would appear to give a non-statutory body the power to tell a statutory body what to do. I understand the objections to that course.
I shall listen carefully to what the Minister is able to say about the discussions to which he referred in Committee and to which reference has been made by other noble Lords today. I hope that at Third Reading some agreement will be forthcoming which will clarify the differences.
My Lords, it is clear that there is a great deal of common ground on the issue. That common ground was expressed most clearly by the noble Lord, Lord Saatchi, in introducing the amendments and by the noble Lord, Lord Newby. We all agree that the Takeover Panel does a good job in overseeing the procedures and practices of parties to takeovers. We have agreed that it is widely respected. That goes back for many years. We want the panel to continue to do that job in the effective way it has done so to date.
We agree also that there is some overlap between some of the things the panel does and the territory covered by the new market abuse regime. However, equally clearly, that can be dealt with in the same way as other overlaps--for example, between the market abuse regime, the rules of recognised investment exchanges and clearing houses and between the FSA's role as prosecutor and that of the other prosecutors.
There is nothing inherently special about the position of the panel compared with exchanges that makes us feel that a different approach is warranted here. This is not a new concern. Overlaps exist at present between regulatory rules and some criminal offences and the rules of the Takeover Panel, exchanges and other regulatory bodies.
Where issues arise, they are dealt with at present through policy statements, practical arrangements, liaison and information sharing. There has been no difficulty about that to date; and I see no reason why there should be particular difficulty. However the panel--perhaps I may say to the noble Lord, Lord Stewartby, that it raised these issues only in the past few months, and not during the early stages of the Bill--fears that the fact that the new market abuse regime is a statutory regime will change matters. It fears that because the regime is statutory it will be easier for aggrieved parties in a hostile takeover to seek to involve the FSA in an effort to frustrate the takeover. Those parties, the argument runs, will find it easier than now, with regulation currently being largely on a contractual basis, to seek judicial review in circumstances in which the FSA decides not to respond to a request that it should consider exercising its powers under Part VIII of the Bill at a time when a takeover is in progress.
In theory, there may be something in that argument (as Wittgenstein might have said) but not in practice. It is the case that the FSA cannot bind itself never to consider whether it should take action under Part VIII of the Bill when a bid is in progress, but it would not be appropriate for it to do so.
I was interested to hear the explanation of the noble and learned Lord, Lord Donaldson, of judicial engineering in the Datafin case. The attitude of courts to the Takeover Panel and the takeover code is well known. They have not said that they will never intervene while a bid is in progress. They have indicated that the circumstances in which they would be prepared to do so would be very rare indeed. With great respect to the noble and learned Lord, I think that is the solution for the Takeover Panel. I believe that it is possible to do that. It is open to the FSA to adopt a similar attitude to that which the courts have adopted without running the risk of fettering its discretion in an unacceptable and irreversible way, and that is what the second amendment in particular does.
My Lords, I am handicapped because I am not a lawyer. However, can the Minister deal with this specific point? If the FSA were to act as he suggested--that is, not to intervene--the argument runs that it would then be vulnerable to an action for judicial review because it had not examined the circumstances of a particular case. That would lead to delay and the kind of problems which have been described.
My Lords, I have the same handicap as the noble Lord. I am not a lawyer either. I plan to come to that later.
The point I make here is that the policy that the noble and learned Lord, Lord Donaldson, called masterly inactivity is as open to the FSA as to the courts. The fact that it cannot run the risk of fettering its discretion does not mean that it cannot refuse to intervene in tactical matters, and say so in advance. It would be wrong if parties to a bid and others involved in it could circumvent the clear position which the courts have adopted through the back door of the new regime in Part VIII of the Bill. The courts would not look kindly on any attempt and would look favourably on any effort by the FSA to avoid that happening.
The effects of Amendments Nos. 157YA and 157ZA would be, first, to allow the FSA to provide effectively that in the area of takeovers market abuse is whatever the Takeover Panel says it is; and, secondly, to allow the FSA to adopt a policy that it will intervene only in certain areas of market abuse where the panel invites it to do so. Thirdly, they appear to attempt to avoid the panel being in any way publicly or legally accountable for anything it did or failed to do in the course of discharging the wide-ranging functions that the amendments would by implication bestow on it.
These are serious charges about both amendments. However, I want to emphasise that the two amendments are conceptually different propositions. Amendment No. 157YA is concerned with the status of the City code and the question whether compliance with it constitutes market abuse. On the last occasion, two amendments covered both safe harbours and discretion as to who should take action. We rejected them. But we rejected them--it is important to note--for the same reason. As a matter of principle we do not agree that the FSA should be able to fetter its discretion in this way.
Returning to the point raised by the noble Lord, Lord Forsyth, the issue is not whether it would be subject to judicial review if it fettered its discretion; it would be reneging on the duties which will be given to it by statute in the course of the Bill.
Amendment No. 157ZA is concerned with the circumstances in which the FSA can take action where an abuse which has contravened the code occurs. It is about who takes decisions, and not, like Amendment No. 157YA, about whether the behaviour is abusive.
My concerns as a matter of principle are obvious. If the FSA agreed to "turn on" these provisions, as it would in the first line of the second amendment, the effect would be to give the Takeover Panel, a non-statutory body which is not subject to accountability or transparency arrangements comparable to those of the FSA, powers over the FSA which neither the Treasury nor Parliament has. Treasury Ministers cannot tell the FSA when something is abuse or when it is not. The definition of abuse is provided for on the face of the Bill in Part VIII.
Let us remember what we are doing in this Bill. We are setting up the FSA as the single statutory regulator of the financial services industry. What it does is conditioned by the objectives and principles which Parliament is giving it, 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, extending its reach to cover both regulated and unregulated persons. Together with that, it has statutory investigation powers enabling it to compel people to answer questions.
The Takeover Panel, however good a job it does in regulating the conduct and process of takeover powers--and we are all agreed about that--is a very different body. It is not subject to the statutory checks and balances; for example, it is not subject to consultation requirements, cost-benefit analyses, annual reports, independent complaints investigations and so on.
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 where market abuse is concerned, the last word should rest with the body to which Parliament is giving the job of tackling the problem. Only in this way will we ensure that there is consistency and coherence in the regime.
We have to remember that interests other than those of shareholders in the various parties to a takeover are at stake. There is the interest of other market participants and the market as a whole, where concerns of fairness and efficiency are at the heart of what we are doing.
Furthermore, there will be times when it is appropriate for the FSA to take action against market abuse during a takeover. The amendments recognise that--there is no disagreement about it--as has the panel in its talks with us. Examples might be where the abuse was very serious and affected companies other than those involved in the takeover or where a party to a takeover did not comply with a panel ruling.
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. I believe firmly that the decision in a particular case should rest with the statutory regulator which Parliament has charged with the responsibility of tackling market abuse across the board.
I cannot accept that it is right for the FSA to be able to adopt a policy of only ever exercising its market abuse powers where a takeover is involved on the say-so of the panel. Apart from the point of principle, as a practical matter it would not be desirable for the FSA to be able to take action only at the request of the panel. The panel may not always be in possession of the facts because it does not have the direct statutory investigation powers.
However, I have been properly challenged about what the practical solution to the problem will be. I believe that it has to be, and would be if the amendments were carried, administrative arrangements; in other words, agreement between the Treasury, the FSA and the panel. As is well known, the Treasury has been brokering meetings between the panel and the FSA and I want to report on what has happened during those meetings.
There are three important factors. We have made a great deal of progress, although we have not yet completed the process. The first is a policy statement setting out the FSA's general policy in relation to takeovers. While the FSA cannot adopt a policy of never intervening regardless of the circumstances--any more than the courts can--as that would be unlawfully fettering its discretion, it can adopt a policy of not intervening generally where it feels that the panel can take adequate action. We are assured by the FSA that it will do so. That is my answer to the question posed by the noble Lord, Lord Saatchi.
I now return to the question asked by the noble Lord, Lord Forsyth. The FSA can adopt general policies to which it must be prepared to make exceptions. If the case in question does not warrant an exception being made to the general policy, a judicial review will not succeed. Of course proceedings for review may be brought, as they may be brought against the panel, but in a case such as the one I have mentioned it is unlikely that the courts will grant the necessary leave for an application to be made.
The discussions could involve a general policy of the FSA not intervening in response to a request which it believes has been made for tactical reasons and not because of the concern that serious abuse has taken place. Again, that is in answer to the concerns expressed by noble Lords opposite. That is the first front.
The FSA is currently working with the panel on a statement which will provide as much clarity as possible on the kinds of cases in which it would seek to intervene. These will be the more serious and urgent cases involving widespread abuse which goes across sectors or involves other parties than the parties to the takeover. The FSA's intention is that the statement of policy will address issues of timing, a delay in the exercise of certain powers and whether to impose a penalty until after the completion of the bid process.
The second front is the code of market conduct provided for in Clause 116. The FSA is required to produce a code which gives appropriate guidance to those determining whether or not behaviour amounts to market abuse. The FSA is working with the panel, as it is with recognised bodies, to identify rules which are capable of providing such a safe harbour.
Finally, the FSA and the panel are working on an operating agreement setting out clearly the arrangements for the sharing of information, liaison and co-operation.
I was asked particularly by the noble Lords, Lord Newby and Lord Elton, why there appeared to be no urgency in the process. There certainly is urgency in the process. There are strong incentives for both the main parties in the negotiations to make rapid progress against a background of uncertainty as to whether the Bill would be amended. I believe that if the House is established in the view that an amendment on the face of the Bill is not the best way forward, that will help progress to be made in the negotiations. I will ask the FSA to produce a position paper before next Thursday--before the Third Reading of the Bill--for circulation to all noble Lords who have shown an interest in the matter. As I have said, the FSA is currently working on a policy statement, operating agreement and code of market conduct for safe harbours.
I am sure that those arrangements are the right way forward and provide a satisfactory solution to the problem. Under those circumstances, I cannot agree that the amendments, which are separate and not consequential on each other, would be helpful in the negotiations or would help us to reach the agreed conclusion which is necessary for both the Takeover Panel and the FSA, and I ask the House to reject them.
My Lords, I am grateful to my noble friends Lord Forsyth, Lord Boardman, Lord Elton and Lord Stewartby for supporting the amendments and also to the noble Lord, Lord Goldsmith, for supporting Amendment No. 157YA.
The summary of what the Minister said is that we are promised a position paper from the FSA before next Thursday. That appears to be the action that will follow from today's short debate. However, as some of my noble friends said, that is not what we are looking for at all. We are looking for a view from the Government about how they will resolve a pressing problem--which was pointedly described by the noble Lord, Lord Newby--that we have before us two critical regulating bodies which have an overlap in their regulatory powers. That is bad enough and is not good organisation. But what is worse is that in the overlap they have already disagreed on fundamental aspects of their respective roles. I believe that that is why the noble Lord, Lord Newby, and other noble Lords said that we need an agreement on the circumstances in which the FSA would intervene directly over the head of the Takeover Panel.
In, I believe, a most important intervention, the noble and learned Lord, Lord Donaldson, said that such an agreement could not be achieved because too many circumstances were involved. I believe that he said that he preferred our amendment which (he said in a striking phrase) gave the FSA the power to apply with "masterly inactivity". I believe that that is why he preferred our amendment to any possible agreement. However, either by way of an agreement brokered by the Treasury or by way of agreeing to these amendments, the Government will surely offer the House at Third Reading more than the position paper from the FSA.
The Treasury is responsible for the situation that we are about to enter. I hope that one way or another it will find a solution before Third Reading, either via our amendment or via an agreement. As an inducement to the Treasury to try to find such an agreement, I hope that it will reflect on the fact that if it does not, then--perish the thought!--the decision might be taken by votes in your Lordships' House. In the meantime, I beg leave to withdraw the amendment.
My Lords, I beg to move that further consideration on Report be now adjourned. In moving this Motion, may I suggest that the Report stage begins again not before 8.42 p.m.