Further consideration of amendments on Report resumed.

Clause 155 [Interpretation]:

[Amendment No. 157A not moved.]

moved Amendment No. 158:

Page 75, line 30, after ("have") insert (", or are intended or likely to have,").

My Lords, in moving this amendment, I should like to speak also to Amendments Nos. 158A, 158B, 158BA, 158BB, 170CH, 170CJ, 170CK and 217. These amendments make a number of minor improvements to the competition provisions of the Bill in the light of commitments made to noble Lords opposite and are designed to ensure that the Bill works properly.

Amendments Nos. 158A, 158B, 170CH and 170CJ give effect to a commitment that I gave in Committee to noble Lords opposite. They will ensure that the same limitation as applies to the documents that the director can require people to produce--namely, that they relate to a matter relevant to his investigation--also applies in the case of information.

Amendment No. 217 to Clause 407 makes a change to the definition of the word "Commission" as used in various provisions of the Bill. At present, this says that "Commission" means the "European Commission". This is relevant, for example, in Clause 195(7). However, "Commission" is also used as shorthand in Chapter III of Part X to refer to the Competition Commission. This amendment will ensure that the right meaning is attached to the term "Commission" where it occurs in the Bill. I am sure that the House will agree that that is quite an important clarification.

Finally, Amendments Nos. 158BA, 158BB and 170CK will ensure that the wording in Parts X and XVIII are consistent. I commend the amendments to the House and beg to move.

My Lords, as the Minister quite correctly said, Amendment No. 158 is a drafting amendment relating to competition scrutiny provisions and is absolutely fine with us. Indeed, we are grateful to him for it. Amendments Nos. 158A to 158BB relate to the power of the Director-General of Fair Trading to request information for the purposes of his review of the FSA's regulations and practices, and the sanctions that he can ask the court to impose for failure to comply with the information requirement. These are drafting amendments only and we are most grateful for them.

On Question, amendment agreed to.

Clause 157 [Power of the Director to request information]:

moved Amendments Nos. 158A to 158BB:

Page 76, line 42, leave out from ("control") to end of line 43.

Page 77, line 6, at end insert--

("( ) A requirement may be imposed under subsection (2) or (3)(a) only in respect of documents or information which relate to any matter relevant to the investigation.").

Page 77, line 13, leave out ("punish") and insert ("deal with").

Page 77, line 14, leave out ("had been guilty of contempt of court") and insert ("were in contempt").

On Question, amendments agreed to.

Clause 161 [Authority's power to require information]:

moved Amendment No. 158BC:

Page 80, line 14, leave out ("without delay") and insert ("before the end of such reasonable period as may be specified").

My Lords, this amendment is a repeat of one put forward in Committee. It has been repeated only to prompt an explanation from the Government. Under Clauses 161(2)(a), the authority can require an authorised person to provide information and documents,

"before the end of such reasonable period as may be specified".

However, when the authority authorises one of its officers to require an authorised person to provide information or documents under Clause 161(3), the officer can require that such information or documents be provided "without delay". Why is it that the authority must stipulate a "reasonable period" for providing information and documents, while one of its officers can require that they should be provided "without delay"? The amendment would merely align the two provisions so that they would be consistent.

The Government have tabled Amendments Nos. 158BD to 158BK in relation to Clause 164 and they also feature in this grouping. This series of amendments appears to reorganise Clause 164. The reorganisation will leave Clause 164(1) covering only paragraphs (b) and (c). It applies, if the circumstances arise, in the view of not only the authority but also the DTI--referred to collectively as the "investigating authorities".

Subsection (2) will be expanded to apply to both investigating authorities and not just "the Authority". Therefore, subsection (4)--the equivalent, in the case of the DTI, to subsection (2)--will be deleted. Instead, there is a replacement to subsection (4) which picks up for the authority the deleted paragraphs in subsection (1) and adds to them circumstances suggesting that there may be a contravention of other enactments where the FSA can prosecute but which are outside the new subsection (2). The only situation to which I can think that this might apply is money laundering.

Subsection (5) is deleted as part of the reorganisation. It defines "related offence", which was the previous paragraph (d) in subsection (1) but which has now been deleted and replaced by paragraph (b) in the new subsection (4). Despite the scale of this reorganisation, it seems to us to be acceptable.

Amendments Nos. 158BL to 158BM are to Clause 165. These amendments are consequential and perfectly acceptable. However, perhaps the Government could tell your Lordships whether in Clause 165(2) there should also be a reference to an investigator appointed under Clause 164(5). My reason for asking that is that subsection (2) refers to Clause 164(3) only "so far as relating to" subsection (1), now amended to "as a result of" subsection (1), and the new subsection (5) covers most of what was covered by subsection (1).

Amendments Nos. 158BM to 158NS to Clause 166 are consequential and therefore acceptable. Amendment No. 158BT to Clause 168 is consequential, but did the Government mean to delete subsection (5)?--because, if not, the amendment should require the deletion only down to the end of line 19. The other amendments, the Government will be relieved to know, in our interpretation are consequential. I beg to move.

My Lords, I should draw to your Lordships' attention that Amendment No. 158BT contains a printing error. The amendment should state,

"to end of line 19", rather than,

"to end of line 20".

My Lords, we are grateful to the noble Lord, Lord Kingsland, for describing the government amendments in the group. I have a little more to say about them, but not much. There is one opposition amendment in the group compared with 20 government amendments.

My Lords, I am most grateful to the noble Lord for giving way. I had no wish to describe the government amendments but I was compelled to do so by the way the grouping is arranged. We had tabled one amendment which, unfortunately, turned out to be the first in the group. Therefore it fell to me to deal with the rest.

My Lords, I hope that the noble Lord does not misunderstand me. We are extremely grateful to him for doing that, perhaps more than he realises. As regards his amendment--

My Lords, I am always pleased to throw light on the Government's amendments.

My Lords, I do not think that I said that.

As I said in Committee in dealing with the opposition amendment, it is clearly important that the authority can get access to information and documents on a timely basis. This is vital for effective regulation. It is for this reason that subsection (3) of Clause 161 provides that the authority can require the information or documents "without delay".

As I attempted to explain when we considered this same amendment before, we do not agree that there should be a requirement for all requests for information to be subject to some specified period for compliance. That would be bureaucratic and quite unnecessary. The authority must, of course, be reasonable in its expectations of when information may be forthcoming. As was explained on the previous occasion, the term "without delay" means without unjustified or unreasonable delay. It does not mean instantly. That would be an absurd interpretation of the phrase.

Therefore it is clear that subsection (3) does not require a person to meet some unreasonable or impractical requirement. Imposing a requirement on the FSA to specify some reasonable period within which the requirement for information must be complied with would simply add an unnecessary bureaucratic burden. It would place a quite unnecessary onus on the FSA to decide in each case what period must reasonably be allowed for producing the information. The current wording enables the provider of the information to take such time as is necessary for providing the information so long as he does not delay in the normal sense of that word.

The noble Lord drew attention to a difference in wording between various parts of the clause. Clause 161(2) deals with the FSA sending out an information request. Subsection (3) deals with the situation where it has been deemed necessary to authorise a specific officer to obtain the documents or information. The term "without delay" reflects the more immediate purpose or nature of such a requirement, but it still means without unreasonable delay. That is why we believe that the wording in subsection (2) is appropriate in the first situation and the wording in subsection (3) is appropriate for a situation where it has been deemed necessary to authorise a specific officer to obtain documents or information.

The government amendments all constitute improvements to the drafting. They reflect the continuing commitment of the Government to make this legislation, which is bound to be technical and complicated, as user-friendly as possible. In the course of looking at ways in which we need to align the investigation powers under Part XVII with the comparable provisions under Part XI, we have also dealt with some potential ambiguity in the drafting of Part XI.

These amendments simplify the drafting of Clause 164, which gives the authority the powers it needs to investigate possible offences and other contraventions under the Bill. They deal in a more elegant way with the fact that some types of investigation--for instance, into possible insider dealing--are powers held concurrently by both the authority and the Secretary of State for Trade and Industry.

I hope that noble Lords have seen a version of the clause as it would look if the House amends it tonight, to assist your Lordships with the changes that are made.

Building on the restructured Clause 164, the other government amendments improve the clarity of the cross references in other clauses in Part XI to the different types of investigation that may be mounted under Clause 164, and correct technical defects in the existing wording of Clauses 165(2), 168(4) and 169(5). It was not clear that these references worked correctly in identifying the cases to which those subsections apply.

These are essentially technical drafting amendments and do not represent any change in the effect of the provisions in Part XI, although the restructuring of Clause 164 has led to a relatively large number of purely consequential amendments, including additional amendments to Clause 280.

Amendment No. 158BF is part of the rearrangement of Clause 164, in that it removes subsection (1)(d), which is replaced by subsection (4)(b) in Amendment No. 158BK. But this amendment makes a subtle change to the effect of the clause, in that it deletes subsection (1)(e), which is not replaced by the other amendments. This removes an unnecessary and potentially unhelpful reference to offences that may have been committed by virtue of Clause 395. Clause 395 is concerned with circumstances in which an individual may be deemed guilty of an offence committed by a corporate body or partnership. Where it applies, its effect is that the individual is guilty of the offence under the provision which originally creates the offence. Therefore it is unnecessary to have to refer expressly to Clause 395 in Clause 164. To do so might cast doubt on the way in which Clause 395 was intended to operate. Subsection 1(e) is therefore removed.

Finally, Amendment No. 158BL brings Clause 165 into line with Clauses 163 and 164 by making it clear that one or more persons may be appointed to conduct an investigation, and that they must be competent persons.

The noble Lord, Lord Kingsland, asked whether Clause 165(2) should refer to Clause 164(5). That is not necessary, as the powers under Clause 164(3)and (5) will be the same. I hope that that answer satisfies the noble Lord.

My Lords, that final answer to one of my questions sums up much of the proceedings of this Bill--"it all depends by what you mean by...", and so on.

So far as concerns my Amendment No. 158BC, I am most grateful to the Minister for his explanation. I think he is saying that what I wanted to achieve from my amendment is already on the face of the Bill, and therefore I have nothing to worry about. If that is so, I happily beg leave to withdraw my amendment.

Amendment, by leave, withdrawn.

Clause 164 [Appointment of persons to carry out investigations in particular cases]:

moved Amendment No. 158BD:

Page 82, line 14, leave out ("the Authority") and insert ("an investigating authority").

My Lords, I beg to move.

My Lords, the odd grouping of my noble friend's amendment at the beginning of this group means that when the Minister spoke to his amendments for the first time it blocked out any comments on them because, of course, no one can speak to an amendment at Report stage after the Minister. Therefore, I am speaking on the first amendment in his group.

I wish merely to express my thanks for the circulation of the interpretation of the effect of this vast shoal of amendments, which would have been beyond me had he not sent it. Even so, the task of keeping up with the flow of government amendments--even with this facilitating assistance--is something which would normally be a full-time job for people who had the time in which to do it. I repeat the complaints made earlier by my noble friends--we have perhaps rather lost sight of the resentment that we felt in the early stages--that it is very difficult indeed for a House which is not supposed to consist of full-time professionals to keep up with the volume of technical changes that the Government are making to highly technical legislation. But I am grateful to the Minister for having done his best to help us with the nearest thing to a Keeling schedule that he can provide. That is the point I wished to make.

My Lords, I am very grateful to the noble Lord. Although it is painful to have to go through technical amendments such as these, it may be that in years to come others will thank us for having taken the trouble to do so, even shortly.

On Question, amendment agreed to.

moved Amendments Nos. 158BE to 158BK:

Page 82, line 16, leave out paragraph (a).

Page 82, line 21, leave out paragraphs (d) and (e).

Page 82, line 24, leave out paragraphs (f) to (l).

Page 82, line 39, leave out ("the Authority") and insert ("an investigating authority").

Page 83, line 2, leave out ("Authority") and insert ("investigating authority").

Page 83, line 4, leave out subsections (4) and (5) and insert--

("(4) Subsection (5) applies if it appears to the Authority that there are circumstances suggesting that--

(a) a person may have contravened section 18;

(b) a person may be guilty of an offence under any enactment other than this Act--

(i) which the Authority has power to prosecute under this Act; but

(ii) which it would not otherwise have power to investigate;

(c) an authorised person may have contravened a rule made by the Authority;

(d) an individual may not be a fit and proper person to perform functions in relation to a regulated activity carried on by an authorised or exempt person;

(e) an individual may have performed or agreed to perform a function in breach of a prohibition order;

(f) an authorised or exempt person may have failed to comply with section 55(5);

(g) an authorised person may have failed to comply with section 58(1) or (2);

(h) a person in relation to whom the Authority has given its approval under section 58 may not be a fit and proper person to perform the function to which that approval relates; or

(i) a person may be guilty of misconduct for the purposes of section 65.

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

(6) "Investigating authority" means the Authority or the Secretary of State.").

On Question, amendments agreed to.

Clause 165 [Investigations etc. in support of overseas regulator]:

moved Amendments Nos. 158BL and 158BM:

Page 83, line 22, leave out ("a person") and insert ("one or more competent persons").

Page 83, line 24, leave out ("(so far as relating to") and insert ("(as a result of").

On Question, amendments agreed to.

Clause 166 [Investigations: general]:

moved Amendments Nos. 158BN to 158BS:

Page 84, line 25, leave out ("the Authority") and insert ("an investigating authority").

Page 84, line 26, after (" 164(3)") insert ("or (5)").

Page 84, line 28, leave out paragraph (b).

Page 84, line 35, after (" 164(1)") insert ("or (4)").

Page 84, line 39, leave out from ("(2)") to second ("of") in line 40.

On Question, amendments agreed to.

Clause 168 [Additional power of persons appointed as a result of section 164(1)]:

moved Amendment No. 158BT:

Page 86, line 18, leave out from ("appointed") to end of line 20 and insert ("as a result of subsection (1) or (4) of section 164").

On Question, amendment agreed to.

Clause 169 [Powers of person appointed to investigate as a result of section 164(2)]:

moved Amendments Nos. 158BU and 158BV:

Page 86, line 35, leave out ("or (4)").

Page 86, line 36, leave out ("(so far as relating to") and insert ("(as a result of").

On Question, amendments agreed to.

Clause 170 [Admissibility of statements made to investigators]:

[Amendments Nos. 158C and 158D not moved.]

moved Amendment No. 158DA:

Page 87, line 15, leave out ("(4)") and insert ("(5)").

My Lords, I spoke to this amendment with Amendment No. 158BC. I beg to move.

On Question, amendment agreed to.

Clause 171 [Information and documents: supplemental provisions]:

moved Amendment No. 158DB:

Page 88, line 10, leave out ("(4)") and insert ("(5)").

My Lords, I spoke to this amendment with Amendment No. 158BC. I beg to move.

On Question, amendment agreed to.

Clause 172 [Entry of premises under warrant]:

moved Amendment No. 158DC:

Page 89, line 31, leave out ("(4)") and insert ("(5)").

My Lords, I spoke to this amendment with Amendment No. 158BC. I beg to move.

On Question, amendment agreed to.

Clause 174 [Obligation to notify the Authority]:

moved Amendment No. 158E:

Page 90, leave out lines 27 and 28 and insert ("Before a person can acquire").

My Lords, I shall speak first to Amendments Nos. 158E, 158EA, 158EB, 158EC, 158H, 158J, 158K, 158L and 158M.

These amendments were tabled by the Opposition in Committee. If I recall correctly, the Minister said in Committee that he was broadly in agreement with the objectives of these amendments and that he would think about the points that had been made. The Government have not tabled any amendments to this clause, and as a reminder of the Minister's remarks, we have tabled our amendments again.

The Minister will be relieved to hear that I do not want to repeat what I said in Committee, except to say that the corresponding provisions dealing with the obtaining of new or increased control in relation to UK authorised investment firms under the existing Investment Services Regulations 1995 use wording which mirrors our amendments. Regulation 41(1) of those regulations states that:

"No person shall become"-- a relevant controller of a UK authorised investment firm unless--

"he has served on each relevant regulator written notice that he intends to become such a controller".

We have followed this approach with our amendments as we believe that this form of wording is clearer than the present form of words in Clauses 174 and 186. I should remind your Lordships that these are not merely technical points: failure to comply with Clauses 174 and 186 constitutes a criminal offence.

So far as concerns Amendments Nos. 158F and 158G, they relate to the definition of "controller" as used for the purposes of the "control over authorised persons provisions". They refer specifically to the definition of an "associate". Importantly, it is necessary to aggregate with the acquired's own holding of shares or voting rights, the shares or voting rights of his associates, and it is provided in Clause 175(5) that "associate" has the same meaning as in Clause 412.

Clause 412 repeats the definition in the implementing regulations relating to all three single market directives. However, it seems to include as an associate a nominee company and as a result all shares held by the nominee company have to be aggregated, and this could in itself bring the notification procedures into play. Similarly, the definition extends to cover parties to an agreement for the acquisition or disposal of shares and, although acquisition and disposal probably relate to transfer of the legal title, it would be dangerous to assume that this does not include brokerage agreements.

Accordingly, it would be necessary to regard the broker as an associate and all the interests of that broker would have to be aggregated. Even worse than this, if the acquirer is the nominee company or broker, it will be necessary to aggregate with him all the holdings and voting rights of all clients, even if they have nothing to do with the nominee or broker at all.That is going far too far, especially in the case of control over authorised persons provisions, but also even in so far as the control provisions generally are concerned. In addition, I do not see how the person "H" in Clause 412(4) can possibly discover the facts which the definition of "associate" requires him to do in this regard.

The Treasury's Explanatory Notes say that the Treasury will be given the power to provide exemptions from Part XII where, for example, the definition of "associates" has the effect that two or more people would have to notify the same acquisition of shares or voting rights. That is exactly what the wide definition of "associates" always requires, as it catches two people in relation to the same holding of shares rather than agreements relating to two different holdings, as is surely intended. As I have explained, the scope of "associates" can be far wider than this as it can apply to all client relationships. In my submission, therefore, the Government ought to agree to this amendment or, better, agree it in Clause 412 itself.

I speak now to Amendments Nos. 219A to 219F. As your Lordships will be aware, Clause 412(1) provides that its definition of "controller" applies throughout the Bill. However, there are similar but different provisions relating to who is a controller for the purposes of Part XII--control over authorised persons--and therefore that should be expressly excluded from the terms of Clause 412(1). The definition of "associate" applies both in relation to a company in which each holder holds shares and in relation to another company in which each holder can exercise or control the exercise of voting rights. Applying that in paragraph (g), which is in any event far too wide, leads to a ridiculous situation. It means that, if a holder has a relevant agreement or arrangement with another person in relation to the company in which he holds shares, that other person is also an associate in relation to the company in which he has voting rights, even though the agreement has nothing to do with it. The converse is also true. I can therefore see no justification for this wide definition, which would lead to absurd results.

I would also emphasise that the amendment follows the wording which is in the single market implementing regulations. Those are the regulations under the European Communities Act which implement the four single market directives. It may be that the draftsman of the Bill was being over-precise in separating out the two different holdings into two different companies, but we surely have to insist that the "associate" definition stays as it is in the implementing regulations. Even if it does, it still has the problems which Amendment No. 11 tries to solve, but this peculiar extension only makes the position more inexplicable. There is really no way that any company can possibly police it. Amendments Nos. 219D and 219E delete "D" from paragraph (g) as a consequence of going with a single company test. I beg to move.

My Lords, in this large group of opposition amendments there is one lone government amendment, Amendment No. 159, to which I should like to speak before I refer to the opposition amendments.

The Bill introduces the controllers regime to replace the current patchwork of arrangements set out in various pieces of legislation with a single set of coherent prohibitions--provisions; it was a Freudian slip! The regime has attracted much debate during the passage of the Bill both here and in another place. The principal matter for discussion has been the scope of the obligation to notify a change in control. A number of interesting and technical examples have been put forward where it is felt that these obligations fall too heavily or too indiscriminately in certain circumstances.

The Government are committed to creating a regime which is both effective and fair while also ensuring that we fully and properly implement our obligations under European law. The single market directives constrain our room for manoeuvre in this area to a large degree, but we have been persuaded that there is a case for greater flexibility. With that in mind, we have tabled Amendment No. 159 to Clause 188, which introduces a power for the Treasury to exempt by order certain persons from the obligations to notify the FSA of acquisition or divestment of control. In the case of a provisional agreement to sell shares, for instance, we do not consider it necessary to require both the buyer and the seller to notify the agreement. In that situation, the seller might be exempted from the obligation to notify.

We do not think it is appropriate or sensible to seek to be definitive on the face of the Bill about the circumstances in which it would be reasonable and proportionate to disapply the notification requirements. Our discussions on this part of the Bill have thrown up a number of fairly detailed technical points and it seems likely that other circumstances will arise or will be identified in the future in which it is desirable to relieve persons of the obligation to notify using this power. But I must emphasise that this power can be exercised only in accordance with the single market directive.

In addition, the Delegated Powers and Deregulation Committee judged that the amendment raises no problems in relation to the delegated power provided for here, and I hope that the amendment will be acceptable to the House.

I turn to the Opposition amendments, beginning with those relating to nominees. The point raised by Amendments Nos. 158F--and by 158G, which seems to be a straight duplicate of Amendment No. 158F; I hope I understand it correctly--and Amendment No. 219F--

My Lords, it is clear to me and it surely cannot have escaped my noble friend's notice that the last line of Amendment No. 158F contains the words,

"at the direction of Y", and in the last line of Amendment No. 158G the words are,

"at the discretion of Y".

Presumably, therein lies the difference.

My Lords, I had not noticed that either. I wonder whether, with the leave of the House, the noble Lord, Lord Kingsland, would like to explain the difference between the two.

My Lords, because I realised that there could be a difference, I referred to the amendments, rightly, as "they" and not "it"!

My Lords, I have already used my Browning example. Noble Lords will recall that Browning was asked late in life what his early poem, "Sordello" meant. He said,

"When it was written, God and Robert Browning knew what it meant; now only Gods knows".

My Lords, that applies to a number of places in this building!

My Lords, I am delighted to have discovered the difference between the two amendments, for which I am grateful to the noble Lord, Lord Elton.

Amendment 219F, which is not the same, also concerns circumstances where there may be a degree of unnecessary double counting of shares and voting rights. The amendments seek to exempt a nominee or agent who only acts on the instructions of another person.

Unfortunately, as I explained in Committee, we cannot agree to this amendment as the terms in which it is drafted would breach the European directives; namely, Article 11 of the second banking directive and Article 9 of the investment services directive, which require notification of the holding of either capital or voting rights. I shall gladly look further at examples of possible duplication in the notification requirements to see whether we should exercise the new power to exempt particular circumstances. But that cannot be at the expense of giving full effect to the requirements of the directives.

Amendments Nos. 158E to 158EB and Amendments Nos. 158H to 158L refer to "taking steps". We are in complete agreement with the noble Lord, Lord Kingsland, that it should be only the step which results in the acquisition of control that should need to be notified. Equally, it is important that it is clear that this step should not proceed without approval.

We amended Clause 174 in another place precisely to make this clear. However, in view of the concerns expressed by the noble Lord, Lord Kingsland, in Committee, we have again consulted parliamentary counsel. We are satisfied that it is implicit that the steps referred to in Clause 174 are the steps which, if taken, would directly lead to the person concerned acquiring control and not some prior steps, and that the courts will not take the view that some first tentative step on the path to acquiring control should be notified. To be more precise, we are clear that merely instructing your broker to ask the price at which your target shares are currently trading would not trigger the obligation to notify.

We have considered whether there is anything further that might be done to make that conclusion any more secure. We do not see that there is. We certainly do not think that the amendments achieve that. We therefore take the view that the text of the Bill is correct as it stands.

I turn now to Amendment No. 219A, which appears to seek to separate the definition of "controller" under Clause 412 as it applies for the purposes of other parts of the Bill--for example, Part XI on investigations--from the circumstances in which acquisition of control requires notification under Part XII.

I do not think that such a separation is helpful. The concepts to be applied are the same. Having a separate definition of "controller" in Clause 412 can be seen as rather duplicative, but we think it is necessary to have a single Bill-wide definition of the term.

In practice, we shall want to keep the definition under Clause 412 in step with the notification requirements under Clause 175, which is why we have included a power to amend Clause 412 with the power to amend the notification requirements. I am happy to make clear for the record our intention to keep these provisions in line if that provides any reassurance.

Finally, Amendments Nos. 219B to 219E and Amendments Nos. 158EC, 158M and 158N appear to be drafting amendments. We do not see that they add any value and we are not, therefore, inclined to accept them. I hope that the House will approve our Amendment No. 159 and that noble Lords will not feel it necessary to press the other amendments.

My Lords, I thank the Minister for his response and derive some comfort from it in relation to our amendments. I shall look carefully at the text of Hansard to see whether I must pursue the matter at Third Reading.

The noble Lord asked whether the Opposition was prepared to support Amendment No. 159. I hope that the Minister will allow me one further request for clarification. Following on his observations, my understanding is that the amendment allows the Treasury to provide for exemptions from the notification requirements. To that extent it is, therefore, applauded. The Treasury's Explanatory Notes make clear that the power of exemption is intended to protect persons from an unnecessary obligation to notify the authority. It is explained that exemptions will be granted only in cases where the single market directives do not apply or where, for example, the definition of "associates" has the effect that two or more people must notify the same acquisition of shares or voting rights.

However, we believe that what would do most to prevent unnecessary obligations to notify would be a change in the phraseology of the notice requirement in Clause 174. It is very difficult to be able to identify the precise step that will result in somebody acquiring control under Clause 174(1). Accordingly, any act which is likely to lead to a person acquiring control may in practice cause that person to notify. The Minister has been quite helpful on that point, but it shows the importance of accepting at least the spirit of our amendment to the clause. I hope that what the Minister said does that. If so, I do not believe that we shall need to return to the matter at Third Reading.

My Lords, with the leave of the House, we have dealt with it in an amendment to Clause 188 because of the difficulties under Clause 174 of conformity with the European directives. The amendments to Clause 174 which the Opposition have tabled, and any others that we have tried to think of, simply do not work. We believe, however, that the amendment to Clause 188 provides the necessary flexibility and makes it possible for the Treasury to exempt persons under certain circumstances from the notification requirements. We share the view of the noble Lord that we should, as far as possible, reduce the burden of notification, and we believe that our Amendment No. 159 is the best way to achieve that.

My Lords, I am most grateful to the noble Lord for again responding so fully. In the spirit of his constructive response, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 158EA to 158EC not moved.]

Clause 175 [Acquiring control]:

[Amendments Nos. 158F and 158G not moved.]

Clause 186 [Notification]:

[Amendments Nos. 158H to 158M not moved.]

Clause 187 [Offences under this Part]:

[Amendment No. 158N not moved.]

Clause 188 [Power to change definitions of control etc.]:

moved Amendment No. 159:

Page 98, line 30, at end insert--

("( ) provide for exemptions from the obligations to notify imposed by sections 174 and 186;").

On Question, amendment agreed to.

Clause 196 [Rescission and variation of requirements]:

moved Amendment No. 160:

Page 103, line 28, after ("power") insert ("of the Authority on its own initiative").

My Lords, on behalf of my noble friend I rise to move Amendment No. 160 and speak to Amendment No. 161. These amendments represent minor drafting changes and remove a degree of overlap between subsections (2) and (3) of Clause 196. At present both subsections deal with the decision of the authority to vary a requirement on its own initiative, but subsection (2) deals also with the decision to rescind. The amendment limits subsection (2) to the situation in which the FSA decides to rescind a requirement on its own initiative. In this case a written notice must be issued specifying the date on which the requirement ceases to have effect. Subsection (3) continues to deal with the variation of a requirement of the FSA's initiative, with the full supervisory procedure under Clause 193 being applied. This is the same procedure as applies to the original decision to impose the requirement. I beg to move.

On Question, amendment agreed to.

moved Amendment No. 161:

Page 103, line 28, leave out ("or vary").

My Lords, I beg to move this amendment formally.

On Question, amendment agreed to.

Clause 206: [Statements of policy]:

moved Amendment No. 161TA:

Page 106, line 32, at end insert ("and

(c) the circumstances in which the Authority will take disciplinary measures under this Part.").

My Lords, under Clause 206(1) the authority must prepare and issue a statement of policy with respect to (a) the imposition of penalties under Part XIV and (b) the amount of penalties under Part XIV as well. Part XIV is that section of the Bill dealing with the power of the authority to take disciplinary measures against an authorised person who has contravened a requirement imposed on him by or under the Act.

The authority's statement of policy on the imposition of penalties and the amount of penalties themselves is important. We believe the statement should be extended to cover the authority's policy on the circumstances in which it will take disciplinary proceedings. No doubt the authority will have a policy on taking disciplinary proceedings and, in the interests of transparency, we believe that policy should be made public and be made subject to consultation under Clause 207.

Clause 206(2) sets out those matters to which the authority must have regard in the context of its policy on the scale of penalties. Amendment No. 161UA reflects our proposal that the authority's statement of policy should be extended to cover its policy on the circumstances in which it will take disciplinary proceedings. Amendment No. 161VA would add a further matter to which the authority must have regard: namely, whether the person who contravened a requirement brought the matter to the authority's attention.

We believe that this is an important consideration for the authority to have regard to when fixing penalties. On the assumption that those who do bring contraventions to the authority's attention will be eligible for lower penalties, this provision will encourage authorised persons to come forward, rather than hoping that the matter will remain undiscovered.

I now turn to Amendment No. 161WA. Financial institutions in general, and the City in particular, are very concerned, as your Lordships must by now be aware, about the authority's disciplinary powers. I hasten to add that this is not because they are frightened of being disciplined for genuine wrong-doing, but rather because of the almost unlimited circumstances in which they are at risk of being so disciplined.

The reason that firms are so concerned about discipline is the following: first, FSA rules cover virtually every aspect of an authorised person's regulated activities; secondly, the rules are generally drafted in absolute terms which apply to every single transaction. For example, a broker will normally be required to achieve timely execution on every trade, and a financial adviser to give suitable advice on every occasion. Accordingly, a single failure amounts to a rule breach.

Thirdly, there is no de minimus provision, which provides that a small number of failures will not amount to a rule breach. Fourthly, firms are required to keep records of their activities and generally to log rule breaches. Finally, firms are required to notify serious rule breaches to the authority, which in any case carries out routine inspections of firms.

Virtually every authorised firm will therefore be in breach of one or more rules for much of the time and will feel exposed to the risk of disciplinary action. For this reason, understandably enough, firms are concerned to ensure that there should be adequate safeguards built into the disciplinary process.

This amendment seeks to address one particular concern, which is that once the authority has decided to commence disciplinary action, by the issue of a warning notice, there should be ample opportunity for firms, and also approved persons and individuals being disciplined for market abuse, to be able to speak to an independent committee within the authority in order to attempt to settle the matter in advance of a formal tribunal hearing. At present the Bill contains very little about the procedure which is to apply between the issue of the warning notice, dealt with by Clause 203, and the issue of the decision notice, dealt with by Clause 204.

There is provision in Clause 390 that the authority must have a procedure in relation to the giving of warning and decision notices. Subsection (2) states that the procedure must ensure that the decision to give such notice should be taken by someone who is not directly involved in establishing the evidence upon which the decision was based. However, in our submission, this does not go far enough. The proposed new clause after Clause 207 seeks to codify what the authority has recommended in its response to Consultation Paper 17.

Consultation Paper 17, issued in December 1998, sets out the authority's proposals for enforcing the new regime. It attracted, as many noble Lords will doubtless be aware, a significant amount of comment, in particular in relation to ensuring that firms were able to make effective representations to the FSA without needing to go to the trouble and expense of a formal disciplinary hearing.

The authority published its response in July 1999 taking into account various responses received from the financial services industry. Pages 4 to 7 set out the authority's comments on the decision-making process. Paragraph 18 states that the authority is attracted to a disciplinary decision-making process with most of the features now contained in the proposed new clause after Clause 207.

The reason for setting the process out in the Bill rather than hoping that the authority will adopt this procedure and continue to keep it in force is to give confidence and certainty to regulated firms. Without in any way seeking to diminish the importance of observing the rules in the first place, and without denying that in many circumstances disciplinary action is wholly justified, firms are anxious to ensure that, if threatened with such proceedings, they have the assurance of a reasonable opportunity to seek to persuade the authority that it should not so proceed. It could, for example, be because the authority is mistaken as to the facts, has overlooked mitigating circumstances or perhaps is even treating the firm unfairly or inconsistently. I beg to move.

My Lords, Amendment No. 161VA would add a new factor to which the authority must have regard in its policy on setting penalties: whether the alleged contravenor brought the matter to the FSA's attention.

Everyone would agree that any reasonable public authority is bound to take due account of whether a person drew the authority's attention to a contravention. In another field it would be called good mitigation. The act of "owning up" is clearly a factor that should be taken into account. That is part of establishing an effective collaborative relationship between regulator and regulated.

Indeed, the authority has already made clear that this would be one of the factors that it would take into account in its policy on imposing fines on authorised persons under Part XIV and approved persons under Part V. As has been pointed out, this was factor (g) in a list of factors to be taken into account on page 36 of the authority's Consultation Paper 17, entitled Enforcing the New regime, published in December 1998.

Other factors listed on page 36 of that paper include the degree of co-operation shown in the investigation of a breach, or steps taken to prevent similar problems arising in future, neither of which appears on the face of the Bill.

Similarly, the authority dealt with the factors to be taken into account when deciding to impose financial penalties for market abuse on page 53 of CP17. These include the degree of co-operation with FSA inquiries and steps taken to address the misconduct in question. It is in any case right that we should not include factors here that are not included in the exactly equivalent provisions in relation to the financial penalty powers in, first, Part V, approved persons in Clause 69, secondly, Part VI, official listing in Clause 91, and, thirdly, Part VIII, market abuse in Clause 120.

The point is that we have identified in Clause 206 particular factors which the joint committee said should be given particular weight, but these are not exhaustive. There are clearly other factors that any reasonable public authority should take into account, one of which is whether or not the person owned up.

The FSA is well aware of that and has reflected it in its proposed policy. Indeed, it has reflected it on a wider basis than would be implied by the amendment in isolation. The policy will be carried through to its enforcement manual, which it will publish soon for further consultation.

Amendments Nos. 161TA and 161UA seek to expand the scope of the statement of policy to be issued under Clause 206 to include a statement as to the circumstances in which the FSA will take disciplinary measures under Part XIV as opposed to the policy on imposing financial penalties. We submit that that, too, is unnecessary.

Page 35 of CP17 listed criteria which the FSA proposed to take into account in determining whether to take disciplinary action. As with the factors in fining decisions already referred to, these criteria for disciplinary actions received broad support during the process of consultation on CP17. Again, the FSA's draft enforcement manual will specifically cover these criteria, so there will be a further opportunity for consultation on them.

Our point is that we have followed the recommendation of the joint committee in prescribing what must be covered by the statement of policy. That does not mean that the authority should not publish and consult on other aspects of its policy--as indeed it has been doing--but we have not attempted to make this provision exhaustive and we do not think it necessary to do so. It is on that basis that we hope the noble Lord will agree to withdraw his amendment.

The proposed new clause after Clause 207 seeks to legislate for the enforcement committee, the arrangements for which were also set out in CP17. As we have made clear on a number of occasions, including in the Government's response to the Burns committee and in another place, we do not think it appropriate or desirable to set out the administrative arrangements which the FSA must follow in such detail. Instead, we have used the Bill to impose certain important parameters.

Clauses 390 and 391 require the authority to consult on and publish a statement of its procedures. In keeping with the recommendation of the Burns committee that,

"the FSA should set up an enforcement committee or some equivalent mechanism to separate the functions of investigation and enforcement", the Government introduced subsection (2) of Clause 390. It requires that, among other things, the published procedures must be designed to secure an appropriate separation between those directly involved in building a disciplinary case and those taking the decision to proceed with the disciplinary action.

Thus the enforcement committee is the means by which the FSA currently proposes to meet that requirement, but the Bill does not prevent these administrative arrangements being developed and improved in future. Deliberately, Clauses 390 and 391 leave the way open to future development of the procedure. That is entirely in keeping with the Burns committee recommendation.

The FSA will allow time for representations to be made following the warning notice. That is already a requirement under Clause 382. The FSA has also announced that representations can be both written and oral. However, we cannot accept that there should be a requirement in the Bill that the enforcement committee should take oral representations from the authorised person, his legal representatives or the authority. In our opinion, that would be going too far in turning the committee into an additional tribunal.

The Government have made clear again and again that we do not believe it is desirable that the authority's internal arrangements should be turned into a rival tribunal to the independent financial services and markets tribunal established under Part IX of the Bill. That tribunal is a fully independent, first-instance tribunal and, as such, is the guarantor of a person's right to a fair hearing. Inserting a prior quasi-tribunal stage would serve only to increase the time and expense involved before the person concerned has access to the proper tribunal.

We believe that the amendment suffers from other problems; for example, the notification required under subsection (10)(a) would duplicate the notice of discontinuance which the authority is required to issue under Clause 384 where it decides not to proceed with an action proposed in a warning notice.

It is also important that we do not fudge the matter of who is taking the action in question. The amendment appears to give that responsibility to the committee, as distinct from the Financial Services Authority, although the powers are the authority's and it must be the authority that is accountable for their use.

By appearing to give the committee separate responsibility for the exercise of the authority's powers, there is a danger that the committee will separately become a competent authority for the purposes of the European directives. We have already amended Part IX of the Bill to avoid precisely that possible, and we believe unwelcome, outcome for the tribunal. It is for those reasons that we invite the noble Lord to withdraw his amendments tonight.

My Lords, I thank the Minister for his characteristically full reply. I am, of course, disappointed that he should consider that the first three amendments to which I spoke should demand a degree of precision on the face of the Bill which he is reluctant to concede. This is not the first time that the Opposition have been presented with that view and it will probably not be the last. I have come to accept that the Government are keen to maximise the discretion that the authority should have in these circumstances. Although the Opposition disagree with that approach, it appears that that is what the City will end up with.

So far as concerns the amendment to additional Clause 207A, I should like to look in full at the answer that the noble Lord gave before I tell him whether or not this is a matter that the Opposition intend to pursue at Third Reading. For what it is worth, my own view is this: I believe that the Government are running a very high-risk policy with Article 6.1 of the European Convention on Human Rights. Should the Government's interpretation prove wrong, it is almost certain that the Bill will have to be amended.

Clause 207A provides an extremely useful cushion to the FSA to deal with situations which, if dealt with formally, might expose the inadequacy of the protection of the individual in the Act. Therefore, I ask the Minister to reflect on what he said about our proposal. Perhaps he will surprise me and come back at Third Reading with an amendment that reflects our own. Meanwhile, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 161UA and 161VA not moved.]

[Amendment No. 161WA not moved.]

Clause 211 [Rights of the scheme in relevant person's insolvency]:

moved Amendment No. 161XA:

Page 110, line 21, at end insert ("; and

( ) for transferring to the scheme manager a right of recovery against that person").

My Lords, in moving this amendment, I should like to raise an important point about the financial services compensation scheme. In essence, as your Lordships will know, it is proposed to have the power to extinguish policyholders' rights to recovery and replace those rights with a claim under the compensation scheme. So the compensation scheme will have a new right to proceed as a creditor of the failed firm.

As many noble Lords will know, reinsurance contracts usually restrict liability to payments actually made by the insurer and I am concerned that the Bill's provisions will sever that link. The reinsurer would not have a contractual liability to the compensation scheme and its new right of recovery. Therefore, this amendment seeks to extend Clause 211 to allow rules to be made which transfer the liability of the insurance company in respect of the claimant to the scheme. That will be in addition to the power to extinguish the liability and confer new rights on the scheme.

However, the amendment seems to solve the problem. I should be very happy if the Government were to accept it and thus to ensure that the reinsurer would have a contractual liability under the compensation scheme. I beg to move.

My Lords, I am grateful to the noble Lord, Lord Hunt, for moving his amendment, for writing to me in advance and, indeed, for the positive and constructive contribution which he has been making to the Bill on a number of occasions.

I have problems with the drafting of the amendment but I shall not weary the House with those problems unless the noble Lord, Lord Hunt, wants me to. Perhaps we can have a few words in private about that.

However, I have a question as to whether the issue which he has raised needs to be addressed. On balance, we do not believe that it does. We reached that conclusion by looking at Clauses 211 and 213 together. Clause 211 deals with the rights of the compensation scheme manager in the event that compensation is paid out to the customers of a firm which is unable or likely to be unable to meet its liabilities. For most firms, that does not raise any issues in connection with reinsurance contracts because they are not relevant to most types of business.

The issue here is effectively confined to cases of insurance company insolvency, as the noble Lord recognised. In practice, however, we believe that it will almost certainly be necessary and desirable for the scheme manager to take measures under Clause 213 where an insurance company is in financial difficulties.

Under Clause 213, the FSA will be able to make provision for the scheme manager to take measures to avoid the inconvenience and expense of allowing insurance companies to become insolvent by effecting the transfer of policies to another insurer or by providing assistance to the relevant insurer to enable it to remain in business, so allowing for a more orderly and less expensive run-off of the liabilities on its policies. Indeed, that is what the Policyholders Protection Board does at the moment.

Those measures are important. The administrative costs of liquidation for insurance companies can be extremely high because the run-off of insurance liabilities can last for several years. Not only does liquidation push up costs, it can also mean inconvenience for customers, who may face substantial delays as the liquidator seeks to calculate the insurer's overall liabilities and so determine what can be paid to individual claimants.

Where assistance under the compensation scheme is given to the insurance company under Clause 213, that will enable the insurance company to pay its policyholders itself. There will be no need to rely on the provisions in Clause 211 and therefore there is no doubt that the insurer can claim against it reinsurers.

So it is difficult to envisage the circumstances which would, in practice, give rise to the problem which is raised by this amendment. I hope that that reassures the noble Lord and, indeed, the Association of British Insurers and that he will not feel it necessary to press the amendment.

My Lords, I thank the Minister for that response. The amendment arises from the concern about the effect on reinsurance contracts and he has given some reassuring words which I should like to consider and I know that the Association of British Insurers would also wish to read what he said. In those circumstances, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 224 [Determination under the compulsory jurisdiction]:

moved Amendment No. 161YA:

Page 118, line 18, leave out subsections (4) to (7) and insert--

("(4) The ombudsman's determination shall be binding on the respondent and the complainant and shall be final.

(5) The ombudsman's statement must--

(a) give the ombudsman's reasons for his determination; and

(b) be signed by him.").

My Lords, there are four amendments in this group. They all make distinct and different points so, perhaps tediously for your Lordships, I am obliged to describe them in turn. They all deal with what we perceive to be anomalies in the crucial ombudsman scheme. I must also confess that Amendment No. 161ZA has been tabled incorrectly. It should relate to line 13 on page 118 and not to line 37.

Clause 224(2) states that,

"A complaint is to be determined by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case".

That sounds fine. However, our concern with that formulation is that it would enable the ombudsman to uphold a complaint even though a firm had observed all the FSA's rules and all the relevant legal provisions. We believe that that could be unfair to firms. It would also remove the level of certainty that firms need when devising their procedures under this regulatory regime. Therefore, this amendment proposes that the ombudsman will uphold a complaint only when the respondent has breached a rule or failed to satisfy a legal obligation or duty owed to the complainant.

Amendment No. 161YA repeats an amendment that we tabled in Committee. I shall explain again why we believe that the current provisions in subsections (4) to (7) of Clause 224 are unfair and should be amended in this way. At present, most of the existing ombudsman schemes include a provision along the lines of the current wording of subsections (4) to (7), which provides that the ombudsman's determination is not binding on the complainant but is binding on the respondent. The difference is that those schemes are voluntary schemes. They are not compulsory as is the scheme under this Bill.

There is a significant difference in principle in relation to voluntary schemes where the authorised person can choose to have the benefits of the scheme, knowing that the price that he has to pay is that any determination will be binding on him and not on the complainant. However, we believe that it is different where the authorised person has no choice about whether to join the scheme or not. It must be remembered that the complainant's position is already well protected, not least because the complainant chooses whether or not to refer a complaint to the ombudsman in the first place. We believe that if he decides to use the ombudsman scheme, he must accept that the ombudsman's determination will be binding on him.

Amendment No. 161B relates to Clause 225(3) which provides that the ombudsman may award compensation of the same kind as a court can award for breach of contract. The issue here is that there are two different kinds of damages recognised by the law. The first is damages in negligence which are designed to place an investor back in the position he would have been in had he not been given poor advice. Typically, that is achieved by a return of the contribution that has been paid, plus interest to the investor where an unnecessary life assurance policy has been sold. That is the measure of compensation normally awarded to retail investors under the existing Financial Services Act.

By contrast, an award of damages in contract is intended to put the investor back into the position he would have been in had the contract been performed; for example, if an investor has been sold an investment with a guaranteed 9 per cent return, a court would compensate for any under-performance by requiring the firm to pay the guaranteed growth rate.

Under Clause 225(3), in most cases it will be appropriate for the ombudsman to award damages in negligence rather than in contract. It seems to us that the clause, as drafted, suggests that the ombudsman should award damages only in contract. Therefore, as indicated by our amendment, we believe that it is highly desirable for the words "or negligence" to be inserted at the end of the clause to make it clear that the ombudsman should award whatever compensation is appropriate in the circumstances and not necessarily compensation based only on breach of contract.

I turn now to the last in this group of amendments, Amendment No. 161C. This amendment amends Clause 226 which is concerned with the ombudsman's power to award costs. Again, Clause 226(3) provides that,

"Cost rules may not provide for the making of an award against the complainant in respect of the [company's] costs".

However, under subsection (4), these rules can provide for an award in favour of the company where, in the opinion of the ombudsman, the complainant's conduct was "improper or unreasonable" or,

"the complainant was responsible for an unreasonable delay".

In our view, this does not appear to be balanced. Authorised persons are bound to participate in the ombudsman scheme, but they have no redress even where the complainant acts improperly or unreasonably or has been responsible for unreasonable delay. Amendment No. 161C would allow the ombudsman scheme rules to provide for an award against the complainant in respect of the respondent's--the company's--costs in the same circumstances as already provided for in subsection (4). I beg to move.

Because Amendments Nos. 161A, 161B and 161C are being spoken to along with Amendment No. 161YA, I should point out to the Committee that if Amendment No. 161A is agreed to, I shall not be able to call Amendment No. 161B. If Amendment No. 161C is agreed to, I shall not be able to call Amendment No. 162.

I welcome the opportunity to explain the thinking that lies behind Amendment No. 161A. In doing so, I should like to mention my personal feelings about the ombudsman scheme. Noble Lords will know that for 35 years I have been a solicitor involved in advising insurance companies and their trade association, the Association of British Insurers, and the predecessor bodies.

Just under 20 years ago, as solicitor to two insurance companies in particular, I was one of the authors of the original industry scheme for the insurance ombudsman. After discussions with the National Consumer Council, we set up the scheme. Its themes could be described as informality, flexibility and speed. I believe that the scheme has been a tremendous success, as indeed have been the other schemes. I am moving this amendment in the hope that we shall retain that flexibility and speed in the new scheme, and I know that the chief ombudsman and his colleagues share that view.

What I and a number of other noble Lords seek to do in this amendment is to draw attention to what I believe to be a fairly obvious defect in the drafting of what is now Clause 225(3). Perhaps I may say how pleased I am to see sitting in their places the noble Lord, Lord Borrie, and the noble and learned Lord, Lord Donaldson of Lymington. I know that the noble Lord, Lord Phillips of Sudbury, would have been here had it been possible for him to be present. That is because we are all concerned about the defect which I shall explain and which I understand was brought to the attention of the Treasury as long ago as August last year. The Government have been on notice for several months as regards anxiety about the defect which is shared not only by the chief ombudsman, but also by the Financial Services Agency and the scheme operator whom we now know as the financial ombudsman service.

If ever there was a provision in the Bill that needs to be clear for ordinary consumers, surely this is it. Among all the provisions of the Bill, those concerning the powers of the ombudsman are most likely to be of interest to ordinary consumers. Furthermore, it is crucial for responsible members of the industry. It is of the utmost importance that everyone should be clear about the powers of the ombudsman in relation to the size and the make-up of money awards.

Of course, the whole purport behind the scheme is a reflection of the fact that the industry is rightly placing more emphasis on curing the problem as soon as possible. The FSA will be making rules to govern firms' complaints-handling activity. And most large financial service firms--banks and insurance companies--have in-house complaints-handling units. The current schemes, and indeed the new scheme, are intended to be a last resort after a complaint has been considered at senior level within a firm. On average, firms probably deal with between six and 10 times the number of complaints that the ombudsman ever receives.

Against that background, it is critical for complainants and their advisers to be clear about the powers of the ombudsman to make money awards. It would be most unfortunate if the ambiguity had to be the subject of regular argument before the ombudsman by sets of advisers, or, even worse, before the courts, before a clear interpretation could be established. That would do little for confidence in the industry and, indeed, for confidence in the scheme itself. Speaking as a solicitor, I feel strongly that the last thing the ombudsman scheme wants is intense learned argument over a considerable period of time.

The figures to which I have been referring as to the number of complaints handled by in-house complaints departments are not untypical throughout the industry. The cases that reach the ombudsman are, in effect, disputes that cannot be resolved even by the application of expertise and goodwill by experienced staff in complaints-handling units in industry. The complexity or novelty of the matters in issue, or perhaps the bitterness and lack of trust that may have developed, mean that the matter must be referred for independent adjudication. At that stage, therefore, when a matter is referred to the ombudsman, he must expect the parties to an unresolved dispute to be at loggerheads. It would be unfortunate, therefore, if there were further room for dispute over the ombudsman's powers because this House had failed to enact a clear provision.

I have envisaged situations where a financial firm complained of had the benefit of professional advice. But many will not seek advice. The whole ombudsman scheme is designed to be used without professional assistance. Let us consider a dispute with an investor over what is alleged to have been negligent advice. Both might stare long and hard at the words of this subsection before trying to guess its meaning, and that is the topic I want to address.

Let me for a moment reflect on the process that the Bill provides for a determination to be made. Clause 224 empowers the ombudsman to determine a complaint on the basis of what is "fair and reasonable". That is clearly wider than the definition used within a court. For example, the ombudsman might conclude, "I find that, while this company has not broken any rule or legal duty, it behaved unfairly towards the complainant and that behaviour caused the complainant financial loss of X amount and much anxiety and distress". On that basis the complaint is upheld. But what redress can follow? That is where the problem arises.

Under Clause 225, the ombudsman can either make a direction or a money award. By virtue of Clause 225(2)(b) the ombudsman may make a direction the financial consequences of which are unlimited and such a direction can encompass requirements that courts are unable to make. So in the case we are considering, the ombudsman could, for instance, direct that the institution should apologise; that it should write to other organisations reassuring them about the complainant's creditworthiness if that had been put in doubt; that it should reconstitute the complainant's account, as directed, and should treat as valid certain transactions it had purported to invalidate. All these matters are within the ombudsman's power even though the cost might exceed the monetary limit. They are certainly powers which are not exercisable by a court--that is my key point--nor rightly does the subsection try to constrain the ombudsman's powers by reference to the powers of a court. Such is the wide variety of possible remedies that might be appropriate in a scheme where disputes need to be settled with the minimum of authority that the power of the ombudsman needs to be generously defined.

But when considering a money award, the Bill adopts a very different approach. The ombudsman must then look to Clause 225(3) and try to understand what it means. In a money award he is required only to compensate for the kinds of loss or damage for which a court could order,

"if it were deciding an action for breach of contract".

What on earth does that mean?

There are two very different possible interpretations of that provision. The first could follow these lines: the ombudsman is permitted to construct a hypothetical contract which contemplates any form of loss or damage as potentially resulting in an award of damages for a breach of that hypothetical contract. If it is possible to envisage any contract resulting in the kind of loss for which a court could award, then the ombudsman can make an award. I shall not go into any further detail on that matter.

The second possible construction is that the ombudsman must look to the actual contract entered into by the complainant and the respondent and then consider the kind of damages that a court would have power to award for breach of that particular contract. But the problem with that interpretation is that often there will be no contract at all. What the complainant complains about is, for instance, that he has been wrongly discriminated against and has been unable to take out a contract so there is not one. Alternatively, he is a third-party beneficiary under a trust or an insurance policy and under those circumstances he is not party to a contract at all. Even if he is party to a contract, that approach might turn out to be too narrow, depending on that, if anything, which is finally specified under subsection (3)(b).

I hope that I am taking the Minister with me so far because this is such a crucial and critical point. Surely it would be absurd for the ombudsman to declare, "I find that this complaint should be upheld on the basis that in my opinion it would be fair to do so, even though a court would not. However, I am unable to award compensation for the complainant because a court would not do so".

There appears to be a clash here between the requirement that the ombudsman should determine the outcome of complaints on a basis different from and wider than that used by the courts on the one hand, and the attempt to constrain the money awards that the ombudsman may make by reference to the powers of the court.

We have to remember that these provisions may have to be interpreted in the courts. It is that which I am seeking to avoid. In a similar context the courts have been found to be very cautious about interpreting generously provisions such as these. Unless clear words are used on the face of the legislation the courts normally say that the powers of decision-makers are to be construed no wider than the powers of the courts themselves. That is the approach that the courts have taken to quite similar provisions in the legislation relating to the powers, for example, of the pensions ombudsman. That ombudsman will be very different from the one proposed here. The courts will have their minds lead to such precedents.

My amendment and that of my noble friend, seek to clarify matters. It would make a more natural and commonly recognised distinction between financial loss under paragraph (a) and other forms of loss or damage under paragraph(b). The policy aim in separating all this is that the authority should be enabled to impose a separate limit on these forms of loss or damage under paragraph (b). I believe that the amendment would permit that to be done.

In proposing this amendment I am seeking to assist the Government to get this rather important clause right and to make sure that it is clear on the face of the Bill. There is a clear and recognised ambiguity here. I hope that it will be accepted that this ambiguity can be eradicated by enacting my amendment. The Minister may say that it is not a perfect amendment--I do not know yet. It can be argued that the expression "financial loss" should be expanded so that it could refer to future uncrystalised losses. Some people may prefer that, as a matter of policy, the authority should specify the heads of loss or damage if these are to be the subject of a separate limitation. However, these issues are of less importance than the ambiguity contained in the main provision.

I am aware that disquiet has been expressed by the FSA and by the ombudsman about the drafting of the clause. The concern was also shared by the current ombudsman schemes. I could quote from the letter from the chairman of the Council of the Banking Ombudsman dated 26th January of this year, but the Minister will be aware of that communication. Therefore, I shall just make a passing reference to it. When the Economic Secretary replied on 14th March, he said:

"It is, of course, the Government's intention that the meaning of these provisions should be clear, and I have therefore asked my officials to consider whether the clause needs amending".

I hope that my noble friends and I have given the Government that opportunity.

My Lords, I should like to express my support for the amendment to which the noble Lord, Lord Hunt, has just been speaking. He has explained the amendment so admirably that I do not feel that I need to add to his explanation. I shall simply express my support and point out that the amendment to which my name is attached is a constructive measure and one which will be helpful in trying to explain more clearly what we all believe is the intention behind the clause; namely, the way in which the ombudsman should determine the amounts that he might award.

I wish to speak about the other amendments in this grouping, which were spoken to by the noble Lord, Lord Saatchi. I shall leave one of those amendments aside--the one referring to negligence which would be unnecessary. It cannot be read along with the amendment to which the noble Lord, Lord Hunt, myself and others have subscribed. In my view, the other three amendments to which the noble Lord, Lord Saatchi, spoke are wholly retrograde and undesirable. They show either a misunderstanding of the ombudsman system that we have come to know over many years, or a distrust or dislike of the system. I do not know which it is.

Noble Lords will already be aware that the private sector ombudsman, starting with the insurance one, began in the early 1980s--so I suppose that it has reached its majority. The parliamentary ombudsman dates back to 1967 and is concerned with matters other than breach of the law. He also deals with maladministration, if I may use the omnibus word in respect of what that particular ombudsman deals with and, similarly, do so in respect of the other ones in the public sector. The reason why I suspect a certain misunderstanding of the ombudsman system is that all of them are concerned with what one might call fairness, reasonableness and equity; they are not just concerned with the narrow question of whether someone has broken the law or certain rules.

Clause 224(2) says that the ombudsman's determination shall be on the basis of what is,

"fair and reasonable in all the circumstances of the case".

That is disliked by the Opposition Front Bench, but it follows the precedent of ombudsman schemes that I have described. I must stress that it is not intended under existing systems--or, indeed, under this Bill--that the ombudsman scheme should be a court of law.

The noble Lord, Lord Saatchi, did not mention the fact that the compensation awards are limited. The Minister will correct me if I am wrong, but I understand that it is intended that the limit of what the ombudsman can award in this area is £100,000, even in the most serious cases. Of course, if someone wishes to pursue a legal claim for more than that, he or she has the right to go to court.

That brings me to the point of how important it is that the right to go to court should be retained. In my view it should be retained until the very moment when the complainant accepts an award that has been made by the ombudsman. I believe that it is quite wrong for the Opposition Front Bench to suggest that the complainant should be forced to choose--ex ante, as it were, before he approaches the ombudsman at all--between a court of law and the ombudsman.

I suggest that there is a misunderstanding here. All the ombudsman schemes, including the one in this Bill, are surely designed with the idea that people should be encouraged to use them rather than a court of law. This is achieved by making the ombudsman scheme informal, by not involving lawyers and costs and certainly not by doing what the noble Lord, Lord Saatchi, wants; namely, to impose a risk that if the complainant loses his case he may have to pay the costs and the costs of the lawyers engaged by the other side. Each and every one of the three amendments which the noble Lord, Lord Saatchi, has tabled in the group we are discussing are to my mind wholly retrograde to what I might call "ombudsmanship", if there is such a word. The whole essence of the ombudsman arrangements is informality. They seek to avoid the rule that costs should follow the event; that if one loses one pays the other side's costs; and the matter of being compelled to choose between an ombudsman and a court of law right from the start.

I remind the noble Lord, Lord Saatchi, that even in the courts lawyers have recognised, at least for 20 or 30 years, that the costs rule in civil cases often has a retrograde and discouraging effect on people taking perfectly good and reasonable cases to court because they are so worried that if they lose they will have to pay the uncertain, unknown figure of costs that the other side incurs with their lawyers. Hence in the 1970s--Conservative Lord Chancellors agreed with this approach--one could bring small claims to the County Court satisfied in the knowledge that if one failed one would not have to pay the other side's costs.

I find it amazing that in the year 2000 the noble Lord, Lord Saatchi, should want to apply to the ombudsman schemes a rule that has fallen into a certain amount of desuetude, and certainly dislike, in the ordinary courts of the land. I am extremist in my views on this group of amendments. I am wholly in favour of the amendment that is proposed by the noble Lord, Lord Hunt. Noble Lords will notice that it is supported by the Cross Benches, the Liberal Democrats and a Back-Bench Conservative former Cabinet Minister. It is wholly worthy of support. The amendments proposed by the noble Lord, Lord Saatchi, on the other hand, are wholly worthy of dismissal.

My Lords, I speak to Amendment No. 162, which stands in my name and that of my noble friend Lord Sharman. I wish to comment also on other amendments in the group that we are discussing.

Like the noble Lord, Lord Hunt, we on these Benches believe that the principles of informality, flexibility and speed should characterise the work of the ombudsman in this area, as with other ombudsmen. We believe too in the principles of ease of access and cost-free access. Those principles informed our view of all the amendments in this group and led to the tabling of the amendment in our name.

As our amendment has not yet been spoken to, I should remind your Lordships that it seeks to delete subsection (4), which allows cost awards to be made, to put it in shorthand, against a vexatious litigant. I am sorry that even in his extremism the noble Lord, Lord Borrie, did not speak in support of this amendment. Given the arguments that he made, it is an amendment that is worthy of his support.

As I understand the situation at the moment, there are a number of ombudsmen in the financial services sector and a number of ombudsmen in other sectors. As a general rule, costs are not awarded, in any circumstances, against anyone who brings a case to the ombudsman. Obviously in some cases it may be the view of the ombudsman--it may be the view of a reasonable man or woman--that the person bringing a case to the ombudsman is absolutely obsessed by something which has no merit. But it is a part of the role of the ombudsman to deal with such cases, as well as to deal with cases that are very well founded.

If we get to a situation where ordinary people--not only obsessives--when considering what action to take after being badly done by feel that they may run into a costs award against them, this will deter the very people who should be applying to the ombudsman for redress from doing so because they will be worried that they will not be able to pay the costs. In our view, it is not a part of the plan for the ombudsman to be draconian in this respect, but, as long as this provision remains on the statute book, it will deter from going to the ombudsman the kind of people the scheme is designed to benefit.

At the same time, it will do nothing to deter the obsessive. A person with a burning grievance will take it to the ombudsman; if the ombudsman turns it down, he or she will pursue it through the courts until they reach the end of every conceivable level of redress. Not only is it wrong in principle, but it will be ineffective in practice. It will not stop the vexatious litigant from applying to the ombudsman. I urge the Government to drop this measure.

As to the other amendments, it almost goes without saying that we oppose Amendment No. 161C, which would broaden the scope for making cost awards against people bringing cases to the ombudsman. We support Amendment No. 161A. It is constructive and clarificatory and we hope that the Government will support it.

I apologise for taking the amendments in reverse order. We oppose Amendment Nos. 161ZA and 161YA. Amendment No. 161ZA would exclude a raft of cases which fall under the general heading of "maladministration" rather than a formal breach of rules. If an ombudsman is there to do anything, he is there to look at cases of plain, straightforward maladministration which the "maladministrator"--if that is the right word--refuses to accept. We believe that Amendment No. 161ZA would unduly constrain the kind of case in which an ombudsman can make a determination.

As the noble Lord, Lord Borrie, said, Amendment No. 161YA appears to require a potential complainant to the ombudsman to decide, before making a complaint, whether to go down the ombudsman route or the court route. This is an unnecessary and unsatisfactory choice to require people to make. It may force some people to decide on a court route who would receive a perfectly satisfactory outcome through the ombudsman route, which must be a preferable way of dealing with these issues.

In moving this amendment, the noble Lord, Lord Saatchi, said that one of the thoughts behind it was that this was a compulsory scheme rather than a voluntary scheme, and that that put it in a different category from other ombudsman schemes. That is a complete red herring. I do not see the relevance of that argument at all. Everyone, including the noble Lord, Lord Saatchi, believes that this scheme should apply across the board in the financial services sector and therefore the broad principles which apply to ombudsman schemes elsewhere should apply to it. Therefore, I would not support Amendment No. 161YA. We look forward to hearing from the Minister that he is prepared to move that little distance by agreeing to Amendment No. 162.

My Lords, I, too, look forward to the Minister saying that. I shall speak briefly to the amendments because they have been so fully explained.

If Amendment No. 161YA were accepted the ombudsman would be confined to dealing with cases where there had been a breach of a rule or a failure to satisfy a legal obligation. I am sure that that would be very restrictive. As has been pointed out, there have been cases of maladministration or just plain rudeness which do merit consideration by the ombudsman and in some circumstances would undoubtedly merit an award against the respondent. I know that it looks odd that one should have a unilateral ombudsman scheme--a one-way street--in which the complainant can take the matter up to, but not as far as, the award and then say, "I have not done very well here. I shall now go off to a court. Perhaps I shall do better there". But that is not what happens.

The proof of the pudding is that over many years this has been the pattern for all the ombudsman schemes. The dialogue that takes place between a complainant and the ombudsman, including very often a draft award telling the complainant what the award would contain if he persisted, has settled the matter completely. It may be illogical but it works. If ever there was a case for leaving it to work, this is it. We are not trying to invent a new ombudsman scheme. We are merely trying to rationalise a large number of ombudsman schemes, almost all of which have in common the feature that the respondent can be caught by an award but not the complainant.

I shall move briefly on to Amendment No. 161B. I respectfully suggest to the noble Lord, Lord Kingsland, although he is not in his place, that he does not mean "negligence". He means "tort". There are many things such as defamation and the like which come under that broader heading. I just thought that I might put in my two penn'orth on that one.

Amendments Nos. 161C and 162 deal with costs. I have never litigated, except on one occasion, for fear of the costs. Perhaps I may describe the occasion when I did it. I had gone round advocating that people should put a legal expenses addition to their household comprehensive policy. The time came when I thought that I should perhaps put my money where my mouth was, provided that it was not too much money. I discovered that it was only £10 and so I did it. I then found myself in dispute with a marine surveyor and handed over the matter to the legal expenses insurers, who took it from there. It was very satisfactory. I was insured against any liability to the other side in respect of costs. This scheme will fail if people are frightened of costs.

That brings me to the amendment to which I subscribe. I agree with all the reasons which have been given. I had to ring the chief ombudsman and ask what are the rules for damages in contract. He told me about it--he reminded me of it is a better way of putting it. They are very limiting--much more limiting than they ought to be, even in regard to court cases. They certainly have no place here. I very much hope that the Minister will be able to accept our much broader suggestion.

My Lords, I have been concerned with the creation of certain ombudsman schemes during my time in business. To the best of my knowledge, they have all worked satisfactorily from the point of view of the organisations that established them and the number of complainants whose core complaints have been met. I agree with the remarks of my noble friends Lord Saatchi and Lord Hunt of Wirral regarding the essential requirements, the fact that they can be dealt with speedily and the way in which awards were made--somewhat generously, but not generously in terms of the cost if people had suffered through their problems not being met or going to the courts.

I support the amendments. Two queries have been raised regarding the proposals of the noble Lord, Lord Saatchi. The matter of negligence was raised by the noble Lord, Lord Borrie. I interpret that as a measure of assessing the damages which could properly be awarded by an ombudsman, taking into account the various circumstances. To that extent negligence widens the field rather more than was otherwise appropriate.

The second relates to costs. I am not sure that I understood the noble Lord, Lord Newby, but as I understand it his amendment strikes out all reference to costs. Yet the noble Lord explained that costs seemed essential to stop someone going from court to court and running them up. Whatever the noble Lord's reasoning, I believe that the provision of a deterrent in the form of costs to stop the aggressive litigant abusing the system is quite a good thing. Such a provision should be used with considerable discretion. The costs certainly should not follow the event. But if someone abuses the system by making unreasonable complaints, it should be up to the ombudsman to provide a deterrent for the future by awarding costs against that person. Subject to those qualifications, I support the amendments that have been proposed.

My Lords, on behalf of the Government, let me try to take a rather tricky walk down the middle of the various amendments, incompatible as they are.

When we considered a similar clutch of amendments in Committee, I prefaced my remarks by explaining that the purpose of the ombudsman scheme was to provide a quick, cheap and informal mechanism for resolving disputes between authorised firms and consumers. It was also mentioned that over 80 per cent of complaints under the schemes we are replacing were resolved between the parties without the ombudsman having to take a decision one way or another. That is important, because it sets in context questions about who should be bound by the determination and on what basis such determinations should be reached. These issues do not even arise in the vast majority of cases.

I turn first to Amendment No. 161YA, proposing that decisions should not bind respondents. The amendment deals with the question of whether the ombudsman's decision should be binding on the complainant. This question has been raised before and has been given careful consideration. We believe that the approach taken in the Bill is the correct one. It is fundamental to the character of an ombudsman scheme that decisions should not be binding on complainants. Existing schemes are based on that premise. They provide consumers with an alternative to court action but do not deprive them of their legal rights at any stage before they decide to accept the determination. We do not believe that it would be appropriate in any way to design a new scheme in such a way as to put consumers in a less favourable position than under current schemes.

Apparently, over the past number of years, in general, complaints have been upheld only in a minority of cases: roughly 30 per cent in insurance, and roughly 40 per cent in investment matters. In the majority of cases complainants are disappointed.

However, experience is that over the past 20 years a handful of dissatisfied complainants have gone on to take advantage of their right to pursue matters by way of court proceedings. If complainants were required to choose between the ombudsman route and abandonment of their legal rights--that might well be the effect of the amendment if passed--or to preserve their rights by issuing proceedings, it is possible that many more would choose the court route. We believe it is unlikely that that outcome will be welcomed by the financial services industry, and we invite the noble Lord, Lord Saatchi, to withdraw his amendment.

Amendment No. 161ZA relates to Clause 224. It is perhaps helpful if I explain briefly the basis on which we believe that the ombudsman should determine cases for which the Bill makes provision. We believe it is right to require the ombudsman to determine cases on the basis of what is fair and reasonable in all circumstances. Existing schemes determine cases on that basis. We believe that this arrangement has worked well, as a number of noble Lords have said this evening, and it should continue. The scheme must be quick and informal. It would be wrong to constrain the ombudsman by requiring a purely legalistic focus, or a focus on rules to the exclusion of everything else. To do so might mean that he was unable to examine all the matters, such as delay or maladministration, which were relevant to a complaint. We would certainly expect the ombudsman to take into account, where relevant, the matters mentioned in the amendment--breaches of rules or legal duties and obligations--but it would be too prescriptive to limit his role to those matters.

I turn to the first set of incompatible amendments: Amendments Nos. 161A and 161B. Amendment No. 161A in particular, with no disrespect to Amendment No. 161B, gives us some food for thought. These amendments deal with the provisions under which the ombudsman will be able to make awards of compensation for loss or damage suffered by complainants. I briefly outline the intended purpose of Clause 225(3) which has been subject to some gentle but severe criticism during the course of this evening's debate. Ombudsmen have traditionally made awards which reflect not only financial loss and other losses compensable in general commercial matters but other matters such as distress and inconvenience. Clause 225(3) is intended to allow that to continue while ensuring that the ombudsman's power to make awards for loss or damage not generally compensable in commercial litigation is limited to matters specified in rules made by the FSA.

Subsection (3)(a) is intended to cover losses for which damages would be recoverable in a breach of contract action. Subsection (3)(b) is intended to allow the FSA to specify other types of loss in respect of which the ombudsman can award compensation. We believe that that approach strikes the right balance and allows the ombudsman sufficient discretion to award compensation while ensuring clarity for the industry in respect of awards for loss or damage not generally compensable in commercial litigation.

We have some concerns about Amendment No. 161A. We believe that that amendment, spoken to notably by the noble Lord, Lord Hunt, which removes the requirement that awards under paragraph (b) should be specified in rules, rather detracts from what we seek to achieve. We do not believe that Amendment No. 161B is appropriate. I do not want to go into details at this stage. The noble and learned Lord, Lord Donaldson, suggests that "tort" is better than "negligence" but that neither is appropriate. The Government also take that view.

We have listened with care to, and will read with even greater attention, the points made this evening and consider whether we can do anything to clarify Clause 225. If it is appropriate to do so we shall table an amendment at Third Reading. It may be that the days in between could be taken up by some discussion on possible ways round this. I do not want to hold out too much hope of movement, but we have been impressed by the arguments that have been put forward, particularly in relation to Amendment No. 161A. In view of that, I hope that the noble Lord, Lord Hunt, will not press his amendment at this particular stage.

Now I move to Amendments Nos. 161C and 162. They deal with the provisions under which the scheme operator can make rules allowing the ombudsman to award costs. We discussed similar amendments in Committee and I can assure noble Lords that we have given full and careful consideration to these provisions since that discussion.

Clause 226 as it stands allows no scope for the ombudsman to make an award of a firm's costs against a consumer. We believe that is right. The scheme is intended to provide consumers, many of whom simply will not have the resources to pursue a case through the courts, with a free means of redress. To allow a firm's costs to be awarded against a consumer could discourage consumers from using the scheme. Indeed, if such an amendment is passed, it is arguable that responsible financial companies might arm themselves with lawyers as soon as a complaint was lodged, and the ombudsman scheme would then have to make the complainant aware that he was at risk of payment of costs if he pursued his complaint.

That might be a really serious inhibition on consumers pursuing complaints. Of course we recognise that the amendment of the noble Lord, Lord Saatchi, (Amendment No. 161C) would allow such awards to be made only where the consumer had behaved improperly or unreasonably, but we still do not think that the changes proposed are desirable. We want to make sure that any action that could be taken in response to improper or unreasonable behaviour is, and is seen by consumers considering whether to use the scheme to be, controlled and proportionate. A respondent's costs could be very high, and they are beyond the control of the scheme operator.

Turning to the amendment of the noble Lord, Lord Newby, to protect against the possibility that consumers may misuse the scheme, the Bill allows the ombudsman--this is what the noble Lord seeks to delete--in limited circumstances to make an award of the scheme operator's costs against a complainant. We want to emphasise once again that there is no scope under the Bill for the ombudsman to award costs against a complainant, except where that person has acted improperly or unreasonably or has been responsible for unreasonable delay. We expect an award to be made only in extreme cases and only after prior warnings had been given to the complainant.

In addition--and this we consider important--the ombudsman cannot award costs against any consumer at all, even if they have behaved badly, improperly or unreasonably, unless rules have been made to allow it. The authority and the scheme operator have made it clear that there are no plans at present to allow the ombudsman to make such awards. Such rules would be made only if, in the light of experience, it proves necessary to do so.

Therefore I would describe the authority's attitude about this as being a "reserve" reserve power. The rules are not there: there is no intention to make them. They would be made only if it was thought appropriate to do so, and thus no award could be made until the rules were made.

The scope of the power to award costs to consumers who behave unreasonably or improperly is clearly defined. We would expect it to be used only in the worst cases--my next three words are important--if at all. However, we do think that it is important to have it in the Bill against potential abuse of the scheme. The scheme will give consumers access to a coherent and effective mechanism for seeking redress, and it is only fair to ask that those consumers use the scheme responsibly. It is in that context that I invite the noble Lord, Lord Newby, not to move his amendment.

My Lords, I am grateful to noble Lords who have taken part in the short debate on this important scheme which we fully support. As I said, we see some anomalies. I can understand the merit of the amendment in the name of my noble friend Lord Hunt. He has highlighted a key point about the vagueness of the concept of a breach of a notional contract. I was encouraged by the Government's response.

However, having heard my noble friend Lord Hunt and other noble Lords describe the many merits of their amendment, I am even more confident about the merits of our amendments. The noble Lord, Lord Borrie, said that he wants more informality. That is fine. But we want more balance--if that means more formality, we say, "So be it"--so that the ombudsman will not be able to uphold complaints where a firm has observed all the FSA's rules and will be able to make claims against an unreasonable and improper complainant. I should like to test the opinion of the House.

On Question, Whether the said amendment (No. 161YA) shall be agreed to?

Their Lordships divided: Contents, 17; Not-Contents, 86.

Division number 2

See full list of votes (From The Public Whip)

Resolved in the negative, and amendment disagreed to accordingly.

[Amendment No. 161ZA not moved.]

Clause 225 [Awards]:

[Amendments Nos. 161A and 161B not moved.]

Clause 226 [Costs]:

[Amendments Nos. 161C and 162 not moved.]

Clause 232 [Open-ended investment companies]:

moved Amendment No. 162A:

Page 122, line 28, at end insert--

("(4A) In determining whether the investment condition is satisfied, participation in the scheme shall be deemed to take place either at the time shares in, or securities of, BC first become available for purchase or subscription by investors or on any occasion thereafter on which the arrangements constituting BC are changed to a material extent.").

My Lords, Clause 232 sets out the new definition of open-ended investment companies. Amendment No. 162A is intended to raise a number of issues relating to the definition that we would like to have clarified.

As I said to your Lordships in Committee, broadly we welcome the definition but we believe that it has a potential flaw. The flaw is that the question of whether or not an entity is an open-ended investment company depends on the expectations of a reasonable investor participating in the collective investment scheme in relation to his ability to realise his investment.

The expectations of a reasonable investor may well differ depending on when the investment is treated as taking place. As a result, the categorisation of a collective investment scheme will depend not on the nature of the scheme itself but on what an investor's expectations may be at a particular moment in time.

I can illustrate that by reference to an example. The example assumes that subsection (4) of Clause 232 is not a desistance. An investment company is launched in year one and states that in year five it will redeem at net asset value the shares of any investor who wishes to have the shares redeemed. After year five there will be no further opportunity for investors to have their shares redeemed. I would suggest that at year one the company would not be an open-ended investment company because a reasonable investor in year one would not expect to be able to realise his investment within a reasonable period--five years being too long a period for these purposes. However, in year four a reasonable investor may expect that he would be able to realise his investment within a reasonable time--one year possibly being a reasonable period for these purposes.

Does that mean that at that point the company converts from being a closed-ended to an open-ended investment company? After year five, the opportunity for investors to have their shares redeemed would have passed. Investors would no longer have an expectation of realising their investment within a reasonable period. Does the company then become a closed-ended investment company again? I should be interested to hear the Minister's response.

In Committee the noble Lord said:

"The investment condition operates in relation to the company itself. It does not concern a particular point in time at the end of the company's life. Focusing on that particular point in time does not give an impression of the nature of the company; it is the nature of the company that counts as far as concerns the definition in the new clause".--[Official Report, 9/3/2000; col. 944.]

That is a helpful statement but I believe that my example will have demonstrated that, inevitably, the question of whether a company is an open-ended investment company will be asked at points in time. At those points in time, the expectations of the reasonable investor must be considered and those expectations will change, leading to the consequences I have tried to illustrate.

Our suggested Amendment No. 162A deals with the issue by asking the question at the launch of the company, when shares in the company become available to purchase for the first time, and on each occasion thereafter when the constitutional arrangements of the company--typically, its articles of association--are changed to a material extent.

Minor variations to the articles of association--for example, to comply with listing rules--would be unlikely to result in a significant change to the constitution of the company. Therefore, we propose that those are ignored. The amendment is only a suggestion to meet the concerns that I have outlined.

When replying, I should be grateful if the Minister will deal with the following additional questions. First, when considering the reasonable investor and his expectations about realising his investment, is it necessary to consider the entirety of the investor's investment? In other words, if the investor has a reasonable expectation that he will be able to realise only half of his investment but not the whole of his investment within a reasonable time, would that satisfy the investment condition in subsection (3)?

Secondly, will the Minister please clarify what is meant by,

"calculated wholly or mainly by reference to the value of property", in Clause 232(3)(b)? If the realisation price was equal to a Stock Exchange quoted price for the shares, I assume that that would not be calculated wholly or mainly by reference to the value of property in respect of which the scheme makes arrangements. Does the reference to "property" mean the actual property of the scheme or property of the same kind? Perhaps the word "the" should be inserted before "property" to make that point clear.

Again, what is the position if part of an investor's investment is realised on a basis,

"calculated wholly or mainly by reference to the value of property", and part is calculated on a different basis?

One final point I should like to make is that the FSA will be able to give guidance under Clause 153 in relation to the interpretation of Clause 232, assuming that the FSA's power to give guidance with respect to the operation of the Act covers guidance on the interpretation of the definitions in the Act. However, any FSA guidance on the meaning of Clause 232 can only ever be the authority's view of what the clause means. Only a court will be able to determine what meaning should be given to the clause. I beg to move.

My Lords, I am grateful to the noble Lord, Lord Kingsland, for his recognition of the Government's achievement in Committee in framing a generally acceptable definition of an open-ended investment company, although he rather spoiled it by the criticisms that he made thereafter of what I thought had gained fairly general agreement, not only in this House but in the long and fruitful consultation with industry representatives. We thought then, and think now, that we have a robust, targeted and flexible definition of an OEIC.

I stress the flexibility because the definition has to serve a number of purposes. It describes the number of companies that can be incorporated and carry on collective investment; it determines the companies to which regulations are made by the Treasury and rules made by the authority in relation to OEICs supply; and more importantly it determines the companies constituted outside the UK that are caught by the rules and regulations relating to OEICs and to collective investment schemes generally.

Largely because of that final purpose--companies constituted outside the UK--the amendment proposed carries significant risks. It reduces the flexibility of the definition by putting a qualification on the investment condition leg. As the House will recall, the definition of an OEIC in Clause 232 is framed by reference to two conditions: property and investment.

The noble Lord, Lord Kingsland, asked about the property condition. As his amendment refers to the investment condition only, I hope that he will forgive me if I deal with the matter in writing.

The investment conditions contain a requirement that a reasonable investor would, if he were to participate in the scheme, expect that he would be able to realise, within a time appearing to him to be reasonable, his investment in the scheme. That allows his expectation in relation to participation at any time in the life of the scheme to be considered.

The amendment proposes that the clause should specify the points of time by reference to which a potential participant's view of his ability to realise his investment in the scheme can be considered. Participations would be limited to the times when the shares in, or the securities of the companies first become available for purchase or subscription, or when, thereafter, the arrangements constituting the company are changed to a material extent.

As I said in Committee, the definition deliberately does not specify a time at which the open-endedness of a company must be considered. It is important that the nature of the company can be judged at any time.

The amendment would exclude from the definition, for example, a company that offered investors no right to redeem their investments for the first, say, six months after its shares became available for subscription. At that point, a reasonable investor would be likely to consider that, were he to participate in the scheme, he would not be able to realise his investment within a reasonable time. However, the same scheme could offer continuous redemption from the six-month point onwards without any change, material or otherwise, to the arrangements constituting it. But it would still not meet the definition of an OEIC.

Of course, it is essential that shares are capable of coming within the definition of an OEIC so that the rules and regulations covering collective investment schemes, for example in relation to the promotion of schemes, apply to it. Whereas Treasury regulations and FSA rules will determine the nature of OEICs that can be established in the UK, the definition has to apply to overseas established schemes as well, over whose constitution the UK authorities have no control. It is imperative that the OEIC definition is broad enough to cover a variety of such schemes that are capable of offering collective investments.

This is a new type of scheme that has been growing rather rapidly. The nature of OEICs that are being set up varies. If we were to start to lay down restrictions of the sort that are proposed by this amendment, we would run a serious risk of strangling the baby not quite at birth but in early infancy. We want OEICs to exist. They are valuable investment schemes. It is important that they should be allowed to exist and to be regulated. It would be a great shame if a restriction of this kind, which seems to be largely formalistic, were to endanger the possibility of new forms of OEICs that conform with the general definition that we agreed in Committee.

The noble Lord, Lord Kingsland, asked for an example of company changes over the years. Over time, it is perfectly possible for a company to change from closed-ended to open-ended investment. It is right that from time to time the assessment should be made. In that sense the definition is designed to be "ambulatory"--I believe I understand what that means. A hypothetical reasonable investor looks at the type of company in which he is considering investing and forms a view as to the nature of the company in the example given. The fixed term company will probably fall to be considered as a closed-ended company throughout its life, even though in its final year a view may be taken that redemption of the investment could be achieved within a reasonable period.

We cannot allow a loophole of the kind that would be provided by this amendment. More generally, the Committee will recall the government amendment in Committee which introduced a power for the Treasury to amend the OEIC definition should that become necessary. For that reason, restricting the definition, which this amendment would do, would run counter to the approach the Government are seeking to adopt here. We are deliberately looking for a broad and flexible definition, one that captures the essence of the beast while still allowing changes to be made if experience shows that they are needed. As I said in Committee, any order making such a change would be subject to the affirmative resolution procedure. I hope that, on the basis of the arguments I have put to the Committee, the noble Lord will not press his amendment.

Finally, government Amendment No. 219 is a consequential amendment arising from the changes made in Committee to the definition of an open-ended investment company.

My Lords, with great respect to the Minister, I think it is a little rich of him to suggest that we are trying to stifle enterprise by seeking greater precision in the Bill. I believe I can honestly say that throughout the proceedings on the Bill we have sought greater precision in order to encourage enterprise, because the greater the amount of imprecision there is, the greater will be the uncertainty for those who must operate under it. The greater that uncertainty, the more likely it will be that people will become less resourceful. The whole object of seeking greater precision in these definitions is to encourage enterprise and to make OEICs work--as the Minister put it so evocatively.

Despite what the Minister has said, I hope that over the next few days he will reflect on the enhanced quality that the Opposition believe this amendment would bring to the Bill so that on Third Reading at least a little movement might be seen on this. I hope very much that we shall not have to discuss this matter again at that stage. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 253 [Directions]:

moved Amendment No. 162B:

Page 123, line 16, leave out from ("communicate") to end of line 17 and insert--

("to a person in the United Kingdom--

(a) an invitation to participate in a collective investment scheme; or

(b) information which is intended or might reasonably be presumed to be intended to induce any person to do so.").

My Lords, Amendments Nos. 162B and 162C concern restrictions on promotion. Clause 234 imposes special restrictions on the marketing of collective investment schemes. As it stands, the prohibition applies to even non-UK branches of the authorised person--even in relation to investors outside the UK. We wish to make the same amendments to the prohibition as we are proposing for financial promotion generally.

In another place the honourable Mrs Melanie Johnson, the Economic Secretary, said in Committee that she was beginning to realise that marketing restrictions applicable to authorised persons under the provisions of Clause 231 do not need to be as wide as those applicable to non-authorised persons under Clause 19. That is why the amendment restricts the prohibition to communications,

"to a person in the United Kingdom".

This restriction follows the existing law. We tried several times to persuade the Minister that it would damage UK competitiveness if the local regulator allowed the marketing of collective investment schemes to particular categories of investor not allowed by the FSA--typically high net worth individuals--and the only firms which could not market such schemes to them were authorised persons.

The prohibition applies to all authorised persons, not only UK firms. Why should non-UK firms that establish a branch in the United Kingdom, perhaps using an EC passport, have to be subject to a worldwide prohibition on marketing investment funds to prohibited categories of investor from that UK branch? In addition, if the collective investment scheme that they want to market is established in the UK--typically an English limited partnership--the non-UK firm cannot market it from any branch anywhere in the world, which is perhaps going a bit over the top. The imposition of the world-wide prohibition is likely to induce United Kingdom, or non-UK, authorised persons to use an offshore group company--for example, a special purpose subsidiary--to market the collective investment scheme to prohibited categories of investors outside the United Kingdom. It does not do anyone any good to force them to take that step and perhaps incur substantial expense.

Amendment No. 162C seeks to make a similar amendment to the special restrictions on promoting collective investment schemes as the amendment proposed to the general prohibition on "financial promotion" marketing in Clause 19. I beg to move.

My Lords, we discussed a similar issue in relation to Clause 19. This is another area where, as I indicated then, the differences between the Government and the noble Lord, Lord Kingsland, may be narrowing.

Amendment No. 162B to Clause 234(1) seeks to delete "inducement" and replace it with,

"(a) an invitation to participate in a collective investment scheme; or (b) information which is intended or might reasonably be presumed to be intended to induce any person to do so".

I understand the importance which the Opposition attach to this amendment. But there is not a great deal of difference between us in terms of policy. In Committee I undertook to look at whether Clause 234(1) needed further clarification in respect of the meaning of "inducement". As the Government said repeatedly in relation to this clause and the corresponding words of Clause 19, only promotional communications will be targeted by the prohibition. I believe that is also the intention of the Opposition's amendment.

As things stand, in my view, Clause 234 as drafted is the best way of tackling these issues. The term "inducement" should, we believe, only catch communications of a promotional nature. The noble Lord, Lord Kingsland, kindly agreed to meet me this Thursday to discuss the matter in the context of Clause 19. I should like to reserve any further judgment on his amendment until we have had the opportunity to have that meeting. I hope that on that basis he will feel able to withdraw it.

Amendment No. 162C seeks to amend subsection (3) of Clause 234 so that subsection (10), which sets out the basic prohibition, does not apply unless the communication is intended or might reasonably be presumed to be intended to be acted on by a person in the United Kingdom. That too was a Committee stage amendment. But there is concern that the clause is not sufficiently clear; that the communication will only be caught if it is targeted or "directed at" a person in the UK. We have said that we believe the issue is one best dealt with in subordinate legislation and have proposed something designed to achieve that in the draft order set out in the second consultation document; namely, cutting back the "capable of having effect" test in subsection (3).

The amendment proposed by the noble Lord, Lord Kingsland, indicates why the Government's approach is prudent. It is not at all clear what "acted on" means. For example, if a communication is sent from abroad for onward transmission by an agent in the United Kingdom, is that a communication which is intended to be "acted on" by a person in the United Kingdom?

Another intention behind the amendment may be the need to address our Community obligations. Let me say categorically that the UK takes its Community obligations seriously in respect both of our treaty obligations in general and any specific legislation such as the proposed e-commerce directive, in particular with regard to the territorial jurisdiction and other requirements it might place on the UK's rules. We are committed to ensuring that these rules comply with all Community requirements. Clause 234 was amended in Committee to clarify that the Treasury can adjust the scope of the Bill's financial promotion regime in order to take full account of international and technological developments. Given our intention to modify the scope of prohibition using secondary legislation, the Government will continue to resist this amendment. I hope that noble Lords will not press it.

My Lords, the Minister reminded me of our meeting on Thursday at 3.30 p.m. That seems a long way away at 11.20 p.m. when we have got through only half of the amendments on the third day of Report stage. Nevertheless, it has sufficient allure for me to thank the Minister for his response and the prospect of discussing all these matters again in 48 hours. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No.162C not moved.]

Clause 248 [Procedure when refusing approval of change of manager or trustee]:

moved Amendment No. 162D:

Page 130, line 9, leave out from ("notice") to end of line 10 and insert--

("(a) to the manager if notice of the proposal was given under section 247(1) and, unless the Authority considers that there are good reasons not to do so, to the trustee; and

(b) to the trustee if the notice of the proposal was given under section 247(3) and, unless the Authority considers that there are good reasons not to do so, to the manager.").

My Lords, this amendment relates to an issue that we also discussed in Committee concerning Clause 248. As your Lordships are doubtless well aware, that clause deals with the procedure to be adopted by the authority when refusing approval of a change of manager or trustee or an alteration to an authorised unit trust scheme. Under Clause 248(1) notice of the refusal is only to be given to a person who gave notice of the proposal. In turn, that notice will be given by the trustee or the manager of the unit trust.

However, both are likely to be involved in the outcome. Our amendment in Committee was to the effect that notice of refusal should be given both to the trustee and the manager. That did not find favour on the basis that there may be confidential information in the notice which should be restricted to one party.

We accept that there should be a confidentiality override. Our amendment would oblige the authority to give the notice of refusal to both parties unless, in the case of the person who did not give notice of the proposal, the FSA considers that there are good reasons for not giving the notice of refusal to that person. In Committee the Minister said that if, as proposed, the notice went only to the applicant, the authority could, under Clause 257(4) pass on to the other party,

"such information about the revocation or variation, in such a way, as it considers appropriate".--[Official Report, 27/3/00, col.629.]

However, as is clear, Clause 257(4) deals with revocation or variation and does not address the circumstances set out in Clause 248(1). There is no provision elsewhere for passing on information in the event of the refusal of a request to replace the manager or trustee.

As regards Amendment No. 264A, the introduction of the supervisory notice procedure for certain types of enforcement action has resulted in the removal of these cases of the 28-day minimum period for representations. Without fettering the authority's discretion, we believe that it is important to introduce a test of reasonableness in Clause 255(4)(d) for making representations. The authority would still be able to specify a period which allowed for no representations before the event in the case of an urgent decision, but would require a reasonable period for representations after the decision had been taken. It would also establish a discipline requiring a reasonable period to be specified in non-urgent cases. I beg to move.

My Lords, it is no disrespect to the amendment to remind the House of the very specialist nature of the clauses that it is proposed to amend. We are talking about a requirement on the authority to give a warning notice under Clause 248 when it has been notified of a proposed change in the identity of either the trustee or the manager.

In Clause 247, the Bill requires the manager to notify a proposal to replace the trustee and the trustee to notify a proposal to replace the manager. The amendment says that the authority has to give a warning notice to both. As the Bill stands, if the authority proposes to refuse to approve such a replacement--and only in those circumstances--it must simply give a warning notice to the party that notified it of the proposal.

The amendment would simply put an extra administrative burden on the FSA and would complicate the procedures. It is not just that extra notices would be required; the issue of a decision notice to persons who have received a warning notice also triggers the right for the party that has been given the notice to refer the matter to the tribunal. It would be quite inappropriate for both parties to have rights of referral to the tribunal when the refusal would generally be counter only to the interests of the party proposing the change, who would not of course be the one whose replacement was being refused.

It is also important that the person who has to present the case, both to the authority and to the tribunal if necessary, is the person who will retain a continuing responsibility for the scheme. He will be the party with the interest in the proposed replacement of the other party and must make the case for it. It may be that the person who is to be replaced wishes to give up his role in relation to the scheme. In such a case, if he were aggrieved by a refusal from the authority effectively to release him from his obligations, he could seek judicial review of the authority's conduct in an appropriate case.

Of course we appreciate that a change in the manager or trustee of a scheme has a significant impact on the regulation of the scheme. It may well be that the authority chooses to discuss the matter with the party who it is proposed to replace. However, that should not be an obligation as suggested in this amendment.

Amendment No. 164A would require the authority to specify a "reasonable" period within which a person to whom it has issued a notice of its proposal to issue a direction under Clause 253 may make representations to the authority. The amendment is unnecessary as the authority, being a public body, is bound in any event to act reasonably. Persons to whom notices are issued would have recourse to the normal legal remedy of judicial review were it not to allow a reasonable period for representations. The amendment would add nothing to that. Moreover, it would contrast with similar provisions in other clauses of the Bill; for example, in the second new procedure clause recently inserted after Clause 51. It would also be unhelpful to cast doubt on the authority's duty to act reasonably in these cases by explicitly specifying such a requirement in Clause 255. I hope that noble Lords will not pursue these amendments.

My Lords, I am most grateful to the Minister for his reply. I have heard many reasons for not inserting the word "reasonable" in an Act of Parliament but never that one. So, yet again, the noble Lord has made legislative history.

My Lords, it was exactly the same sort of argument.

My Lords, as I said, the Minister has made legislative history yet again. Indeed, the noble Lord has confirmed what I just said.

I make no apology for the fact that these amendments concern very specific matters in the Bill. But, of course, the Bill is about individuals conducting their economic life on a daily basis. These details matter enormously to the success of their enterprise. In my submission, it is perfectly proper for the Opposition to deal with detailed matters by way of amendments where that is appropriate. However, I might have misunderstood what the Minister said.

My Lords, I deeply apologise if there was any suggestion in my response that it was inappropriate or improper for the Opposition to raise these matters. I had no intention of giving that impression. I was simply pointing out the very specialist nature of the clauses which it is proposed to amend.

My Lords, I am much obliged to the Minister for his response. Perhaps I read too much into his opening remarks. I thought he was suggesting that the amendment was unnecessary or, perhaps, rather tiresome. However, he clearly took neither view and I am most grateful to him for his clear explanation.

I very much regret that the amendments seem to have had no impact whatever on the Minister. However, he will be relieved to hear that instead of pressing them now I shall read what he has said and consider whether they ought to be brought back at Third Reading. In the meantime I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 253 [Directions]:

moved Amendments Nos. 163 and 164:

Page 132, line 6, leave out from ("scheme") to end of line 8.

Page 132, line 9, leave out from ("up") to end of line 11.

My Lords, these amendments have already been spoken to with Amendment No. 107. I beg to move Amendments Nos. 163 and 164 en bloc.

On Question, amendments agreed to.

Clause 255 [Procedure on giving directions under section 253 and varying them on Authority's own initiative]:

[Amendment No. 164A not moved.]

moved Amendments Nos. 165 and 166:

Page 133, line 29, at end insert--

("( ) If the direction imposes a requirement under section 253(2)(a), the notice must state that the requirement has effect until--

(a) a specified date; or

(b) a further direction.

( ) If the direction imposes a requirement under section 253(2)(b), the scheme must be wound up--

(a) by a date specified in the notice; or

(b) if no date is specified, as soon as practicable.").

Page 134, line 7, at end insert--

("(12) For the purposes of subsection (1)(c), whether a matter is open to review is to be determined in accordance with section 386(6A).").

My Lords, these amendments were debated with Amendment No. 107. I beg to move Amendments Nos. 165 and 166 en bloc.

On Question, amendments agreed to.

Clause 263 [Power of Authority to suspend promotion of scheme]:

moved Amendment No. 167:

Page 137, line 29, leave out ("of a kind mentioned in section 234(1)").

My Lords, this amendment was debated with Amendment No. 48. I beg to move.

On Question, amendment agreed to.

Clause 264 [Procedure on giving directions under section 263 and varying them on Authority's own initiative]:

moved Amendment No. 168:

Page 139, line 28, at end insert--

("(14) For the purposes of subsection (1)(c), whether a matter is open to review is to be determined in accordance with section 386(6A).").

My Lords, this amendment was debated with Amendment No. 107. I beg to move.

On Question, amendment agreed to.

Clause 265 [Procedure on application for variation or revocation of direction]:

moved Amendment No. 169:

Page 139, line 39, at end insert--

("( ) If the application is refused, the operator of the scheme may refer the matter to the Tribunal.").

My Lords, this amendment was debated with Amendment No. 107. I beg to move.

On Question, amendment agreed to.

Clause 278 [Procedure on giving directions under section 277 and varying them otherwise than as requested]:

moved Amendment No. 170:

Page 146, line 23, at end insert--

("(12) For the purposes of subsection (1)(c), whether a matter is open to review is to be determined in accordance with section 386(6A).").

My Lords, this amendment was debated with Amendment No. 107. I beg to move.

On Question, amendment agreed to.

Clause 280 [Power to investigate]:

moved Amendment No. 170A:

Page 146, line 40, leave out ("The Authority or the Secretary of State") and insert ("An investigating authority").

My Lords, in moving Amendment No. 170A I wish to speak also to Amendments Nos. 170AA, AB, AC, AD, AE, AF, AG, AH, AJ, AK and AL. This group of amendments has come about in part as a result of concerns raised in Committee about the need to align the circumstances in which an investigator appointed under this clause may obtain information subject to banking confidentiality with those set out in Clause 171 for investigations under Part XI.

Amendment No. 170AK amends Clause 280 so that it accords precisely with the circumstances set out in Clause 171 by inserting the provision for banking confidentiality to be lifted when the investigating authority directs, or when the person to whom confidentiality is owed permits. We have also, as I indicated to your Lordships that we would, tabled amendments to introduce further aspects of the Part XI investigations provisions which are appropriate for investigations concerning collective investment schemes. These amendments ensure that the provisions in the Bill are not any less effective than those in the 1986 Act.

Overall, this group streamlines the drafting, and reduces the potential for ambiguity or uncertainty arising from differences in terminology. I have taken the opportunity to supply noble Lords with a copy of Clause 280, as amended by these amendments.

Amendments Nos. 170A, AB, AC, AE and AF are all drafting amendments adjusting the wording of Clause 280 to reflect the use of the term "investigating authority" in Part XI as a result of the amendments we have discussed to that part.

Amendment No. 170AL ensures that the term "investigating authority" has the same meaning as it has under Part XI, that is, either the FSA or the Secretary of State. Amendment No. 170AG is a further consequential drafting change.

Amendment No. 170AD deletes subsection (4) to Clause 280 which allows the administering of oaths to those under investigation. This is unnecessary, and potentially confusing, as Clause 173, which applies to investigations under this clause by virtue of subsection (7), already allows the courts to deal with a person who does not comply with the requirements of the investigations regime as if he were in contempt. Also, Clause 173(4) already makes it an offence to provide false information. Again, this aligns the clause more precisely with Part XI.

Clause 280(7) currently ensures that lawyers may be required to furnish the names of their clients and that liens are not affected by the production of a document. Amendment No. 170AH extends certain other provisions of Clause 171 which are also appropriate to this kind of investigation. These are the powers to take copies or extracts of documents; to require explanations of documents; and to require a person to give an explanation where he fails to produce a document.

Amendment No. 170AJ provides for a power of entry of premises under warrant for collective investment schemes investigations. This is a vital element in ensuring that these powers are effective and it will bring Clause 280 more fully in line with the current position under the Financial Services Act 1986.

Amendment No. 170AA is a drafting amendment which aligns the wording of the Part XVII regime with that of Part XI as regards the persons permitted to conduct investigations.

I hope that noble Lords will appreciate the desirability of these amendments. I beg to move.

My Lords, as I understand them, these amendments bring the power of the authority to appoint investigators in relation to collective investment schemes into line with the provisions relating to investigations generally, and they seem satisfactory. They give the authority and the Secretary of State the power to enter premises under a warrant; to require an authorised person or an employee to explain what is meant by a document disclosed to the investigator; and to tell the investigator where a missing document is.

I have one suggestion, which I offer with great respect, and it concerns new subsection (9) introduced by Amendment No. 170AK. As we have been made aware by the Minister, this amendment provides for the obligation of confidence to be overridden on the instructions of the investigating authority. In my view, this is so serious that I should like to propose to the Minister that the instruction ought to be given by a senior official not personally involved in the meeting with the authorised person concerned.

My Lords, I am grateful for the general welcome. I am interested in what the noble Lord said about Amendment No. 170AK. This amendment inserts the provision for banking confidentiality to be lifted when the investigating authority directs or when the person to whom confidentiality is owed permits. I do not think it would be particularly necessary to have a senior officer of the investigating authority required to lift confidentiality when the person to whom confidentiality is owed permits, but I shall think about the requirement for a senior officer of the investigating authority to be called in in other circumstances. If I may, I shall write to the noble Lord on that point.

On Question, amendment agreed to.

moved Amendments Nos. 170AA to 170AL:

Page 146, line 40, leave out ("a person") and insert ("one or more competent persons").

Page 146, line 41, leave out ("and report on") and insert ("on its behalf").

Page 147, line 7, leave out ("Authority or the Secretary of State") and insert ("investigating authority").

Page 147, line 30, leave out subsection (4).

Page 147, line 35, leave out ("the Authority") and insert ("an investigating authority").

Page 147, line 37, leave out paragraph (b).

Page 147, line 39, leave out ("cases") and insert ("case").

Page 147, line 43, after ("Subsections") insert ("(2) to").

Page 147, line 44, at end insert--

("( ) Subsections (1) to (9) of section 172 apply in relation to a person appointed under subsection (1) as if--

(a) references to an investigator were references to a person so appointed;

(b) references to an information requirement were references to a requirement imposed under section 171 or under subsection (3) by a person so appointed;

(c) the premises mentioned in subsection (3)(a) were the premises of a person whose affairs are the subject of an investigation under this section or of an appointed representative of such a person.").

Page 147, line 47, after ("unless") insert ("subsection (9) or (10) applies.

(9) This subsection applies if--

(a) the person to whom the obligation of confidence is owed consents to the disclosure or production; or

(b) the imposing on the person concerned of a requirement with respect to information or a document of a kind mentioned in subsection (8) has been specifically authorised by the investigating authority.

(10) This subsection applies if").

Page 148, line 6, at end insert--

("( ) "Investigating authority" means the Authority or the Secretary of State.").

On Question, amendments agreed to.

Clause 281 [Exemption for recognised investment exchanges and clearing houses]:

moved Amendment No. 170AM:

Page 148, line 17, leave out ("and its recognised nominee (if any) are") and insert ("is").

My Lords, I am afraid this is an even worse list. In moving Amendment No. 170AM I shall speak also to Amendments Nos. 170AN, 170AP, 170AQ, 170AR, 170AT, 170AU, 170AV, 17OAW, 170AX, 170BA, 170BB, 170BC, 170BF, 170BG, 170BH, 170BJ, 170BK, 170BL and 170U. I think that is the list.

These amendments remove the provisions concerning recognised nominees from the Bill. The effect of these provisions would have been to allow a recognised body to apply for exempt status to be given to bodies carrying out certain functions on its behalf.

We introduced this concept into the Bill in another place in order to facilitate the application for recognised status by two or more bodies which together formed an exchange or clearing house but which singly did not do so and might, therefore, have had difficulty in applying for recognition.

The particular case which prompted us was that of ISMA (the International Securities Market Association), which sets the rules for the Eurobond market, and ISMA Limited, a subsidiary which carries out functions on ISMA's behalf. However, following the introduction of the recognised nominee provisions we have reviewed the regime closely with the FSA and have had discussions with the recognised bodies and with ISMA. We have identified a flaw in the way the provisions work which has convinced us that it would not be safe to proceed with them.

Recognised bodies will be subject, as now, to recognition requirements concerning their fitness and properness, financial resources and so on. Where they breach these requirements, the FSA can take action. Under the Bill, this will include a power to direct the recognised body to comply with the requirements as well as, in extremis, to revoke the body's recognition.

The flaw in the recognised nominee arrangements is that it may not be possible for the FSA to take action against a recognised nominee, or indeed a recognised body, where the recognised nominee does something which would have been a breach of the recognition requirements if the recognised body had done the same thing itself--that is, the recognised nominee would not be "standing in the shoes" of the recognised body. This potential problem arises because the recognition requirements do not bite directly on the recognised nominee. This creates a serious shortcoming in the supervision of recognised bodies.

Having looked at the options available to us, we have concluded that the best alternative is to remove the recognised nominee arrangements from the Bill. As far as ISMA is concerned, we intend to address the matter in the regulated activities order. Our intention is broadly to replicate the existing arrangements in the Financial Services Act 1986 under which ISMA is recognised as an international securities self-regulating organisation. I beg to move.

My Lords, as the Minister said, the idea of recognised nominees was conceived in the course of the passage of the Bill through another place and was so inserted. Here we are, several stages on in your Lordships' House and now the Minister has informed us, doubtless for very good reasons, that the concept of recognised nominees is being expunged. The Minister is a well-known expert on English literature. He will recall the name of the author, because I cannot, who claimed to have spent the whole of the morning inserting a comma in his text and the whole of the afternoon deciding on whether or not to take it out. Was it Henry James? I cannot believe that, for once, I have stumped the noble Lord.

My Lords, the noble Lord teases me. I am embarrassed. I commend the amendment to the House.

On Question, amendment agreed to.

moved Amendments Nos. 170AN to 170AR:

Page 148, line 22, leave out ("or by its recognised nominee on its behalf").

Page 148, line 24, leave out ("and its recognised nominee (if any) are") and insert ("is").

Page 148, line 27, leave out ("or by its recognised nominee on its behalf").

Page 148, line 29, leave out subsection (4).

On Question, amendments agreed to.

Clause 282 [Qualification for recognition]:

moved Amendment No. 170AS:

Page 149, line 11, at end insert--

("(6) Regulations made under subsection (1) must provide as recognition requirements--

(a) a requirement that the investment exchange or clearing house must establish and maintain arrangements for the investigation by a person independent of the investment exchange or clearing house of complaints arising in connection with the activities of the investment exchange or clearing house;

(b) a requirement that the arrangements established by the investment exchange or clearing house for the taking of disciplinary measures in relation to its members comply with the requirements of the European Convention on Human Rights; and

(c) a requirement that the investment exchange or clearing house is subject to restrictions on the disclosure of confidential information obtained from other persons equivalent to the restrictions which apply to the Authority under this Act.").

My Lords, Amendment No. 170AS concerns Clause 282 and the Treasury's regulations setting out the requirements which must be satisfied by an investment exchange or a clearing house if it is to qualify as a body in respect of which the FSA may make a recognition order and which, if a recognition order is made, it must continue to satisfy if it is to remain a recognised body.

Such recognised bodies are regulated entities, and regulators themselves in that they regulate the conduct of their members and take disciplinary action against them. To some extent, the role of these quasi-regulators has escaped detailed scrutiny during the passage of the Bill. The purpose of Amendment No. 170AS is to raise a number of issues concerning the criteria which the Treasury will lay down as recognition requirements under Clause 282.

The amendment proposes as recognition requirements matters which already apply to the FSA; notably, an independent complaints investigator, disciplinary measures in relation to members of the recognised body which comply with the requirements of the ECHR, and an obligation not to disclose confidential information obtained from third parties. I hope the Minister will be able to confirm that these requirements represent the bare minimum that the Treasury will be setting out in the regulations under Clause 282.

Perhaps the Minister would also confirm that these are indeed the recognition arrangements that will apply to the merged London-Frankfurt recognised exchange.

My Lords, when we discussed the Bill's provisions dealing with recognised bodies in Committee, I made it clear that we should deal with the requirements on internal arrangements and the operation of recognised investment exchanges and recognised clearing houses in the recognition requirements that the Treasury will make under the powers of Clause 282(1)--in other words, not on the face of the Bill. We consulted on a draft of these requirements in February last year. So, although I agree with much of the substance of the amendment, I do not think it would be appropriate to place such a provision on the face of the Bill.

The noble Lord, Lord Saatchi, seeks to place on the face of the Bill details of how recognised bodies should operate. The problem with that, and the reason that we decided to do it by secondary legislation in the first place, is that we should not be able to update the requirements as necessary to take account of developments in the industry. We should run the risk of either over-loading the face of the Bill with detail or of missing some important points.

The amendment would do three things. First, paragraph (a) would require each recognised body to appoint an independent complaints investigator. One of the recommendations of the Burns committee was that the recognised body should be required, as a condition of having statutory immunity, to have "an adequate complaints procedure in place". The Government have accepted that recommendation. They have given a commitment that the recognition requirements will provide that all recognised bodies must have independent and fair arrangements for dealing with complaints. I am happy to repeat that commitment. I do not believe the amendment to be necessary.

Paragraph (c) of the amendment provides that recognised bodies must maintain restrictions on the disclosure of confidential information "equivalent" to those imposed on the FSA. I share concern that the recognised bodies should not be able to disclose information that they have received in confidence unless there is a good reason for doing so. They will, of course, be subject to the common law duties of confidentiality as they are now, so they will not be able to disclose confidential information unless the public interest in disclosing it outweighs the public interest in maintaining confidence.

If anything further is required--and I do not think it is--that can be addressed when we come to make the recognition requirements. If anything needs to be done, it should not be done by applying arrangements that are the equivalent, or the same as, those applying to the FSA. The FSA is a different animal from the recognised bodies, having different functions under the Bill.

Paragraph (b) of the amendment would require recognition requirements to be made under which recognised bodies would have to comply with the requirements of the European Convention on Human Rights. In one sense, that is simply unnecessary. The Bill is drafted on the assumption that the recognised bodies will be public authorities for the purpose of the Human Rights Act 1998. But in so far as it is necessary to make provisions to take account of that in the recognition requirements, we should of course do so.

The noble Lord asked whether these criteria would apply to the merged exchange. As I said earlier, that is the expectation, although the exact form of the merged body, and hence the regulatory arrangements, are not yet clear.

Even in the absence of the noble and learned Lord, Lord Donaldson, for the record I should like to refer to a matter that he raised and argued in Committee; namely, that, in order to ensure consistency between the disciplinary arrangements of recognised bodies and the market abuse regime under the Bill, it would be helpful if the tribunal to be established under the Bill were to have a role in relation to the disciplinary decisions of recognised bodies. I said at the time that I was not attracted to the idea, but since then I have talked to the noble and learned Lord and corresponded with him. We have concluded that, given the overlap between the market abuse regime and some of the rules of recognised bodies, there is merit in ensuring that it would be possible for the tribunal to be given a role in such disciplinary cases if that were considered desirable in the future.

We have decided to table amendments to deal with this matter at Third Reading. We intend that the power should take the form of allowing the Treasury to extend the jurisdiction of the tribunal to cover specified types of hearing before the disciplinary proceedings of recognised bodies. Before such power is implemented we shall consult the exchanges and the clearing houses. I am sorry to add that point to my response, but I want to put it on the record for the benefit of the noble and learned Lord, Lord Donaldson. As to the amendment that we are now debating, I hope that I have persuaded the noble Lord not to press it.

My Lords, I thought I heard the Minister say that in the context of the merged London and Frankfurt exchanges, the regulatory arrangements were not yet clear.

My Lords, that was not quite what I said. I said that the exact form of the merged body was not clear which meant that the appropriate regulatory arrangements for that merged body were not clear. That does not mean that there is any doubt about the availability of suitable regulatory arrangements.

My Lords, does the Minister accept that the statement that the regulatory arrangements are not yet clear is slightly at odds with his view expressed earlier today that the regulatory arrangements are as contained in this Bill? If they are not yet clear, how can he be certain that the arrangements are as described in this Bill?

My Lords, I do not want to leave the House with the wrong impression. This Bill provides for suitable regulatory arrangements for any possible final constitution of the merged body.

My Lords, I shall not press the point further. I am sure that the Minister understands what I am getting at. I should like to study the Minister's response in Hansard--I was distracted by the interest generated in the statement of the noble Lord--before deciding what to do at Third Reading. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 283 [Application by an investment exchange]:

moved Amendments Nos. 170AT to 170AX:

Page 149, line 16, leave out subsection (2).

Page 149, line 23, leave out paragraph (d).

Clause 284 [Application by a clearing house]:

Page 149, line 39, leave out subsection (2).

Page 150, line 3, leave out paragraph (d).

Clause 286 [Recognition orders]:

Page 150, line 31, leave out subsections (2) and (3).

My Lords, I beg to move Amendments Nos. 170AT to 170AX en bloc.

My Lords, I am in the hands of the House, but it is a bit naughty.

On Question, amendments agreed to.

moved Amendment No. 170AY:

Page 150, line 39, leave out ("299") and insert ("(Recognition orders: role of the Treasury)").

My Lords, it is perfectly proper at Report stage to move en bloc amendments which cover more than one clause.

In moving Amendment No. 170AY, I should like to speak also to Amendments Nos. 170B, 170BD, 170BE, 170BM, 170BT, 170BX to 170CG, 170D to 170L and 170V. It takes half an hour to turn over the pages of the amendments. It reminds me of the time that I began to read Proust's A la recherche du temps perdu in French. I say this for the benefit of the noble Lord, Lord Kingsland. It took me two hours to cut the pages, which was as long as I would normally have spent reading an entire book.

This group of amendments brings the competition scrutiny arrangement for recognised bodies into line with those which have been put in place for the FSA in Chapter III of Part X. We indicated on a number of occasions that we would table amendments to this end. We have already debated these arrangements as far as concerns the FSA. The key changes which the arrangements make are to give the Competition Commission an important role in scrutiny arrangements and to restrict the role of the Treasury in second-guessing the competition authorities compared with the position now. I hope that, provided noble Lords are satisfied with such details as they wish to have, they agree that the objective of the amendments is wholly admirable.

We believe that these are important changes. Like the FSA, it is possible that recognised bodies which have regulatory functions in relation to the markets that they run and the clearing services that they provide can do things which have an adverse impact on competition. Although there may be good reasons to justify this in a particular case, it is important that these bodies are subject to a robust, thorough and effective external scrutiny in this respect. Ensuring that action can be taken where competition is damaged unnecessarily is vital to getting the regulatory balance right. This was recognised in the Financial Services Act 1986, which put in place a similar competition scrutiny regime for recognised bodies. It is, if anything, even more important now in the age of globalisation.

I should draw attention to two main differences of substance between the arrangements put in place for recognised bodies in Part XVIII and those which we have debated in respect of the FSA in Part X. These are, first, that the regime has to cover applicants for recognition, as well as bodies which are already recognised. This adds not inconsiderably to the complexity of these clauses, compared with those in Part X.

The second difference is that the recognised bodies themselves can exploit the strength of their market position. This is because, in spite of having some regulatory responsibilities, they are also commercial bodies. The FSA is not in the same position and it is therefore necessary for the competition scrutiny regime to be able to consider whether an exchange or clearing house is exploiting its strong market position, for example, to keep potential new entrants at bay. Apart from these differences, the regime put in place is the same as that which we have agreed should apply to the FSA. I hope that I may commend these amendments to the House. I beg to move.

On Question, amendment agreed to.

moved Amendment No. 170B:

Page 151, line 3, leave out ("299") and insert ("(Recognition orders: role of the Treasury)").

My Lords, I beg to move this amendment.

On Question, amendment agreed to.

Clause 287 [Liability in relation to recognised body's regulatory functions]:

moved Amendment No. 170BA:

Page 151, line 4, leave out from ("body") to ("are") in line 5 and insert ("and its officers and staff").

My Lords, I beg to move this amendment, already spoken to.

On Question, amendment agreed to.

Clause 289 [Notification requirements]:

moved Amendments Nos. 170BB, 170BC, 170BD and 170BE:

Page 152, line 11, leave out ("or its recognised nominee (if any)").

Page 152, line 16, leave out ("or its recognised nominee (if any)").

Page 152, line 40, leave out subsection (8).

Page 152, line 43, leave out ("(8)") and insert ("(7)").

My Lords, I beg to move these amendments en bloc. They have been spoken to.

On Question, amendments agreed to.

Clause 292 [Authority's power to give directions]:

moved Amendment No. 170BF:

Page 153, line 38, leave out ("or its recognised nominee (if any)").

My Lords, I beg to move this amendment, which has already been spoken to.

On Question, amendment agreed to.

Clause 293 [Variation of recognition order in relation to recognised nominee]:

moved Amendment No. 170BG:

Leave out Clause 293.

My Lords, I beg to move this amendment, which has already been spoken to.

On Question, amendment agreed to.

Clause 295 [Directions and revocation: procedure]:

moved Amendments Nos. 170BH, 170BJ,170BK, 170BL and 170BM:

Page 155, line 8, leave out ("or (4)(b)").

Page 155, line 15, leave out subsection (4).

Page 155, line 31, leave out ("or (4)(b)").

Page 155, line 40, leave out subsection (8).

Page 156, line 7, leave out subsection (11).

My Lords, I beg to move these amendments en bloc. They have already been spoken to.

On Question, amendments agreed to.

Clause 298 [Interpretation]:

moved Amendment No. 170BN:

Page 157, line 23, at end insert--

(""practices" means--

(a) in relation to a recognised investment exchange, the practices of the exchange in its capacity as such; and

(b) in relation to a recognised clearing house, the practices of the clearing house in respect of its clearing arrangements;").

My Lords, in moving Amendment No. 170BN, I should like to speak also to Amendments Nos. 170BP, 170BQ, 170BR, 170BS, 170BU, 170BV, 170BW, 170N, 170P, 170R and 170S. These amendments are a further part of the changes that we have said that we should make to bring the competition scrutiny regime in Part XVIII into line with that of Part X. They concern the description of what is covered by the regime. As in the case of the FSA, the director general will keep under review the rules, guidance and practices of recognised bodies.

Amendments Nos. 170BN, 170BP and 170BQ define what the practices of recognised bodies are for that purpose and make a drafting correction concerning the description of the criteria which recognised bodies laid down when determining to whom they will provide clearing services.

Amendments Nos. 170BR and 170N, 170P and 170R simply remove a number of unnecessary references in this part of the Bill to the trading practices of those subject to the rules of recognised exchanges and clearing houses. That is because the regime is concerned with ensuring that the recognised bodies do not require their members to engage in practices which are unnecessarily anti-competitive. It is not concerned with what those members get up to of their own accord. That is a matter covered by the Competition Act 1998.

Amendment No. 170BS brings the description of what the regime is aimed at--things which have a significantly adverse effect on competition--into line with the wording introduced in Part X in Committee.

Finally, Amendments Nos. 170BU, 170BV and 170BW make a drafting correction to Clause 298, which currently talks about guidance where it should talk about regulatory provisions, which includes rules as well as guidance. I beg to move.

On Question, amendment agreed to.

moved Amendments Nos. 170BP to 170BW:

Page 157, line 29, leave out ("particulars described") and insert ("criteria mentioned").

Page 157, line 31, leave out ("particulars described") and insert ("criteria mentioned").

Page 157, leave out lines 32 to 41.

Page 157, line 42, leave out from ("Chapter") to end of line 45 and insert ("regulatory provisions or practices have a significantly adverse effect on competition if--

(a) they have, or are intended or likely to have, that effect; or

(b) the effect that they have, or are intended or likely to have, is to require or encourage behaviour which has, or is intended or likely to have, a significantly adverse effect on competition.

( ) If regulatory provisions or practices have, or are intended or likely to have, the effect of requiring or encouraging exploitation of the strength of a market position they are to be taken, for the purposes of this Chapter, to have an adverse effect on competition.").

Page 158, line 1, leave out subsection (3).

Page 158, line 8, leave out ("guidance has, or is") and insert ("regulatory provisions have, or are intended or").

Page 158, line 9, leave out ("it is") and insert ("the provisions concerned are").

Page 158, line 10, leave out ("it") and insert ("them").

On Question, amendments agreed to.

Clause 299 [Examination of rules and guidance]:

moved Amendment No. 170BX:

Leave out Clause 299.

On Question, amendment agreed to.

Clause 300 [Continuing scrutiny]:

moved Amendment No. 170BY:

Leave out Clause 300.

On Question, amendment agreed to.

Clause 301 [Initial report by Director General of Fair Trading]:

moved Amendments Nos. 170C to 170CC:

Page 159, line 13, leave out from ("284") to ("in") in line 14 and insert--

("( ) The Authority must send to the Director such information in its possession as a result of the application for recognition as it considers will assist him in discharging his functions").

Page 159, line 16, leave out from ("must") to end of line 24 and insert ("issue a report as to whether--

(a) a regulatory provision of which a copy has been sent to him under subsection (1) has a significantly adverse effect on competition, or

(b) a combination of regulatory provisions so copied to him have such an effect.").

Page 159, leave out lines 26 to 34 and insert ("significantly adverse effect on competition,").

Page 159, line 35, at end insert--

("( ) When the Director issues a report under subsection (2), he must send a copy of it to the Authority, the Competition Commission and the Treasury.").

On Question, amendments agreed to.

moved Amendment No. 170CD:

After Clause 301, insert the following new clause--