Clause 177

Legal Services Bill [Lords] – in a Public Bill Committee at 6:45 pm on 26th June 2007.

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Duties of regulated persons

Photo of Simon Hughes Simon Hughes Shadow Attorney General, Party Chair, Liberal Democrats

I beg to move amendment No. 242, in clause 177, page 94, line 33, at end insert—

‘( ) The duty to comply with regulatory arrangements overrides any obligations which a person may have, including to shareholders (otherwise than under the criminal law), if those obligations are inconsistent with the duty to comply with the regulatory arrangements.’.

I was so excited about the new Criminal Justice and Immigration Bill that I had not caught up with the fact that this amendment would be with us so quickly. It would add for the purpose of clarity a statement that would give priority to the duty to comply with regulatory arrangements. It would be inserted after subsection (1), which sets out the duties of regulated persons.

We are now into part 8; we have made great progress, and we are in the home stretch. This aspect of the Bill is called “Duties of regulated persons”, as is the clause, which starts by saying:

“A person who is a regulated person in relation to an approved regulator has a duty to comply with the regulatory arrangements of the approved regulator”.

The amendment would set out that that statement overrides any other obligations that that person may have,

“including to shareholders (otherwise than under the criminal law), if those obligations are inconsistent with the duty to comply with the regulatory arrangements.”

The Members’ explanatory statement, of which some of us are keen fans, says that the amendment

“is intended to put beyond doubt that for all those within the regulated sector, the duty to comply with regulatory arrangements is paramount”.

The real reason for the amendment is that if the Bill is passed as the Government want it to be, alternative business structures will be set up, organisations with people from different professions will work together, and they will not be governed as the legal profession on its own was governed in the past, simply by its own regulatory objectives.

This debate is like the earlier one about the priority of access to justice and the Legal Services Board. The amendment would ensure that, beyond peradventure, people understood and were in no doubt about the priorities. The Minister may say that the drafting is not perfect, that it is not in the right place or other things. I hope that she will say that subject to the criminal law, there must be an overriding duty of compliance, which the Bill should be absolutely express about for the avoidance of doubt. I await with interest her reply.

Photo of Bridget Prentice Bridget Prentice Parliamentary Under-Secretary, Ministry of Justice

Sir Nicholas, I am sure that you are aware that this issue was debated on several occasions in the other place. We made it clear then that the duty of lawyers and their practices to comply with the professional conduct rules and other regulatory arrangements is absolutely essential, which is why we have placed those obligations on a statutory footing and written several supporting safeguards into the Bill. There should be no scope for it to be compromised by other obligations—to shareholders or otherwise.

The Bill already achieves the amendment’s objective. If the lawyer or the licensed body were to breach professional conduct rules, they would be acting inconsistently with clause 177 and breaking the law. Approved regulators would be able to take whatever remedial action was necessary if the breach were serious—for example, allowing client confidentiality to be compromised in order to deliver a better return for shareholders. That would be grounds for revoking a licence and for permanently disqualifying the individual from ever working in an ABS firm again. There is no way that compliance with other obligations could ever provide a defence for that. Directors of that licensed body could not countenance breach of the law in the name of their duties to shareholders. If that were the case, directors could cause their companies to breach regulatory obligations all the time and then defend their actions by saying that they did it in the name of shareholder obligation. That simply is not how company law works.

Directors cannot take decisions that cause breaches of statutory obligations in the name of an obligation to their shareholders. They must abide by their statutory obligations, and their duties to shareholders do not justify any breach of those obligations. There is no conflict, so there is no need for an override provision. We have had detailed discussions on this matter with the FSA and the DTI, both of which confirmed that directors cannot use their duties to shareholders to justify the breach of a statutory obligation. They also confirmed that directors’ duties, including those to promote the success of the company as set out in the Companies Act 2006, presume that directors and their companies will be subject to all kinds of other obligations—statutory, fiduciary and regulatory. Section 172 of the Act co-exists with those duties; it does not conflict with them, so there is no need for an override provision.

I fear that the introduction of an override provision would cast out the principle of co-existence and would effectively state that such clauses are needed to ensure that directors comply with their statutory obligations, which clearly is not right. Such a provision might create negative influences for other duties, which could be damaging and could lead to uncertainty in applying principles that are vital to ensure consumer protection and to comply with legal obligations.

The importance of that principle is not unique to legal services, and I certainly do not want to jeopardise the interests of consumers in other sectors and create uncertainty about the application of company law by incorporating an unnecessary provision. I do not think that an override provision is needed, and accepting it might compromise the position that is set out clearly in the Companies Act. It is well known that directors cannot use their obligations to shareholders to override statutory obligations. I hope that my comments have reassured the hon. Gentleman enough for him to withdraw the amendment.

Photo of Simon Hughes Simon Hughes Shadow Attorney General, Party Chair, Liberal Democrats

I am grateful to the Minister for her considered reply, and I take seriously what she said about having consulted the DTI and others and that it  is their clear view that such protection is not needed. She was very clear, and people will be able to look back through the Hansard records to read what has been said about statutes and statutory protection in certain appropriate circumstances.

Obviously, we are all clear that the criminal law reigns supreme, but I want to clarify one thing. I understand the Minister to have said that obligations that do not of themselves give rise to criminal breach, but are obligations because the regulator has imposed guidance or required certain things, are still overriding obligations as set out in the Bill, and that one cannot pray in aid of shareholders’ interests and set those obligations against each other. Criminal law, of course, comes first, but other obligations are expressly to take precedence over any shareholder obligations, even if they do not have a criminal sanction. I think that that is what the Minister was clearly saying, but I would be grateful if she could clarify it. If that is the case, it might provide the necessary reassurance. I would not want any amendment to be accepted that compromises the achievement of that hierarchy of obligations.

Finally, we are looking at different sorts of firms, maybe run by non-lawyers, such as big insurance or investment companies or private equity firms, which will need to know what the score is. They need to know absolutely that if they come into this business, and if ABSs take off and that part gets through—a lot of discussion still needs to take place between the two Houses—in England and Wales, they must be governed by the same regulatory regime as that which governs law-only professions and which has worked well in that context recently.

Photo of Bridget Prentice Bridget Prentice Parliamentary Under-Secretary, Ministry of Justice 7:00 pm, 26th June 2007

I think that I can give the hon. Gentleman that reassurance. Statutory obligations are key. He is right to talk about criminal sanctions at the top of the hierarchy, but any statutory obligations will override any obligation to shareholders. I hope that that gives him that reassurance. He is quite right to say that those who might own some of those firms in the future must be very clear that that is the case absolutely. Hopefully, this debate will have gone some way to making that clear to them.

Photo of Simon Hughes Simon Hughes Shadow Attorney General, Party Chair, Liberal Democrats

I am grateful. I hope that when the Bill is passed, as I am sure that it will be in some form, and when anyone applies to set up an ABS, if permitted—some of us are still unhappy about that, but we will continue that debate elsewhere—they will get a copy of the “Minister says ‘obey!’” rule which could be sent gratis. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 177 ordered to stand part of the Bill.

Clause 178 ordered to stand part of the Bill.

Sitting suspended.

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