§ '(1) If at any time it appears to the Secretary of State that the rules of a recognised organisation do not satisfy the requirements of paragraph 3(1) of Schedule 2 to this Act he may, instead of revoking the recognition order or making an application under section 12 above, direct the organisation to alter, or himself alter, its rules in such manner as he considers necessary for securing that the rules satisfy those requirements.
§ (2) If at any time it appears to the Secretary of State that the rules and practices of a recognised organisation which is concerned with two or more kinds of investment business do not satisfy any requirement of Schedule 2 to this Act in respect of investment business of any of those kinds he may, instead of revoking the recognition order or making an application under section 12 above, direct the organisation to alter, or himself alter, its rules so that they preclude a member from carrying on investment business of that kind unless he is an authorised person otherwise than by virtue of membership of the organisation.
§ (3) Any direction given under this section shall, on the application of the Secretary of State, be enforceable by mandamus or, in Scotland, by an order for specific performance under section 91 of the Court of Session Act 1868.
§ (4) Before giving a direction or making any alteration under subsection (1) above the Secretary of State shall consult the organisation concerned.
§ (5) A recognised organisation whose rules have been altered by or pursuant to a direction given by the Secretary of State under subsection (1) above may apply to the court and if the court is satisfied—
- (a) that the rules without the alteration satisfied the requirements mentioned in that subsection; or
- (b) that other alterations proposed by the organisation would result in the rules satisfying those requirements,
§ (6) The jurisdiction conferred by subsection (5) above shall be exercisable by the High Court and the Court of Session.
§ (7) Section 11(2) to (7) and (9) above shall, with the necessary modifications, have effect in relation to any direction given or alteration made by the Secretary of State under subsection (2) above as they have effect in relation to an order revoking a recognition order.
§ (8) The fact that the rules of a recognised organisation have been altered by or pursuant to a direction given by the Secretary of State or pursuant to an order made by the court, under this section, shall not preclude their subsequent alteration or revocation by that organisation.' — [Mr. Howard.]
§ Brought up, and read the First time.429
§ Mr. Howard
When we discussed in Committee the provisions of the Bill relating to RSROs, it was clear that there was widespread support for the proposal that the Secretary of State or designated agency should have the power in certain circumstances to alter the rules of an RSRO without having to apply to the courts under the procedure provided for in clause 12. I undertook at that stage to consult interested parties and bring forward an amendment on Report. The new clause reflects the results of those consultations.
As hon. Members will recognise, the new clause incorporates the provisions of the existing clause 13. The new power is provided in subsections (1), (4), (5) and (6). The clause will allow the Secretary of State or designated agency to act quickly when the interests of investors so demand, but will also allow an RSRO an opportunity to have its original rules, or an alteration proposed by the organisation, restored. I believe that this proposal strikes the right balance between effective enforcement by the Secretary of State or designated agency and the autonomy which RSROs will need if they are to command confidence and authority. The proposal is, I believe, acceptable to the Securities and Investments Board and to the potential RSROs. I commend it to the House.
The amendments to clause 12 extend the compliance order provisions to cases where a self-regulating organisation, a registered investment exchange or a recognised clearing house has failed to comply with an obligation to which it is subject by virtue of the Bill. Under the Bill as originally drafted, such a failure was a ground for revocation of a recognition order but not for seeking a compliance order. The Government will be bringing forward amendments in another place to apply the compliance order provisions to recognised professional bodies.
The remaining amendments are largely technical. They make clear that a failure to comply with an obligation imposed under, for instance, clause 91 — which is concerned with the provision of information — constitutes grounds for the revocation of a recognition order.
§ Mr. Gould
'The new clause represents the fulfilment of yet another undertaking, I think it is fair to say, extracted from the Minister by an all-party consensus in the Standing Committee. Indeed, it could be claimed to have been our first major victory. Therefore, I am delighted to see it. Since I was criticised on an earlier occasion for failing to take credit for a change which the Minister proposed, I shall take the credit for that amendment. I also pay tribute to the Minister's hon. Friends on the Committee who agreed with the position we took. I believe that, in the end, we agreed to support the amendment of the hon. Member for Beaconsfield (Mr. Smith).
The amendment that the Minister has finally produced is, to all intents and purposes, a complete fulfilment of his undertaking. One regrets, perhaps, that the Securities and Investments Board's preference for practices as well as rules to be subject to the rule-changing power has not been given effect. I think that the Minister has gone as far as one could reasonably expect him to to meet the virtually unanimous view of the Standing Committee. Even the self-regulating organisations which, for understandable reasons, were not keen on the change have reluctantly accepted it, or at least have not resisted it too strenuously.
430 I should like the Minister to elaborate on two small points. The fact that a rule book change is forced on a self-regulating organisation by the new power under subsection (8) does not mean that the rule book is set in concrete. Nevertheless, it opens up, at least, the rather unattractive prospect that there may be an unedifying game of ping-pong between the SIB and an SRO. Can the Minister say how he will avoid such an unfortunate circumstance?
The Minister proposes that a self-regulating organisation which has been subjected to the power under subsection (5) should be able to go to the court to have the decision reversed. I would agree with him if he said that the power of judicial review should be available. It is difficult to see how it could be excluded. I regret that the Minister has found it necessary to provide a right of appeal, in effect, on the merits. That can only introduce an unwelcome element of uncertainty.
It is appropriate to refer to the fact that although the new clause does not deal with the matter, the Minister does not propose to introduce a similar measure in respect of recognised professional bodies, although that was something which the Committee had asked for and expressed an opinion on. As I understand from the Minister, the matter is to be dealt with in another place. One must recognise and establish that the Minister, perhaps for understandable reasons, has failed to fulfil an undertaking that he gave to the Committee. We must register our disappointment that he has not moved on that element, although we accept that he has substantially fulfilled the undertaking he gave on self-regulating organisations.
§ Mr. Nelson
The hon. Member for Dagenham (Mr. Gould) is difficult to please. When his arguments fail to move my hon. and learned Friend the Under-Secretary of State, he complains. When his arguments move my hon. and learned Friend, he complains. When my hon. and learned Friend changes his view because of outside influences, the hon. Gentleman commplains. My hon. and learned Friend should not feel too disappointed or surprised at the reaction to the new clause.
I very much welcome the new clause. I welcome the responsive way in which my hon. and learned Friend replied to the debate in Committee. In the judgment or many of us, it is important that the self-regulating organisations should to some extent, have their powers fettered by the supervisory intervention—at least on a contingent basis — of the designated agency, the Securities and Investments Board. I think as do many others, that it is an essential and important part of the new regulatory structure that the designated body will be able to act in certain instances quickly and positively where investor protection is imperilled.
I should like to take up specifically the point concerning the recognised professional bodies. Recently, my hon. and learned Friend answered a question that I had tabled on this matter. He made it clear that he intended to deal with their position in a rather different way. I had great misgivings about extending to any of the professions an exemption from the rule-changing power of the SIB. It seemed to me that many people in the professions were to an increasing extent, offering the same sort of investment service as many individuals or authorised persons. It would be wrong, when those people were departing from the mainstream activity of their chartered body and 431 moving into these more lucrative areas, to extend to them a preferential status or immunity from their charter rules being changed thereby placing authorised persons operating under other SROs in a preferential position.
Having said that, I found the arguments put forward by my hon. and learned Friend very compelling. He argued that the recognised professional bodies would enable only their individual members or member firms to give incidental or limited investment advice. Because the type of business that individuals or firms within professions will be able to offer will be much more limited than the type of investment advice that other organisations will be able to offer, there is perhaps less need for the sort of rule-changing power that will be imposed on other SROs.
In accepting that, I should like to enter one important caveat. Much depends on the policing by the SIB of the professions. If it transpires that many of the recognised professional bodies are engaging, not in incidental general investment advice, but in particular wide-ranging investment advice and are operating outside the sphere of the professional body in such a way that they should get separate authorisation, this matter should be reviewed, even if it touches the sensibilities of some of the royal charter organisations. For the time being at least, it is reasonable to deal with the matter in this separate way. Perhaps my hon. and learned Friend will direct his attention to the more particular proposals that he intends to make in another place.
§ Mr. Ashdown
I join in welcoming the new clause and in paying tribute to the hon. Member for Beaconsfield (Mr. Smith), whose amendment in Committee is put into effect by this new clause. I am sure he recognises that other hon. Members argued for that amendment as well. It has been a vehicle for a useful debate.
I must express a degree of disappointment. The Under-Secretary of State has allowed for alteration of the rules but not followed the sensible recommendations put forward by Sir Kenneth Berrill in his letter to the Minister in which he cogently argued in favour of a similar level of intervention and power in the case of practices.
The particular practice in which one is interested is the enforcement of the rules. It is one thing to have a set of rules; it is another thing to ensure that the self-regulating organisation concerned enforces them adequately. I believe that the Minister must answer that point more fully, and I hope he will say why he agrees that there should be intervention in the case of rules without having to seek recourse to what was referred to in Committee as the "nuclear deterrent," the ultimate revocation of recognition, but he has not applied that in the case of practices.
We all recognise that we are talking about a reserve power. It is a power that is most unlikely to be used. Indeed, the fact that the power is on the statute book means, in many cases, that it will never be used. Were it not there, obviously the leverage that could be exercised by the SIB in respect of an SRO would be considerably less than it currently is. We all know, and Sir Kenneth Berrill has made it clear, that he would wish the broadest level of consultation to occur before such a reserve power was used. Therefore, it would be the ultimate "nuclear deterrent" of revocation.
432 If that is a reserve power, one which the Minister agrees is unlikely to be used, and would be used only under exceptional circumstances, why has he not been prepared to extend it just one small step further to ensure that the SIB can intervene in respect of practices, especially in respect of enforcement? That seems to lose nothing and to gain a great deal in the powers of the SIB.
In his reply to the letter from Sir Kenneth Berrill of 10 April the Minister said, although I did not find it convincing:But I do not think there is the same need to be able to act immediately about practices. Problems about the adequacy of enforcement or other practices are likely to develop only over a period.Would that it were always so. Unhappily, that is not the case. Reference has been made to the Westland affair. It would be wrong at this point to state categorically that the rules of the Stock Exchange were overturned in that affair. However, there is some question over the matter. What happened was that the people involved simply went ahead and acted and presented the stock exchange with what was essentially a fait accompli. There is similar concern over the activities of people involved in, for example, dawn raids and whether that infringes the rules.
The question of having an ultimate reserve power to be able to dictate or intervene in the enforcement of the rules laid down by an SRO is important, not only as a reserve power, but to enable the SIB to move quickly and effectively and with the maximum amount of influence. I believe that this is an important point, and I hope that in answering the debate the Minister will at least give rather more flesh to what I thought was scanty reasoning in his reply to Sir Kenneth Berrill, so that the House will understand why he has chosen to limit this ultimate reserve power to just short of that which I believe to be necessary.
§ Mr. Cash
Following the rather unsatisfactory position in which we now find ourselves as a result of passing new clause 5, I should like to welcome new clause 6 because it provides an opportunity for rectifying some of the difficulties which may arise under new clause 5. I hope that new clause 6 can be used to the fullest possible extent for that objective.
On the matter of the recognised professional bodies, I should like to draw the Minister's attention to the fact that there appears to be a slight omission from clause 18. I drew that to the Minister's attention in Committee, but it does not seem to have been taken up. On some reasonable construction of clause 18, the Law Society would not qualify as a recognised professional body. That is somewhat extraordinary and I should be glad to hear from the Minister on that point.
I should simply like to say that, at the end of the day, schedule 2 will determine the manner in which the Bill operates and, unless we use the powers of new clause 6 effectively I fear that it will not work as we had intended and as we had understood it would in Committee.
New clause 6 applies to circumstances which arise after an event has occurred, whereas new clause 5 would have created a situation in which a body—to all intents and purposes a statutory body, in respect of which the law on negligence is well established—would have been able to operate in the same way as the CEGB, for example, if it faced a statutory liability involving sums similar to those in other examples of such liability.
§ Mr. Tim Smith
As I moved the amendment in Committee which would have had the same effect as the new clause, I should like to welcome the fact that my hon. and learned Friend the Minister has introduced the clause. I think that it meets the concerns of all those who spoke in Committee on this issue.
I shall refer to the position of recognised professional bodies because my hon. and learned Friend said in Committee that he would deal with the matter subject to the practical difficulties. We are all conscious that the position of the RPBs is different from that of the SROs as they already exist. Indeed, some of them are subject to a royal charter. There were probably two considerations that my hon. and learned Friend had in mind when he told my hon. Friend the Member for Chichester (Mr. Nelson) in an answer on Monday that he proposed to deal with RPBs by introducing provisions along the lines of clause 12.
We are talking only about incidental investment advice. My hon. and learned Friend talked about the possibility of a new sort of mainstream work for professionals, and if it is mainstream work they will not be able to follow this route. They will have to have authorisation from an SRO, or directly from the SIB. Secondly. the way in which my hon. and learned Friend proposes to deal with the matter will ensure, as the courts will be involved, that any difficulties arising from royal charters or any other constitutional problems will be dealt with by the courts.
§ Mr. Howard
I am grateful for the general welcome that the new clause has received. We said at the outset that judgment on this issue was finely balanced and that we would listen to the views that were expressed. It was on that basis that I felt able to accede readily to the view that was expressed almost unanimously in Committee that a direct rule-changing power should be introduced.
I confess that I was mildly surprised, but pleasantly so, that the amendment that we devised was able to obtain the approval of the SIB and the SROs. I regard that as a considerable achievement. It was a balance, and if we disturbed it in the way which has been suggested by some Opposition Members, I do not think it certain that we would preserve the accord.
The hon. Member for Dagenham (Mr. Gould) referred to clause 8, and his argument was covered by his remarks about clause 5. As the court is the arbiter of these matters, there would be no point in the ping-pong that he envisaged. It would be idle for an SRO to change immediately a rule change which had been ordered by the court, as it would find itself back in court with the same consequences. It was essential that some provision such as that in clause 8 be introduced, otherwise once a rule had been changed by the court it would he set in concrete and could not be changed. That would obviously be undesirable.
That fact that the court can consider the merits of the argument under subsection (5) is part of the balance to which I have referred, and which I believe it is important to keep. That is the answer to the hon. Member for Yeovil (Mr. Ashdown). The fact that intervention in the practices of the SRO is not to be provided by the clause is part of the same balance. I adhere to the argument that I set out in my letter to Sir Kenneth Berrill that the reason 434 advanced for the provision for a direct rule-changing power which the clause provides is the need for speedy and effective action to be taken over the change in rules.
As it is not envisaged as part of the regulatory structure that the designated agency should interfere with specific cases for discipline or enforcement but only with the general pattern which it is its duty to assess, there cannot be the same need for a speedy and immediate response in relation to practices as is necessary with changes in the rules. That is the reason that I explained in my answer to Sir Kenneth Berrill and I do not in any way [rime from that. I remind the House that in order to achieve a proper balance, we must take all the elements of a solution into account.
§ Mr. Howard
Of course objectionable practices should not he allowed to develop. However, the way in which the hon. Gentleman put his question confirms that that is not something that happens at a moment in time, requiring a snapshot response in the same way that a change in the rules or a failure to change the rules on the part of a self-regulatory organisation may require. The evolution of an objectionable pattern in terms of practices needs to be assessed over a period, can be assessed over a peroid and can be dealt with by the designated agency in many ways without the need for this immediate rule or practice-changing power which the clause provides.
§ Mr. Ashdown
I will not press the Minister too far on this point, because we could get into a ridiculous position. However, I would like to postulate a possible situation. There may be a set of rules in an SRO—for example, the stock exchange—which govern the business of the operation of dawn raids. A pattern may develop in the stock exchange where a number of these are causing damage to the probity of the stock exchange and of the City and operating in a way that is damaging to the investors. There are rules, but the stock exchange has chosen, for all sorts of complicated reasons no doubt, through the enormous pressure from its members, simply not to enforce those rules or not to enforce them adequately. In this matter of enforcement, it would be important for the SIB to be able to act quickly and to have a reserve power whereby the SIB can say that the rule must be enforced more effectively to provide precisely the swift action which I believe is necessary.
§ Mr. Howard
The hon. Gentleman's example proves my point. It would be undesirable for the designated agency to intervene in any specific case of abuse of that nature. If the hon. Gentleman is worried about a pattern, which by definition is not instant but which develops over a period, the designated agency would be able to make use of the other remedies that are available to ensure that proper enforcement is undertaken by self-regulating organisations. I do not think that the case for instant response of the kind which the direct rule-changing power confers has been made out in connection with practices. I believe that the balance is about right in the clause as it stands and I commend it to the House.
§ Question put and agreed to.
§ Clause read a Second time, and added to the Bill.