.—(1) This section applies to an agreement between a person ("the depositor") and another person ("the deposit-taker") in the course of carrying on by the deposit taker of deposit-taking in contravention of the general prohibition.
(2) If the depositor is not entitled under the agreement to recover without delay any money deposited by him, he may apply to the court for an order directing the deposit-taker to return the money to him.
(3) The court need not make such an order if it is satisfied that—
(4) "Agreement" means an agreement—
(5) "Court" means
Brought up, and read the First time.
Mr. Deputy Speaker
With this it will be convenient to discuss Government amendments Nos. 245 to 248.
§ Miss Johnson
The central objective behind the unenforceability provisions in clauses 24 to 27 is not to find an additional way to penalise wrong-doers, but to assist the financial markets by removing uncertainty. The clauses start from the same presumption of unenforceability that exists under the general law and section 5 of the Financial Services Act 1986.
The underlying principle is that agreements entered into in the course of, or as a consequence of, illegal activity cannot generally be enforced in the courts. In other words, people should not be able to profit from crime. These provisions confirm that presumption, and also establish clear conditions which, if met, give the courts discretion to enforce agreements if that would be just and equitable. It was thought necessary to include provision along those lines in the 1986 Act. We think that it is equally right and necessary to provide the same level of clarity and certainty in this Bill.
In Committee, the hon. Member for Arundel and South Downs (Mr. Flight) agreed with us that it is a reasonable principle to apply that an authorised person should not be able to enforce an agreement if it was made through an intermediary who should have been authorised but was not. However, the hon. Gentleman argued that it was unfair to penalise the authorised person if they did not know that the agreement resulted from unauthorised activity by some third party. We accepted that argument.
Clause 26 goes beyond the existing test in that it makes an agreement unenforceable if the court considered that, although the authorised person did not know, he had grounds for suspecting. That is not the intention behind these provisions. Government amendment No. 245 will therefore align the test with the 1986 Act, so that the courts can exercise their discretion to enforce when they are satisfied that the service provider did not know that the agreement resulted from illegal activity.
We also undertook in Committee to amend the test for enforcing agreements resulting from illegal financial promotion. As it stands, the tests in clause 27 are 977 concerned with the effect of the promotion, rather than the belief or knowledge of the service provider. On reflection, we think that that is inappropriate. The effect of the promotion on the customer can be taken into account as necessary by the court in deciding whether enforcement is just and equitable, but the prior test should be as it is for agreements entered into as a result of unauthorised regulated activity.
If the service provider is also the promoter, the question should be whether he reasonably believed that he was not contravening the prohibition. If the promoter is a third party, the question should be whether the service provider knew that the agreement was a result of an illegal promotion.
§ Sir Nicholas Lyell
I am mostly encouraged by the Minister's remarks, but I am not entirely happy with part of them. If it is just and equitable that the deposit should not be returned, why is it necessary for the person who will suffer—contrary to justice and equity—to prove that he reasonably believed something?
§ Miss Johnson
I shall think about that point for a moment, because it is a difficult question. The right hon. and learned Gentleman was one of the main instigators of some of the improvements made in the new clause, as a result of issues that he raised about deposit taking and unenforceability in correspondence with me. Sadly, he was not present when we discussed it in Committee, but I hope that the new clause addresses the point that he made, as well as those raised by the hon. Member for Arundel and South Downs, who rued the absence of the right hon. and learned Gentleman at that point in the Committee's proceedings.
The hon. Gentleman also argued in Committee that clauses 24 and 25 should not exclude illegal deposit taking from the effect of these provisions. In support of that, he put forward the possibility of a person locked into a fixed-term deposit arrangement with an illegal deposit taker. In such a case, he argued that the depositor should be able to demand the return of their deposit immediately. Again, we accept the point.
It would be unsatisfactory if the victims of an illegal deposit taker were disadvantaged, so new clause 12 tackles the point directly. Unless the courts are satisfied both that the deposit taker reasonably believed that he was not breaching the prohibition and that it would be just and equitable to uphold the agreement, the depositor will be able to obtain immediate repayment. I do not know whether that answers the right hon. and learned Gentleman's question. [Interruption.]—I think that he is indicating that he is satisfied by that.
§ Miss Johnson
I have nothing further to say at this point, except to commend the new clause to the House.
§ Mr. Heathcoat-Amory
The new clause addresses the enforceability of contracts or agreements made by regulated persons in contravention of the rules. As we have heard, and as we discussed in Committee, those are 978 generally unenforceable except in certain circumstances. The changes that the Government have brought forward are generally helpful, so we do not complain about them.
I have a slight problem in understanding the distinction between someone who sells and someone who purchases. The authorised person, it is assumed in the Bill, is normally the person who is selling something to a member of the public and is then found to have done so in contravention of the rules. However, the Government now appear to recognise that the authorised person could be buying something because, in Government amendment No. 244, the word "provider" is replaced with the phraseperson carrying on the regulated activity".Following discussion with those who have advised us, we recommended the word "counter-party" as preferable to "provider". It is neutral, and the person thus referred to could be receiving or providing services. That suggestion has not been taken up, although the Government have mostly tried to avoid the word "provider". However, clause 26 will still contain the word "provider", which is now an anomaly. I do not know whether it is an oversight—perhaps the late corrections to the Bill have not picked up all the instances of the use of "provider"—or deliberate. Perhaps the Minister could clarify that point.
§ Sir Nicholas Lyell
I welcome what the Minister said, as far as it went. However, it did not go far enough and, although the new clause looks innocuous on paper, I fear that it could lead to injustice. If the deposit taker has to have "reasonably believed" that he was not contravening the general prohibition when making the agreement, he may suffer a loss that, but for those words, the court would regard as unjust.
I shall make up an example of what I mean. Let us say that a person gives money to another person who makes investments on his behalf. Normally, the money is given simply to pay for the investments but, in the case that I am describing, some proportion of it is deemed to be held on deposit. If the person doing business fails to pay other debts to the business that makes investments on his behalf, he may claim back the money that is being held on deposit.
In those circumstances, it may be very unfair not to allow the illegal deposit taker to hold on to the money. Indeed, he may be relying on that money so that he can continue to invest on his client's behalf. The Minister's advisers may recall that all my thoughts go back to the case of SCF v. Masri, in which that rule, which is part of the Banking Act 1979, very nearly caused serious injustice. In that case, the investment business was not held to have been an illegal deposit taker, but making that determination can often involve many technical questions.
The technical circumstances may mean that the business held to be an illegal deposit taker did reasonably believe that it was not contravening the law. To that extent, new clause 12 would be satisfactory. However, it could easily transpire that that belief was not reasonable, and that a silly mistake had been made. Such a mistake could have highly disproportionate consequences if provisions such as those in the new clause were accepted.
I entirely understand where the Government are coming from, and accept that they are thinking about the matter sensibly. However, they have not gone far enough. 979 Depositors' automatic entitlement to getting their money back—unless the illegal deposit taker can demonstrate that repayment would not be just and equitable—is sufficient protection for them, but it is not absolute. It means that justice can be done when people have acted in good faith, but not necessarily reasonably.
The structure of the new clause shows that the Government are anxious that the courts should be able to do justice. Proposed new subsection (3)(a) states that the court need not make such an order if it is satisfied thatit would not be just and equitable for the money to be returned".I think that that is enough, and that there is no need for the provision involving reasonable belief. The same arguments apply to Government amendments No. 245 to 248.
The Economic Secretary may argue that, to some extent, this business of unenforceability is a discipline on providers in the market. However, it can be so unjust that most of the time it would not be necessary: in cases where it was necessary, the court would order the money to be paid, because obviously it would be just to do so.
I hope that I have explained myself adequately, and that the Government will agree to think again on the matter. I am grateful for the distance that they have covered already, but it is not quite far enough.
§ Miss Melanie Johnson
First, I shall tackle the question from the right hon. Member for Wells (Mr. Heathcoat-Amory) about terminology, which rehearses a debate that we had in Standing Committee. Indeed, I recall that Opposition Members tabled an amendment about the term "counter-party" in Committee.
We have studied the question, which is largely a matter of drafting. There is a risk that the terminology of the "purchaser" is confusing, given that that person could also be selling investments, which is the point just made by the right hon. and learned Member for North-East Bedfordshire (Sir N. Lyell).
The word "purchaser" is a drafting device, and needs to be seen in that context. However, we shall continue to examine the problem, with a view to bringing forward another suggestion about the wording in another place.
§ Mr. Tyrie
I hope that the Minister will be able to dispel some confusion for me. As I understand it, clause 24 deals with agreements made by unauthorised persons, and clause 25 with agreements made through such persons. New clause 12 addresses the problem in clause 24, but it does not extend the same treatment to clause 25, which deals with agreements entered into with an authorised personin consequence of something said or done byan authorised personin contravention of the general prohibition".Why have the Government excluded clause 25 from the treatment meted out to clause 24?
§ Miss Johnson
In essence, that was the point raised earlier by the right hon. and learned Member for North-East Bedfordshire. The new clause does not cover third-party deposit taking. There is no intention to make giving advice on deposits a regulated activity.
980 In Committee, Opposition Members found it very difficult, in their amendments, to change terminology across the board. An example that we discussed earlier was the difficulty with the definition of the word "consumer". It is not always easy to produce a single term that fits well in all the circumstances in the Bill. We do our best to ensure that all the terminology is consistent and that, wherever possible, the same words are used. As I said, we will continue to consider this and will come back to it in another place if that seems appropriate.
The right hon. and learned Member for North-East Bedfordshire asked why, if it was just and equitable that a deposit should not be returned, it was necessary for the person to prove that he reasonably believed that he was breaching the prohibition. My understanding of the way that this works may be different from that of the right hon. and learned Gentleman. It is important to remember that we are talking about illegal activity. The first question is whether the provider reasonably believed that he was not acting illegally. Only then does the second question kick in—whether the enforcement is just and equitable. It is a staged process. I think that the right hon. and learned Gentleman was suggesting that only the second phase was necessary, but the first stage is supposed to be followed by the just and equitable consideration as the second element.
§ Sir Nicholas Lyell
Will the Minister clarify this point? She is concentrating on the illegality of the activity. While it is true that the idea of not being able to profit from one's own wrong is deeply embedded in the common law, does the hon. Lady recognise that the illegality in these circumstances is, in a sense, artificially—although rightly—created by statute? Buying and selling shares, for example, is a perfectly legitimate activity. Therefore, there is a high degree of technicality about the illegality. Hence, does the hon. Lady agree that, if it is just and equitable in a commercial situation for money to be returned or not, that should be the end of the question, and that what someone did or did not reasonably believe is a step too far?
§ Miss Johnson
I do not think that I agree with the right hon. and learned Gentleman. My view is that, if the illegal behaviour resulted from an obscure technicality of the kind that he sketched out, the court may be satisfied that the person reasonably believed that he was not breaking the law. That is a distinct possibility. But, if the belief was not reasonable, why should the courts enforce the illegal contract?
§ Sir Nicholas Lyell
We are talking about activities that are contrary to the general prohibition. Those are not obscure technicalities, but the circumstances in which a breach of the general prohibition may have arisen but be entirely innocent, albeit the person was slightly negligent. If that was the case, does the Minister recognise that unreasonableness would creep in and injustice could be done because the money could not then be returned by the court even though it had been decided at the first stage that it would be just and equitable to do so?
§ Miss Johnson
I believe that, if what was done in the first place was straightforward and not a matter of obscure technicality, the issues may not be the same, but the measure must address the point that it may not be clear whether there is an obscure technicality. The right 981 hon. and learned Gentleman does not wish to entertain that possibility, but it is an eventuality that must be entertained. I recognise that that will sometimes cause difficulty for those carrying out unlawful activities, but there is a balance to be struck and the Bill strikes it properly. I do not think that I have anything further to add.
§ Sir Nicholas Lyell
Would the Minister just answer this question? If there is a small mistake—a negligent mistake, as most mistakes are—but, considering the issue as a whole, it would be unjust to the deposit taker to have to return the money, why should the court's hands be tied from doing justice?
§ Miss Johnson
I do not believe that we are tying the court's hands and preventing justice from being done. It is the business of the courts to do justice and I do not believe that anything that we are doing has or will have that effect.
Question put and agreed to.
Clause read a Second time and added to the Bill.