HC Deb 27 January 2000 vol 343 cc632-41

.—(1) The Lord Chancellor may by regulations establish a scheme governing the provision of legal assistance in connection with proceedings before the Tribunal. (2) If the Lord Chancellor establishes a scheme under subsection (1), it must provide that a person is eligible for assistance only if—

  1. (a) he falls within subsection (3); and
  2. (b) he fulfils such other criteria (if any) as may be prescribed as a result of section (Provisions of the legal assistance scheme)(1)(d).
(3) A person falls within this subsection if he is an individual who has referred a matter to the Tribunal under section 101(4). (4) In this Part of this Act "the legal assistance scheme" means any scheme in force under subsection (1).".—[Mr. Timms.] Brought up, and read the First time.

The Financial Secretary to the Treasury (Mr. Stephen Timms)

I beg to move, That the clause be read a Second time.

Mr. Deputy Speaker (Mr. Michael Lord)

With this it will be convenient to discuss the following:

Government new clause 9—Provisions of the legal assistance scheme.

Government new clause 10—Funding of the legal assistance scheme.

Government new clause 11—Tax treatment of levies and repayments.

Government amendments Nos. 135, 182 and 183.

Mr. Timms

The purpose of new clauses 8, 9 and 10 is to provide the Lord Chancellor with the power to establish a subsidised legal assistance scheme in cases before the tribunal that involve the imposition of penalties for market abuse. They fulfil a commitment that my hon. Friend the Economic Secretary made to the Standing Committee on 2 November 1999 and will be widely welcomed.

In the light of consultation responses and evidence given to the Joint Committee chaired by Lord Burns, the Government reviewed the question of whether the market abuse regime should be categorised as criminal or civil for the purposes of article 6 of the European convention on human rights. We think that there are good arguments for characterising the regime as civil. Nevertheless, as a precautionary measure, we decided to introduce the convention's criminal protections for market abuse penalties. They include the provision of subsidised legal assistance where a person has insufficient means and where the interests of justice so require it.

New clause 8 will give the Lord Chancellor power to establish the scheme by regulations and that will result in a free-standing scheme for legal assistance rather than an extension to the existing legal aid scheme. It also sets out the coverage of the scheme. Assistance is to be provided to individuals who have referred to the tribunal a decision of the FSA to impose a penalty for market abuse. That reflects the category of cases where we think the convention might require assistance to be provided.

Mr. John Bercow (Buckingham)

New clause 8 may be entirely unobjectionable and could even be productive, but I am always anxious when reference is made, especially by this Government, to things being done by regulations. Will the Minister assure me that, when the draft regulations are issued, there will be an adequate period for consultation upon them before they are finalised and those associated with them have to come to terms with them?

Mr. Timms

I am grateful to the hon. Gentleman for what I thought was his welcome for the arrangements in the new clause. The Lord Chancellor will establish the scheme by regulations and I have no doubt that he will go through the normal procedures and provide adequate time for the discussion that the hon. Gentleman is quite right to say should take place.

My hon. Friend the Economic Secretary told the Standing Committee that it was not our intention to make legal assistance available for tribunal cases across the board. Legal assistance is not generally available in tribunal proceedings, which are intended to be speedier and less formal than court proceedings.

The Lord Chancellor's Department is currently considering the eligibility criteria; it is likely that the current conditions for legal aid in criminal cases will broadly be followed. If the criminal regime is adopted as a model, there will be two tests: first, an interests of justice test and, secondly, a means test.

New clause 9 gives further examples of the sorts of matter that will have to be covered by the Lord Chancellor's regulations. For example, we envisage the scheme being administered by the Court Service, which will run the tribunal. Therefore, subsection (1) of the new clause allows the regulations to specify who is to determine applications for legal assistance. Other detailed matters will have to be set out in the regulations and it will be necessary for the Lord Chancellor's Department to specify the form that legal assistance may take.

The funding of the scheme is dealt with in more detail in new clause 10. My hon. Friend the Economic Secretary told the Standing Committee that the scheme would be paid for by levies raised by the FSA from authorised persons. That is the effect of subsections (1) to (4). The Lord Chancellor will determine the cost of the legal assistance scheme and set the total amounts of the levy for a specified period—normally one financial year—required to be paid for by the levies; the FSA will decide on the distribution of levies on authorised persons.

Because the levy will be raised through FSA rules, the distribution of the levy among different groups of authorised persons will be a matter on which the FSA will be required to consult in the usual way under clause 127. The Government have tabled separately several amendments in that respect.

The cost of administering the scheme will come out of the running costs of the tribunal. In subsection (1), we have provided that the levy may cover anticipated or actual costs. The forecast of costs might prove to be an overestimate or an underestimate, so the arrangement we have made allows such matters to be sorted out at the end of the appropriate period.

New clause 11 deals with the treatment for tax purposes of levies payable to the compensation scheme, the ombudsman scheme and the legal assistance scheme, all of which are to be set up in accordance with the Bill. It specifies that payments from those schemes to relevant firms are to be treated as trading receipts. That is achieved by inserting into the Income and Corporation Taxes Act 1988 the provisions set out in new clause 11.

We have had to make that change because the current provision, clause 198, deals only with the tax treatment of payments to and from the compensation scheme. It does not cover the ombudsman scheme or the legal assistance scheme. Amendment No. 135 would remove clause 198, which is replaced by new clause 11, which covers all three schemes. Amendment No. 182 makes some consequential amendments to the Income and Corporation Taxes Act 1988. Amendment No. 183 repeals provisions in that Act and the Finance Act 1991. As the hon. Member for Buckingham (Mr. Bercow) said, it is likely that the series of changes we are making will be welcomed.

Mr. Flight

We were advised of the new territories with which the new clauses deal, but we received details of the new clauses only recently. While we broadly support the intention behind the new clauses, they contain some deficiencies.

Legal assistance is to be given only if the accused person has already gone through the FSA warning notice procedures and made representations. A person who carries out that process is likely to incur major legal expenditure. The Government have, in effect, accepted the probability that market abuse cases will be viewed as criminal under the European convention on human rights, but it strikes us that the scheme does not provide adequate legal aid for the whole process.

4.15 pm

Also at issue is the fairness of the rather convoluted funding arrangements. Market abuse is an offence that can be committed by anyone, even if not an authorised person, and by firms outside the United Kingdom. Therefore, it seems rather unfair that the legal assistance scheme should be funded entirely by authorised persons, and strange that the FSA can require payments to the scheme to be paid only by a particular class of authorised person.

We regard as unfair the FSA being able to make rules that excess receipts paid to it under the scheme should be distributed among only some of the authorised persons on whom the levy was imposed during the period in question. It is also unfair that sums can be applied to reduce amounts that those persons are, or will be, liable to pay to the FSA under the funding requirements "or otherwise". That wording appears to give the FSA the authority to apply excess receipts if a firm is liable to pay a fine—say, for market abuse or a disciplinary offence—but cannot afford to do so. Authorised persons will, in effect, have to pay the fines of defaulters. I doubt that that is what the Government intend.

New clause 11 is fine up to a point. However, an award of costs under costs rules can be deducted in the case of an investment company, but apparently not in the case of insurance companies. What is the reason for that difference? Will similar provisions apply, under normal taxation rules, in the case of all other classes of authorised person? The new clause appears to deal only with the tax position in respect of investment companies.

The big issue is clearly that of not providing legal assistance in respect of other offences. It is strange that the Government have accepted the risk on market abuse, but not on other matters in respect of which substantial fines can be imposed and individuals can lose their livelihood. Proceedings involving matters other than market abuse will be regarded as criminal proceedings under the European convention on human rights.

The requirement in respect of legal assistance is spelled out expressly as a protection in cases of criminal charges, but it is also an aspect of the convention's requirement for a fair hearing. Therefore, legal assistance should be available, and not only because many cases other than those involving market abuse would be regarded as criminal proceedings under the convention.

As the Government are aware, many eminent lawyers are of that view. Lord Hobhouse, who is a Law Lord, Lord Lester, who is a senior QC, and others in their chambers have made clear their belief that the FSA's disciplinary powers as they stand are in breach of the European convention. Lord Burns stated: Large fines imposed by the FSA could look punitive and that takes you into the world of criminal proceedings. In that case, it would be in breach of the ECHR. Lord Poole, chief executive of the Lloyds group, Ockham Holdings, has made similar comments.

In our view, the Government are taking a considerable risk. When the Bill is enacted, it might be undermined completely by a case brought under the European convention on human rights. It would be wiser to address the issues up-front.

The other technical defects and issues that I have raised will no doubt be addressed, debated and corrected in the other place. Without sounding petty, it would have been useful if this territory had been addressed in Committee, where amendments could have been tabled before reaching this stage of the Bill's consideration.

Mr. Timms

I thought that the hon. Gentleman might be more welcoming of the changes that we have made, which arose from commitments made in Committee. I do not agree that we are taking a high-risk approach. Indeed, I think that we are taking a precautionary approach by ensuring that legal assistance will be available in instances where conceivably it could turn out to be required.

The hon. Gentleman asked me a number of questions, which I shall attempt to answer. First, he asked why authorised persons should be those who pay the levy and not others. Authorised persons stand to benefit most from the improved functioning of the market that will be brought about by the market abuse regime. They will be the beneficiaries of any penalties that the FSA imposes. We suggest, therefore, that it is right that authorised persons should be the ones who pay for the costs of legal assistance. I do not think that there is any reason for that burden to be shouldered by the general taxpayer, which I suppose would be the alternative.

The hon. Gentleman asked about what happens if there is a surplus. In that situation the Lord Chancellor might either repay the excess to the FSA or reduce the amount that it has to levy the following year. If the excess is repaid to the FSA, it might distribute the money among those on whom the levy was imposed, or it might be offset against future levies or fees that those persons have to pay. I think that that is a sensible way to manage matters.

The hon. Gentleman asked, "Why not go further and extend legal assistance elsewhere?" That was the central issue in his speech and he described it as the most important. I re-emphasise that the additional protections against market abuse are in place as a precautionary measure. There is not a need to extend the scheme further. We are clear that the disciplinary regime is not a criminal regime for conventional purposes, so a wider scheme of legal assistance is not needed. That issue was addressed fully in the memorandum that went to the Joint Committee on 14 May and in the evidence given on that occasion by the then Economic Secretary, with Sir Sydney Kentridge QC and James Eadie. We have stated our position clearly and unambiguously, and that remains our view today.

Mr. Heathcoat-Amory

I am grateful for the Minister's response to the questions raised by my hon. Friend the Member for Arundel and South Downs (Mr. Flight). However, I am not entirely satisfied because I think the Government are running a big risk in not extending subsidised legal assistance to those accused of serious offences under the disciplinary regime. We welcome the fact that the Government are bringing forward this assistance for market abuse cases, which is important. However, they seem to be relying heavily on their assertion that the disciplinary regime will not be judged to involve matters of a criminal nature, so that the appropriate protection for those accused of criminal offences will not apply in such cases.

In reaching that conclusion, the Government have relied heavily on the fact that, potentially, market abuse offences can cover virtually the entire population. Anyone—even someone not regulated under the Bill—can be judged to be engaging in market abuse. As I understand it, however, disciplinary offences apply only to the regulated community. That gives the regime the character of disciplining a club; that is why a civil regime is appropriate. It is a large club, however. If anyone wants to earn their living in the financial services industry, they must register or, as it were, become a member of the club.

As a layman, I rather doubt whether courts will continue to take the view that all fines, however large, that are levied on the regulated community are of a civil nature. The fines can be extremely large, and I believe would imply a penalty or punishment. If that is the position, I believe that at some stage a court will judge a matter subject to the disciplinary regime to be of a criminal nature. If that is the case, other safeguards must apply under the European convention on human rights. For example, if those accused are unable to pay for professional defence, they must be subsidised. That is natural justice. If someone is to be prosecuted by a professional, he must be defended by a professional. If the individual cannot pay for one himself, there is the legal aid scheme. That is what it is for.

In setting up something akin to the legal aid scheme in the Bill, the Government are most unwise not to make provision to extend it.

Mr. Bercow

I have no means of knowing whether my right hon. Friend is right in his anxieties. Surely the logic of what he is saying, if he is correct, is that the Government lawyers are not giving value for money.

Mr. Heathcoat-Amory

I hesitate to criticise lawyers. We never know when we will need one. My hon. Friend makes a good point in that there is no doubt that the Bill has evolved under the impact of external legal advice. When the Bill was published in July 1998, it was undoubtedly at variance with the requirements of the European convention. I do not know whether that was because of faulty legal advice in drawing up the Bill. Better-qualified legal advice, or advice provided by more specialised quarters, has persuaded the Government to amend the Bill to bring it more into line with the requirements of the convention. That is why the Government have radically amended the market abuse provisions to provide greater clarity and to provide other safeguards.

The Government have not, however, provided for safeguards in respect of subsidised legal advice and defence to be applied to the disciplinary regime as well. I feel that that leaves the Bill wide open. When the European convention becomes fully applicable in English law, which I think will happen later this year, it will be serious if a challenge succeeds.

There is a mechanism for the Government to bring forward in short order an amendment to change the legislation, but meanwhile any cases that are before the courts, or pending, must fail. It would be a serious matter for the City, and the financial services industry generally, to be without proper legal cover. In that respect, the regulatory system would have failed while the Government brought forward further and better clauses. The Government are running a risk not only with their reputation but with the stability of the market. That is why the matter is serious.

We did not debate the Ways and Means resolution. We allowed it to go through on the nod at the beginning of our proceedings in order to make progress. It is relevant to our discussion because the Government are to introduce a new tax on the regulated community through the resolution and the new clauses in the form of a levy. The money will go into the consolidated fund, and, somehow, come out again, when the Lord Chancellor will pay some of it back to the FSA, which may redistribute it back to the authorised firms and individuals if there is a surplus. That is an amazingly cumbersome system, and the Government have not explained why it is necessary.

4.30 pm

If the provisions are accepted, the House will delegate the power to tax to the FSA. We must be cautious about that because an authorised individual—for example, an independent financial adviser—will be subject to a levy. That money will be used not necessarily for legal help for that adviser if he is accused of market abuse, but for his clients—members of the public who will pay nothing. That will happen because the scheme is not funded through general taxation but through the levy. People and firms will have to pay a form of taxation into a fund, which will be used in unspecified ways.

We do not know the details of the scheme. It is another item that will be delegated to secondary legislation through our old friend the negative resolution procedure. This debate is our last opportunity to hear and agree the details, or at least to be told more about them. The way in which a legal aid scheme works, the sources of the funds, their application, and the criteria for eligibility for assistance are important matters of justice. The scheme will never come before the House because the order will be made under the negative resolution procedure. If anyone objects, the Government can say, "That's very interesting, but we won't debate it," and the scheme will become law.

The Minister's comments have been light on substance. We knew that the scheme would be included on Report, but the details remain sketchy. As I said earlier, they involve the redistribution of money, compulsorily levied from people in the financial services industry. The Government owe us a slightly longer explanation.

Mr. Loughton

I am sorry that I was not present for the earlier discussions on the new clause—I was called away. I want to add a few comments to those of my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory).

As I said when we started the debate, the details of the legal aid scheme were not available to the Committee that considered the Bill. As my right hon. Friend said, although great chunks of new clauses are being added at a late stage, an enormous amount of detail about the workings of the scheme is simply unavailable. I am especially worried about new clause 10, which outlines a large part of the new scheme. It establishes a strange, cumbersome structure whereby the FSA will raise a levy from members to pay the Lord Chancellor the relevant sum, which will then go into the consolidated fund. The Lord Chancellor will then fund the cost of legal aid from money provided by Parliament. That necessitates an equalisation fund for the refund to the FSA, and a complicated redistribution to its members. By the time everyone has had a pound of flesh, and taken a cut for the administration of the scheme, one wonders whether any money will be left for the scheme, or to refund the people who paid in the first place.

There is a basic anomaly and injustice in the provision. It is unfair that authorised people alone will pay the levy for the misdemeanours of unauthorised people. There is also confusion about the period in which the Lord Chancellor decides how the equalisation repayments to the FSA and member firms will be made. Much can change in a year, and manipulation can occur.

New clause 10(7)(a)(ii) poses a question about the equality of the redistribution to authorised persons because it refers to: such of those persons as it may determine". On what will such a decision be based? Will it be based on someone having the head of the FSA round for a rather nice lunch and his then deciding that that person should get a slice of the cake for which they paid in the first place? That is iniquitous and leaves the provision open to challenge concerning the equality of the treatment of member firms that have to stump up money. The method of redistribution could be entirely arbitrary. We need far more details.

Decisions about refunds that are paid on account before the amounts are calculated also seem arbitrary. The excess receipts could be calculated against a firm's potential fines. Contrary to the rule that one is innocent until proven guilty, a firm is considered a potential member of the sin-bin pool before being identified as possibly having committed some misdemeanour that may be investigated by the FSA. That turns the code of natural justice on its head and will be open to challenge under the convention on human rights.

Mr. Timms

Who, in the hon. Gentleman's opinion, should pay for the legal assistance scheme, if not the authorised persons?

Mr. Loughton

It is not my job to specify that. I have not objected to a levy for a legal aid scheme. I have not said whether I believe that the scheme is right or wrong. Throughout our proceedings in Committee, I did not say whether it was right or wrong in principle. I simply questioned how it would work. I do not say that we should not have such a scheme. It has great merit, and, if run properly, is probably fair. However, the scant proposals that we have been given do not provide for equality.

In the old days of the stock exchange, there was a mechanism called the PTM levy—I must be careful to get the initials in the right order. It stood for the panel of takeovers and mergers. A levy would be added to everyone's contract. That was considered a fair way of raising money for a group that operated in part of the City's structure. People did not object to it. Could the levy that new clause 10 proposes function in the same way? How will firms pay for it? Is there a mechanism to prevent firms that have to pay an indeterminate levy from adding a legal aid fund levy to contract charges for their clients? If that happened, the clients would pay, quite transparently, for the legal aid process. Is that permissible? It is an obvious way of proceeding. As with so much of the measure, the clients, who apparently need extra regulation, will end up paying for it. How does the Minister envisage companies funding payment of that levy, and could they issue a contract surcharge on their business, whatever sort of business, equity transactions or insurance business they carry on? Is the cost of the levy completely open ended? Will it be capped or could it double one year and treble the next? An awful lot of money could be involved, depending on the amount of legal activity that is to be financed. Smaller firms could have to find a considerable sum, which would affect their ability to carry on their business.

I wanted to raise those questions, but the fundamental point is that we still lack an awful lot of detail. It is all very well for the Minister to say, "What would you do?", but I am not criticising the basic structure or the basic approach that the Government appear to be adopting. I want to be convinced that the proposal will work properly and fairly and that its extent can be properly defined, but I fear that nothing I have heard suggests that I can be assured on any of those questions.

Mr. Timms

I am still listening eagerly for a welcome from Conservative Members for the changes that we have made in response to points raised with us. Their welcome still sounds rather grudging, although the hon. Member for East Worthing and Shoreham (Mr. Loughton) said that the arrangement could be fairly fair so perhaps we are making progress. He asked about the details, and the hon. Member for Buckingham (Mr. Bercow), who was present earlier, was absolutely right about them: it is important that there should be consultation. That is a matter for the Lord Chancellor, who will consult in due course.

I do not want to go back over old ground, but I shall respond to some of the points made by the right hon. Member for Wells (Mr. Heathcoat-Amory) and the hon. Member for East Worthing and Shoreham. The arguments pushed in two conflicting directions: we were being urged to give the scheme a wider embrace and criticised for the way in which it will be paid for, but no alternative was suggested.

I think we have the balance right, but I want to address the serious charge that there is risk in what the Government are doing. I do not believe that that is the case. The right hon. Gentleman fairly and accurately described our position, which is that the disciplinary regime does not deal with criminal conduct, but suggested that we were treating it like club. The right analogy is with the regulation of professions, on which the jurisprudence is absolutely clear: such regimes are civil. That is the basis on which we are proceeding.

Question put and agreed to.

Clause read a Second time, and added to the Bill.

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