§ 11.37 a.m.
§ Lord Lucas of Chilworth
My Lords, I beg to move that the draft Stock Exchange (Listing) Regulations 1984 be approved. I can tell the House that these draft regulations have been considered by the Joint Committee on Statutory Instruments who have not called the attention of the House to any matter. The 1611 draft regulations are laid before Parliament under paragraph 2(2) of Schedule 2 to the European Committees Act 1972. The regulations implement three related European Community directives adopted by the Council between 1979 and 1982. They can most conveniently be labelled as, first, the admissions directives; secondly, the listing particulars directive; and. thirdly, the interim reports directive. The last is little more than an amplified article of the first.
In broad terms, the listing particulars directive lays down the documentation which must be made available to the public by a company seeking to have its securities admitted to the official list of the Stock Exchange. In effect, it is about the prospectus. The admissions directive deals in essence with the powers of the competent authority for listing. If Parliament approves the draft regulations, this would be a role that, I am glad to say, the Stock Exchange has agreed to assume. It also deals with the duties of listed companies. One of these duties is the publication of half-yearly reports. This is the subject of the interim reports directive.
Taken together, the directives establish a common system covering the admission of securities to Stock Exchange official lists and the behaviour of issuers of listed securities. They form part of the Community's continuing programme for the harmonisation of company and related law. Stock Exchange listing in this country has not hitherto been subject to statute law, except to the extent that any prospectus published in connection with the listing has had to comply with the relevant provisions of the Companies Acts. Whether or not a security is listed is a material fact for the purposes of a variety of statutory provisions. But admission has. of itself, been a private act of the Stock Exchange Council, and the Stock Exchange has, over the years, developed considerably higher standards of disclosure to investors than those enjoined by law.
The reason for legislating is that a number of decisions of the European Court since the directives were adopted make it quite plain that de facto compliance with a directive is not sufficient. Implementation has to be by a legislative means, and our compliance in practice would not, without legislation, fulfil our Community obligations. Quite apart from any infraction proceedings against Her Majesty's Government, the existence of directives with no backing in domestic law would face issuers and their advisers with a whole range of quandaries and expose actions taken by the issuers in good faith to challenge. The draft regulations are designed to provide the statutory backing in domestic law which is needed without fettering the Stock Exchange's established discretion any further than is necessary to achieve compliance with the directives. This accounts for the fact that the draft regulations "let the directives speak", merely incorporating them without adaptation.
There may be a disadvantage in this approach, in that directives do not always speak clearly, nor always in language familiar to us. But there is a great offsetting advantage in letting such uncertainties be resolved pragmatically, rather than setting particular solutions in statutory concrete. The regulations necessarily make the Stock Exchange a more public body than it 1612 has been, at least legally, in the past, but I would not expect this—or, indeed, anything in the draft regulations—to have nearly so much impact on the Stock Exchange's operations as the developments it is considering of its own volition. I quote from the preamble to the Admissions Directive, which noble Lords will note is on page 7 of the draft regulations:This co-ordination should be sufficiently flexible to enable account to be taken of present differences in the structures of security markets in the member states and to enable the member states to take account of any specific situations with which they may be confronted.Perhaps I may now turn to the regulations. Regulation 1 provides for these regulations to come into operation fully on 1st January 1985. By deferring entry into force until this date, we are providing a reasonable period for familiarisation and for the Stock Exchange to complete the adaptation of the Yellow Book to the directives. In the case of Crown issues, however, the Listing Particulars Directive is to apply immediately the regulations enter into force, otherwise it might have been argued that the directives were directly effective against the Crown and therefore that anything done by the Crown which did not comply with them was not lawful.
Regulation 2 simply defines a number of terms. Regulation 3(1), with Regulation 6, to which it refers, gives legal effect to the directives, including such national options as they allow and we wish to exercise. Paragraph (2) of Regulation 3 makes companies and other issuers subject to the appropriate obligations—again similar to those incumbent upon issuers under the present listing agreement. But they have to become statutory rather than contractual. Paragraph (3) of Regulation 3 requires any powers of the Council of the Stock Exchange to be exercised consistently with the directives.
Regulation 4 designates the Council of the Stock Exchange as the competent authority prescribed by the directives. It confers upon the council all the powers the member states are required or permitted to bestow upon the competent authority. It enables the council to devolve the administration of its functions as the competent authority to subordinate bodies and individuals. I believe noble Lords will not mind if I anticipate their approval of these draft regulations to the extent of wishing the council well in its competent authority role.
Regulation 5 makes incumbent upon issuers and their advisers the obligation under Article 4 of the Listing Particulars Directive to ensure that investors are provided with all necessary information to enable them to make an informed assessment. Paragraphs (2) and (3) make provision as to liability for non-compliance or contravention of this obligation, to as nearly as possible the extent that they would be for a prospectus under Section 38 of the Companies Act 1948.
Regulation 6 gives effect to Schedule 2, which in turn makes provision for the exercise of various options conferred by the directives on member states. Where no provision is made, the option is not exercised.
Regulation 7 is perhaps the most technical and difficult. Its object, in broad terms, is to avoid incompatibility or duplication between the directives' 1613 requirements and those of domestic prospectus law in the Companies Acts. In the United Kingdom an application for securities to be listed almost always coincides with their being offered to the public, which in turn normally requires the issue of a prospectus giving the information stipulated by Schedule 4 to the Companies Act 1948. The directives envisage that there will be a considerable interval between the public offering and listing, such as is common in other member states.
Regulation 7 also provides that documents required or permitted to be published under the directives are not to be treated as prohibited circulars under the Prevention of Fraud (Investments) Acts (Great Britain and Northern Ireland). I should point out that paragraph (7) of Regulation 7 does not mean that the Community has moved into the criminal law area. It merely transposes to this new context the appropriate Companies Act penalties.
Regulation 8 excludes liability for damages, except in respect of obligations imposed by Article 4 of the Listing Particulars Directive and, in the case of the council, actions or omissions done in bad faith.
This is a very brief account of the provisions, which in some cases are far from simple. However, I hope that I have given your Lordships' House at least a broad understanding of the purport of the draft regulations. In conclusion, it is fair to look beyond the inconveniences of putting a well-proven system into a statutory framework to more welcome possibilities.
A more positive way to regard the directives and their implementation is as applying our standards more widely, thus increasing the attractions of becoming listed upon what is, by general consent, by far the best stock market in the Community in terms of depth, liquidity and regulatory standards. Implementing the directives is a step towards bringing the Community's capital markets closer together. That is a process from which our own stock market stands to gain much. Accordingly, I invite your Lordships to approve the draft regulations.
§ Moved, That the draft regulations laid before the House on 1st May be approved.—(Lord Lucas of Chilworth.)
§ 11.49 a.m.
Lord Bruce of Donington
My Lords, your Lordships will be grateful to the noble Lord for having briefly taken us through the provisions of this quite important series of regulations. Some of your Lordships may consider that their importance merits more than a short discussion on a Friday morning in your Lordships' House. The matters raised in the regulations are of significance and importance, technical though many of them may be.
In this series of regulations certain amendments are carried to the Companies Act 1948. I am well aware that there are precedents, in comparatively insignificant circumstances, for Acts of Parliament to be amended by regulation. However, in a case of this importance—which affects, among other matters, the conditions for listing and regulations governing the approval of prospectuses—it is undesirable that the position should be left in this way, rather than having 1614 a debate take place on amendments to the Companies Act itself.
One point which the noble Lord has touched upon is the appointment of the Stock Exchange as the competent authority for carrying out the supervisory functions and, in some cases, derogation from regulations, in substitution for what would normally be the functions of the Department of Trade and Industry. If the noble Lord reads through the schedules, from pages 13 to 20 of the order itself, he will find that there are no fewer than 29 occasions where authority has been delegated to "the competent authorities". This puts the Stock Exchange in a position of considerable power. As the noble Lord is well aware, the Stock Exchange is not accountable to the public in any way—save, of course, by its reputation, which I should not wish in any way to underrate. Nevertheless, I do not consider that this is the manner in which it should have been done.
We have had the Gower report on the working of the City's institutions and, more particularly, in regard to the necessary amendments to the Prevention of Fraud (Investments) Act. This is the subject of considerable controversy in the City at the moment, as to what kind of supervisory functions should be exercised and, if necessary, by whom. There is a growing consciousness in the community at large, and among the investing public in particular, that the investor needs a far greater degree of protection than is afforded him at the moment by statute.
This brings me to the question of the EEC directives themselves and the schedules and annexe to them. It will be immediately apparent—and the noble Lord himself has hinted at this—that the EEC directives paint with rather a broader brush from time to time, and are rather less meticulous in defining what is lawful and what is not lawful, compared with our own legislation, which, I am happy to say, passes through both Houses of Parliament before it becomes law.
The ambiguity of the directives bothers me. If the noble Lord will refer to the accounting particulars set out in Chapter V, in Schedules A and B to the directive of 17th March (I believe it is) he will find that the accounting requirements are far less onerous than those already imposed by the Stock Exchange. If the noble Lord will consult Chapter III of the famous Yellow Book of admission of securities to listing, he will find that there is a whole section there on accountants' reports. It is couched in very precise terms. It is thoroughly endorsed by all the reputable accounting bodies in this country. To the best of my knowledge, it is very stringently enforced.
It is quite clear from even a superficial examination (and a detailed examination would confirm it) that the requirements of the directive which, by this regulation, will be written into British law are far less exacting than those imposed by the Stock Exchange at the present time, with the full approval and endorsement of the accountancy bodies of the United Kingdom. Those bodies are also required to conform with various standard practices—the breach of which can result in disciplinary measures against the member concerned. Therefore, at the moment the require-ments are very stringent—and very rightly so.
The noble Lord said that some time has to be allowed for the adaptation of Stock Exchange 1615 regulations to those which are now to be enforced by this regulation. I therefore have to ask the noble Lord for a categorical assurance. It may not be convenient for him to give it today. He may seek, and quite properly so, to reply by letter. But I give him notice that if he does take this course, I shall be bound to give immediate publicity to the detailed reply that I hope he will be able to give to my question.
The assurance I require is that the existing provisions of Chapter III for the admission of securities to listing will not be watered down by the passing of this particular series of regulations, in so far as accounting particulars and other information lawfully required for the protection of investors in this country are concerned. It is well known—and I do not wish to be in any way derogatory to our partners in the European Community—that accounting standards are far higher in this country and in the Netherlands than in any of the other countries of the Community, where accounting and reporting standards are unfortunately not quite as high as they are in the United Kingdom and the Netherlands. I do not believe that the investing community or the City would regard with any favour any series of regulations which water down what has hitherto been a characteristic of the code enforced in the City of London.
That brings me to another point. I thought that the noble Lord was a little disingenuous, if he will forgive my saying so. when he came to the explanation for Regulation 1. If your Lordships will refer to Regulation 1 (2), you will find that these regulations will generally come into operation on 1st January 1985. But so far as the Government are concerned, in relation to any securities owned by the Government or by any corporation under the Government's control, these regulations will come into effect after 10 days. I thought that the noble Lord's explanation of the reason for that was a little disingenuous.
The reason is perfectly clear. The noble Lord and the Government really want the British Telecom issue and all the prospectuses and documents connected with it. and all the disclosures which are required at present by law, to be governed not by the provisions of Schedule 4 to the Companies Act but by this new regulation—which, as I have said, is in many respects much more lax than the law of this country at the moment.
We have made one point many times before in relation to the British Telecommunications Bill, which will divest the Government of a substantial proportion of their shares onto the public sometime later this year. We have already described this in terms which I need not repeat to the House today. In the British Telecom Bill they sought to exempt themselves from certain prospectus provisions which are not applicable to other companies in the United Kingdom. This exemption of the British Telecom issue, although supported in the Division Lobby on the basis of party loyalties by Members on the Government Benches, nevertheless still left a degree of disquiet in the House as a whole from the Benches opposite.
The House is entitled to have the assurances for which I have asked. I should also like the House to be informed whether, in the light of these regulations, 1616 when we come to the British Telecom issue and its application for listing the Government intend to work within the Companies Act 1948 as amended by them in one respect on the British Telecom Bill, or whether they will seek to take advantage of the more relaxed requirements (to put it at its highest) which are envisaged in these regulations. The time for frankness in regard to this matter has come. If the noble Lord cannot give detailed replies today perhaps he will give the appropriate information in such correspondence as he may care to enter into with me on the subject.
At the moment, we are very suspicious of this—particularly its application to the Government after the next 10 days. At the time of Mussolini's invasion of Abyssinia before the war some gangsters in Chicago discussed the merits of the matter and said, "It is a swell racket as long as you can keep the boys in line". I hope we never have to remind the noble Lord of that, particularly within the context of what may develop in amendments to the Prevention of Fraud (Investments) Act.
§ Lord Lloyd of Kilgerran
My Lords, I join the noble Lord. Lord Bruce, in thinking the Minister for his brief outline of this very difficult and complicated matter. I am sure all Members of the House will agree with two things he said: first, that these draft regulations are far from simple; and secondly, that EC directives generally are not written in a language that we can understand, and are certainly very complicated. I have the same anxieties as the noble Lord, Lord Bruce, and as he promulgated his anxiety so fully I shall be fairly brief. I support him in his request for some kind of an assurance—not necessarily today—regarding the effect of these regulations on the accounting standards for the protection of investors, which is a matter on which he elaborated.
The second point I should like to develop, and upon which the noble Lord to ached, is the effect of these regulations on the proposed flotation of British Telecom. I must take up a few minutes in indicating where my anxieties lie. Of course, I am not asking for an answer today. I have looked at the explanatory note on page 55 of this document—carefully tucked away right at the very end. I note, of course, that it is not part of the regulations. It is on paragraph 5 of that explanatory note that some of my anxieties are founded. I say at once that it may be I am inaccurate in my submissions, but I have not had the opportunity to examine these regulations in the full detail I should have liked. I apologise to the Minister if I have mis-understood any part of his brief, the explanatory note, the directives or any part of the regulations.
The explanatory note states:In particular the Regulations"—and then, in paragraph 5—make provisions to avoid duplication between the directive requirements and the existing requirements of domestic prospectus law in the Companies Acts".That is the object of the regulations: to avoid duplication between the directive requirements and the existing requirements of British domestic law in the Companies Acts. Perhaps the noble Lord can at some stage clarify what kind of duplication this explanatory note has in mind, particularly in the context of British Telecom.
1617 Paragraph 5 goes on to say that the provisions are intended,to disapply the restrictions"—"disapply" seems to be a somewhat unhappy word, but nevertheless it is there—on the distribution of circulars contained in the Prevention of Fraud (Investments) Acts in relation to listing particulars and ancillary documents required or permitted by the directives (Regulation 7)".If your Lordships then follow the suggestion to look at Regulation 7 of the draft regulations, it will be found on page 4. But the paragraph to which I draw attention in the context of British Telecom is on page 5—paragraph 7 (4). This cites the Companies Act, the Prevention of Fraud (Investments) Act, the Companies Act (Northern Ireland) and the Prevention of Fraud (Investments) Act (Northern Ireland) 1940. It seems to me that what is stated in this paragraph is not consistent with what we heard in the course of the British Telecom Bill, when this matter of the publication of a limited prospectus was dwelt upon at some length.
The noble Lord, Lord Bruce, quite rightly indicated that there was some anxiety about this matter. It went to a Division and the Government were able to get it through. Therefore, in this complicated matter, and in the possible convolution of my submissions, I should like to know whether the Minister can at some time give me his views on the matters I have adumbrated.
§ Lord Lucas of Chilworth
My Lords, I am most grateful to the noble Lord, Lord Bruce of Donington, and, indeed, to the noble Lord, Lord Lloyd of Kilgerran, for their receipt of these regulations. I agree with them both that they are very important. If I fail, in their view, to answer fairly their various and different questions, I hope they will forgive me because it is a complicated matter. Both noble Lords know that I am not as familiar as either of them with the detail of this measure. Therefore, if I do not answer them adequately they can be quite sure I will seek further advice and communicate with them. The noble Lord sought a categorical assurance which I shall touch on later and I certainly understand that he may wish to give any response full publicity. There would be no hedging the bets there.
The date of implementation of the directives was in fact 30th June 1983, but since they were adopted variously between 1979 and 1982, some very detailed discussions have been taking place with the Stock Exchange. These discussions have, in effect, culminated in the publication of the draft regulations and their presentation before Parliament. I think that there would be something of a nonsense of conflicting requirements if the Companies Act prospectus provisions were not amended. The functions vested in the authority are those which the Stock Exchange has been carrying out for years. They are not, I believe, administrative matters of a familiar kind. It was always the intention—and I include in that the last Labour Government—that the Stock Exchange should be a competent authority.
That takes me on to answer the question of the noble Lord, Lord Bruce of Donington, which implicitly suggests that the regulations are complex. 1618 They seek to make certain changes. Why are we doing it through this measure? He referred to Professor Gower's report on investor protection. The short answer is that the regulations deal with matters which, compared with the Gower report, as he will well know, cover a very small and special field. Moreover, they give effect to a Community obligation. Apart from the fact that a future financial services Bill would enable Parliament to consider again the subject matter of the present regulations, the Government do not see these regulations as foreclosing any options at all in regard to the Gower report. The present rate of change in the City is, if anything, an argument against rushing legislative fences at this time.
That is the short answer in one part, but I think it may be helpful for noble Lords to appreciate the Government's other view. In the first place the directives are an accomplished fact. They are not open to national legislation. We cannot amend them. Implementing them by means of a Bill would not alter that. Secondly, the directives are already in force as Community law. If they were not also clearly in force in domestic law, there would certainly be conflict between the Community and existing domestic arrangements, and there would certainly be doubts cast on the validity of flotations. It is surely in the interests of all that these uncertainties should be resolved. Subordinate legislation is the quickest means, and it is an entirely proper one. Moreover, the Government, as I say. are currently considering the Gower report and a possible financial services Bill. I repeat that if there are any matters arising from the regulations that require looking at again, such legislation might prove to be the right opportunity.
The noble Lord, Lord Bruce, asked me in particular about accounting requirements in Chapter 5, on page 44 of the regulations. I am advised—because I do not know Chapter 5 intimately—that the accounting requirements are no less onerous. They require all accounts to be set out. In addition, Article 19, on page 28, gives power to require a further report. Both noble Lords spoke—
§ 12.15 p.m.
Lord Bruce of Donington
My Lords, I am obliged to the noble Lord for what he said just now, but I wish to draw his attention to one particular matter. If he will turn to Chapter 3 of the Stock Exchange regulations—and not Chapter 5—at paragraphs 11, 12 and 13 he will find certain stipulations that reporting accountants are required to deal with certain extraordinary matters; for example, a change of the basis on which accounts are prepared and changes in continuity of assumptions previously made in accounts which may in some years be out of line. I cannot find in these regulations anything which requires the provisions of paragraphs 11, 12 and 13 of Chapter 3 of the Stock Exchange regulations to be carried into effect.
The gravamen of my point is this. I do not complain in any way if the regulations fall short of what is established practice in this country, but what I want an assurance on is that, notwithstanding the regulations, the Stock Exchange and the accounting bodies will be 1619 entitled lawfully to insist on standards even higher than those contained in the regulations.
§ Lord Lucas of Chilworth
My Lords, your Lordships will accept that I am not going to engage this morning in any exchange with so distinguished a member of the accounting profession as the noble Lord. May I take note of what he has said, look at it and, frankly, be advised. I can say this to the noble Lord. I do not know whether he is right, but certainly there is no intention at all in these regulations to dilute in any way the very high standards that we in this country enjoy by virtue of the practices of the accounting profession and, indeed, the Stock Exchange, which in my earlier remarks I said were somewhat superior in a number of respects to those in other markets.
I was about to turn briefly to the question that both noble Lords raised with regard to the British Telecom provisions. Although the regulations change certain elements of the situation that previously applied, the Government are satisfied that overall the requirements as set out in these regulations are as stringent as those we have at present. We do not believe that they are more relaxed.
The last point I ought to mention covers the non-adaptation of the directives. I referred to this briefly in my earlier speech. Noble Lords will know that European Community directives are, in reality, heads of agreement negotiated in seven languages and drafted by a multinational secretariat. Accordingly, the normal practice is to render them into our own usage and give them the certainty of meaning expected of United Kingdom statutes before giving them the force of law. That is the course we embarked on when it became clear from decisions of the European Court that the de facto application of directives by the Stock Exchange would not suffice. Frankly, it would have produced a much tidier result than do the present regulations, but it would have prejudged the decisions which will be taken in the revision of the Yellow Book, which is now being undertaken by the Stock Exchange.
Although implementing the directives unadapted leaves a number of doubts as to their purport, as I said, it leaves the Stock Exchange and users free within, and consistent with, the limits of the directives to agree how those doubts should be resolved. I believe that it is for the best that these should be resolved within the framework of the directives, as they have been before, by common sense and the meeting of minds. I do not think that the regulations are more demanding than the Schedule 4 point which the noble Lord raised.
My Lords, I think that 1 have answered the bulk of the questions raised by noble Lords. I apologise for having been so long but, again, as the noble Lord said, it was an important matter. I hope I have cleared up some of the issues that might have been uppermost in his mind. I commend these draft regulations to the House.
§ On Question, Motion agreed to.