HL Deb 23 July 1986 vol 479 cc216-51

3.13 p.m.

The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Lucas of Chilworth)

My Lords, I beg to move that the House do now again resolve itself into Committee on this Bill.

Moved, That the House do now again resolve itself into Committee.—(Lord Lucas of Chilworth.)

On Question, Motion agreed to.

House in Committee accordingly.

[The LORD AIREDALE in the Chair.]

Clause 3 [Persons entitled to carry on investment business]:

Lord Williams of Elvel moved Amendment No. 54:

Page 3, line 6, at end insert—

("() No person who is authorised to carry on investment business in "managing investments", "advising on investments" or "establishing etc. collective investment schemes" shall be authorised at the same time to carry on investment business in "dealing in investments" or "arranging deals in investments".")

The noble Lord said: The amendment seeks to address itself to an important problem which faces the financial services industry, and that is the problem of a conflict of interests. I accept at the outset that the amendment is imperfect and that if it were accepted by the Committee it would involve a series of consequential amendments which I have not set down. I accept also that it would involve certain problems of timing, which I shall come to later, and certain problems of definition of conflicts to which I shall come later.

The fundamental principle that I wish to assert in moving the amendment is that the duties of those who set themselves up to manage other people's money are towards the people whose money they manage and not to anybody else. There is a fiduciary duty here which the Committee should appreciate.

Until now in the City of London and elsewhere, we have lived with a system where organisations such as merchant banks and others have various activities. As we go forward and as the Bill is enacted, they will undoubtedly be extending those activities. I should like to select two activities among many which I regard as being in fundamental conflict. The first is dealing in securities and acting in a finance corporate capacity for clients in advising underwriting takeovers, and the second is investment management, by which I mean money management on behalf of other clients. Generally speaking, the two sets of clients are different.

A number of merchant banks and other organisations have sought to solve that conflict of interest by erecting what is known as the Chinese wall, under which on an informal basis those who are in charge of managing investments do not talk to those in the same organisation who are dealing and who have corporate finance responsibilities or they have gone a little further and set up separate companies one of which is an investment management company and the other is the bank or other organisation which does the dealing and carries on the corporate finance activity.

There are those of us who feel that the whole concept of the Chinese wall is one which bears serious examination. A number of people feel that that distinction does not work in reality. I am not for a moment impugning the honour and honesty of people who work in the City of London. In many cases, that informal arrangement has worked and continues to work, but there are some fairly spectacular cases where it has not worked.

If I may address four aspects of the problem, I should start by saying that where an organisation, be it a merchant bank, a stockbroker or, in the modern term, a financial conglomerate, has directors who are common to both the investment management side and the corporate finance and dealing side—in other words where a top company has directors who are responsible to the shareholders for the profits of the whole organisation—it seems to me to put them in an impossible position if, on the one side, they are not allowed to know what their investment management department is doing or on the other side, they are not allowed to know what their corporate finance department is doing. Indeed, in those circumstances it is extremely difficult to be a director of such an organisation and to perform the proper responsibilities of a director under the companies legislation.

The second aspect of the problem is in marketing investment advisory or investment management services. There are many cases—I speak from very personal experience—where investment managers seek to obtain business on the grounds that they have access to good deals that come out of the dealing operations or corporate finance operations with which they are associated. I shall not quote cases, and I shall not name names, because it would be improper in this Committee to do so. Nevertheless, it is true that organisations market their investment advisory services at least in part on the basis that they have access to privileged information from the other sides of the business of which they are part.

The third aspect of the problem is that the marketing, not only of investment management services but also of corporate finance services on the other side, involves, as I know again from personal experience, being able to persuade a prospective client that the investment department of a bank or the investment department of a broker has substantial underwriting power in its own right. Merchant banks will go to a prospective client—indeed, I have done it myself—and say "You know, we have an investment management department that handles £5 billion, £2 billion or £3 billion, or whatever the figure is, and you understand we have substantial underwriting capability in that". It is a plus factor when the bank or broker in question is selling corporate finance services. The conflict of interest is again absolutely clear.

The last aspect of the problem with which I should like to deal is the fiduciary nature of those in investment management. We have, in the past, defined the duties of trustees in pension funds and in other trusts. Parliament has defined the relationship of life insurance funds—that is to say, the funds that are set aside for the beneficiaries of a life policy. These are segregated clearly in the legislation. We have not, in legislation, any sense of the trustee relationship that should exist between an investment manager and the person on whose behalf he manages those investments. I believe that it is time that the Committee addressed this problem.

Our solution is to have separation of ownership between investment management companies and companies that deal or act as underwriters or corporate finance advisers. I realise that this is a radical proposal. I realise that it would upset a great number of people in the City of London who have built much of their business on exactly the conflicts of interest that I have tried to describe. I realise that it would take time to achieve.

It is no good passing legislation and expecting what I am suggesting to be achieved tomorow. There would have to be a timetable, saying that within five years, three years or whatever period may be decided there must be a separation of ownership between the different functions. There would have to be some definition of cross-share holdings, the level of interest that, for instance, a dealing organisation or corporate finance organisation might hold in an investment trust, or in a unit trust management company, or other investment management bodies.

Finally, there would have to be recognition of the fact that overseas operators would not come within United Kingdom jurisdiction and might be able to evade what we are seeking to achieve. I recognise these problems. Nevertheless, the problem of conflict of interest is one that will be exacerbated by the passage of the Social Security Bill, which has left this Chamber, and the Building Societies Bill that we are to consider later this evening and that we expect to leave the House this evening.

The problem is exacerbated because there will be, probably rightly, an attempt to engage the attention of many people who, until now, have not put their money under management with an organisation, to do so; in other words, to market services of an investment nature. It seems to me that if that is going to happen—I do not believe that there is any way the Committee can stop it happening if the various Bills that I have mentioned are enacted—the independence of investment management must not only be there, for the reasons that I have specified, but must also be seen to be there. I believe that anything else would be wrong and deceptive of those whose money a number of institutions will try to attract under management.

Schedule 1 to the Bill, in fact, defines investment businesses in a very convenient form for this amendment. I have not used Schedule 1 in referring to my amendment. I have simply taken the titles out of Schedule 1 because, at the time I drafted the amendment, I did not realise that Schedule 1 would still stand part of the Bill. Nevertheless, Schedule 1 is part of the Bill. And had I been drafting this amendment yesterday, as opposed to the day before yesterday or whenever it was, I would probably have referred to Schedule 1.

The specific activities that I have listed in the amendment correspond to the investment businesses under Schedule 1. So the Government appear to me to be moving towards a clear distinction between the different types of business that I have outlined. We would like to see them moving a little further and saying that there must be, and there should be, a complete separation of ownership, in the course of time and in conditions that remain to be determined, so that the fund management, the money management, can properly be a trustee relationship between the manager and the client on whose behalf he is managing the funds. We shall therefore get away once and for all from the question of conflict of interest. We shall do away once and for all with the Chinese wall that has given rise to so many difficulties. I beg to move.

Lord Denning

I wish to support the principle that underlies the amendment. It has been well settled in law for at least 100 years or more that no person should have an interest conflicting with his duty. It is for the simple reason that he is not able to do his duty properly if he has an interest of his own or in any other way. There are often cases in the courts involving a director of a company, perhaps the director of a buying company but also a selling company. How can he act properly in relation to any transaction of buying or selling between those companies? It is not only a matter of buying and selling. There is the question of an agency and the like. There have been dozens of cases.

It has been argued that somehow the City of London manages to deal with the situation. And so it does. If a director of one company is interested in a transaction, he does not sit or vote on the matter in which he is concerned. In this Chamber one ought at least to disclose an interest if one is going to be affected in the argument. In the courts we have had many cases of the problem of common directors of two companies. How does one solve it? Somehow the City of London manages it reasonably well. The person who has an interest takes no part in the discussions. That shows well the integrity and honesty of the City of London, but will it not be very difficult in this new situation? Can the City of London manage with bamboo walls, or Chinese walls, or whatever they are called? Ought we not to have the principle stated somehow?

I am not sure that this can cover all the ground, but is it not a matter for close consideration, perhaps by further amendment to the Bill or the schedules, to make it clear that no person, or shall I say, no company—because one may not have common directors; that might be a way out of it—in investment or other business shall have an interest conflicting with his duty? He ought not to be able to wear his investor's hat one moment and to take it off the next moment and wear his dealer's hat. I support the principle of the amendment.

3.30 p.m.

Lord Grimond

I should like to say that I very strongly support this proposed amendment. As the noble Lord, Lord Williams, has pointed out, there are obvious difficulties about it. I imagine that as drafted it would defeat the whole purpose of the Big Bang. I am not sure that would be a bad thing, but it would certainly arouse strong feelings in the City. As I undertand it, it would affect the operations of many people concerned in the City, even under the present regime. Therefore, as the noble Lord says, it may be a matter which has to be thought over very carefully and brought in after further discussion.

However, like the noble Lord, I am not impressed by the promise of Chinese walls. As somebody has already said, every Chinese wall has a grapevine growing up it, and it is very difficult to believe that they will enforce this absolute separation which is vital if conflicts of interest are to be avoided.

It must also be said that while the City of London has in general had an extremely high reputation, and investors have been able to rely upon the senior partners of the major firms, and upon the Bank of England, to ensure that their interests are looked after, it is not so clear to me that this will now continue. For one thing we have had the instance in Lloyd's and Johnson Matthey which shows that there are people in the City who are prepared to go a very long way to make money. We have also the example of what has been going on in America, where the most reputable banks and other financial firms have been breaking the law in a perfectly monstrous but unashamed fashion. The City of London will become more and more international and I am afraid that we cannot rule out the possibility that these habits will spread to it.

Therefore, once again I feel that the small investors do not have adequate protection under this Bill as it stands at present. I would welcome any move such as this to ensure that they are safeguarded against conflicts of interest and that over and above the safeguards which are incorporated in the Bill there is a clear legal obligation that people shall not indulge in operations in which one interest clearly clashes with another. That may be a matter of great difficulty. It may be a matter which would cause the City grave difficulty. But if we want to extend investment in this country, as we do, I think that it is absolutely vital to ensure that the reputation of the City is upheld and to ensure that the ordinary investor gets a square deal.

Lord Harmar-Nicholls

It is very difficult to be against the arguments that the noble Lord who introduced this amendment has put forward. If it is the view that things could happen if certain people were prepared to move from the proper standards, one can always in theory find a good reason for saying that nothing is safe anywhere at any time. I therefore do not and cannot argue against the particular points as they have been put by the noble Lord and supported by other noble Lords.

However, my instinct is against this. My instinct is against statutory intervention in these matters. I do not believe that by making it a crime—which is what statutory intervention does—it will achieve what the noble Lord, Lord Grimond, said he wants: that is, to encourage investment in this country and to encourage confidence in the City of London which is a very important part of this nation's income. We may reach the situation where we disillusion people about the overall integrity of the City of London by saying that we have to have these statutory protections, which we have never had before. When that reputation was being built and when we were the centre of international investment and financial leadership we did not have a problem because we enjoyed confidence throughout the world and encouraged people to feel that those who were actually in the driver's seat could be trusted.

There will always be people who will try to take advantage of knowing two sides of an argument. However, to be both a director of an investment company and a money manager does not necessarily automatically cause a conflict. It is possible for people to dissociate their knowledge of one sphere of their life and activities from that of another. If one wants good, experienced money management, for instance, it is not a bad thing to have it done by people who know the other side of the coin. If one makes it statutory that they must be confined to the one narrow aspect, I do not believe that the attraction of investment and the general good will will be as good as it is now.

I am all for finding some way of removing the apprehensions that certain people may have because of certain things that have happened. But to make it a statutory obligation will, I am convinced, undermine what we want more than anything else. We want to retain our country, and the City of London in particular, as the centre of these activities.

With regard to the rogues—as the noble and learned Lord, Lord Denning mentioned—who will take advantage of the conflict of interest, they will get round the statutory obligation whatever one does; or they will try to. One will never have perfect protection by statutory means for the standard that one requires. In trying to do so we may be undermining the confidence we need so that an activity which has been continuing for a century or more can expand in the way we would wish.

Lord Denning

I sympathise a great deal with that view. One does not want to hamper business. It is being done very well at the moment. The City of London has done very well on the whole. Perhaps it can continue to do so without statutory intervention which I gather is what is desired.

Lord Tryon

I must quickly add my voice to this debate. This amendment has a very large element of overkill in it. It is fascinating to discuss this matter, but if the amendment were to be carried, the effects would make so-called Big Bang look like a very small squib indeed. It is tremendously radical. I think that the noble Lord, Lord Williams, admitted that.

I spent many years dodging from one side of a Chinese wall to another. I made a declaration of interest at Second Reading. I shall not do so again. However, I spent many years as investment director of a merchant bank. I do not want any impression to be left with noble Lords that Chinese walls do not work in well-ordered societies; and most of them are very well ordered. It was not unusual for one to be in possession of information which was market sensitive as a result of one's directorship of the main board of the merchant bank company. But it was quite possible—and it worked very well in the merchant bank that I was then with, and in many others—that one could carry out one's duties perfectly well without rushing over to the investment department to tell them to stop dealing in that share or to mind their eye in this, that or the other. It works, provided that the senior positions in the City are filled by honest men, and I believe that on the whole they are.

Lord Lucas of Chilworth

I really am most grateful to the noble Lord, Lord Williams, for the manner in which he has explained to the Committee what lies behind his amendments. Certainly if by his amendment he intended to emphasise that there must be regulatory provision to ensure that a business authorised to give investment advice does not improperly use its position to influence customers to use its other services, then I do not think that I would dissent from that objective. There should be proper regulatory provision for preventing conflicts of interest, and we believe that Clause 45 provides just that regulatory provision.

My noble friend Lord Harmar-Nicholls said that things could happen, and I think that the Committee will understand what he meant by that remark. That they can happen but should happen within the rules is perfectly correct. Certainly the rules suggested by Clause 45 provide for the kind of flexibility for which I think we are all looking. The rules of which we are thinking will require information obtained by an authorised person in the course of one part of his investment business to be withheld from a person employed in another part of that business. That can be found in Clause 45(2)(h).

The principles for rule-making in Schedule 6 make clear the importance attached to the need for the rules to make proper provision to ensure that authorised persons do not put their interests before their clients and that they act fairly between them. Rules of self-regulating organisations and professional bodies must provide at least equivalent protection. If a business breaches such a rule, it will be open to disciplinary action up to and including—for gross breaches—withdrawal of authorisation; and if anyone suffers loss or is adversely affected as a result of such a breach, he may sue under Clause 57 of the Bill.

However, this amendment seeks to alter the way in which investment businesses are organised to prevent the same authorised person from carrying on certain types of investment activity under the same authorisation, and it imposes a criminal sanction for such a breach. We believe that criminal offences should be defined clearly and precisely. Vagueness about the boundaries of a criminal offence should, so far as possible, be avoided. Nor should criminal offences be created unless they are clearly necessary. The amendments that we are discussing would create criminal offences which do not meet either of those tests. The boundaries between the different types of investment business defined in the amendment are inevitably blurred, and it could be possible unwittingly to stray across the boundary between what was permitted and what was not.

No one has yet demonstrated why a criminal offence is needed here. It has not been suggested that the system of rules and the civil and disciplinary sanctions which the Bill provides for breach of such rules are inadequate. The rules will require an authorised person to have an effective Chinese wall. His compliance with those requirements will be monitored by the appropriate supervisor, and discipline and civil sanctions will follow a breach. Those sanctions will be underpinned by the criminal law in that if a person transgresses the rules seriously enough, he will lose his authorisation. He will then be committing a criminal offence if he continues to carry on investment business. However, the criminal offence will then be the straightforward one of carrying on business without authorisation. We believe that this reliance on civil and disciplinary sanctions with criminal sanction only as the ultimate back-up is the best way of achieving the objective.

I certainly agree with the noble Lord, Lord Williams, in that a person who manages a client's funds should owe a duty to that client, but the amendment is not necessary to achieve that. A person managing someone else's funds acts really in an agency capacity, and agency law imposes specific obligations on him to act in the interests of his clients and to subordinate his own interests to those of his client. As my noble friend Lord Harmar-Nicholls said, I think that it would be extremely damaging to the United Kingdom's competitiveness as a financial centre to impose by statute artificial restrictions on the kinds of business in which companies may engage.

I think it is notable that countries where such restrictions are imposed have in general lost business to those where they are not imposed. I thought that in his opening remarks the noble and learned Lord, Lord Denning, was somewhat in favour of the amendment. I am not quite sure whether I understood him correctly because later, in an intervention, I rather took the view that he agreed with my noble friend Lord Harmar-Nicholls.

Lord Denning

That is quite right. In view of the good arguments of my noble friend Lord Harmar-Nicholls, I changed my mind.

3.45 p.m.

Lord Lucas of Chilworth

Then I think that I have understood the noble and learned Lord aright, because the conduct of business rules—and this can be found in paragraph 4 of Schedule 6—must make provision for subordination of the authorised person's interests to those of the client. I do not believe that of itself separate ownership does not guarantee that conflicts of interest can be avoided. An unscrupulous operator (and I think that the noble Lord, Lord Tryon, said this) could easily arrange for the business to be conducted separately and yet in such a way that those separate businesses could work together to the detriment of clients. I welcomed what the noble Lord, Lord Tryon, said.

Perhaps the Members of the Committee will allow me to recall what the noble Lord, Lord O'Brien, had to say about the efficacy of Chinese walls during the course of our Second Reading debate. The noble Lord was talking about the challenges that the City would face after the Big Bang and as a result of the Financial Services Bill. The noble Lord said that he hoped, that the present inhabitants of the City will be equal to the challenge facing them. From long experience, I should be surprised if they are not".—[Official Report, 11/7/86; col. 606.] I believe that that is really what the noble Lord, Lord Tryon, was saying. I take comfort from the comments of both noble Lords; they are comments by men with a wealth of experience in the City. I believe that both noble Lords are right. I do not think that it is necessary for us to have this amendment in the Bill. I believe that there is adequate provision to look after the interests of the investor, which is the purport of the Bill, and I would urge the noble Lord opposite to withdraw his amendment.

Lord Williams of Elvel

I am most grateful to the noble Lord, Lord Lucas, for his response, and I am also most grateful to noble Lords who have joined in this debate. I am bound to say that I found the first intervention by the noble and learned Lord, Lord Denning, rather more to my taste than his second intervention, and I am sure that the noble and learned Lord will understand why.

I believe that in his first intervention he made a very important point, which answers the point made by the noble Lord, Lord Lucas, when he quoted the noble Lord, Lord O'Brien of Lothbury, on Second Reading, that up to now things have probably gone all right. However, we are moving into a different era, and I am quite uncertain whether what has happened—and I refer to the remarks of the noble Lord, Lord Tryon—20, 15 or 10 years ago, or even three weeks ago, will be relevant after 27th October. This, I think, is a major problem we have to address.

The noble Lord, Lord Grimond, very kindly supported what I had to say, but pointed out, quite rightly, that there were great difficulties in the amendment, and I accept that this is what I would call in a curious way an amendment in principle. I accept at the outset that it is not something which can go as it is worded into the Bill. Nevertheless, it is a principle on which we can feel either for or against.

The noble Lord, Lord Harmar-Nicholls, said it was difficult to be against the sentiments I was putting forward, but his instinct was against statutory intervention. This whole Bill is about statutory intervention. We are trying to make rules. As I understand it, we have so many clauses and so many schedules which are trying to make rules, which are trying to set up a statutory framework for the whole business; and if it is not that, I do not know what we are talking about.

The noble Lord, Lord Lucas of Chilworth, said in reply that there were certain powers under the Bill which would satisfy the points I have in mind. I am bound to say to him that he was in fact making my argument for me, because I said at the outset that I thought the position of directors—and this is what the noble and learned Lord, Lord Denning, said in his first intervention—became intolerable when they were directors of organisations which were essentially in conflict. This is a point which is absolutely central to the amendment I am moving, and I am afraid it is no good simply saying that we can do this or that and that directors must do this or that. There is a basic and inherent conflict which one cannot get away with unless one adopts the principle in my amendment.

The noble Lord, Lord Lucas of Chilworth, also said that we should define clearly and precisely what is and what is not a criminal offence. I certainly would agree with him in that. In the amendment we are talking about authorisation, and, as he rightly pointed out, anyone who does business who is not authorised commits a criminal offence. I am not talking about making it a criminal offence to do one investment business and another investment business in the terms of the amendment; I am simply saying no one shall be authorised; and it is the authorisation question to which I am addressing myself.

Again, I come back to the principle that there is an inherent conflict of interest. But I believe that we have a chance here to set a standard for ourselves and, indeed, for the rest of the world. If I may say so, the United States came very near to doing this in the late 1960s and early 1970s, when there was a draft Securities Act, and it was only the arrival of, I think, President Nixon in power which stopped that Act from taking effect. But they were moving very far in that direction at that time, and I believe there is nothing inherently wrong in this. Indeed, I think there is something inherently right in it. I recognise the defects of the amendment. I recognise that it will take time and will need considerable study if the proposals that are enshrined in the amendment are to be put into effect. Nevertheless, I wish to press this amendment.

3.53 p.m.

On Question, Whether the said amendment (No. 54) shall be agreed to?

Their Lordships divided: Contents, 80; Not-Contents, 116.

Addington, L. Listowel, E.
Airedale, L. Llewelyn-Davies of Hastoe, B.
Ardwick, L. Lloyd of Hampstead, L.
Barnett, L. Longford. E.
Blyton, L. Mackie of Benshie, L.
Bottomley, L. McNair, L.
Briginshaw, L. Mais, L.
Brockway, L. Mishcon, L.
Brooks of Tremorfa, L. Molloy, L.
Bruce of Donington, L. Morris of Grasmere, L.
Burton of Coventry, B. Nicol, B.
Caradon, L. Northfield, L.
Carmichael of Kelvingrove, L. Oram, L.
Cledwyn of Penrhos, L. Phillips, B.
David, B. Ponsonby of Shulbrede, L.
Davies of Penrhys, L. [Teller.]
Dean of Beswick, L. Prys-Davies, L.
Denington, B. Rea, L.
Ennals, L. Rhodes, L.
Ewart-Biggs, B. Rochester, L.
Ezra, L. Seear, B.
Fisher of Rednal, B. Sefton of Garston, L.
Gallacher, L. Shackleton, L.
Gladwyn, L. Shepherd, L.
Glenamara, L. Silkin of Dulwich L.
Graham of Edmonton, L. Stallard, L.
Grimond, L. Stedman, B.
Hacking, L. Stewart of Fulham, L.
Hampton, L. Stoddart of Swindon, L.
Hanworth, V. Strabolgi, L.
Hatch of Lusby, L. Taylor of Blackburn. L.
Henniker, L. Taylor of Mansfield. L.
Houghton of Sowerby, L. Tordoff, L. [Teller.]
Hughes, L. Underhill, L.
Jenkins of Putney, L. Wallace of Coslany, L.
John-Mackie, L. Walston, L.
Kagan, L. Wells-Pestell, L.
Kearton, L. Wigoder, L.
Kilbracken, L. Williams of Elvel, L.
Kirkhill, L. Winstanley, L.
Leatherland, L.
Ampthill, L. Cameron of Lochbroom, L.
Auckland, L. Campbell of Alloway, L.
Bauer, L. Carnegy of Lour, B.
Belhaven and Stenton, L. Carnock, L.
Beloff, L. Coleraine, L.
Belstead, L. Colville of Culross, V.
Benson, L. Cork and Orrery, E.
Blyth, L. Cranbrook, E.
Boardman, L. Crawford and Balcarres, E.
Brabazon of Tara, L. Crawshaw, L.
Brougham and Vaux, L. Croft, L.
Broxbourne, L. Davidson, V.
Bruce-Gardyne, L. De La Warr, E.
Butterworth, L. Denham, L. [Teller.]
Caithness, E. Denning, L.
Dilhorne, V. Mersey, V.
Drumalbyn, L. Middleton, L.
Effingham, E. Milverton, L.
Ellenborough, L. Monk Bretton, L.
Elles, B. Montagu of Beaulieu, L.
Elliot of Harwood, B. Morris, L.
Elton, L. Mottistone, L.
Fairhaven, L. Mowbray and Stourton, L.
Faithfull, B. Munster, E.
Fortescue, E. Nugent of Guildford, L.
Fraser of Kilmorack, L. O'Brien of Lothbury, L.
Gisborough, L. Orkney, E.
Gray of Contin, L. Pender, L.
Gridley, L. Perth, E.
Grimston of Westbury, L. Radnor, E.
Hailsham of Saint Rankeillour, L.
Marylebone, L. Reigate, L.
Halsbury, E. Renton, L.
Harmar-Nicholls, L. Rochdale, V.
Henley, L. St. Aldwyn, E.
Hives, L. St. Davids, V.
Holderness, L. Sanderson of Bowden, L.
Home of the Hirsel, L. Sandford, L.
Hooper, B. Seebohm, L.
Hylton-Foster, B. Selkirk, E.
Inglewood, L. Sempill, Ly.
Kimball, L. Shannon, E.
Kinloss, Ly. Sharples, B.
Knollys, V. Skelmersdale, L.
Lane-Fox, B. Slim, V.
Lawrence, L. Strathcarron, L.
Layton, L. Sudeley, L.
Long, V. Swinton, E.[Teller.]
Lothian, M. Terrington, L.
Lucas of Chilworth, L. Teviot, L.
Lyell, L. Tranmire, L.
McAlpine of Moffat, L. Tryon, L.
McFadzean, L. Ullswater, V.
Mancroft, L. Vaux of Harrowden, L.
Masham of Ilton, B. Vivian, L.
Massereene and Ferrard, V. Westbury, L.
Maude of Stratford-upon- Whitelaw, V.
Avon, L. Wilberforce, L.
Merrivale, L. Young, B.

Resolved in the negative, and amendment disagreed to accordingly.

4.2 p.m.

Clause 3 agreed to.

Clause 4 agreed to.

Clause 5 [Agreements made by or through unauthorised persons]:

Lord Williams of Elvel moved Amendment No. 55: Page 3, line 33, after ("entitled") insert ("either").

The noble Lord said: I beg to move Amendment No. 55 standing in my name and that of my noble friend Lord Morton of Shuna. It may be for the convenience of the Committee if I speak also to Amendments Nos. 56, 57, 58 and 59. I understand that they are grouped.

Lord Lucas of Chilworth

I think I heard the noble Lord aright—Nos. 55, 56, 57, 58 and 59.

Lord Williams of Elvel

Yes. Perhaps I may speak to Amendments Nos. 55 and 56, because I have no particular comments to offer on the amendments tabled by the noble Viscount, Lord Colville of Culross. The thrust of Amendments Nos. 55 and 56 is as a result of a submission to us from the Law Society of Scotland. They adhere to the view that they expressed in a memorandum of observations to Parliament that greater latitude should be given to the courts to decide the extent to which the other party should be entitled to restitution in cases where an investment agreement is entered into in contravention of subsection (3). I should be grateful if the Government would consider the concern of the Law Society of Scotland. I beg to move.

The Lord Advocate (Lord Cameron of Lochbroom)

I have listened to the noble Lord and I have read the submission made by the Law Society of Scotland. It seems to me that there may be material which will require further consideration arising out of it in that a court's discretion, in the event that a party applies to the court, is limited simply to recovery of money or other property paid or transferred under the agreement, which is in terms of Clause 5(1) to be held to be unenforceable against the other party.

The only addition that the clause provides for is of course interest on any such money, bearing in mind that that definition of the property that has passed is to be read along with subsection (5) which deals with the position where the property has been transferred to a third party, in which event it is to be the value at the time of the transfer under the agreement.

I am happy to be able to indicate to the Committee that we would wish to look not only at the matters that are raised in the amendments in the noble Lord's name but also at the points which appear in the remaining amendments to which the noble Lord referred, Amendments 57 to 59.

Lord Williams of Elvel

I am grateful to the noble and learned Lord the Lord Advocate. It is not for me to cross swords in any way with Scottish lawyers. I have to apologise for the absence of my noble friend Lord Morton of Shuna, and I am grateful to the noble and learned Lord for his assurance that he will take these points away and look at them. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 56 not moved.]

The Deputy Chairman of Committees (Lord Airedale)

I have to point out that if Amendment No. were agreed to, I could not call Amendments Nos. or 59.

Viscount Colville of Culross moved Amendment No. 57:

Page 4, line 10, leave out from beginning to end of line 13 and insert

(" on the application of the person mentioned in sub-paragraph (i) of that paragraph, that the person mentioned in sub-paragraph (ii) of that paragraph should, for the purposes of that transaction, be treated as if he had not been in contravention of that section").

The noble Viscount said: I hope that there has not been some confusion about this matter, and I certainly do not want to cross swords with the noble Lord, Lord Williams of Elvel, about it, but I thought that the groupings had been done separately and that my amendment was going to be taken independently because it is on a slightly finer point than the two that have just been discussed.

This amendment relates to a situation where there will be three parties involved. There would be the investor, an authorised or an exempted person—a bank, stockbroker, or something of that sort—and there would be somebody who had persuaded the investor to suggest that the investment transaction should take place. That third person should have been either authorised or exempted but was not, and was acting in contravention of the provisions of this Bill and consequently was not entitled to make the suggestion in the first place and is indeed subject to a criminal offence, as my noble friend Lord Lucas mentioned just now.

The Bill as drafted, dealing with this situation, says something about it in Clause 5(3)(b). There it puts a burden of proof upon the various people who would be involved when the investor said that he was entitled to recover his money because the person who introduced him to the situation was not either authorised or exempted. Burdens of proof have quite a lot to do with the way in which cases are decided. It is difficult to prove a negative, and that is what the Bill at the present moment requires should be done by the stockbroker, the bank, or whoever it is.

There is a similar situation under the Consumer Credit Act 1974. If persons who ought to be licensed as credit brokers under that Act introduce arrangements or agreements, there is a system whereby the people concerned can go to the Director General of Fair Trading and he has, as it were, a discretion on the facts of the case whether to allow the transaction to persist or to disallow it. I should have thought that in the enormous variety of circumstances that could arise in this sort of situation it would be better to leave it to the discretion of the county court or, I suppose, if it is a big enough case, the High Court. 1 should have thought that the judges would be just as good at that as the Director General of Fair Trading, and that is what this amendment does. It requires that an application should be made and then it is in the discretion of the court.

My noble and learned friend Lord Cameron has said that this is another of the matters that he is prepared to consider. I hope he will consider that analogy that I have described because I imagine it has worked well since it is run by the department whose representative here is my noble friend Lord Lucas, and it has presumably been going for the past 12 years without any great problem. Therefore if that is a sensible solution I suggest it should be used on this occasion as well. I beg to move.

Lord Bruce-Gardyne

I should like to support my noble friend Lord Colville on this amendment. I should declare an interest as a director of the Trustee Savings Bank. In common with the Committee of London and Scottish Bankers, the Trustee Savings Bank strongly supports this amendment and the change which my noble friend has proposed, I think for the reasons that he has explained.

All I should like to add in this context is that it seems to me that this also comes back to the discussion we had on Monday night on Schedule 1. When we were discussing the interpretation and the weight to be laid upon the phrase "engaging upon a business" my noble friend replying from the Front Bench gave as his belief that "engaging upon a business" involved something more than very occasionally doing so. Here I revert to the subject matter we were discussing on Schedule 1—the representations from the Association of Corporate treasurers, to whom his department pointed out that where corporate treasurers, for example, were acting in the normal commercial course of their activities, it would clearly not be a question of the Department of Trade embarking upon criminal proceedings against them.

However, I raised the question that as I understood it an individual could seek to have annulled a transaction which had been entered into in good faith by another party because it turned out subsequently that the transaction had not worked out as he wished it to do, simply because he could claim that the other party could not establish qualification under paragraph 12 of Schedule 1 to this Bill. In replying, my noble friend said that this was where the question of the onus of proof would arise under this clause and this particular amendment. It seems to me that if my noble and learned friend could accept this amendment moved by my noble friend Lord Colville, this would go a considerable part of the way to alleviate anxieties on that score.

4.15 p.m.

Lord Cameron of Lochbroom

I am grateful to both my noble friends for what they have said in explanation of this amendment. While making clear that I am happy to take it away to look at in the light of those remarks, I should set out that the object of Clause 5—apart from providing a remedy for investors who are affected by the carrying on of investment business unlawfully—is to impose some obligation on an authorised business to take care that none of its investment agreements arise because of the involvement of an unauthorised person. Thus, for example, if a business regularly uses introducers it ought to make sure that those who need to be authorised because of the nature of their business have secured authorisation. I think my noble friends will understand that that is the purpose at which subsection (3)(b) is aimed.

We are trying to secure the proper balance by seeing that the investor does not suffer and is able to secure adequate recompense and, at the same time, that authorised businesses are not unreasonably penalised by having agreements entered into in good faith deemed unenforceable. I take from the gist of what my noble friend Lord Colville said that really he is looking perhaps to give more discretion to the court in this matter. I am conscious of the advantage of doing so, both for the reasons I referred to earlier when replying to the noble Lord opposite and also concerning this point. I shall carefully consider what has been said on this matter.

Viscount Colville of Culross

I am grateful to my noble and learned friend. I should have thought that if any investment broker regularly had an introducer as part of the scene and did not check out that he was properly authorised there could not be any question but that he ought to have his transaction disallowed. The difficulty is where the client comes along at the instance of an unauthorised introducer about whom the investment dealer knows nothing at all. It is those circumstances which cause some anxiety. My noble and learned friend has said that he will look at this matter. I am grateful to him, and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Hacking moved Amendment No. 58: Page 4, line 11, leave out ("neither knew nor ought to have known") and insert ("did not know").

The noble Lord said: As Amendment No. 59 is closely related to Amendment No. 58, with the leave of the Committee I shall address the Committee on both amendments. These amendments attempt to tackle again the discretion that ought to be given to the courts when dealing with agreements which for one reason or another are unenforceable, although they have been entered into in good faith by the parties. It has already been established in this Committee that Clause 5 makes agreements unenforceable if entered into by unauthorised persons. It also makes them unenforceable, even if they are entered into by authorised persons or by exempt persons, if for one reason or another that agreement otherwise falls into contravention of the terms of the Bill.

When considering the court's discretion, we turn to Clause 5(3)(b). The court is entitled in the exercise of its discretion to apply the test as to whether the party seeking to enforce the investment agreement knew or ought to have known that the agreement was unenforceable at the time it was made.

My amendment seeks to apply a simpler test and in doing so gives a wider discretion to the court—a factor that the noble and learned Lord the Lord Advocate welcomed just now in relation to the amendment moved by the noble Viscount, Lord Colville. The wider discretion, therefore, that my amendment seeks to give is to remove the words, neither knew nor ought to have known and to base the court's discretion on the much simpler test of whether the party seeking to enforce the discretion did not know that the agreement was unenforceable. It then goes on to give a wider berth for the court also in applying the test that in the circumstances it would be just and equitable to allow the agreement still to be enforceable notwithstanding that there has been some illegality in the sense that it has not fallen strictly within the terms of the Bill.

I suggest to the Committee that we give the court that wider discretion which, incidentally, would also include applying the test of whether the party who is seeking to enforce this agreement should have known or ought to have known that there was some illegality about it. So it incorporates the test that is set out in the statute, but gives a wider area of discretion to the courts. I hope therefore that the Government will consider my amendment with favour. I beg to move.

Lord Cameron of Lochbroom

Again, the noble Lord has raised a point giving more discretion to the court. I think that I would have to say that I would be cautious in perhaps going along the road that he suggests of removing the words "ought to have known" from paragraph (b), the problem being that if you have simply contained in that paragraph reference to knowledge, it may well be thought that the reference to imputed knowledge is not available to the court in exercising its discretion. Certainly I would say that a business which blindly shuts its eyes to the fact that the business has been introduced by someone who had no authority is, I suggest, in like case as a business which does know, and particularly when we are thinking about a remedy for investors who are affected by that particular transaction.

Certainly the indication of discretion as based upon the just and equitable basis is something which I should be very happy to look at. It perhaps narrows the point and gives the court a more obvious indication of what is being looked at in the way of exercising its discretion than does the amendment of my noble friend Lord Colville of Culross. These are all matters which I should be very happy to look at in the light of what has been said.

Lord Silkin of Dulwich

The noble and learned Lord the Lord Advocate began his remarks by saying that he would wish to be cautious about removal of the phrase, "ought to have known". I hope that he will be very cautious indeed about that. It seems to me that that would very much reduce the effectiveness of this provision. While there may well be a good case for Amendment No. 59, or something on the lines of the principle of Amendment No. 59, giving the court powers which reflect the justice of the situation, it does not seem to me at any rate that that should be confined to the region to which Amendment No. 58 would confine it—the situation where there was knowledge but not imputed knowledge.

Lord Hacking

I have heard the Committee's observations, including the observation of the noble and learned Lord, Lord Silkin. In view of the willingness of the noble and learned Lord the Lord Advocate to give consideration at least to my Amendment No. 59, I am only too happy to withdraw Amendment No. 58 and, in a moment, not to move Amendment No. 59.

Amendment, by leave, withdrawn.

[Amendment No. 59 not moved.]

Lord Cameron of Lochbroom moved Amendment No. 60: Page 4, line 31, at end insert ("and is not excluded by Part HI or IV of that Schedule.").

The noble and learned Lord said: This amendment ensures that if a person carries on business in contravention of Clause 3 but also carries on investment business which he may lawfully carry on by virtue of the exclusions in Part III and IV of Schedule 1, only those investment agreements which he has entered into unlawfully will be unenforceable. The amendment is consequential upon certain amendments made earlier in another place to Clause 1 and Schedule 1. I beg to move.

On Question, amendment agreed to.

Clause 5, as amended, agreed to.

Clause 6 [Injunctions and restitution orders]:

Lord Cameron of Lochbroom moved Amendment No. 61: Page 4, line 39, leave out ("or, in Scotland, an interdict").

The noble and learned Lord said: For the convenience of the Committee I shall speak also to Amendments Nos. 62, 159 and 160. These are all technical amendments which are designed to clarify certain of the provisions of the Bill which bring it into line with the terminology more commonly used in the Scottish legal system. I beg to move.

On Question, amendment agreed to.

Lord Cameron of Lochbroom moved Amendment No. 62: Page 4, line 40. at end insert ("or, in Scotland, and interdict prohibiting the contravention").

On Question, amendment agreed to.

Clause 6, as amended, agreed to.

Clause 7 agreed to.

Clasue 8 [Self-regulating organisations]:

Lord Williams of Elvel moved Amendment No. 63: Pager 6. line 21, after ("by") insert ("making and ")

The noble Lord said: I beg to move Amendment No. 63, which stands in my name on the Marshalled List. It may be for the convenience of the Committee if I speak also to Amendments Nos. 64 and 65. We are here dealing with the self-regulating organisations. These amendments are designed to elicit a response from the Minister by way of clarification. As I understand it, the self-regulating organisations will be entitled, subject to certain restrictions, to make rules as well as to enforce rules. It seems to me that that is a clarification which needs to be made in the Bill.

Then in Clause 8(3) there is the expression in brackets about, rules (whether or not laid down by the organisation itself)".

That seems to presuppose that the organisation may be enforcing rules which are not laid down by itself. I wonder whether that is exactly what the Government want to say—whether they wish to say that the SIB has powers under certain clauses that we shall come to later to change the rules, and therefore those rules cannot be considered as being laid down by the organisation itself; or whether they have anything else in mind that I do not know about.

My original point is that the rules of a self-regulating organisation should be laid down by the organisation itself and can be changed by a certain procedure which the Bill describes, but that the self-regulating organisation is not in a position to enforce other rules. If my understanding is wrong, I should be most grateful if the Minister could help me on that.

Amendment No. 65 again seeks to address itself to the same point: where rules may or may not be laid down by the organisation itself, so guidance may or may not be laid down by the organisation itself. Again, I should be grateful if the noble Lord the Minister could help me on whether a self-regulating organisation will be in a position to support guidance in some way laid down by somebody else. I beg to move.

Lord Lucas of Chilworth

I am grateful to the noble Lord for making it clear that he is seeking further information. Certainly we envisage that the SROs will make their own rules and, as he so rightly points out, there are provisions as to what those rules shall contain. We shall later discuss the SROs' rules alongside those of the head body, the SIB.

SROs will have the responsibility of enforcing their own rules, but they cannot of course enforce those rules of another organisation even if their member belongs to that other organisation. I think that was largely the point the noble Lord was seeking to elicit. Certainly the guidance that SROs are expected to give have to be supported by the rules and so in effect, although they do not have the same statutory backing that the rules have, they could or should be taken as being part of the rules.

4.30 p.m.

Lord Williams of Elvel

I wonder whether I may ask for a little more help from the noble Lord. Do I take it that the expression, (whether or not laid down by the organisation itself) might refer to the rules of the SRO which are imposed in some way by the Secretary of State or the SIB? I fully understand that, but in that case it seems to me that, by virtue of the clauses we shall come to later, they are in effect to be laid down by the organisation itself. From what the noble Lord said, it seemed to me that those words are redundant, but perhaps he can help us on that point.

Lord Lucas of Chilworth

I am sorry if I misunderstood the noble Lord. Perhaps I can make it a little clearer by saying that the noble Lord's second amendment deletes the reference in the definition of an SRO's rules and changes it to refer to rules laid down other than by the organisation itself. That reflects the fact that SROs may incorporate into their rulebooks rules made by another body, in which case of course they then enforce their own rules. Some may wish to incorporate into their rules accountancy standards or other kinds of rules. The clause, as drafted, makes clear that if they do so those standards and those rules become part of the SRO's rules for the purposes of the Bill.

They may have rules and guidance which apply only to matters not related to investment business. For example, they may provide other facilities for members and they may have rules about their use. The definition of rules and guidance in subsections (3) and (4) of Clause 8, which we shall be dealing with, restricts the definition for the purposes of the Bill to rules and guidance which are relevant to matters regulated by the Bill and not to those which are not encompassed by the Bill.

Lord Williams of Elvel

I am sorry to keep on wearying the Committee with this question. If an SRO incorporates into its rules accountancy standards or anything else, as I would understand it, those rules are laid down by that SRO. Therefore the expression, (whether or not laid down by the organisation itself) is redundant. That is the point I was trying to make. Either the rules are made by the SRO, from whatever source they come, whether it is from the Institute of Chartered Accountants or anybody else, or they are not made by them. What was worrying me was that the SROs, under the Bill as drafted, do have some curious power which I have seen defined to enforce rules which may be laid down by somebody else. I do not see how an SRO can have rules laid down by somebody else, unless it is by the Secretary of State or the SIB.

Lord Lucas of Chilworth

In fact, that is exactly the point. It is the rules that could be laid down by the Secretary of State or the designated agency, as, for example, in Clause 50, which we will come to, dealing with clients' money. I am very sorry that I did not make it abundantly clear.

Lord Williams of Elvel

I am now clear on what this means, and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 64 and 65 not moved.]

Clause 8 agreed to.

Clause 9 [Applications for recognition]:

Lord Williams of Elvel moved Amendment No. 66: Page 7, line 19, leave out ("or other legible form").

The noble Lord said: Again, this is an attempt to clarify what is meant by "or other legible form". I understand that the phrase occurs in a number of statutes, but is it possible that rules are made other than in writing or in a language other than English—ancient Sanskrit, for example? Can the noble Lord help me on this?

Lord Lucas of Chilworth

The point we have in mind here is that guidance may not be issued only in a written document. With modern technology, guidance may be stored on computers with the facility to call it up on a screen when it is necessary to refer to it. We did not find it very easy to find the right words to explain the concept, and perhaps the words we have chosen are not altogether satisfactory. However, I think they convey the intention clearly enough: at least I hope they do.

Lord Harmar-Nicholls

If one has in mind computers, I do not think that "legible" is the right word. I think that something a little more in keeping with what we mean by the use of a computer ought to be found if at all possible.

Lord Boyd-Carpenter

Can my noble friend say whether there is any precedent for this form of words in a statute?

Lord Lucas of Chilworth

If memory serves me right, I think we embraced this form only a few weeks ago when we were discussing the Patents, Designs and Marks Bill, because of the change in technology which was envisaged in that area. We were talking at that time about a register. The old statute implied a register which was in a book that could be looked at and photocopied. During the passage of that Bill we enlarged it so as to include a computer printout; so I think that there is already a precedent accepted.

Lord Boyd-Carpenter

If I may follow that up with my noble friend, would it exclude a document where handwriting was used—and here I must declare an interest—which is difficult to read?

Lord Silkin of Dulwich

If I may leave the area of semantics and come to the area of practicalities, I wonder why this is confined to that which in any form is legible. Why not any guidance, whether it be legible or not?

Lord Lloyd of Hampstead

I wonder whether I may suggest that the appropriate word might be "intelligible" rather than "legible".

Lord Harmar-Nicholls

Or even the word "identifiable", if it might be identified by picture, by computer or whatever it is. I do not think "legible" is the right word. Doctors would not have a chance.

Lord Lucas of Chilworth

A number of suggestions have been made. As I said, I am not sure that we actually found the right wording. I think the intention is quite clear to the Committee. Suppose I invite the Committee to accept that intention. Of course we will look to see whether we can find a better word, but I have a suspicion that at the end of the day we will find another word and then some other Member of the Committee will find that objectionable and suggest yet another one. That sort of thing frequently happens in this kind of area.

Lord Silkin of Dulwich

I wonder whether it is right that the intention is quite clear. With respect, it certainly is not clear to me. As it stands, whatever word you use it would seem to be intended to rule out guidance that is given verbally. Is that what is intended and, if so, why?

Lord Lucas of Chilworth

One would expect, because of the very nature of the arrangements one envisages for SROs, that word of mouth would not transmit easily. Mistakes are made, and if SROs are going to do their job properly one would expect them to put in some kind of documentary form or legible form which can be referred to and not easily forgotten.

Lord Boardman

At the risk of prolonging this discussion, may I suggest to my noble friend that we miss all those words out and we just have "a copy of any guidance issued", without referring to writing or "legible form"? They seem to me to be quite unnecessary.

Lord Lucas of Chilworth

I am grateful to my noble friend Lord Boardman. As I said earlier, we shall have another think about it, but I believe that the intention is quite clear.

Lord Williams of Elvel

I am most grateful to the Minister. We have had a very interesting debate. The more the debate goes on, the more matters of substance seem to arise out of what appeared originally to be an entirely semantic problem. I think there is a problem of substance as to how guidance is to be issued by SROs, and I take issue with the noble Lord in saying that SROs will have to put everything in writing. The whole point about practitioner-based legislation is that there is a lot of guidance given verbally, and it is right that it should be so. But on the noble Lord's assurance that he will look at the wording again, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 9 agreed to.

Clause 10 [Grant and refusal of recognition]:

Lord Williams of Elvel moved Amendment No. 67: Page 7, line 33, leave out subsection (3).

The noble Lord said: I move this amendment simply to express a concern which a number of people have in the City of London, that they will have to belong to a great number of SROs in order to carry on the business that they carry on at present. I shall be grateful for any guidance that the Minister can give us on how many SROs there will be, and whether it will be necessary for everybody to join every one, in order to continue to do the business that they do at present. It is an area which is causing a certain amount of confusion at the moment, and any guidance that the noble Lord can give us would be welcome. I beg to move.

Lord Lucas of Chilworth

It is envisaged that there will probably be five or six SROs. This depends entirely on the range of products that each organisation is intending to cover. It may be that an SRO will deal with a very narrow band of products which do not encompass all the activities of one of its members, in which case, yes, certainly, a member may have to join more than one. It is designed in that way so that the SROs can properly enforce the area which they have chosen to represent as an organisation.

It would be quite wrong of course if the membership of one SRO which had a specific activity had the responsibility of enforcing the rules of another organisation which the original SRO's member may wish to join. It may be a little cumbersome and a little expensive, but it will certainly be necessary for some authorised persons to belong to more than one. I think it is only the conglomerates which would probably need to join more than one, or possibly three or four. The way matters are shaping up, we see that most people deal with only one kind of investment business, and therefore their activities would be looked after by the one organisation.

Lord Williams of Elvel

I am grateful to the noble Lord. In moving this amendment I ought, as it were, to have redeclared the interest I declared on Second Reading, that I am on the national board of a Spanish bank. That particular Spanish bank has one branch in London, and apparently finds itself having to join four SROs for the different activities in which it engages. That is the point which I wish to bring to the noble Lord's attention. It seemed to be slightly unreason-able. But having said that, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Lucas of Chilworth moved Amendment No. 68: Page 7, line 37, at end insert ("or an exempted person in respect of that business.").

The noble Lord said: This amendment corrects an oversight. A member of a recognised self-regulating organisation may also be an exempted person for certain types of business. This amendment provides that he is not to be precluded from carrying on the business in respect of which he is exempt by the organisation's "scope" rule. I beg to move.

On Question, amendment agreed to.

4.45 p.m.

Lord Ezra moved Amendment No. 68A: Page 7, line 40 after ("regard") insert ("to the desirability of restricting the number of recognised self-regulating organisations and").

The noble Lord said: I beg to move this amendment, which links up with the point raised by the noble Lord, Lord Williams of Elvel, in moving Amendment No. 67. It is obviously desirable that the number of SROs should be limited to the minimum necessary. It is, after all, one of the objectives of this Bill that, while providing proper safeguards for investors, there should not be undue encumbrance on practitioners. It is known that the SIB, which will eventually, presumably, be taking on these responsibilities, is seeking to reduce the number of SROs by creating mergers. Six have been talked about, but there may be five or even four. I should have thought it would help to achieve that desirable objective if this wording were introduced into this clause. I beg to move.

Lord Lucas of Chilworth

I readily accept—and I have sought to demonstrate our acceptance—the desirability of keeping the number of SROs to the minimum, but it has to be consistent with the effective regulation of the whole range of investment business. The purpose of Clause 10(4) is to allow the Secretary of State, or the designated agency, to refuse recognition on the grounds that there is no need for it, having regard to the existence of other organisations which are, or are likely to be, recognised. We have always expected that one of the factors to be taken into account is the desirability of keeping the numbers down, though there will also be other factors.

For example, it may be that in a particular area regulation would be more effective if it were divided among two organisations rather than one, or it could be that tidier demarcations between the areas regulated could be achieved if three organisations rather than two were recognised. I would be hesitant about letting the desirability of restricting numbers, as such, be the basis of the recognition decision. We believe that the existing provision, enabling recognition to be refused on the grounds that it is not necessary, is sufficiently flexible to allow due weight to be attached to the considerations to which the noble Lord, Lord Ezra, has drawn our attention, as well as other considerations of the type to which I have referred. I hope that that explanation is sufficiently wide to explain why I am going to suggest to the noble Lord that his amendment is not necessary and to invite him to withdraw it.

Lord Ezra

I am grateful to the noble Lord for saying that he agrees with the principle underlying this amendment. It may well be that it is in the wrong place. It may even be that it does not need to be explicitly stated. But I should have thought it was in the interests of all concerned that the number of SROs should be kept down to the minimum. Having aired this point, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 10, as amended, agreed to.

Schedule 2 [Requirements for recognition of self-regulating organisation]:

Viscount Colville of Culross moved Amendment No. 69: Page 154, line 8, leave out ("to") and insert ("which may").

The noble Viscount said: I see that this amendment has been grouped with Amendments Nos. 70 and 71. They are actually slightly separate points; but if it is for the convenience of the Committee, I shall deal with them together, provided that my noble friend gives me two answers because there are two points. The first one is essentially a matter of drafting. It relates to paragraph 1(3) of the second schedule, and the matters that are to be taken or should be taken into account by an SRO when it is making its own rules. The point is very simple. In Clause 26, the Secretary of State, or I suppose the SIB, is given a collection of matters that have to be looked at. One of them, in subsection (3), is the question of people who will be employed by or associated with the applicant for the necessary authorisation. That is absolutely right and I am not in any way trying to alter the Government's intention in this or in either of my other two amendments.

The difficulty comes in the wording of the schedule. In Clause 26, the Secretary of State is allowed discretion as to whether or not to take the point concerned into account. However, if one examines Schedule 2, in paragraph 1(3) it appears that the self-regulating organisation must take it into account because of the phrase that is used. I do not suppose that such is intended. I imagine that the same discretion exists as with the SIB. However, if that is so, it ought to be spelt out. There will be circumstances when, for instance, the SIB could not possibly know about the persons who will be employed by or associated with the business.

My second point concerns, on the face of it, a matter of drafting. However, it is important. In paragraph 3 of Schedule 2, the SRO must provide in its rules for protection, at least equivalent to that afforded", essentially, to those given under the SIB rules. However, the SIB will not be making rules in all the areas that SROs will be covering in their own rules. What is more, the SIB may not be sufficiently quick to spot changes in rules that the SROs themselves would like to make to keep up with the way in which business develops.

If one uses the word "equivalent" it presumes that there is in the first place an SIB rule to which the SRO's rules will be equivalent. I do not believe the Government intend that to be so. I believe the Government mean that the SROs should have rules that are no less advantageous but that they do not require something similar in the SIB's rules that can then be photocopied, as it were, by the SROs.

The two points to be considered are, first, that if the SIB does not make rules that are specifically required for the SRO's areas of activity, then it will not be possible to have anything that is equivalent. Secondly, there is the matter of change. I wish in no way to reduce the protection that is being given by the Bill; I simply want to make it more workable and flexible. I hope that my noble friend will be able to help in respect of both points. I beg to move.

Lord Lucas of Chilworth

I am grateful to my noble friend Lord Colville for grouping his amendments. He asked me particularly to give two answers. I am delighted to do so. The first answer is yes, and the second answer is no. Perhaps I could be a little more helpful. What I mean is that, yes, I am happy to accept my noble friend's first amendment because it really is a helpful clarification, and I am grateful to him for it.

However, as to my noble friend's second and third amendments, I do not believe that they would have any substantive effect. The test provided for in paragraph 2(1) of Schedule 2 is that the recognised self-regulating organisation's rules must provide at least the standard of investor protection that is provided by the rules made by the Secretary of State or by the probable designated agency. In other words, the standard of investor protection provided by the rules must be as high as or higher than that provided under the rules of the Secretary of State or the designated agency. As I understand it, that is also the intention of my noble friend's second amendment, and I hope he will agree on reflection that his amendment is not really necessary.

The rules with which the organisation's rules will be compared will be corresponding ones made under Chapter V—that is, the rules concerning the kind of investment business with which the organisation is concerned. If the Chapter V rules make different provisions for different cases—for example, by making less onerous provisions for transactions with a sophisticated investor—then so may the organisation's rules do the same. Again, as I understand the matter, that is the intention underlying my noble friend's third amendment.

I do not believe that there is any substantive difference between us. My noble friend will recall that some little while ago, he discussed with me the exact meaning of the word "equivalent" or "equivalence". I draw his attention in particular to paragraph 3(1) of Schedule 2, at line 23 on page 154 of the Bill, which makes mention of investors protection at least equivalent to that afforded". That implies that there is movement; that there is not a totality of equivalence but that the protection must be no less than that afforded under Chapter V and may be higher. It must be at least equivalent to Chapter V protection. I hope that that explanation is satisfactory to my noble friend, and that he will find it sufficiently so not to move his two other amendments.

Lord Bruce of Donington

The noble Viscount has afforded the Committee an opportunity of discussing paragraph 1(3) of Schedule 2, which states that: The matters to be taken into account under the rules in determining whether a person is a fit and proper person must include those that the Secretary of State may take into account under section 26 above". The noble Lord will be aware that I have expressed some anxiety in your Lordships' House on occasion about the distinct possibility, amounting to a probability, that people will seek membership of SROs, or will seek the authorisation of the Secretary of State—and more likely the former—who are themselves resident outside this country. They may seek, possibly under a respectable guise or by reason of a shareholding in a concern in this country, to apply for authorisation, albeit indirectly.

The question I have to ask the Minister is this: what kind of liaison is being established between the Secretary of State and the SIB, and through the SIB to the SROs, to determine the extent of the matters that are to be taken into account? The Secretary of State normally has far more resources to ascertain the authenticity and desirability of aliens seeking to come to this country under the cover of respectable organisations than have either the SIB or the SROs. To what extent will the position be safeguarded? To what extent will information be exchanged concerning matters of that kind?

Lord Lucas of Chilworth

I recall the noble Lord, Lord Bruce, raising this point by way of a Parliamentary Question a few weeks ago. I said at that time that every person would have to be authorised. A person may be in a recognised professional body today, which might offer automaticity. Such a person may apply to a self-regulating organisation on his own account, or he may seek direct authorisation. Whichever route the person takes, and even if he is an existing member of, for example, a recognised professional body, it will be for that recognised professional body to satisfy itself that newcomers, and all those in existing membership, have the right qualities and qualifications.

Of course there will be a day-to-day relationship between the designated authority and the SROs. The relationship of the Secretary of State's department and my department would not be quite so close, although from time to time it would be absolutely necessary for the department to engage in consultation with the designated agency. So there is a sufficent intention—it is certainly not set down in the Bill that they shall meet at certain prescribed times—to ensure that the rules are adequate.

The Secretary of State has an overriding discretion with regard to the designated agency's rules, and the designated agency's rules will have to cover all the particular businesses covered by SROs, otherwise no comparision could be made between the SRO's rules and the designated agency's rules: in other words, the head rules as such. The SRO's rules must provide for any relevant matter relating to any of the persons specified in Clause 26(3). They all have to be taken into account.

In Schedule 2, paragraph 7, and Schedule 5, paragraph 5, and others, there is a provision for the regulatory bodies to co-operate one with another and also for developing contacts with overseas regulators for an exchange of information.

I genuinely understand what lies behind the question put by the noble Lord, Lord Bruce of Donington. It goes back a long way and I believe that it is a very genuine concern. I should like the noble Lord to consider tomorrow exactly what I have said. If he has a particular example rolling in the back of his mind, I should be grateful if he would instance it to me. I can then look at it and give him a categorical answer. I do not think that is possible during the course of our Committee proceedings.


Viscount Colville of Culross

As regards Amendment No. 69, it is enormously agreeable to find a form of words that appeals to my noble friend. I hope that they will now go into the Bill.

As to the other two amendments, I hope my noble friend can help me further. I do not think it matters whether we have the word "equivalent" or some other adjective in the Bill provided his department acts in a sensible way. My noble friend will be able to tell the Committee about this because it is a matter of administration, not law. Is my noble friend's department going to recognise SROs who include in their rules matters that are not encompassed by what the SIB has put down?

Is my noble friend's department going to continue the recognition of an SRO, and not revoke it under Clause 11, if, because the type of business or the way the business is carried out is changed, the SRO includes in new rules things that the SIB has not got round to? That is the substance of the matter. Nobody is trying to do anything to put an obstacle in the way of protection for investors. All that is being thought about at the moment is the way that the schedule is drafted which indicates that a blueprint will be necessary from the SIB before the SRO can make a rule or change its rules.

If the department is not going to pay any attention to that and is going to allow the SROs to make sensible rules and amendments to their rules to deal with exigencies and circumstances—and I shall continue for a moment so that my noble friend can read the note just handed to him—there is no problem whatever in having the word "equivalent". My objective is to make it sufficiently flexible to keep up, in the case of any particular SRO, with what happens in the business world. If my noble friend can give an assurance about that, it is perfectly acceptable to leave the schedule as it is.

Lord Lucas of Chilworth

The SROs can alter their own rules, and provided any alteration makes a provision over and above the designated agency's rules then of course everything is perfectly all right. It is for the SIB, as the regulatory authority, to advise the Secretary of State of the acceptance of a self-regulatory organisation. It is not for the Secretary of State so to do. It will be for the SRO to satisfy the SIB in the event of there being no SIB rule to which the SRO's new rule can be compared. It will not be able to bring it into force until it has the necessary authority, which may well mean the SIB having to change its rules.

We come a little later—I cannot recall the clause—to the challenge which can be made with regard to the rule-making procedures. I think that might be the better place to discuss what happens if the SIB does not accept an SRO rule. I hope that is helpful.

Viscount Colville of Culross

I suspect that it is not, but perhaps we can come back to it later. I think that my noble friend has confirmed the fears that if an SRO wishes to change its rules to meet some new facet of business and the SIB has not got round to considering it, the SRO will not be able to do it under the way the schedule is amended until the SIB itself has been moved into action to take some equivalent activity. That cannot be sensible because if the SRO is going to be responsible for the rules which deal with the sort of investment business within its own sphere, it is going to be much better equipped to bring up to date the changes that need to be made. It should not have to wait for the SIB to get round to doing something similar. It ought to be able to do it without being blocked.

The purpose is to provide protection for the investor. What I think my noble friend is saying is that the SROs will not be able to provide adequate protection under their own rules until the SIB has made an equivalent change. If that is wrong, it is extremely important that that should be said now. I see my noble friend is shaking his head. Perhaps he would like another opportunity to clarify the matter.

Lord Lucas of Chilworth

I apologise to the Committee if I have not made myself clear—and it is obvious that I have not done so. Provided an SRO makes rules in addition to and over and above the basic ones contained in the SIB rules, it can do so without let or hindrance. Therefore, the SRO's have the flexibility which I think my noble friend is seeking.

Viscount Colville of Culross

I am grateful to my noble friend. That explanation is very much better and clearer, and I should like to read the whole passage to see whether this matter is taken up under the Clause referred to. Meanwhile, since we are dealing with Amendment No. 69, I beg to move.

On Question, amendment agreed to.

[Amendments Nos. 70 and 71 not moved.]

Lord Lucas of Chilworth moved Amendment No. 72: Page 154, line 42, at end insert ("in respect of investment business of a kind regulated by the organisation.").

The noble Lord said: For the convenience of the Committee, I shall speak at the same time to Amendments Nos. 75, 105, 251 and 267. I shall refer also to Amendments Nos. 73, 74 and 76 which also apply to Schedule 2.

This group of amendments tidies up some of the requirements for recognition or designation under the Bill. The first amendment clarifies the scope of paragraph 4(1) of Schedule 2. It makes clear that while a recognised self-regulating organisation has to monitor and enforce compliance with directly applicable rules which apply when a member is carrying on investment business of a kind with which the organisation is concerned, it does not have to monitor and enforce compliance with rules to which a member is subject simply because he is also directly authorised.

The other Government amendments all concern the bodies to whom monitoring functions can be delegated by the bodies regulating investment business under the Bill. At present these bodies are specified in lists included in the relevant schedules, but it is already becoming clear that it may be desirable for monitoring to be delegated to persons who are not on the various lists; for example, in the case of a foreign business it would be its own domestic regulator. It may well be that other bodies will emerge in the course of time who are capable of performing this monitoring function. It therefore seems preferable to delete the lists and to permit the delegation of the monitoring function to any person or any body who is able and willing to perform it. Of course, it will be for the Secretary of State or the designated agency to be quite satisfied that that person or that body in question is in fact able and willing and that the arrangements are adequate for effective monitoring. With that explanation I hope that the Committee will be able to accept these amendments. I beg to move.

Lord Ezra

Included in the grouping which the noble Lord mentioned are three amendments in the names of my noble friend Lord Taylor of Gryfe and myself; namely, Amendments Nos. 73, 74 and 76. I believe that they are all in line with what the noble Lord has just told us.

The intention of Amendments Nos. 73 and 74 is simply to make sure that the enforcement aspect is not lost sight of in sub-paragraph (2) at the bottom of page 154. The purpose of Amendment No. 76 is to make it absolutely clear that a separate monitoring and enforcement body could be established if it were thought fit to carry out these functions. That is not in fact stated in sub-paragraph (3) at the top of page 155. We believe that this amendment will be entirely in line with what the noble Lord has just said.

Lord Lucas of Chilworth

When I said that I intended to speak to these amendments I rather wanted to suggest to the Committee that we resist these three amendments, but I thought that it might be preferable for the noble Lord to explain what he had in mind before I over-guessed him perhaps. These three amendments would permit the enforcement as well as the monitoring function of recognised self-regulating organisations to be delegated to another body. I can see the force of the argument that these SROs, in the absence of any other pressures, might in some cases at least tend to be too lenient toward their own members in the interests of good relations. But in fact the Bill contains safeguards which are designed to prevent this. For instance, the governing body will have to include a significant independent element if it is to satisfy the requirements of paragraph 5 of Schedule 2. That in itself should help to prevent any drift toward leniency.

Of course, behind all this will be the powers of the agency to withdraw recognition fully under Clause 11, partly under Clause 13, or indeed to seek a compliance order from the courts under Clause 12. We hope and, frankly, expect that these powers will rarely, if ever, be used, but they are there of course if they are needed.

There is a need to avoid overlapping supervision in appropriate cases. That is why the Bill provides for monitoring to be undertaken on behalf of a self- regulating organisation by another body. This would allow monitoring to be delegated to a joint body of the kind proposed by the noble Lord. But I believe that enforcement and discipline must remain the responsibility of the SRO itself. Were it otherwise, both the authority of the organisation over its members and its responsibility or indeed its ability to uphold standards of investor protection in our view would be quite seriously weakened. I suggest to the Committee that the effect of the noble Lord's proposals would be the very opposite of what he is seeking to achieve.

5.15 p.m.

Lord Ezra

In order to avoid any confusion in my mind, may I take it in regard to Amendment No. 76 that if the word "enforcement" were left out, the noble Lord will accept it? Where it seems to me that sub-paragraph (3) is deficient is that it does not give a sufficiently wide range of options.

Sub-paragraph (2) states that: The arrangements for monitoring may make provision for that function to be performed on behalf of the organisation … by any such body or person as is mentioned in sub-paragraph (3) below". But sub-paragraph (3) does not suggest an independent body, which is obviously one option.

Lord Lucas of Chilworth

I can respond to the noble Lord's invitation only perhaps by saying that I am quite prepared to have a look at the suggestion. I should like to do this with more advice to hand than I have this afternoon, though I do not believe that this amendment is at all necessary because anybody can now carry out this function. However, I shall of course have a look at it with the best will in the world.

Lord Bruce of Donington

I think that the noble Lord has spoken to Amendment No. 75. The noble Lord will be aware that his amendment, Amendment No. 75, is quite sweeping in the sense that the original paragraph 4(2) read: The arrangements for monitoring may make provision for that function to be performed on behalf of the organisation (and without affecting its responsibility) by any such body or person as is mentioned in sub-paragraph (3) below who is able and willing to perform it". The noble Lord will observe that at sub-paragraph (3) these bodies are listed in some detail. I shall not weary the Committee by repeating them. The noble Lord is moving for the deletion of all those particulars relating to the Bank of England and so on and wants simply to put in its place: other body or person who is able and willing to perform it". May we have some indication as to the noble Lord's thinking behind that proposal and why he now finds it necessary to make the definition more general and much wider?

Lord Lucas of Chilworth

Frankly, I do not think I can go any further than my original remarks. I said then that it had become very clear to us that it would be very difficult for monitoring to be delegated to persons not on a list; for example, in the case of a foreign business. Because things are changing so fast, it seems totally undesirable to have a firm list which would then have to be altered. It is far better in the case which I instanced of a foreign business to look for its domestic regulator to be the body. Other bodies could quite easily emerge in the course of time. That is exactly what I said. So long as they can demonstrate a capability of performance, they should be allowed to get on with it.

The safeguard is that the monitoring has to be effective. Even if that function were delegated as a condition for recognition, the designated agency would have to be totally satisfied that the SRO's arrangements for monitoring, as it has now been sub-contracted, are still effective.

I do not think that I can add any more. This is only an expansion of what I said at the outset. I do not think that the noble Lord needs to fear that any authority will be lost by a sub-contractor organisation. It falls back at the end of the day on the SRO to ensure that the monitoring is effective.

On Question, amendment agreed to.

[Amendments Nos. 73 and 74 not moved.]

Lord Lucas of Chilworth moved Amendment No. 75: Page 154, line 45, leave out from ("any") to end of line 8 on page 155 and insert ("other body or person who is able and willing to perform it").

On Question, amendment agreed to.

Lord Ezra had given notice of his intention to move Amendment No. 76: Page 155, line 3, after ("are") insert ("a monitoring and enforce-ment body established and operated only for the purposes of monitoring and enforcing functions delegated to it such as are mentioned in sub-paragraph (2) above, ").

The noble Lord said: On the understanding that the noble Lord will have a look at the point raised, I shall not move the amendment.

[Amendment No. 76 not moved. ]

Viscount Chandos moved Amendment No. 77: Page 155, line 19, after ("unless") insert ("at least one third of).

The noble Viscount said: With the leave of the Committee, I propose to speak also to Amendment No. 78. I hope that the Committee will find these two brief amendments simple and self-explanatory. I think that the presence of lay members on SRO governing bodies is important and can be seen as a central part of the principles of self-regulation on which the Bill is founded. If we go back to the agreement in 1983 between the then Secretary of State for Trade and Industry and the chairman of the Stock Exchange, one of the three specific concessions agreed by the Stock Exchange at that point was the appointment of lay members of the Stock Exchange Council.

In view of the importance of that principle, my noble friends and I find the phrasing in the Bill, "a sufficient number", a little vague and perhaps potentially unhelpful to SROs in determining the composition of their governing bodies. It is also a central point for the public in establishing their confidence in the SROs.

A ratio of 2:1 between professionals and lay members seems to be on a rule-of-thumb basis about right, although there is no magic in that proportion. This is an important point and I think that the Bill would benefit from the specific requirement that at least one-third of the members be effectively lay members and not involved directly in the business which the SRO is set up to monitor. I beg to move.

Lord Graham of Edmonton

I had intended to raise this matter on the Question whether Schedule 2 should be agreed to, but perhaps when the Minister deals with the amendment he can tell the Committee where the Government see a place for those employed in the industry on the governing body. Paragraph 5 of the schedule talks about: The arrangements of the organisation with respect to the appointment, removal from office and functions of the persons responsible". The noble Viscount talks about what he considers to be a proper balance of the interests affected by the work of and the conduct of business rules appertaining to the SRO. Those employed in the business are as entitled as any other element affected by the business to be heard or at least to have their opinions considered.

When the Minister deals with the question of the balance on the governing body and whose interests should be represented, I hope that he can deal with that point also, rather than taking up time with it on the Question whether the schedule should be agreed to. Hundreds of thousands of individuals in financial services may be affected. I have in mind not merely insurance agents or members of bona fide trade unions. They may be members of other bodies or they may be working as individuals. The powers that be, company directors and senior officials, may well be able to look after themselves, but the employees are entitled to access to the governing body in order to influence particularly the conduct of business rules. I hope that the Minister can deal with that when replying to the amendment.

Lord Lucas of Chilworth

I accept fully what the noble Viscount and the noble Lord say about the importance of having effective independent representation on the governing bodies of SROs to help to prevent them from becoming cosy clubs (which I think is an expression that has crept into our discussions) and to ensure that proper account is taken of the interests of users and of the public. Paragraph 5 of Schedule 2 seeks to achieve that objective by making it clear that effective independent representation will be required, while leaving it open to individual SROs to decide the detailed composition of their governing bodies.

The amendment seeks to impose a precise numerical requirement that the independent members—the noble Viscount used the term "lay members", but I am sure that we mean the same thing—should constitute a third of the membership of the governing body or any other body which exercised effective control. He said that there was no magic about the proportion of one-third. If he will allow me to say so, I could not have put it better.

Lord Grimond

The amendment says "at least one-third". It is not precise.

5.30 p.m.

Lord Lucas of Chilworth

The noble Lord is right. I was merely quoting the noble Viscount, who said that there was no great magic about a third. I agree. As a general statement, I would not differ from the proposi-tion that something like a third of the members should be independent. The SIB has said that, if powers to recognise SROs are transferred to it, it will expect them to have a number of independent individuals of high standing in appropriate positions on their governing bodies. It has explained that it is thinking in terms of about one-quarter to one-third of the members of the governing body being independent of the organisation. I welcome that statement. I think that the Committee will probably welcome it also.

The Bill does not impose specific numerical requirements because it seems to us right to leave it to organisations to decide on the precise composition of their body in the light of particular circumstances and needs, provided always of course that the basic requirement of securing a proper balance is met.

A specific requirement for a stated percentage of the governing body to represent particular interests would be undesirably rigid. It would involve deciding into which category an individual fell. For example, if one-third of the governing body had to be made up of independents how would an accountant who did some work for members but who was otherwise independent be regarded? What about the non-executive director of a member company who had been appointed to that company because of his wide knowledge and independent judgment? Would he qualify as an independent member or would he have to be grouped with the members' representatives, even if not elected by them as one of their representatives?

We must avoid the situation in which somebody with no relevant experience may be appointed merely to make up the number of independents or satisfy a certain category of independents. We think that the quality of the people appointed is rather more important than the precise numbers.

The provisions as they stand in the Bill avoid that problem by requiring that there is a sufficient number of independent persons. Even if there is doubt about how an individual may be classified, the Secretary of State or the designated agency would be able to look at the constitution of the governing body in the round when determining whether there was a sufficient number of independents to secure the proper balance for which we are all looking. That is the balance between the interests of the organisation or its members and the interests of the public. I believe that that is a preferable approach.

I am grateful to the noble Lord, Lord Graham. He made the point that the governing body should include employees' representatives. SROs are concerned with the interests of investors in those investors' dealings with investment businesses, not necessarily—I do not wish to be too harsh about this—with the relations between employers and their employees. There is a fundamental difference. I do not think therefore that it would be appropriate to require employee representation on governing bodies. That is the difficulty one has when deciding into which category a person of sufficient high standing, knowledge and so on should fall. I do no believe that there is any suggestion of discrimination. Again, I come back to the generality that we have left the SROs to determine their own governing body within a rather wider framework.

Lord Graham of Edmonton

Good industrial relations figure more prominently now than ever before. There is a need for those employed in a business to be satisfied about the conduct of that business by those who have executive authority who should take into account the needs and views of those employed in the business. I merely want to leave that on the record for those who will study with care what the Minister and other Members of the Committee have said. I believe a case can be made out for that. We are looking for individuals of high standing and ability. Many employees of a company or business have been employed in it for many years. Many of those serving in the higher echelons of companies may well have served for a short time only. They may be clever and able and they will certainly be able to make a contribution.

I merely wish to leave on the record the fact that when SROs meet, their members should pay due regard to the fact that good employee relations are better obtained if employees consider that their interests are taken into account.

Lord O'Brien of Lothbury

I hope that it is not out of order for me to intervene on what the noble Lord, Lord Graham, has said. From my long experience in the City, I have come to the conclusion that industrial relations in that part of our economy are in a far healthier state than those in any other part. Trade union intervention has been small. I do not think that there is any case for having trade union or employee representation on a body that is designed for a specific purpose. It should fulfil that purpose, and to do so it does not need representatives; it needs effective executives.

Lord Boyd-Carpenter

I agree wholly with what has just been said about trade union and employee representation, but I am less happy about the use of the word "sufficient". I ask my noble friend who is about to reply whether he will say: sufficient for what? If one is laying down something in a statute which the courts may have to consider, surely the courts should be given some guidance as to what is the purpose, sufficiency for which in numbers is required by the clause. It is not clear to me.

Lord Lucas of Chilworth

Before the noble Viscount whose amendments we are discussing replies, would it be helpful if I responded to the points which have been put to me? I understand what the noble Lord, Lord Graham, wishes to get on the record. Equally, I appreciate what the noble Lord, Lord O'Brien, had to say. I do not think that there is any difference. In the Bill, we are not seeking, in any shape or form, to introduce any point about industrial relations. I think that the noble Lord wanted to make the point so that SROs and others can take note of what he feels about the matter. There is no doubt that this little debate on that point will bring it to their attention without in any way upsetting the position that the noble Lord, Lord O'Brien, puts to us.

My noble friend Lord Boyd-Carpenter asked, as he so frequently does, a blunt question about "sufficient". It is a matter of its being sufficient to secure a proper balance between the interests of the organisation or its members and the interests of the public. It is therefore for the SROs, with guidance from the SIBs, to determine where that balance is to be struck. It could be different for different SROs. That is why 1 have suggested to the noble Viscount that we should not be specific about numbers.

Lord Silkin of Dulwich

The Minister has clearly and admirably defined what is meant by "sufficient". Might not words similar to those which he has used be inserted into the schedule at the next stage of the Bill?

Viscount Chandos

I should like to thank the noble Lord, Lord Lucas, for his response, though there are still some aspects of the matter which concern me. I shall make a few comments on the intervention of the noble Lord, Lord Graham. In this case, there is a danger of trying to kill two birds with one stone and to use the Bill to ensure and safeguard the position of employees in the financial services industry.

However, there is, I believe, still something extremely useful that we can consider arising from the comments of the noble Lord, Lord Graham. It is the composition of the governing bodies relative to the seniority of the nominees from member companies. In a very complex and fast-changing industry, there is often a deeper understanding of some of the problems at a relatively junior level within an organisation. Many industry associations and working parties, looking at the problems emerging in the market, actually comprise people who are not all that senior in the organisations in which they work. This is a matter that could fairly be borne in mind.

I was concerned by what the noble Lord, Lord Lucas, said. It seemed to me that in trying to get away from the cosy club syndrome—that was, I think, his phrase—the example that he gave of whether a non-executive director of a member firm was really independent or not seems potentially to raise valid concerns on the part of the public as to whether the independent representation on the SRO's governing body is really sufficient to ensure a proper balance. I accept that the more precisely one defines a minimum representation of independent members of the governing body, the more precisely one has to define who is independent. We have to face the fact, however, that in very complex markets a self-regulatory organisation, with a majority of members who come from the industry, will, if given the chance, limit the number of independent members because it will make life easier. It will be able to discuss the problems in shorthand without going through the laborious process of explaining some of the problems and some of the market practices to people who are genuinely independent and inexperienced in those markets. It is for that sort of reason that I am concerned that the general phrase of a sufficient number of independent members to ensure proper balance is not really helpful to the SROs' governing bodies in resolving conflict between an efficient and smooth-running governing body and one that has adequate representation of independent members.

I was encouraged, however, to be reminded of the SIB's guidelines on minimum representation of between a quarter and a third. That, if anything, reinforces my view that the Bill should include a minimum requirement of, say, 25 per cent. rather than one-third. I wonder, in the light of those comments, whether the noble Lord, Lord Lucas, has anything to add.

Lord Lucas of Chilworth

The only addition that I can offer the Committee is to reiterate that it has always been the intention that governing bodies should include a significant independent element. Frankly, we believed that this was implicit in paragraph 5(1). At Committee stage in another place a large number of amendments was proposed, all seeking to set a precise formula for the constitution and all including an explicit reference to independent members. In response to pressure on this point we inserted paragraph 5(2) which, we believed, brought out much more explicitly the requirement for independent members.

I suggested in my earlier remarks why we wanted to resist precise numbers. I have to tell the noble Viscount that I now invite the Committee to reject his amendment for the reasons I have given. Frankly, we do not wish to see any precise number, whether given in fractional terms or in percentage terms. We do not believe that this would serve the interests of the investors, the members, the RSROs and all the bodies to which I have referred.

Viscount Chandos

In the hope that the SIB success-fully enforces the guidelines mentioned by the noble Lord, Lord Lucas, and despite maintaining some reservations, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 78 not moved.]

Schedule 2, as amended, agreed to.

5.45 p.m.

Lord Cameron of Lochbroom moved Amendment No. 79: After Schedule 2, insert the following new schedule:

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