PART II

HL Deb 23 July 1986 vol 479 cc290-364

TRANSACTIONS BY LISTED INSTITUTIONS WITH PERSONS OTHER THAN LISTED INSTITUTIONS OR THE BANK OF ENGLAND

3. This Part of this Schedule applies to any transaction between a listed institution and a person other than such an institution or the Bank of England in respect of any investment specified in paragraph 1(2) above if the conditions in paragraph 4 below are satisfied.

4.—(1) Subject to sub-paragraph (6) below, the condition; referred to above are as follows.

(2) The consideration for a transaction in respect of an investment falling within any of paragraphs l(2)(a) to (d) above must be not less than £100,000.

(3) The value or price of the property in respect of which an option within paragraph 1 (2)(e) above is granted must be not lest than £500,000.

(4) The price payable under a contract within paragraph 1(2)(f) above must be not less than £500,000.

(5) The value or price the fluctuation in which, or the amount the fluctuation in the interest on which, is relevant for the purposes of a contract within paragraph 1(2)(g) above must not be less than £500,000.

(6) The above conditions do not apply if the person entering into the transaction has in the previous twelve months entered into another transaction with the same person, being a transaction in respect of an investment specified in paragraph 1(2) above in the case of which those conditions were satisfied

5. This Part of this Schedule also applies to any transaction between a listed institution and a person other than another such Institution or the Bank of England by which one of the parties agrees to sell or transfer an investment falling within paragraph I or 3 of Schedule 1 to this Act if—

1. (a) by the same or a collateral agreement that party agrees, or acquires an option, to buy back or re-acquire that investment or an equivalent amount of a similar investment within twelve months of the sale or transfer, and
2. (b) the consideration for the sale or transfer is not less than £100,000.

(2) Paragraph 2(2) above applies also for the purposes of this paragraph.

6. The monetary limits mentioned in this Part of this Schedule refer to the time when the transaction is entered into; and when the consideration, value, price or amount referred to above is not in sterling it shall be converted at the rate of exchange prevailing at that time.").

The noble Lord said: I beg to move Amendmen No. 106, and for the convenience of the Committee should like to speak to Amendments Nos. 113 and 123. With the agreement of the Members of the Committee, I should also like to speak to Amendment No. 106A being moved in the name of the noble Viscount, Lord Chandos, which is an amendment to Amendment No. 106.

I realise that this is a new schedule. It is of some length and I shall try to encapsulate what we are trying to do as best I can. The amendments to which I an speaking reflect the decision announced by my honourable friend the Economic Secretary in May. 1. was that the Bank of England should regulate the wholesale money, bullion and foreign currency markets. The behaviour of these markets is closely connected with the money supply, and the Bank of England as part of its economic responsibilities, has by tradition been closely involved with them and has generally supervised them.

Under the Bill as it was originally drafted some of these activities in these markets were covered by the Bill and others were not. I do not think that Members of the Committee would agree that this is an altogether satisfactory position. On reflection, it was decided that the Bank should be made responsible for these markets. The Government will be publishing a consultative document about their future regulation in the autumn.

As a consequence of this decision and in order to reduce supervisory overlap, the Economic Secretary announced that the Bill would be amended so as to remove from regulation under it certain transactions in the wholesale market undertaken by institutions, subject to supervision by the Bank under the new arrangements. These amendments implement that undertaking. They have been the subject of widespread consultation with interested parties; their general approach has been welcomed. We have sought to meet the detailed difficulties which have been drawn to our attention. However, we shall be happy to look at any further points which may arise when all those concerned have had the proper opportunity to study these amendments in detail.

Perhaps it might be helpful if I outline the main features. First, it applies only to institutions on a list which will be drawn up by the Bank of England. In order to ensure proper accountability, the criteria for admission to the list and arrangements for additions to it and removals from it will be subject to approval by the Treasury. The list is expected to include all those banks, building societies and licensed deposit-takers who are competent to operate in these markets, together with other institutions which satisfy the Bank that they are fit and proper so to do.

The exemption applies to certain transactions in the investments which are traditionally regarded as money market instruments. These are short bonds and debentures, including certificates of deposits; also currency futures and options, bullion futures and options, contracts for differences on interest rates, currency and other money market investments. For the benefit of noble Lords who are as unfamiliar as perhaps I am with some of the terminology—and I do not think that there are very many in the Committee right now—perhaps I should explain that a "repo" is an agreement to sell investments subject to an arrangement to buy them back at an agreed future date. I suppose that they could most simply be regarded as the equivalent of secured lending.

Transactions in relevant investments between two institutions, both of which are on the Bank's list or between such an institution and the Bank of England are exempt, whatever the size of the transaction. Such institutions will be large, professional operations well able to look after themselves and subject to Bank supervision. In the case of transactions between an institution on the list and someone else, the exemption applies only if the size of the transaction exceeds the limits set out in the new schedule or if it is with a person who can be treated as a wholesale counter-party. The size limits are deliberately set high: £100,000 sterling for transactions in bonds and debentures, and £500,000 sterling for futures and options. So the ordinary private investor is not deprived of the protections provided by the Bill. It is only wholesale market transactions which are to be exempted, and they will then come instead under the supervision of the Bank of England.

But even wholesale market operators sometimes need to do small deals. This is why the schedule provides that where a person has entered into at least one transaction over the prescribed limits within the previous year, he may be treated as a wholesale counter-party, and subsequent transactions with him are covered by the exemption, whatever the size.

I fear that I have spoken rather quickly and at some length, but I recognise I may well not have been able fully to explain the amendments. These are complex matters. The development of the markets and of new investment products has blurred the old distinctions between the straightforward money market instruments such as certificates of deposit and securities. These amendments seek to move the dividing line between the areas regulated by the Bank of England and those regulated under the Bill. The principle behind the move is widely supported. The dividing line inevitably is arbitrary. Everyone will have their own views about the details and, of course, matters will change. That is why Amendment No. 183 adds the new subsection to those listed in Clause 43 so as to ensure that amendments can be made by order if in future they are found to be necessary.

Before I sit down, I should say something about the amendment to the new schedule which is in the name of the noble Viscount, Lord Chandos. His amendment seeks to extend the exemption to a broker who is on the bank's list, who arranges transactions between two institutions not on the list if both those institutions were wholesale counter-parties so far as the broker was concerned. We think that this would be a sensible extension of the exemption. We are not sure that the wording suggested is totally satisfactory, but I can give the noble Viscount an undertaking to deal with what lies behind his amendment, as we see it, and bring forward an amendment which is acceptable. Of course, we will be in touch with him about it at a later stage.

The Deputy Chairman of Committees (Lord Alport)

There is an amendment to Amendment No. 106 —Amendment No. 106A.

8.45 p.m.

Viscount Chandos moved, as an amendment to Amendment No. 106, Amendment No. 106A: After Schedule 3, at end insert— ("7. This Part of this Schedule also applies to any transaction effected or arranged by a listed institution pursuant to paragraph 13 of Schedule 1 of this Act with or between persons other than listed institutions if such transaction would, if made between each of the persons with or between whom the transaction is effected or arranged and the listed institution, have been the transaction to which this Part of this Schedule would have applied.").

The noble Viscount said: The amendment to Amendment No. 106 moved by the noble Lord, Lord Lucas of Chilworth, is an important amendment and one which I think we should welcome unequivocally. I am delighted to hear (and I am very grateful to the noble Lord) that in principle what I am trying to achieve in Amendment No. 106A is acceptable to the Government. Again, looking at the wording of my own amendment, I feel this one is worthy of Groucho Marx on a good day, so I welcome the assistance of the noble Lord in trying to refine the wording to something that is perhaps easier for all of us to understand.

If I may take this opportunity to raise one or two points on Amendment No. 106 the role of the Bank of England is clearly a sensible and logical one in taking responsibility for supervising a broad range of instruments and markets that are related to the money markets. But this raises the question to which other noble Lords have already referred this evening—that of the lead regulator. I think it would be most important to try to clarify, if possible, the extent to which the Bank of England will follow the recommendations of the registered SROs as to acceptable firms to join the category of listed institutions not otherwise regulated by the Bank of England.

I think it would cause considerable problems if, in this instance, the Bank of England attempted to apply its own requirements on matters such as capital adequacy to firms which were not otherwise within its supervisory ambit. Clearly, one of the purposes of this Bill is to establish the concept of "level playing fields" for capital adequacy between different institutions subject to different SROs or different regulatory regimes. But nonetheless there will probably be variants, and I hope that those variants will still be accepted even where firms are being granted position under the title of listed institutions.

In passing, the area of "repo"—repurchase contracts—is one that should be included in the instruments that are subject to this schedule. But we should bear in mind nonetheless—this is something that I know the Bank of England is very conscious of—that the "repo" market in United States Government securities has been a graveyard for firms and an area of very substantial losses.

Finally, perhaps unintentionally in the drafting of this amendment the exemption that I think is from the Gaming Act 1845 that is being introduced in Clause 58 is unfortunately lost in the case of listed institutions operating in these markets; at least that is my understanding of this amendment. Given that that was a valuable exemption or clarification of the position where contracts for differences were questionably covered by the Gaming Act, if my understanding is correct, I would certainly hope that at a later stage it might be possible for that to be corrected. However, with the reassurances of the noble Lord, Lord Lucas of Chilworth, that the Government will use their best efforts to improve the wording of Amendment No. 106A, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Viscount Colville of Culross

With respect, the Motion that my noble friend has moved about the insertion of the new schedule is still before the Committee, and I hope I may be allowed to ask him some questions about it. I wished to leave this until after the amendment of the noble Viscount had been dealt with, and perhaps it would now be convenient for the Committee if I were to ask him some questions.

The Deputy Chairman of Committees

We are now back on the original amendment, and therefore it is perfectly in order.

Viscount Colville of Culross

I hope my noble friend Lord Lucas of Chilworth will forgive me for throwing these questions at him, but he will appreciate that this amendment has not been available to us for very long. Indeed, he talked about the possibility of further consultations and response to views put forward.

If I may, I should like to ask my noble friend three questions. First of all, as he said, there will be certain bodies, such as building societies and banks, which, in relation to the sort of investment transactions that are spelt out in his new schedule, will be exempted persons for that purpose and that purpose only. The very strong probability is that they will also be authorised persons for large quantities of other investment transactions.

If they are authorised persons, they will fall within various rules to be made by the SIB, or, I suppose, by one of the SROs, and will then come under Clauses 44 and 45 and the schedules we have already discussed. If they are to be exempt for the purpose of these money market transactions, what is the point of that exemption unless there is an undertaking at this stage that the SIB or the SROs will not make rules affecting them in relation to these very transactions? If that were to happen there would be no object in making them exempt. They would still be subject to rules and the exemption would have no effect.

Can my noble friends tell the Committee whether or not the SIB will be making rules about these very matters which would automatically then bring the persons, the organisations, the banks, whatever it is, who would otherwise be exempt, into the whole realm of being authorised persons and subject to the rules made thereby? That is the first point. In other words, is there going to be a complete differentiation between the rules made by the Bank of England, as is envisaged in this series of amendments, and rules made by the SIB so that they will not interfere with each other, they will be mutually independent?

The second question relates to the financial limits to which my noble friend referred in Part II of the new schedule. He said that they were intended to be somewhat on the high side, I think. I wonder why, when he refers to the wholesale market, for instance in relation to certificates of deposit, his department has chosen £100,000? The way that this was dealt with recently in the Finance Act 1984 related to the level above which the banks no longer automatically deducted tax from deposits placed with them.

The limit that was placed in Section 27 of that Act and in the eighth schedule, paragraph 3(8), was £50,000. That was thought, a matter of only two years ago, to be an adequate definition of the wholesale market for the purposes of certificates of deposit, which is one of the examples that my noble friend gave of the type of investment that this new schedule is supposed to be dealing with. Indeed, it obviously does, because it is one of the ones listed in Schedule 1 to the Bill. Why then have a different standard for the wholesale market as between the Finance Act of two years ago and the Bill now before us? That is the second question.

The third question is something that I think my noble friend would be happy to deal with immediately. The new clause that he has spoken to, which is Amendment No. 113, not only deals with the actual tansaction—and he will see this in subsection (1) of his new clause—but also deals with "anything done for the purposes of that transaction. That presumably includes advice given leading up to somebody deciding whether or not they are going to embark upon that transaction.

How on earth is anybody giving that service going to know whether or not the person whom he is advising is going to limit himself to £100,000, or £500,000, particularly if the advice is being given in relation to a number of different transactions? If you have these words in then it seems to me that the whole question of the limit is difficult to understand. There is no way in which the person giving that advice can tell whether at that stage he is or is not exempt. He does not know whether he is going to be subject to a whole collection of different rules which will be made if the transaction that ultimately turns out to take place is below the limit now in the schedule.

Those are some of the points that have occurred to people I have been speaking to immediately upon looking at the new schedule. I hope that my noble friend does not think that they are hostile criticisms. They are not intended to be that at all. The undertaking that was given in another place has been admirable fulfilled, and nobody wishes to belittle that, but nevertheless there are still some details that need dealing with.

Lord Williams of Elvel

The noble Lord, Lord Lucas, in introducing this seems to have presented us with a new Bill. I was grateful to him when he said that a consultative document on this schedule would be issued. I hope that it will be issued before the Report stage in your Lordships' House, because we now have a completely new list in addition to other lists which are there under the Banking Act and other Acts such as the Companies Act. We have another list of money market institutions which the noble Lord defined in rather broad-brush terms. We on our side are interested to know exactly who qualifies for this list and what are the criteria for getting on this list, because obviously membership of this list confers considerable benefits on those who are there.

Having read through the schedule I share the doubts of the noble Viscount, and I also have, in addition to the noble Viscount's questions—and as he said these are immediate questions, they are not questions on reflection—doubts as to whether options as expressed in the new schedule are in fact money market instruments at all. After all, options are dealt with in the commodity exchanges. That is not by any definition a money market or a wholesale operation. Options are dealt in internationally. I have doubts about whether money brokers are going to be involved in this. Where do they fit into this whole equation?

With the noble Viscount, Lord Colville, I have doubts about the limits. After all, on the question of an option, £500,000 is not a very large amount. A number of operators on the London Metal Exchange will go in for options of that amount without any problem whatsoever.

All I can say is that we look forward to the consultative document. We wait to see what this all really means, what is the thrust of this new schedule. I understand clearly that there is, if I may say, a turf problem between the Bank of England and the Department of Trade and Industry. I understand that that turf problem has to be resolved. I obviously appreciate the Government's efforts in trying to resolve it, but until we have had clarification in the consultative document of what this all means I do not think I can comment further. I shall reserve my comments for the Report stage when it comes.

9 p.m.

Lord Lucas of Chilworth

Perhaps at the outset I may clear up something that may have been my misunderstanding. I said that the Government would be publishing a consultative document about their future regulation in the autumn. If the Committee will be kind enough to check Hansard they will see that I was talking about the Bill as originally drafted, and that some of the activities in the foreign bullion and wholesale markets and so on were covered by the Bill and others were not. I said that this was not an altogether satisfactory position and that on reflection it had been decided that the Bank should be made responsible for these markets. The Government will be publishing a consultative document about their future regulation in the autumn. We are not proposing to publish a consultative document about Amendment No. 106. Perhaps I should say here and now that we have already published that document in the form of Notes on Clauses, which I am sure the Committee will find helpful in giving consideration to what we have been discussing.

My noble friend Lord Colville asked me one or two questions, and I certainly did not think of them in any way in hostile terms. On the question of the SIB rules, the banks and so on, most banks will need to be authorised. We certainly would not expect the SIB or the SROs to make rules about the wholesale market transactions which would apply to exempt persons even if those persons were authorised by an SRO for another activity. The banks, SIB and SROs will in any case be co-operating. Indeed under the Bill they are required to co-operate about drawing up rules. So I do not think there will be any difficulty there.

On monetary limits, the moment when my noble friend started introducing tax schedules struck a little note of horror in me. I wonder whether I may put it to my noble friend this way? Limits are inevitably arbitrary. They were set high in this instance because only one transaction over the limit makes a client a wholesale counter-party for the following year. If we lowered the limits, perhaps down to the figure of £50,000 (which is the tax limit in the Finance Act 1984 to which he referred), we believe we should have to tighten up the definition of wholesale counter-party. So, frankly, a balance here had to be struck. On practical grounds we believe it preferable to have a very high limit but a rather more relaxed definition of "wholesale counter-party" than the other way round, which I hope gives my noble friend a real explanation of why the £100,000 and the £500,000 sterling figures were chosen.

My noble friend also asked whether the new clause in Amendment No. 123 includes advice and if so—

Viscount Colville of Culross

It was Amendment No. 113.

Lord Lucas of Chilworth

I am obliged to my noble friend—how this proposed transaction will be covered? The monetary limits are only relevant to the first deal with the wholesale counter-party. It is unlikely that any person advising others will confine himself to advice on these instruments. In practice we think there is no problem. If my noble friend can see a problem, as I said in my opening remarks, we should be very glad to talk further about it, because, as the noble Viscount acknowledged, we want to get this huge improvement as correct as we possibly can. I should be only too happy to engage in discussions between now and Report if that would help any member of the Committee.

Lord Williams of Elvel

I am most grateful to the noble Lord for his explanation. I am sorry, as he corrected me in my interpretation of what he said about a consultative document, that gloom suddenly descended upon the Chamber. Indeed gloom descended on me. I had rather expected that we were to receive a document which would explain the details of all this. However, I am grateful for his assurance that he will consult other parties. Perhaps I can issue myself an invitation as one of those who might be consulted as I might have something constructive to offer.

On Question, amendment agreed to.

Clause 36 agreed to.

Clause 37 [Clearing houses]:

Lord Williams of Elvel moved Amendment No. 107: Page 24, line 36, at end insert ("or off the exchange if the rules of the clearing house so allow").

The noble Lord said: This is a simple amendment to try to extend the ability to operations which are off the Exchange but nevertheless form part of the clearing house activities. This happens frequently in a number of markets and I hope the noble Lord will find no particular difficulty with this.

Lord Lucas of Chilworth

Simple the amendment may be, but I have to confess to questioning whether it is necessary because the clause as it stands covers arrangements with a recognised investment exchange for transactions effected on the exchange. I realise that there is a type of transaction—in colloquial parlance, "off exchange dealing"—which takes place outside normal trading hours, for example. But on a well-run exchange—here I pause for a moment because I remind the Committee, if I may, that all recognised exchanges will be required to be well run—there are rules on reporting, clearing and so on which apply to such deals. I suggest therefore that the existence of these rules means, for the purposes of the Bill, that, however transactions are referred to colloquially, deals are effected on the exchange and are therefore covered by those rules to which I have referred. Therefore I do not believe that the amendment is necessary and I ask the noble Lord, Lord Williams, wherher perhaps on reflection he might like to withdraw it.

Lord Williams of Elvel

I am referring in particular to deals concluded on the commodity exchanges and, particularly on the London Metal Exchange. We do not know whether when the LME joins ICCH the contracts which will be dealt in outside what is known as the Memo (the 90-day basic contract which is dealt in on the ring) will be cleared in a clearing house or not. It seems to me that the clearing house may decide that, although they are not dealt in on the ring, they may well be part of the operations in the clearing house. Therefore the expression "on the exchange" is perhaps too narrow for that purpose. This is what I had in mind; but if the noble Lord assures me that that will be covered, then I am very happy to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 37 agreed to.

Clause 38 [Grant and revocation of recognition.]:

Lord Lucas of Chilworth moved Amendment No. 108. Page 25, line 27, leave out ('and') and insert— (" () has adequate arrangements and resources for the effective monitoring and enforcement of compliance with its rules or, as respects monitoring, arrangements providing for that function to be performed on behalf of the clearing house (and without affecting its responsibility) by another body or person who is able and willing to perform it;")

The noble Lord said: I beg to move Amendment No. 108 and with it perhaps I may speak to Amendment No. 110. The amendments impose additional requirements which have to be satisfied if a clearing house is to be recognised under this Bill. These requirements are similar to some of those which an investment exchange must satisfy if it is to be recognised. I am quite sure that the Committee will agree that a clearing house which is to benefit from the status of recognition should have proper arrangements for enforcing and monitoring compliance with its rules and should be able and willing to promote high standards of integrity and to co-operate with other supervisors. That is the purpose of these amendments. I beg to move.

On Question, amendment agreed to.

Lord Hacking moved Amendment No. 109: Page 25, line 28, after ("provides") insert ("or is able to provide")

The noble Lord said: As has already been expressed in Committee by the noble Lord the Minister, the Bill enables the Secretary of State under Clause 38 to declare a clearing house to be recognised for the purposes of the Bill. The Bill then sets out certain requirements that have to be met by a clearing house applicant to get his recognition under the Bill. Those conditions are set out in subsection (4), which has two paragraphs, (a) and (b). If the Minister moves his Amendment No. 110 (which I anticipate he will be moving shortly) and it is accepted by the Committee, there will be a third condition under a new paragraph, paragraph (c) as I anticipate it will appear in the Bill.

These conditions are as follows: First—and I am reading from subsection (4)(a)—that the applicant has financial resources sufficient for the proper performance of its functions". I now read from subsection provides clearing services which would enable a recognised investment exchange to make arrangements with it that satisfy the requirements of Schedule 3 to this Act.

Then there is the proposed third condition under subsection (4)—and I read from Amendment No. 110— is able and willing to comply with duties corresponding to those imposed in the case of a recognised investment exchange by paragraph (5) of that Schedule".

My concern is—and this is the reason I move this amendment—that during the currency of the applica-tion the applicant to the Secretary of State has to show that he is providing clearing services; and this—unless the noble Lord, the Minister can help me and help the Committee and indicate that the presumption I am making is wrong—will if my presumption is not wrong, effectively exclude newcomers who are not currently providing clearing services but who have the capacity to do so.

My amendment seeks to give the Secretary of State power to grant recognition not only when the clearing house applicant is providing clearing services but is able to provide them. It is significant, if I may say so, that in the Minister's amendment the proposed third condition under subsection (4) actually uses the terminology, "is able and willing". It will therefore appear that my amendment fits rather neatly with the amendment that the Minister is about to move.

Lord Lucas of Chilworth

The last time that I had the pleasure of commending one of the amendments of the noble Lord, Lord Hacking, he accused me of being a little churlish. May I say how warmly I welcome his amendment which fills a technical omission. I commend it to the Committee.

On Question, amendment agreed to.

Lord Lucas of Chilworth moved Amendment No. 110: Page 25, line 31, at end insert ("; and () is able and willing to comply with duties corresponding to those imposed in the case of a recognised investment exchange by paragraph 5 of that Schedule.").

On Question, amendment agreed to.

Clause 38, as amended, agreed to.

Lord Lucas of Chilworth moved Amendment No. 111: After Clause 38, insert the following new clause: ("Overseas investment exchanges and clearing houses.

.—(1) Any application under section 36(1) or 38(1) above by a body or association whose head office is situated in a country outside the United Kingdom shall contain the address of a place in the United Kingdom for the service on that body or association of notices or other documents required or authorised to be served on it under this Act.

(2) If on any such application it appears to the Secretary of State that compliance, or full compliance, with the requirements for the making of a recognition order mentioned in section 36(4) or, as the case may be, 38(4) above is precluded in the case of the body or association making the application by—

1. (a) the law of the country in which its head office is situated; or,
2. (b) any action taken by or the practices of the government or any other authority or body in that country,

he may, subject to subsection (3) below, make a recognition order notwithstanding that those requirements are not complied with.

(3) The Secretary of State shall not make a recognition order by virtue of subsection (2) above unless it appears to him—

1. (a) that the body or association is, in the country mentioned in subsection (2) above, subject to supervision which, together with the rules and practices of that body or association, is such that investors in the United Kingdom are afforded protection in relation to that body or association at least equivalent to that provided by the provisions of this Act in relation to investment exchanges and clearing houses in respect of which recognition orders are made otherwise than by virtue of that subsection; and
2. (b) that the body or association is able and willing to co-operate, by the sharing of information and otherwise, with the authorities, bodies and persons responsible in the United Kingdom for the supervision and regulation of investment business or other financial services; and
3. (c) that adequate arrangements exist for such co-operation between those responsible for the supervision of the body or association in the country mentioned in that subsection and the authorities, bodies and persons mentioned in paragraph (b) above.

(4) In determining whether to make a recognition order by virtue of subsection (2) above the Secretary of State may have regard to the extent to which persons in the United Kingdom and persons in the country mentioned in that subsection have access to the financial markets in each others' countries.

(5) In relation to a body or association declared to be a recognised investment exchange or recognised clearing house by a recognition order made by virtue of subsection (2) above—

1. (a) the reference in section 35(2) above to the matters dealt with in Schedule 3 to this Act shall be construed as a reference to corresponding matters;
2. (b) sections 36(7) and (8) and 38(7) and (8) above shall have effect as if the requirements mentioned in section 36(7)(a) and in section 38(7)(a) were those of subsection (3)(a) and (b) above; and
3. (c) the grounds on which the order may be revoked under section 36(7) or 38(7) above shall include the ground that it appears to the Secretary of State that revocation is desirable in the interests of investors and potential investors in the United Kingdom.

(6) In this section "country" includes any territory or any part of a country or territory.

(7)A body or association declared to be a recognized investment exchange or recognised clearing house by a recognition order made by virtue of subsection (2) above is in this Act referred to as an "overseas investment exchange" or an "overseas clearing house".").

The noble Lord said: I beg to move Amendment No. 111. I should like to speak at the same time to Amendments Nos. 244, 247, 255, 345, 371, 373, 379 and 403. All these amendments will facilitate the proposed trading links between exchanges and clearing houses in the United Kingdom and those overseas. The principal amendment is a new clause dealing with overseas investment exchanges and clearing houses. This is desirable in view of the increasingly international nature of the financial services industry. A number of links are being planned between exchanges and clearing houses here and overseas which will enable investors in the United Kingdom to benefit from the increasingly diverse variety of investment services available throughout the world. It will also help to promote foreign investor services provided by investment businesses in the United Kingdom.

There are already some major overseas exchanges and clearing houses which are participating in discussions with the Department of Trade and Industry and others in this country with a view to co-operation in the provision of investor protection across international boundaries. This is in keeping with the recognition given to such overseas exchanges as the New York, Toronto and Tokyo stock exchanges under the provisions of the Prevention of Fraud (Investments) Act which this Bill will replace. Members of the three exchanges I have mentioned have had special status for many years through their United Kingdom associations. Furthermore, as investment opportunities become increasingly international, so our regulatory framework should be able to take into account arrangements which exist overseas for the protection of United Kingdom investors who transact investment business there.

These amendments respect the sovereignty of overseas governments just as we hope they will respect our own. Furthermore, they contain provisions which permit the Secretary of State to have regard to the extent to which persons in the United Kingdom and countries overseas have access to the financial markets in each other's countries. They require the Secretary of State to be satisfied that adequate arrangements exist for mutual co-operation by the sharing of information or otherwise. They also provide that the Secretary of State may not make a recognition order in respect of an overseas investment exchange or clearing house unless it appears to the Secretary of State that the overseas investment exchange or clearing house is subject to supervision which, together with its rules and practices, is such that investors in the United Kingdom are afforded protection in relation to that exchange or clearing house at least equivalent to that provided by compliance with the requirements of Clauses 36(4) and 38(4) respectively.

We discussed those clauses earlier and touched very gently on this subject. The object of course is to ensure that the protection is at least equivalent to that provided here so that there is no advantage to an overseas exchange and no disadvantage to a United Kingdom investor. The amendments I am proposing to the Committee respond to the need for the Bill to reflect the increasingly international nature of financial services. They make the appropriate provisions for overseas investment exchanges and overseas clearing houses. I commend this group of amendments to the Committee.

Lord Bruce of Donington

We are grateful to the noble Lord for having explained Amendment No. 111, and for having given us a list of the other amendments that we understand are associated with it. In so far as the noble Lord described the purposes of this series of amendments to us, they appear to be quite satisfactory.

However, the noble Lord mentioned by name three reputable exchanges that are of international standing and very widely respected in the financial community. There are, of course, other investment exchanges which although perhaps in formal terms might stand up to the requirements of this particular clause, nevertheless, in the experience of some investors in the United Kingdom, lack enforcement powers in their respective states. I shall not mention any particular exchanges, because it would be quite invidious, but the noble Lord must know which exchanges I have in mind.

I would ask that the noble Lord give the Committee an assurance that some attention will be paid by the Secretary of State not only to the formal claims and formal statutes of these exchanges, other than those I have already mentioned, but also that he will generally satisfy himself, if necessary by detailed reference to our overseas representatives in the states concerned, that the powers of enforcement are equal to the formal powers that apparently exist.

As I said, we have not really had the opportunity of examining this series of amendments in detail. In general, we agree with the purpose of the noble Lord, but he will quite understand, in view of the time factor, that we reserve our right to come back if necessary on Report or possibly, if the noble Lord is available—as I know he very often is—to make unofficial representation before Report stage.

Lord Lucas of Chilworth

May I quickly respond to the noble Lord? The first answer is, yes, I shall be very happy to talk about this and I shall make myself as available as one reasonably can at this time of the year. Secondly, I mentioned those three exchanges only because they have had special status. Other exchanges have not necessarily had that status, and I should like to give the noble Lord the assurance that he seeks. We would want to make sure whether the laws in an overseas country in which an exchange has its head office, or the regulatory authorities in that country, might prevent an exchange from complying fully with each and every requirement of Schedule 3 and whether there might be some restriction on the showing of information. Notwithstanding that, the rules and the practices of the exchange, taken together with the overseas country's laws, must afford to investors in the UK equivalent protection to that afforded by our own. So I can give the noble Lord that assurance quite categorically.

On Question, amendment agreed to.

Clause 39 agreed to.

9.25 p.m.

Clause 40 [Lloyd's]:

Viscount Chandos moved Amendment No. 112: Page 27, line 6, after ("persons") insert ("only fora period of three years commencing when this Act is passed").

The noble Viscount said: On the Second Reading of this Bill in your Lordships' House I gave a trailer to the fact that the question of the exemption of Lloyd's remained a matter of considerable concern both to the general public and to members of the financial community. We heard from the Government Benches during the Second Reading debate—and there were long discussions in another place—about why the Government believed it was correct that Lloyd's should be exempted from the Financial Services Bill; that many of the offences or malpractices that appear to have been committed in the insurance market were committed before the Lloyd's Act was passed in 1982; that more time was needed to assess the efficacy of the 1982 Act, and that the inquiry set up under the chairmanship of Sir Patrick Neill would assist in doing this.

So, while I was initially inclined to believe that there was a case that Lloyd's be brought immediately under the provisions of the Financial Services Bill, I think I have been persuaded that it would be wrong to attempt to bring it forthwith under the purview of the Bill, because of the transitional state that the market is in, the need for more time to assess the efficacy of the 1982 Act and, perhaps more pragmatically, because of the major task faced by the SIB in grappling with the legislation as it will affect all other markets. Nonetheless, it seems that the investment aspects of the insurance business and conceivably even the marketing of Lloyd's membership—and we have seen reports of Lloyd's membership being marketed to people of quite modest wealth—should potentially come within a broad interpretation of financial services.

The compromise that this amendment proposes is that Lloyd's will be exempted for a period of three years from the enactment of the Bill, during which period it would be perfectly reasonable to expect the 1982 Act to be fully and comprehensively reviewed for its efficiency. During that time, clearly, the Neill inquiry will report. If the amendment were accepted by the Government, it would mean that Parliament would necessarily have the chance to reconsider the position of Lloyd's in respect of financial services legislation once the Lloyd's Act and the Neill inquiry have been fully reviewed. For that reason, I beg to move.

Lord Fanshawe of Richmond

I have spent 38 years working at Lloyd's. I have been with the same firm for all that time, since 1948, and I am now a director. When I first joined 38 years ago, there were 100 employees and today there are something like 15,000. It is now the largest insurance broking firm operating in the United Kingdom and indeed the largest based outside the United States. I have also been for 35 years a member of Lloyd's, and obviously I am very concerned about the fact that many people outside this Committee have been making the comment that Lloyd's should be included in the Bill when it becomes an Act.

The noble Viscount, Lord Chandos, told the Committee that he has been persuaded by the various arguments put to him that Lloyd's is covered, and covered properly, in the 1982 Act. Indeed, I played some part in helping that Bill pass through another place. I believe that it would be a pity if the amendment of the noble Viscount were to be agreed to this evening because it would continue the uncertainty that has caused so much concern in Lloyd's over the past few years. The 1982 Act, as the noble Viscount himself said, has been working. It has worked extremely effectively, contrary to some reports that one has seen in the national press recently. Exemption of Lloyd's from the Bill will enable the Lloyd's Act to continue to work over the years ahead. To introduce any form of uncertainty such as the amendment would provide could undermine the workings of that Act.

As the noble Viscount stressed, all the scandals and problems of Lloyd's have horrified those of us who work in that community just as much as those outside who are interested in Lloyd's, particularly in other areas of the City of London; but one must accept the fact that the actions taken have been dealing with incidents that occurred before the 1982 Act came into existence. This new tailor-made regulatory system was designed specifically to take account of the fact that Lloyd's names are not investors in the ordinary sense, but are themselves in business as insurers. A normal investor can put his money into a business and can presumably—sometimes at a disadvantage to himself—take out the money. An investor in Lloyd's is not an investor because he cannot do that. A name at Lloyd's puts his money into Lloyd's and insures not for other people but on behalf of himself through an agent at Lloyd's—and an underwriter at Lloyd's. He therefore cannot suddenly take his money out or be treated in the same way as an investor can be treated in other parts of the City of London; or, indeed, outside the City.

It is clear also that all the wrongdoings which have been made the subject of so much publicity, and which took place before the 1982 Act came into force, have been tackled by the new and enlarged Council of Lloyd's. Therefore, I think it is misplaced to judge the present quality of regulation of the Lloyd's market on past malpractices. As someone who is working in that community it seems to me that Lloyd's has acted with commendable speed and vigour to put in place since January 1983 a comprehensive and stringent body of rules which set the standards of conduct of Lloyd's members and underwriting agents. In no less than 40 by-laws Lloyd's has enacted conduct of business rules which it believes will ensure high standards of behaviour. Certainly as someone involved in that market, that is my view.

If, however, any of those rules are breached in the future, Lloyd's have a thorough, effective and fair procedure for investigating and disciplining any misconduct which may have taken place. In fact, its active pursuit of cases of misconduct contrasts with the apparently less active policy of the Director of Public Prosecutions. There is some considerable concern in the City and in Lloyd's that various individuals who have been proved to have carried out malpractices in Lloyd's, have not yet been brought to account in public and put on trial.

Lloyd's bylaws, which have been put into effect since the Act became effective in 1983, have concentrated on enforcing very similar principles to those enshrined in the Bill we are now discussing—disclosure, avoidance of conflict of interests and a fit and proper test for practitioners. Lloyd's has made extensive reforms on reporting and disclosure. Of particular importance are the comprehensive rules on accounting and auditing. Lloyd's has also taken a firm stand on conflict of interests, which is very important. In order to ensure that Lloyd's market is run by fit and proper—that is, honest, competent and solvent—underwriting agents, all agents have been required to go through a new vetting procedure for registration and any unsuitable agents are weeded out.

I believe that since the 1982 Act came into force—it was very controversial at the time and caused a great deal of debate in both Houses of Parliament—an efficient regulatory and protection system has been evolved and is now in action. That is not an academic statement from someone looking at the scene from outside. It is a statement from someone involved in the business and working there daily who is very much aware of the effect that these new rules are already having on business life in Lloyd's. In my opinion, they were well overdue.

It would be much better if we leave matters as they are, see how the Act develops and what the Neill Committee reports. If the situation then arises in which Parliament has to look at the position again, it can always take place. There is no need, and it can only provide more uncertainty, to have an amendment such as that proposed by the noble Viscount, Lord Chandos. I hope that the Committee will reject it.

Lord Hacking

I, too, am opposed to this amendment. After the words of the noble Lord, Lord Fanshawe, I do not intend at this stage to advance any further detailed argument on what steps have been taken at Lloyd's since the passing of the Lloyd's Act 1982. It may be necessary for further argument to be put forward if the noble Lord, Lord Bruce, moves his motion to oppose the Question that Clause 40 stand part of the Bill, but at this stage, particularly after the words of the noble Lord, Lord Fanshawe, I shall not advance any such further argument.

I am opposed to this amendment because I am applying the test which the noble Viscount, Lord Chandos, applied when he tabled his amendment which is now before the Committee. That test was: at this stage should Lloyd's be taken out of the exempt status under this Bill? Having thought about the matter and considered it in more detail, the noble Viscount has fairly conceded to the Committee that it would not be right at this stage to take Lloyd's out of the exempt status of the Bill. If that is correct, my submission to the Committee is that we should not try to foresee the future or place anything in this Bill which deals with a time, three years ahead, when we do not know what then will be the functioning of Lloyd's, nor what then will be the effective functioning of this Bill.

There are therefore two areas which require consideration. One is the continued effectiveness of the new Council of Lloyd's under the Lloyd's Act 1982; the other is the effectiveness of the provisions of this Bill. In my submission to the Committee both those things should be considered before we consider taking Lloyd's out of the exempt status of this Bill. If that is right—and this is the test which the noble Viscount has applied—it is not appropriate at this stage to judge what the scene in the market will be three years from now.

Lord Cameron of Lochbroom

I know that this is one of the contentious issues in the Bill. Although the noble Lords opposite have not spoken, I think it is only right that in what I say now I should cover the whole of the Government's case both as regards this amendment and generally on the matter of Lloyd's. The case is quite simple. In essence it is that it is not only wrong to make a judgment on Lloyd's before Sir Patrick Neill's inquiry is complete, but that in any event this Bill is ill-equipped for the task of regulating Lloyd's.

I have been reminded by my noble friend Lord Fanshawe of the general background against which this debate takes place. Perhaps I may just add to what he has said—that it is only four years since Lloyd's itself embarked on a major reform of its system of regulation. It did so in a private Act. That is to be noted. It is an earnest of the good faith of Lloyd's. It made some major changes at Lloyd's, as my noble friend reminded the Committee. For instance, it introduced the Council of Lloyd's so as to facilitate the process by which by-laws are made. It introduced on to the council an independent element of persons whose appointment has to be confirmed by the Governor of the Bank of England. It introduced a new disciplinary system and gave the council very wide by-law-making powers.

The Act set in train a process at Lloyd's which is still under way. My noble friend, of course, has reminded us of the 40 by-laws and the areas which are covered: matters such as disciplinary procedures, the conduct of underwriting agents, and the nature of the agency agreement between a member of Lloyd's and his underwriting agent. However, the Government have come to recognise that the present Bill sets new standards in investor protection. Indeed, all our perceptions have changed since Professor Gower was asked to undertake his review in July 1981.

In January this year the then Secretary of State for Trade and Industry set up an inquiry, headed by Sir Patrick Neill, to consider the regulatory system at Lloyd's. The inquiry is considering whether the regulatory arrangements set up at Lloyd's under the 1982 Act provide protection for the interests of members of Lloyd's comparable to that proposed for investors under the Bill. The Neill inquiry is now well under way and Sir Patrick and his colleagues have been at work for some months. They have now received the bulk of the evidence, and indeed we look forward to their report, which we now expect to receive in the autumn. When we have the inquiry's report we shall then consider what to do. Should government legislation be necessary—and that is only one of a number of possible outcomes—we will bring forward the necessary proposals.

Let me just remind the Committee of what my right honourable friend the Prime Minister has said on the matter. Before the Neill Committee was set up, she said in December of last year: We are watching events at Lloyd's carefully and will not hesitate to take whatever legislative or other action is necessary". We have both set up an inquiry and expressed our will to act should that be necessary.

I think that we must consider the proposal from the opposite Benches against that background. It is not just or fair, I suggest, to apply the Bill to Lloyd's when such an inquiry has been set up and has to report. We must now let the inquiry do its work and not pre-empt its conclusions. Deleting Clause 40 amounts to pre-empting that conclusion, since it would subject underwriting agents at Lloyd's to a quite new and separate regime from Lloyd's Acts.

I now turn to the amendment which the noble Viscount moved. I am bound to say that I find it curious. It has the effect that whatever happens—however Sir Patrick Neill's committee reports and however the Government and Lloyd's respond to that report—Lloyd's will not be covered by this legislation for three years, but thereafter it will fall within it. I cannot think that that is a wise course both because of its inherent lack of flexibility and because this Bill anyway is not equipped to regulate Lloyd's.

The amendment has another effect which I think is undesirable. Under it, Lloyd's will be subjected to this legislation unless there is primary legislation. But Lloyd's has a new system of regulation set in place by its Act of 1982 which was not in place at the time that the troubles at Lloyd's took place. We do not regard it as proved that the new system is not sufficient. We are looking to Sir Patrick Neill's inquiry to provide a comprehensive and authoritative answer to that question. Nevertheless, at the moment I should have thought that it was only proper that Lloyd's, like any other person, should be able to call in aid the presumption of innocence. The amendment, on the other hand, shifts the burden the other way. It assumes that the present system at Lloyd's is unsatisfactory. It provides that unless the Government subsequently ask Parliament for different legislation, Lloyd's is covered by the Bill.

I listened to the noble Viscount. He said that he was persuaded. I ask: persuaded by what? What evidence was there to satisfy him that Lloyd's was after three years to be regarded as guilty? Is this some kind of suspended sentence? That is no way to legislate. As my noble friend Lord Fanshawe said, it leaves the matter uncertain. We should be providing for certainty and not uncertainty in the Bill.

That brings me to the Government's second objection to the amendment and also indeed to the proposal to delete Clause 40 entirely. As was made quite clear from the start of the debates in the other place, we do not think that this Bill is an appropriate vehicle for regulating Lloyd's, even if it were shown that such regulation was necessary.

The regulation of Lloyd's is not simply a matter of investor protection, which of course is the sole subject of the relevant part of this Bill. Indeed, my noble friend Lord Fanshawe reminded us of the difference in the nature of Lloyd's members as names as compared with the investor with whom we are dealing here. It is true that a major part of the regulation of Lloyd's, and the part which has received the greatest recent attention, and which of course is the subject of Sir Patrick Neill's inquiry, is the protection of the interests of members of Lloyd's as providers of capital for insurance business.

The regulation of Lloyd's must also cover policyholder protection—that is, looking after the interests of those who take out a policy of insurance at Lloyd's. The paramount public interest lies in ensuring that insurers can meet their liabilities and in that Lloyd's has been singularly successful.

Those two aims—policyholder and investment protection—must necessarily often conflict. For example, the time-honoured principle of the unlimited liability of members of Lloyd's is an important piece of policyholder protection. It is hardly in the interests of members of Lloyd's themselves. Any regulation of such matters must strike a careful balance between the two aims, as must any system of regulating Lloyd's.

The Bill contains no provisions for policyholder protection. It does not even repeal the Lloyd's Act. The amendment thus would have the effect that in three years a fresh set of rules would be laid on top of Lloyd's statutory rules. Those rules would take no account of the need to protect policyholders. Deleting Clause 40 would have the same effect but would occur as soon as the Bill comes into operation. That is a sure recipe for legislative chaos.

As I said, we have set up an inquiry into the protection of the interests of members of Lloyd's. We have made it clear that it is our intention to legislate if, as a result of the inquiry, we believe that to be necessary. Let us wait for the results of that inquiry before jumping into any hasty or ill-fitting solutions. In particular, we should recognise that the Bill is not one which is suitable to regulate Lloyd's. I ask the Committee to reject the amendment, and if the matter arises to keep this clause in place in the Bill.

9.45 p.m.

Viscount Chandos

I feel that I have a formidable task in trying to justify my amendment after the comments of the noble and learned Lord the Lord Advocate, as well as those of the noble Lords, Lord Fanshawe and Lord Hacking.

I am still essentially unrepentant. The last thing I want to create is legislative chaos. Nonetheless, I should like to create a time limit on the presumption that Lloyd's should not be subject to a further review of legislation. I have no doubt that if that is the conclusion of the Neill inquiry it may well be most appropriately done through an amendment to the Lloyd's Act.

It is difficult, however, not to be conscious of the extreme pressure on parliamentary time that there has been during the past year or even longer. It is not easy to be confident that that will necessarily be different in years to come. I believe that the public concern about Lloyd's is at a sufficiently high level, and is justifiably at that level notwithstanding the enactment of the Lloyd's Act 1982, for a requirement for Parliament to reconsider the matter within the next three years to be in the public interest.

The noble Lord, Lord Fanshawe, repeated the suggestion that other noble Lords have made on other occasions, that the 1982 Act can be seen to be working. He may have suggested that I may have believed that. My view on that is that the jury is out and with the jury being chaired by as formidable a foreman as Sir Patrick Neill, there should be no attempt by me to prejudge the issue. I still think that it would be helpful to have the framework of a time limit within which both he and all other interested parties could be confident that the necessary parliamentary time would be available.

I am not sure that I agree with the argument that the Bill is, as it were, ill-equipped to cover Lloyd's. There are products and markets that we have just included as exempt but subject to the supervision of the Bank of England in co-operation with the Secretary of State or the designated agency which are as far removed, I would suggest, from conventional investment as Lloyd's is from ordinary investment. Nonetheless, waiting perhaps with bated breath to hear what the heavy guns on the Labour Benches are going to say in support of the removal of Clause 40 as a whole, I would propose to withdraw my amendment, encouraged once more by the assurance of the noble and learned Lord the Lord Advocate and the Prime Minister herself, that if the Neill inquiry finds that further legislation is needed, then time will be made for it. I hope that it will be treated with some urgency. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

On Question, Whether Clause 40 shall stand part of the Bill?

Lord Bruce of Donington

I beg to oppose the Motion that Clause 40 stand part of the Bill. The noble and learned Lord the Lord Advocate approached this part of the Bill with far less diffidence and ambiguity than he has approached other sections of it. This is quite clearly a matter on which the Government are in no doubt at all. They are in absolutely no doubt that the exacting standards for investor protection as set out in the Bill should not apply to Lloyd's or to members of Lloyd's.

I should perhaps read out Clause 40 since this is what we, on this side of the Committee, feel should be eliminated from the Bill. Clause 40 says: The Society of Lloyd's and persons permitted by the Council of Lloyd's to act as underwriting agents at Lloyd's are exempted persons as respects investment business carried on in connection with or for the purpose of insurance business at Lloyd's". So immediately we are faced with the fact that but for this clause, the Government themselves consider that the activities of Lloyd's and persons permitted by the council to act as underwriting agents at Lloyd's do, in fact, carry on investment business in connection with or for the purpose of insurance business at Lloyd's. There is no question, if I may say this to the noble Lord, Lord Fanshawe, of this particular part of the business not being investment. According to the Government, it is investment. It is investment in a different form, but investment nevertheless. Otherwise, there would be no necessity to have Clause 40 in the Bill at all. The Government do not seriously contend—and did not contend in another place—that part of Lloyd's business was in connection with investment. There is no doubt about it. The Government admitted it. Nothing was raised in contradiction to that.

Lord Fanshawe of Richmond

Will the noble Lord give way?

Lord Bruce of Donington

I must continue for the moment, but I shall come back to the noble Lord. If the noble Lord wishes to argue with Her Majesty's Government that this particular business to which he refers is not investment business as set out in the Bill, he is quite at liberty to do so. According to the Government, it is. Otherwise, Clause 40 would have been unnecessary.

I hasten to say immediately, for the avoidance of doubt, that in moving that this clause do not stand part of the Bill it is not part of an attempt by me to cast any mud at Lloyd's. The misdeeds of certain members of Lloyd's—which do not yet appear to have attracted the urgent attention of the DPP—are very well known to the world at large. I willingly accept that they are all pre-1982 and it is not my purpose here to scandalise further by regurgitating what has happened in the past. I ask the noble Lords to accept that. Whatever anxieties have been raised—and there has been much cause for anxiety—the noble Lord himself will be aware of the report in the press only two or three days ago of the suicide of one of the outside names because of the monstrous injustice and fraud done upon him. I have no wish in any way to associate the current council of Lloyd's with any kind of misdeeds whatsoever. I am quite willing to accept that since the passing of the Act the council has carried on in a completely lily-white fashion and is beyond all reproach.

It is not my case that Lloyd's is guilty of something until it proves itself innocent. My case is this. So well ought it to have done in the past four years that it is fully capable as of now of complying with the conditions laid down in the Act for investment protection and that all it needs to do now in order to bring itself within the general comity of investor protection is to place itself under the SIB.

What harm is done to the individual name at Lloyd's? What harm is done to the policyholders if members of Lloyd's, and its regulations, were placed under the supervision of the Securities and Investments Board? People seem to think that one can harm an organisation, or a structure. One cannot. One harms only individuals. What harm would it do—it might be to any individual member of Lloyd's or any individual name—if they came under the supervision of the SIB? It might irritate them because Lloyd's is a nice cosy club all on its own and wants to maintain—for quite sentimental and proper reasons—its own doughty independence from the rest of the City. This is all. Nobody will be ill-treated by the fact that this organisation comes under the SIB.

Let us see what the chief of the SIB has to say about it. By kind courtesy of Sir Kenneth Berrill, he was good enough to forward me a copy of a speech given by him to the Financial Times Conference on regulating the financial services industry. With permission of noble Lords, I should like to quote from it. The date is important. The date is 21st January 1986. He said this: There is one other aspect of the Financial Services Bill that has attracted much public comment, and that is the position of Lloyd's. There is quite understandable concern about the working of the Lloyd's regulatory system, even as amended under the 1982 Act, in terms of the protection that is afforded to external names. But to bring Lloyd's within the scope of the financial services legislation would introduce a number of extremely difficult technical and practical problems for both Lloyd's and for my board. Put briefly it would mean my board acquiring the expertise to monitor an insurance market which is quite different from the markets in securities and commodities. Both organisations have pretty full agendas at present. Before embarking on such a course we should, I believe, await the outcome of the inquiry to be undertaken by Sir Patrick Neill at the request of the Secretary of State". Perhaps it should be made quite clear that Sir Kenneth Berrill is not entirely disinterested in the matter because he is of course a member of the Council at Lloyd's. However, no question of law was raised by Sir Kenneth. The noble and learned Lord the Lord Advocate referred to legislative chaos. That is the pot calling the kettle black. If anybody has caused legislative chaos over the last three months in this House, it has been Her Majesty's Government, and they are still busily doing so. However, there is no suggestion in what Sir Kenneth said that, from the legal standpoint, it was in any way repugnant to bring it under the SIB—the difficulties were practical.

I also believe that Sir Kenneth is being unnecessarily modest. The SIB will be at the head of many different self-regulating organisations, including the International Securities Regulatory Organisation, which has a technique all of its own; the Investment Management Regulatory Organisation, IMRO, which also has a technique all of its own; the Life and Unit Trust Regulatory Organisation, which has another set of techniques; and the Financial Intermediaries Managers and Brokers Regulatory Association, FIMBRA, which also has a mystique and technique all of its own. All professions create around themselves their own mystique. Most of them break down to common sense. There is also the National Association of Security Dealers and Investment Managers— NASDIM. To supervise that will also involve many technical problems and unless one is associated with them, unless one is a member of those organisations, they appear very mysterious organisations of high technical complexity.

There is the Association of Futures, Brokers and Dealers. If there is a newly created mystique in that field, surely that is also technical. What is so special about the insurance function that elevates it completely to some highly mysterious level which will require very considerable intellectual effort on the part of either Sir Kenneth Berrill or his staff?

In this connection I should perhaps say that if Lloyd's came within the ambit of the SIB, it would be quite capable of supplying the necessary expertise and, if necessary, of seconding people to the SIB in order that these matters of insurance, upon which the noble Lord, Lord Fanshawe, has expatiated so eloquently, are readily and easily understood.

Mr. Ian Hay Davison, a distinguished chartered accountant, knew very little about Lloyd's when he went there. He functioned in accountancy and in consultancy. It did not take him long to find out what was wrong with Lloyd's. I am quite sure that, although he departed from Lloyd's under circumstances that have not really been fully and publicly explained, Lloyd's very largely took his advice. I read what Sir Kenneth Berrill said in January. But this is what he said recently, when he departed slightly from what he said before. If one reads the interview he gave to the Observer, and which was in the issue of Sunday 13th July last, one sees that he said this: We are not really looking for more work. Lloyd's markets are different from any of our other markets, so if Lloyd's was included we would have to develop a competence to understand the system and the reinsurance arrangements. People have asked why we do not handle property as well. But you have to draw the line somewhere". No mention there as to the lack of feasibility in law, as to any kind of legal incompatibility in bringing Lloyd's under the supervision of the SIB. Once again, things are purely practical.

Lloyd's has very often been referred to as though it were an organisation completely on its own, a very exclusive club with its own colossal building. I am not sure which style the building is in; it makes one crook one's neck to look up at it and I have never yet experienced its lift system. But I am aware it has its own physical mystique, its own facilities. But is it really unique and cut off from the City?

This evening, I have been through a list of the council members of Lloyd's to find out what connections it has. I am not going to call out names, because they will be immediately recognisable. One of the directors, for example, has an interest in Massey-Harris-Ferguson and in Wiggins, and so on. This is a very reputable industry. Another director has a wide interest in BFS Investments and also in various financial services, in the Royal Trust of Canada, and so on. Other members have interests in technical management trusts. That is all right: but they are not isolated from everyone else. They are part of the normal machinery of the City. Indeed, one is a director of the Bank of England. So they are not isolated from the rest of the City stream; they are part of it. They probably meet socially very frequently, so we should not treat them in isolation. There are other directors, too, who have other and quite proper City connections.

An endeavour to keep Lloyd's out of it for the moment on the grounds that the matter is under review by Sir Patrick Neill really will not wash. Of course his report may well assist Lloyd's further in its progress. Many organisations call in consultants from time to time in order that their own performance and everything else may be improved, though according to what other noble Lords have said (and the noble Lord, Lord Fanshawe, indicated this) there is little need for improvement at all. If there is no need for improvement at all, and if the standards established by Lloyd's are already up to and equal to those provided for investor protection in this Bill, there is no reason whatsoever, other than a desire for independence and clubbiness among Lloyd's, to prevent it happening.

I trust that the noble Lord will not persist in trying to keep Lloyd's away from the SIB and keep it thereby away from that system of thorough supervision which, according to the noble Lord, is the hallmark of this Bill.

Lord Kimball

I am certain that the members of the British Field Sports Society will be thrilled to know that the noble Lord, Lord Bruce of Donington, regards BFSS Investments as a major City fund. I should remind him that it was in fact a fund set up to protect the interests of those in the countryside. The noble Lord, Lord Bruce of Donington, did not seem to realise that he was talking about a unique institution in the shape of Lloyd's. It is within two years of its 300th anniversary and is bringing in £1,400 million in foreign exchange to this country. The first thing a Labour government have to do when they come to power is go down Lime Street and assure themselves that that amount of foreign exchange is still coming in, despite the threat that they always pose to the economy of this country.

It employs indirectly some 83,000 people, and over those 298 years no single valid claim of insurance has not been met. It is a proud record. It is a unique institution and an institution that has always had the respect and support of previous Labour adminis-trations. The noble Lord, Lord Bruce, was fair about the miscreants of Lloyd's, the people who have committed crimes. Ever since I have been a council member of Lloyd's since that Act was passed I have been on the Investigations Committee of Lloyd's. We have set up a disciplinary organisation equal to the law courts in this country, and as thorough. We have dealt with no less than 14 cases at Lloyd's. Charges against some 29 people have been determined. Nine people have been expelled and I am happy to tell the Committee that we very nearly have a nil agenda. In fact, every single case that has come before the Investigation Committee of Lloyd's started before the passing of the Act.

The noble Lord, Lord Bruce, asked what would be the disadvantage of bringing Lloyd's under a SIB? Sir Kenneth Berrill himself went down to another place and met an all-party group of Members there. He said that the last thing he wanted was to have Lloyd's, and if he did have Lloyd's, he would turn round and tell the council to get on with it in exactly the same way as they are getting on with it now. The principal disadvantage if Lloyd's were included in the Bill would be the loss of flexibility that we now have under our present Act. We can amend our by-laws as soon as something starts to go wrong. There would be no incentive for Lloyd's itself to take the initiative.

The other and more serious point is that to bring Lloyd's under the umbrella of a SIB would be perceived as a failure of the present Lloyd's regulatory system, which is demonstrably untrue. This could have serious repercussions in the United States where two thirds of our business is now done.

Finally, I think that the noble Lord, Lord Bruce, was misleading the Committee on the question of investment at Lloyd's. An investment at Lloyd's is not the same as another investment. There is a period in all insurance matters when the premiums are held by the underwriting agent as trustee for the name until the time comes to pay the claim, or the risk is reinsured. At no point is that premium money, that investment money, available to the investor. He cannot withdraw it. He has no say on how it is invested. It is a special type of investment, and it does not fall into line with the other investments that this Bill seeks to protect. I hope on those three points that the Committee will reject the argument of the noble Lord, Lord Bruce of Donington.

Lord Cameron of Lochbroom

I shall be brief because I have already spoken on the general matter to which the noble Lord opposite addressed himself. I listened, as I always do, to the noble Lord opposite, to find out why he was suggesting that Lloyd's should be brought within the provisions of the Bill other than as an exempt person. I listened throughout his speech, and by the end of it I had not heard one ground from him to suggest that there was any good reason for bringing Lloyd's within the Bill.

All he said was, "What harm would it do?" That is no argument. The truth of the matter—the noble Lord carefully skirted around this—is that the investor protection that we are talking about in this Bill is for a type of investor wholly different from that we are thinking about in terms of Lloyd's. It was the external names that the noble Lord opposite spoke about. But he does not suggest that the effects of the 1982 Act and what has been done since then have left them unprotected. As I say, there was nothing in what he said that produced any case whatsoever or any evidence that the Lloyd's regulatory system now does not fully protect those who are to be regarded as investors; which means that for the purposes of this Bill it has been necessary to regard Lloyd's and the insurance agents as investors.

As I said, the arguments I presented earlier in my submission have not been answered by the noble Lord. He even took a phrase of mine out of context when he spoke about "legislative chaos". What I was speaking about was the effect it would have if this Motion in the noble Lord's name were to be agreed to. It had nothing to do with the criticism he made about the work of this Chamber in dealing with general legislation. That quality of argument simply will not do in a "stand part" debate. I must therefore urge the Committee to reject the Motion which the noble Lord opposite has pressed upon us.

Lord Bruce of Donington

I am sorry that the noble and learned Lord has found it necessary to be so defensive about this whole business. The onus does not lie upon me to explain why Lloyd's have been excluded from the Bill. If this clause had not been in the Bill, this matter would not have been raised at all. Listening to the noble and learned Lord even now he is saying that Lloyd's already conforms to the very high standards of investment protection in the Bill. What is he afraid of? It is up to the noble and learned Lord to explain. 1 am not attacking Lloyd's. Noble Lords may have prepared their speeches in anticipation that I might attack Lloyd's, but the Committee knows perfectly well that I have done nothing of the kind. All I have done is to suggest that things have so improved at Lloyd's over the past four years that matters have now, as the noble and learned Lord himself says, reached the standard laid down in the Bill for ordinary investors. What therefore is the case for removing Lloyd's from the supervision? The Stock Exchange is to be supervised. That is a pretty reputable institution of longer life possibly than Lloyd's—I am not quite sure about that so I shall not be dogmatic about it. What are the Government afraid of?

The onus does not lie on me to explain any inconsistency. What I have said from the beginning is quite consistent. The noble and learned Lord has the anomaly to explain. It is for the noble and learned Lord to explain why he is so apprehensive and why he is so defensive. When he rose this afternoon he obviously feared an onslaught on the honour of Lloyd's. He got nothing but praise from me. Maybe this is what troubled him.

In all honesty this clause has no place in the Bill at all. I hope the Committee, for the sake of plain common sense, will use its vote to vote it out.

10.20 p.m.

On Question, Whether Clause 40 shall stand part of the Bill?

Their Lordships divided: Contents, 53; Not-Contents, 11.

DIVISION NO. 2
CONTENTS
Bauer, L.	Hives, L.
Beaverbrook, L.	Hooper, B.
Belstead, L.	Kimball, L.
Boardman, L.	Layton, L.
Brabazon of Tara, L.	Limerick, E.
Brougham and Vaux, L.	Lindsey and Abingdon, E.
Bruce-Gardyne, L.	Long, V.
Caithness, E.	Lucas of Chilworth, L.
Cameron of Lochbroom, L.	Lyell, E.
Carnegy of Lour, B.	Merrivale, L.
Carnock, L.	Middleton, L.
Colville of Culross, V.	Milverton, L.
Craigmyle, L.	Monk Bretton, L.
Croft, L.	Mountevans, L.
Davidson, V.	Orkney, E.
Denham, L. [Teller.]	Radnor, E.
Effingham, E.	Renton, L.
Elles, B.	Sandford, L.
Elliott of Morpeth, L.	Shannon, E.
Elton, L.	Skelmersdale, L.
Faithfull, B.	Strathalmond, L.
Fanshawe of Richmond, L.	Swinton, E. [Teller.]
Glenarthur, L.	Terrington, L.
Greenway, L.	Torphichen, L.
Hacking, L.	Vinson, L.
Halsbury, E.	Whitelaw, V.
Henley, L.
NOT-CONTENTS
Bruce of Donington, L.	Molloy, L.
Carmichael of Kelvingrove, L.	Nicol, B.
David, B. [Teller.]	Stoddart of Swindon, L.
Dean of Beswick, L.	[Teller.]
Graham of Edmonton, L.	Williams of Elvel, L.
McIntosh of Haringey, L.	Ypres, E.

Resolved in the affirmative, and Clause 40 agreed to accordingly.

10.25 p.m.

Lord Lucas of Chilworth moved Amendment No. 113: After Clause 40, insert the following new Clause:—

"(Listed money market in institutions.

.—(1) A person for the time being included in a list maintained by the Bank of England for the purposes of this section ("a listed institution") is an exempted person in respect of, and of anything done for the purposes of, any transaction to which Part I or Part II of Schedule (Listed money market institutions) to this Act applies.

(2) The conditions imposed by the Bank of England for admission to the list referred to in this section and the arrangements made by it for a person's admission to and removal from the list shall require the approval of the Treasury; and this section shall cease to have effect if that approval is withdrawn but without prejudice to its again having effect if approval is given for fresh conditions or arrangements.

(3) The Bank of England shall publish the list as for the time being in force and provide a certified copy of it at the request of any person wishing to refer to it in legal proceedings.

(4) Such a certified copy shall be evidence or, in Scotland, sufficient evidence of the contents of the list; and a copy purporting to be certified by or on behalf of the Bank shall be deemed to have been duly certified unless the contrary is shown.")

The noble Lord said: I discussed this amendment with Amendment No. 106; and I beg to move.

On Question, amendment agreed to.

Clause 41 [Appointed representatives]:

Lord Lucas of Chilworth moved Amendment No. 114: Page 27, leave out lines 21 and 22 and insert ("writing")

The noble Lord said: In moving Amendment No. 114, I should at the same time like to speak to Amendments Nos. 115 to 122 inclusive, 150, 167 to 170 inclusive, 172, 173 and 175 to 181 inclusive.

These are a series of technical amendments, designed to ensure that Clause 41 and related clauses on appointed representatives more nearly meet the original intentions. I think the Committee will probably be aware that it is a common practice in the insurance industry for company representatives often to be self-employed rather than to be direct employees of the insurance company concerned. Without Clause 41 such persons would either have to become employees or become authorised in their own right.

We have no wish to change the employment status of these persons, but equally it would clearly strain the resources of the regulatory system to accommodate the separate authorisation of the numbers involved, and there are an estimated 100,000 people who make their living as self-employed insurance company representatives. Accordingly, the White Paper proposed that a special category of appointed representative be created and our aim in creating this special category has been to secure that they do not need separate authorisation but that in return for this their authorised principal is made responsible for their actions, and if the appointed representative offends against any of the rules laid down under the Bill, it will be the same as if the authorised person had himself broken the rules.

I think the Committee will recognise that underlying this is an intention to ensure that in all respects that matter to this Bill, appointed representatives are treated effectively as if they were employees of their authorised principal and not independent businesses. Achieving this effect, which must take proper account of a large and well-developed area of common law, in a few lines of statute has proved technically difficult. Most of the amendments before the Committee this evening on this subject are designed to achieve this aim more precisely.

Thus, there is an important amendment to subsection (7) of Clause 41 which ensures that authorised principals are only made criminally liable for the activities of their appointed representatives in circumstances broadly comparable to those in which a corporate employer would be made criminally responsible for the criminal actions of their employees. At present, the Bill may go too far and could be interpreted always to make them liable. Another important change is to the powers of intervention, where we propose to ensure that protection can be given to assets held by appointed representatives as well as those held by their authorised principal. I beg to move.

On Question, amendment agreed to.

10.30 p.m.

Lord Lucas of Chilworth moved Amendments Nos. 115 to 122: Page 27, line 28, leave out ("authorised"). Page 27, line 32, leave out ("authorised"). Page 27, line 36, leave out ("authorised"). Page 27, line 39, leave out ("authorised"). Page 27, line 40, at end insert— ("(4A) If the contract between an appointed representative and his principal does not prohibit the representative from giving advice about entering into investment agreements with persons other than his principal it must make provision for enabling the principal either to impose such a prohibition or to restrict the kinds of advice which the representative may give by reference to the kinds of investment in relation to which or the persons with whom the representative may advise that investment agreements should be made."). Page 28, line 1, leave out subsection (5). Page 28, line 9, after ("done") insert ("or omitted"). Page 28, leave out lines 13 to 15 and insert ("or any rules of any recognised self-regulating organisation or recognised professional body of which he is or at the material time was a member, anything said or done or omitted by a person who is or at the material time was an appointed representative in relation to that authorised person shall be treated as if it had been said or done or omitted by that person; but nothing in this subsection shall cause the knowledge or intentions of an appointed representative to be attributed to his principal for the purpose of determining whether the principal has committed a criminal offence unless in all the circumstances it is reasonable for them to be attributed to him."). On Question, amendments agreed to.

Clause 41, as amended, agreed to.

Clause 42 agreed to.

Clause 43 [Power to extend or restrict exemptions]:

Lord Lucas of Chilworth moved Amendment No. 123: Page 29, line 24, after ("40") insert (", (Listed money market institutions)").

The noble Lord said: I have already spoken to this amendment earlier in our proceedings. I beg to move.

On Question, amendment agreed to.

Lord Williams of Elvel moved Amendment No. 124: Page 29, leave out lines 27 to 29.

The noble Lord said: I beg to move Amendment No. 124, and it may be for the convenience of the Committee if I speak also to Amendment No. 125.

These amendments refer to the power to extend or restrict exemptions. It is indeed a very important power, because anybody who is exempt from the provisions of the Bill enjoys a privileged status and will undoubtedly be able to do a great number of things that the people who are caught within this Bill would not be able to do. Therefore, the process of granting further exemptions seems to us to require some form of restriction, and the restriction that we propose is that an order should be submitted at least to parliamentary approval and that it cannot be automatic, containing such, provisions as the Secretary of State thinks necessary or expedient".

Amendment No. 125 is, again, designed to achieve the same effect, but we should like to see this as an ability which is confined only to orders which are subject to the affirmative procedure rather than the negative procedure. I beg to move.

Lord Cameron of Lochbroom

I fully understand the noble Lord's wish to have a proper scrutiny of additions to the list of exemptions in Chapter IV but I think that the Bill as it stands meets his point. The majority of additional exemptions to be considered under this provision would, I expect, fall into one of two categories. First, they will add to the list of miscellaneous exemptions as in Clause 42. Thus, they will concern persons who perform a function under another statute, part of which may be regarded as investment business. Additions may be necessary, for instance, to take account of changing legislation, changing titles or changing functions.

Secondly, they will be technical adjustments to the schedules on money markets—for example, to keep abreast of changes in the nature of the investments covered by that exemption. It would seem over-elaborate to subject those categories of additional exemption to the process of affirmative resolution. If the House were to take the view that a particular instrument contained additions that merited a debate, then the procedures of the House make it possible for such a debate to be held.

I believe that the balance in the Bill as presently drafted is correct, and perhaps the noble Lord would like to ponder what I have said at this stage and withdraw his amendment.

Lord Williams of Elvel

I am most grateful to the noble and learned Lord for his response. As I understand him, he is saying in his typically clear manner that we shall be discussing miscellaneous exemptions and technical adjustments. If that is so, and if that is all we are talking about, then I shall be happy to accept the noble Lord's assurance and withdraw my amendment. If, on the other hand, the noble and learned Lord has any reservations, then perhaps he will say so, and I shall think again.

Lord Cameron of Lochbroom

I can go no further. I did say that the majority of the additional exemptions to be considered would fall within one of two categories. The affirmative resolution procedure is where there is a restriction, and there I do see that it would be proper to have the affirmative procedure. I feel that there is, however, a difference with additions as opposed to subtractions. It is for that reason that the balance has been taken here.

Lord Williams of Elvel

I shall study carefully the noble and learned Lord's remarks. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 125 and 126 not moved.]

Clause 43, as amended, agreed to.

Clause 44 [Misleading statements and practices]:

[Amendment No. 127 not moved.] Clause 44 agreed to.

Clause 45 [Conduct of business rules]:

Lord Lucas of Chilworth moved Amendment No. 128: Page 30, line 43, after ("or") insert ("perons certified by a").

The noble Lord said: I have already spoken to this amendment—I believe on Monday. I beg to move.

On Question, amendment agreed to.

[Amendment No. 129 not moved.]

Viscount Colville of Culross moved Amendment No. 130: Page 31, line 43, leave out ("international") and insert ("eligible").

The noble Viscount said: This amendment goes with Amendment No. 133, and I hope the Committee will forgive me if I do not go into all the intricacies at this time of night. It is a matter that I know is very much in the mind of my noble friend Lord Lucas. It concerns stabilisation of issues of equity stock and other such stock, which at the moment is not covered by the Bill at all.

I am seeking an extension of what is already in the Bill, and I believe that there is a good reason for doing so, provided of course that such a provision is accompanied by proper safeguards as to the people who are allowed to apply it. That is what I have attempted to provide in the drafting of both amendments.

It is an extraordinary difficult task, by virtue of the way in which Clauses 44 and 45 have been drawn, to get it right. I hope that my noble friend will not make a point about technicalities. I am after the substance of my amendments, and if he will agree to try to meet me in that respect, then I am sure that others will be very much better at the drafting than I have been.

The point is this. The existing market, which has been used for ages, has built up a practice whereby when a new stock is issued, the people who are dealing with it—the leading dealer—provide an arrangement whereby the price is held for a period of time in order that the issue shall succeed.

This does not apply only to government bonds and debentures, which is what the Bill at present covers. It has also been used frequently—or at any rate fairly frequently—for equity issues of the sort that are very much wider than the Bill at present encompasses. That is why my second amendment extends greatly the number and list of investment commodities that may be covered by this matter.

The formula that is used for this sort of exercise is described by the American SEC. I quote from a particular prospectus: In connection with this offering, the underwriters may over-allot or effect transactions which stabilize or maintain the market price of the ordinary shares or the American depositary shares at levels above those which might otherwise prevail in the open market. Such transactions may be effected on the New York Stock Exchange, the London Stock Exchange, any other Stock Exchange on which the ordinary shares have been admitted to trading privileges, or in the over-the-counter market. Such stabilising, if commenced, may be discontinued at any time.

This is not in any way a matter of party politics because my quote came from an issue of British Petroleum equity stock in 1977, under the control of a previous government, and exactly the same happened with the recent British Telecom issue. It was not, in fact, necessary to stabilise the price because the issue was so successful, but the same formula was used because the issue also took place in the North American market where there is a standard method of dealing with it.

I should have thought it would be insanity for us to prevent that sort of exercise from taking place. No doubt my noble friend has in mind future privatisation exercises such as British Gas, where I believe managers have already been appointed in at least one North American market. To prevent, by virtue of this Bill, that well-known sort of exercise from taking place would deprive this country of a great deal of business and an opportunity to use the international markets for the purposes that people wish to do.

It is perfectly true that it must be kept under control. People ought to know what is going on, and my second amendment provides that the Secretary of State shall take control of the investment exchange through which any exercise of this sort would be carried on. Therefore, I hope that my noble friend will take the view that the provision at present in the Bill needs to be extended in order to take account of this important activity which results in billions of pounds of turnover in this country. If my noble friend cannot accept these amendments, I hope that he can meet me in principle. I beg to move.

Viscount Chandos: I should like briefly to add my support to the amendments proposed by the noble Viscount, Lord Colville of Culross. I mentioned this subject on Second Reading and I should like to remind the Committee of a couple of points which I believe are important.

The grounds on which the SEC approved the practice of stabilisation in the early 1940s was essentially that fund raisers would be unnecessarily handicapped if the practice of stabilisation were disallowed; and in the interest of effecting a fair balance between the interests of investors and the interests of fund raisers. I think that stabilisation, in the broad definition that the noble Viscount, Lord Colville, has suggested, is clearly in the interests of fund raisers. Equally, I do not think that there is necessarily any disadvantage to investors, since clearly there are circumstances whereby stabilisation can actually protect them in an issue which may appear to be satisfactorily subscribed but in which, in reality, the level of long-term investment demand may not match up to the full amount on offer. The immediate after-market may see a fall in price in which the genuine investors, who may be relatively small investors, on seeing such a fall in price, may seek to sell their own holdings, cut their losses and in turn cause a further fall and a sort of vicious spiral.

So the objective of achieving a balance between the interests of investors and issuers does not necessarily imply a concomitant disadvantage to investors compared with the position if no stabilisation were allowed. I should like to support also the principle that the noble Viscount, Lord Colville, has suggested, that the Secretary of State, most probably through the designated agency, if stabilisation were permitted, should establish fairly detailed and well defined guidelines within which stabilisation would be allowed. The sort of matter that should be covered is the prohibition of any intervention at a price level above the issue price at which the offer has been made.

10.45 p.m.

Lord Lucas of Chilworth

I am grateful to my noble friend Lord Colville for the way in which he put his amendment to the Committee. As I am sure the Committee appreciate, he knows that this is a subject which has been considered and is indeed still being considered most carefully by me and my honourable friend in another place, the Parliamentary Under-secretary of State for Corporate and Consumer Affairs. We also discussed this matter quite fully during our Second Reading debate on 1lth July, when the noble Viscount, Lord Chandos, the noble Lords, Lord Roll of Ipsden and Lord Williams of Elvel—in fact noble Lords of all shades of opinion and from all sides of the House—spoke in favour of an amendment to permit lawful stabilisation of price, not only of course of Eurobonds (which was then the example taken), but also of stocks and shares which may be bought and sold by the wider public.

The issue is a sensitive one for the securities market, and the amendment which my noble friend brings forward exempts stabilisation from the scope of a serious criminal offence—the offence of market manipulation as in Clause 44. To be complete, the amendment also needs to create exemption from another serious criminal offence—that of insider dealing in the Company Securities (Insider Dealing) Act 1985, which the Bill currently provides in respect of stabilisation of Eurobonds.

My honourable friend in another place said that the Government would only consider extending the qualifying class of investments to be exempted from both offences if there were a convincing case. Adequate rules would need to be devised to protect investors if the investments whose price was being stabilised were likely to be bought and sold by investors other than the professional business investor who could be expected to understand the risks. These amendments go some way to providing that protection.

I feel, however, that we need something further. We shall need to see that there exist arrangements through rules of business conduct which ensure that investors understand the implications of stabilisation for investments that they are thinking of buying or they are being advised to buy. After all, the price may be artificially higher than what it would be without stabilisation.

As we have heard, stabilisation for all securities is already lawful in the United States of America, but there the rules of the SEC and the New York Stock Exchange offer investors some powerful protections. They insist on disclosure. They require the brokers and the dealers to give price priority to the orders from the general public. If we were to permit stabilisation in those areas, we again should have to look to the Securities and Investments Board to develop rules on similar lines. I understand that it has drafted such rules on a consultative basis.

In agreeing to consider my noble friend's amendments I anticipate that we shall want to look at the principles already contained in Schedule 6 to see whether they should be supplemented by a requirement that the rules must be accompanied by adequate safeguards.

Finally, there is the scope of the eligible securities, which are defined in my noble friend's amendments. The effect would be to add shares, warrants, certificates representing shares in securities, options, rights and interest in investments in respect of any of the foregoing, plus debentures and government and public securities, which, subject to Clause 45, are already open to stabilisation. We shall want to consider such a broad range of investments quite critically. At the moment we feel that perhaps the amendment goes a little too far.

With the invitation that we should welcome views from noble Lords and from the futures exchanges, I give my noble friend an assurance that we are thinking along the same lines. We should like to give greater consideration to the implications of his rather general amendments and come back at a later stage with firm proposals.

Viscount Colville of Culross

I am grateful to the noble Viscount for supporting this amendment and also to my noble friend for what he said. If I may say so, there has been quite a long time already in which the Government have been able to consider the matter. They are now saying—and I am glad to hear it—that they are prepared to go a little further than they have so far in the Bill.

I said that such a provision is extremely difficult to draft. Nothing that I put forward on the Marshalled List either at this stage or Report stage will be right. Therefore I suggest to my noble friend that what we want is a text from him. Unless we have from him a text—it can be a provisional text—of something which he thinks is capable of being properly put into the Bill, with the safeguards that he has talked about (because he does not like mine) it will not be possible to discuss this with the people who engage in these operations in the market; and there are large numbers of them, they are substantial concerns, and they are very much worried about the future of the activity.

I accept entirely what my noble friend says, but I hope that we can now have on a piece of paper something that his department thinks would be, at any rate provisionally, a suitable new insertion into the Bill. If he can promise to have discussions about that between now and the Report stage so that we can come back to it in October, or whenever it is, with positive and well discussed provisions which will be going in at that stage, I think we shall make progress. But I ask him to do a little more than just make the kind of concession which he has. I think we want some words on a piece of paper.

The Earl of Limerick

I rise merely to support the procedural point made by my noble friend Lord Colville. I believe in a complex matter of this nature that that is the only practical way to make progress.

Lord Lucas of Chilworth

I take the point that both my noble friends have made. I am always reluctant to make promises, particularly late at night when I am not totally sure that I can keep them. We should want to consult before we put down an amendment for consideration. I should not like to say what form that will take, whether it will be a text, a piece of paper or consultation in the more popular way. I take on board the valid points that both my noble friends have made and will seek to meet them.

Viscount Colville of Culross

I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Lucas of Chilworth moved Amendment No. 131: Page 31, line 45, at end insert— ("(jj) requiring the keeping of accounts and other records, as to their form and content and for their inspection;").

The noble Lord said: The amendment makes it clear that conduct of business rules may require directly authorised persons to keep accounts and other records. If such rules are made, recognised SROs and RPBs will have to demonstrate that their rules provide equivalent protection for investors in this respect. The rules may also cover the inspection of accounts and other records. Such rules could, for example, enable the Secretary of State or the designated agency to carry out spot checks of the records in order to find out whether the business concerned was complying with its obligations.

Lord McIntosh of Haringey

On these Benches, we should like to welcome the amendment which provides a useful paving stone for some of the require-ments on disclosure that we shall be discussing in a few minutes.

On Question, amendment agreed to.

11 p.m.

Lord McIntosh of Haringey moved Amendment No. 132: Page 32, line 4, at end insert— ("() requiring the disclosure of the amount of the investment which will be available for further investment.").

The noble Lord said: With the permission of the Committee, I should like to discuss Amendments Nos. 254A and 254B with this amendment. Before going on to say why it is necessary to make that grouping (which I hope has been adequately notified to the Government, because I made the point this morning), I want to make it clear that we are not talking about the determination of the level of commission; we are talking about the disclosure of commission.

It is necessary to say that because there was a good deal of confusion on that matter in Committee in another place. It should be clear that we appreciate the difference. We appreciate that the ROLAC rules may be adequate for the determination of commission, but we believe that the Bill should go a good deal further in the disclosure of the amount of commission and the investment margin.

The noble Viscount, Lord Colville, said a few minutes ago that Clauses 44 and 45 were difficult to amend. I agree with him. There are three ways of trying to achieve our objectives. The first would be to make the rules under Clause 45(2) mandatory. In other words, to insert the word "shall" instead of "may". We have been forced to do that in later amendments although clearly it is a less than satisfactory procedure.

The second possibility is to do what we have done in Amendment No. 132, which is to add to the "may" rules, and the third is to add to Schedule 6 which expresses the principles to which the rules must conform and provides the overriding control of the contents of the rules. We have done that in Amendments Nos. 254A and 254B.

Let there be no doubt that a change or firming up of the rules is necessary. One principal reason for that is that although the SIB has sweeping powers to control the rules of SROs and professional organisations, it lacks the ability to fine-tune the regulations, if it is not satisfied that the rules meet its requirements. The Parliamentary Under-Secretary in another place was fond of saying that he could get rid of the members of the board. That seems to us to be using a very heavy piece of artillery indeed to deal with an issue that should perhaps be handled in a much more sensitive and sometimes low-key way. It is the gap between the very wide powers available in theory to the board and the ability to negotiate the detailed content, with the power behind them, of rules which can be exercised in a flexible way that is missing.

Let there be no doubt that the Government have been aware, and have been made aware for some time, of the necessity for further provision on disclosure both on commission and on investment margin. The question of commission was discussed on a number of occasions in another place and has been referred to, not least by my noble friend Lord Graham at Second Reading. The question of investment margin was specifically referred to by Mr Michael Howard, the Parliamentary Under-Secretary of State, at col. 466, during the Committee stage in another place, when he said: I have asked MIBOC to study whether it is possible to require the disclosure of the amount of money given in premiums that is devoted to investments rather than to expenses.

If that request has been adequately answered by MIBOC and if it is the intention of the Government to give satisfactory answer to that request either in regulation or on the face of the Bill, I shall have the greatest pleasure in withdrawing Amendment No. 254B. At the moment, however, despite many months of negotiation, despite a recognition in the SIB document of December 1985 of the importance both of disclosing the investment margin and of disclosing the amount of commission, there has as yet been no positive response from the Government to these very necessary requirements from the point of view of the protection of the investors.

It is not a matter, as I said at the beginning, of determining the level of commission. But many investors, who are being offered a range of options by investment advisers, or insurance salesmen, or whoever they may be, are not necessarily aware that the level of commission may not be in proportion to the premium but may be different as between different products, and that the person selling to them is sorely tempted to temper his advice to meet his own personal needs.

It may not be adequately clear to many investors that the expenses incurred by different investment businesses and charged ultimately to the investor differ very widely. There are indications of these matters in the national press and in the business press. There are those who make it their business to expose the differences in the expenses and the investment margins that are actually available. But at present the Bill does not adequately provide for either of these pieces of information which, in our view, are essential if both the individual investor and the corporate investor are to have their interests adequately protected.

We hope very much that the Government will find it possible, whatever the technicalities of amendment to this clause, to give a clearer indication of their determination to meet these legitimate demands than they have done so far. I beg to move.

Lord Lucas of Chilworth

I am not sure that there is anything to be gained by these amendments which perhaps, in any case, do not express exactly the intentions behind them. We can all agree, I believe, that it is important that the investor should be given sufficient information about investments on offer to enable him to make an informed decision about where to put his money and indeed whether to invest at all.

There was general recognition of this in the debate in Committee in the other place. After that debate the Bill was amended at Report stage in the House of Commons so as to make explicit that the rules of a designated agency must make proper provision for requiring authorised persons to give those to whom they are selling or advising upon investments such information about the nature of the investment and its financial implications as to enable them to make an informed decision. This is now in paragraph 7 of Schedule 6 to the Bill. Since the rules of any SRO must provide at lest equivalent protection for investors as those applied by a designated agency, the effect of this paragraph will also be felt in SRO rules. I think this makes well enough the provision which I agree with the noble Lord opposite is necessary in this area.

SIB and MIBOC have now produced proposals on how this principle in Schedule 6 should be applied to the sale of insurance policies and, by analogy, unit trusts. In drawing up their proposals they have had in mind that to be useful to the investor the information which is to be disclosed must be readily understandable, manageable in quality, relevant and factual, or certainly based on realistic and stated assumptions. They suggest that the investor should be given information about the characteristics of the product, the financial commitment involved, the tax implications, the charges where these can be identified, the surrender values, the consequences of early termination, and the ultimate benefits. We welcome these proposals, which we believe will enhance the ability of investors to choose the appropriate policy for them.

I think that the noble Lord opposite suggested that SIB's and MIBOC's proposals fell short of the ideal in that they do not provide for the disclosure of charges, in particular on with-profits policies. There can be no doubt about the commitment to the disclosure of charges where these are identifiable. There are substantial problems about identifying expenses on individual with-profits policies because there is no mechanism for allocating some of the with-profits policyholder's premium to expenses and identifying the balance available for investment. This has led the two authorities to the view that it is not possible to require disclosure of charges on these policies. If a workable method can be drawn up, I am quite confident that SIB and MIBOC will support it.

I should add that both have said that the particular characteristics of with-profits policies should be clearly explained to the investor. Their proposals concerning the disclosure of surrender values should also put the investor on warning about the sometimes high proportion of the investor's money which goes to cover the cost selling him the policy.

The point has been raised on a number of occasions about the two organisations' proposals on the disclosure of commissions by independent insurance intermediaries. The role of disclosure as a means of mitigating the consequences of conflict of interest, and as a way of enabling more informed decisions to be made by investors, is an important theme in the Bill. Paragraph 5 of Schedule 6 provides that the rules of a designated agency must make proper provision for the disclosure of interests in, and facts material to, transactions, including the disclosure of information about commissions or other inducements. The proposals on the disclosure of commission by independent intermediaries stem from the organisations' concern about the potential there is for abuse in the fact that although an independent intermediary acts as the agent of the investor, he is remunerated by the insurance company whose policy the investor buys.

In these circumstances, SIB and MIBOC believe that the interests of the investor would best be served by an industry agreement on commission levels which would minimise the potential for bias in the choice of company recommended by the intermediary. Steps are being taken to incorporate such an agreement in the rules of the Life Assurance and Unit Trust Regulatory Organisation—LAUTRO—which is aiming to become the body which will regulate insurance companies under the Bill and which has attracted the support of most of the industry.

Where commission is paid by a company which is bound by a voluntary industry agreement, and the scope for bias has therefore been reduced, SIB and MIBOC envisage that the intermediary will simply have to state that commission is within the terms of an industry agreement. Where commission is paid by a company outside the agreement, the intermediary would disclose the actual amount of commission payable and the amount, if any, by which it exceeded the level laid down in that industry agreement.

Perhaps I should turn briefly to company representatives. Their position is of course fundamentally different from that of independent intermediaries in that they are not acting as impartial advisers to the investor: they are selling their company's policies. SIB and MIBOC propose that these representatives should work on behalf of only one company. They say that there should be a strict conduct of business rule requiring a company to ensure that the status of its representatives is made clear to the investor at the outset. The cooling-off notice, which is sent to new policyholders to inform them of their right to withdraw from the contract at that stage if they have had second thoughts, would, under SIB's and MIBOC's proposals, confirm the status of the representative and make it clear that he was unable to offer the policies of any other company.

For that reason the question of "company bias" does not arise for company representatives in the way in which it does for independent intermediaries. The possible abuse which might occur is what is called "product bias"—that is, the representative being influenced in recommending a particular policy by the fact that the company paid him a higher commission on it than on other policies. This is a potential abuse which could arise also for independent intermediaries, even if the commission scale was within a voluntary industry agreement, because the companies could agree upon a commission structure which involved large differentials in commission on different policies. As in the case of company representatives, there would be no disclosure of commission in this instance.

In these circumstances, SIB and MIBOC propose that there should be a conduct of business rule which would require a firm not to weight commission on one or more of its policies in a way which would be likely to result in biased advice being given. Such a rule would apply both to companies' remuneration packages for their sales representatives and to the structure of commission agreements affecting independent intermediaries. I hope that that is helpful to the noble Lord.

Lord McIntosh of Haringey

I am grateful to the noble Lord for reminding me of the detailed terms of Schedule 6. He need be in no doubt that I was aware of the terms of Schedule 6 before framing my amendments, which are intended to push the frontiers of principles applicable to regulations as far as they could possibly be pushed. The explanation we have had has confirmed what a complex area it is, how there have to be different rules for company representatives and independent representatives, and the precautions which have to be taken to deal with the kind of abuse to which the noble Lord and I were both referring. The further details the noble Lord has given of the proposed SIB and MIBOC rules go some way to calming my fears, if I may put it that way. I think it is better that I should study very carefully what he has said rather than press the matter to a Division at the present time, and therefore I beg leave to withdraw the amendment.

Amendement, by leave, withdrawn.

[Amendment No. 133 not moved.]

11.15 p.m.

Lord Hacking moved second Amendment No. 133: Page 32, line 40, at end insert— ("(9) Rules made under this section shall not, except so far as they expressly provide to the contrary, regulate the conduct of investment business outside the United Kingdom.").

The noble Lord said: As the Committee will know, rules made under Clause 45 will govern the conduct of investment business by authorised persons. As the Committee will also know, by Clause 57 the contravention of the rules gives a right of action to any person who has suffered loss or is adversely affected by the contravention.

The power as set out in Clause 45 raises a problem of extra-territoriality in the application of these rules. The extra-territorial application of other countries' laws, particularly the extra-territorial application of the laws of the United States of America, has caused considerable concern abroad and considerable concern in this country to our companies, to our courts and, indeed, to our Parliament; because it was after a particularly rough time on the application of United States laws abroad that a few years ago noble Lords passed the Protection of Trading Interest Bill, which became the Protection of Trading Interest Act. Indeed, it was the predecessor in office of the noble and learned Lord the Lord Advocate who took that Bill through this Chamber on behalf of the Government.

It is worthy of observation that the laws which have caused trouble in this country from the United States of America have been not only laws concerning their discovery procedures but laws concerning their anti-trusts, which are of particular significance when considering this Bill, and laws relating to their Securities Exchange Commission.

To look at this problem in a little more detail in this Act, for the purposes of the Act investment business is not confined to business carried on in the United Kingdom. The Committee may remember the debate we had earlier, when we were considering Clause 1 (2) of this Bill and, indeed, Clause 1(3) of the Bill which refers to persons who have business overseas as well as within the United Kingdom. Therefore, a person who is an authorised person in respect of his investment business in the United Kingdom could also be subject to the rules in respect of an investment business he carries on abroad.

Therefore, if such rules have effect in respect of his overseas investment business and he fails to observe them, the persons with whom he had dealings overseas might be able to claim against him to recover their loss. So if my amendment is not put into the Bill, the English courts could hold that the provisions of the Bill confer a right of action with extra-territorial effect. Moreover, if the overseas agreement was made subject to English law, it is likely the courts would hold that the Bill did not have this extra-territorial effect.

In general terms, I suggest to this Committee that that is undesirable. The application of the rules to overseas activities of authorised persons may discour-age overseas investment firms from setting up branches in the United Kingdom, and for that purpose having to become authorised persons—and I speak with some sensitivity as an English lawyer—might also act to discourage the use of agreement subject to English law or indeed to Scots law.

Of course, there may be circumstances in which it would be appropriate for rules made under Clause 45 to have extra-territorial effect. In such cases, however, the rules should expressly so state. That is why I have moved my amendment, which falls into two parts. The first part is that there is a general statement that, Rules made under this section shall not… regulate the conduct of investment business outside the United Kingdom except in the special circumstances, which is the other part of my amendment, in which the rule itself expressly provides to the contrary: that these rules should not, as recorded on the face of the statute, have extra-territorial effect. I beg to move.

Lord Cameron of Lochbroom

I am grateful to the noble Lord for having raised this point. I am aware that there has been much concern about the question of extra-territoriality. We have to face the fact, however, that modern communications mean that persons situated in overseas territories are able easily to transact business with investors in the United Kingdom, and equally, since one of the objectives of the Bill is to establish the United Kingdom as a clean place to do business in, we do not want to exclude from the protection of the Bill foreigners, including those located overseas, who transact business with firms situated in the United Kingdom.

There may well be cases in which the application of particular rules to businesses conducted overseas would be inappropriate—for example where the rule was directed at a particular national requirement such as those concerning form and contents of advertisements which might conceivably conflict with requirements imposed in another jurisdiction. On the other hand there may be cases in which the application of conduct of business rules to business overseas is appropriate. An example would be where rules were made as to subordination of an authorised person's interest to those of his clients.

I understand the purpose behind the noble Lord's amendment but I would suggest that an express provision on the face of the Bill is not the place or the way to solve the problem. I think he would agree that there may well be circumstances, as I have suggested, where it would be desirable to apply a particular rule to particular things done by an authorised person wherever he does them. However, I would agree with him that there may be circumstances in which it is not desirable to do so. But the amendment is cast in general terms and it gives no indication of when the business is to be regarded as conducted overseas. This is understandable because the definition of the circumstances in which business is to be so regarded would no doubt be difficult and complex.

However I would suggest that this is not the route we should go down. Since the problem is with the scope of particular rules, the right approach is to ensure that those rules do not extend to things done by authorised persons abroad in cases where that would be inappropriate, and the rule-making power is sufficiently flexible to accommodate such an approach. Perhaps the noble Lord might like to consider what I have said and withdraw his amendment.

Lord Hacking

It is my intention to withdraw this amendment. It is more of a probing amendment than one I intended should go into the Bill. The noble and learned Lord has criticised the wideness of the proposal contained in my amendment but has recognised that there are circumstances in which it would be undesirable to have extra-territorial application, and also stated, as I conceded, that there are other circumstances in which it is desirable to have extra-territorial application of our rules.

The difficulty is that the Bill as drafted does not commit itself one way or the other. If I have chosen the wrong route to deal with this problem I should be grateful if the Government could give the matter further consideration to see whether there is another route by which this problem can be dealt with.

Lord Cameron of Lochbroom

I am happy to look again at what the noble Lord has said, and see whether there is some way in which this might be taken into the Bill, though I give no undertaking that it is possible.

Lord Hacking

I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 45, as amended, agreed to.

Lord Lucas of Chilworth moved Amendment No. 134:

After Clause 45, insert the following new Clause:—

"Financial resources rules.

(1) The Secretary of State may make rules requiring persons authorised to carry on investment business by virtue of section 24 or 30 above to have and maintain in respect of that business such financial resources as are required by the rules.

(2) Without prejudice to the generality of subsection (1) above, rules under this section may—

1. (a) impose requirements which are absolute or which are to vary from time to time by reference to such factors as are specified in or determined in accordance with the rules;
2. (b) impose requirements which take account of any business (whether or not investment business) carried on by the person concerned in conjunction with or in addition to the business mentioned in subsection (1) above;
3. (c) make provision as to the assets, liabilities and other matters to be taken into account in determining a person's financial resources for the purposes of the rules and the extent to which and the manner in which they are to be taken into account for that purpose.".

The noble Lord said: In moving Amendment No. 134 I should like to speak also to Amendments Nos. 135, 165, 166 and 258. This is a new clause which will provide an explicit power to make financial resources or capital adequacy rules. Requirements as to capital adequacy are recognised as an important safeguard for investors both directly in helping to head off financial problems in the firms they are dealing with and more generally in helping to avoid knock-on problems in the markets as a whole. They are a feature of the banking and insurance regimes and of existing self-regulation, for example in the Stock Exchange.

It always has been the Government's intention that regulators, such as SIB, the Bank of England, the recognised professional bodies and so on, should be able to set capital adequacy requirements. Doubts were expressed in another place about whether these fit and proper tests for authorisation and the general power to make conduct of business rules were a sufficient basis. We concluded that it would be more desirable to put the matter beyond any doubt by introducing an explicit power. It is this group of amendments which expresses that intention. I beg to move.

On Question, amendment agreed to.

Clause 46 [Modification of conduct of business rules for particular cases]:

Lord Lucas of Chilworth moved Amendment No. 135: Page 32, line 42, after ("45") insert ("or (Financial resources rules)").

On Question, amendment agreed to.

Lord Graham of Edmonton moved Amendment No. 136: Page 33, line 3, leave out subsection (2).

The noble Lord said: This relates to Clause 46. The note in the margin reads, Modification of conduct of business rules for particular cases".

This clearly is designed to provide flexibility and also a very wide discretion. Clause 46(1) reads: The Secretary of State may, on the application of any person to whom any rules made under section 45 above apply, alter the requirements of the rules so as to adapt them to the circumstances of that person or to any particular kind of business carried on or to be carried on by him".

Clause 46(1) gives the Secretary of State carte blanche and discretion not to apply the provisions of Clause 45 almost at will.

The subsection I am seeking to delete is subsection (2). It provides that the Secretary of State can exercise the power to modify conduct of business rules and, in my view, they are insufficiently described and probably hard to comply with in a satisfactory way for consumers particularly.

Let us examine precisely what I mean. In subsection (2)(a) how is the phrase "unduly burdensome" to be interpreted? Perhaps the Minister will tell us the frequency with which the phrase "unduly burdensome" has been used in the past in other legislation; and if that is not the case, what is the genesis for deciding to put it into this legislation?

In current government-speak the phrase is associated with the burdens of small businesses and the inability of small businesses to compete with large businesses. In investment business surely if a company is so small that it cannot compete with larger companies, it is a more risky investment for consumers, which makes a nonsense of subsection (2)(b). If this is not what is intended, does not the phrase "unduly burdensome" simply leave a loophole for intelligent lawyers to exploit and give their clients an opportunity to compete unfairly?

In subsection (2) how will the Secretary of State or the designated agency properly be able to assess undue risk to investors when the Bill as a whole describes a system of self-regulation so far removed from the knowledge and control of the Secretary of State or the designated agency? Does not this clause permit the self-regulating organisation to claim exemption on behalf of its members? If this is the case, the main evidence on risk to investors will come from the same self-regulating organisation. In other words, subsection (2)(b) is thoroughly unclear and, in my view, adds nothing to the Bill. I beg to move.

11.30 p.m.

Lord Lucas of Chilworth

If I could come straight to the heart of the matter, the safeguards in subsection (2) mean that the rules cannot be altered in this way unless they are unduly burdensome and the alteration does not expose investors to undue risk. If the amendment which the noble Lord is proposing were made, it could mean that the rules might be altered so as to put investors at risk. The onus to make a case for alteration will at all times lie with the person making the application; and I think that is really quite important.

The "unduly burdensome" test is a strong safeguard for the investors because how that burden on a firm is to be weighed against the benefit to investors and how the risk to investors is to be assessed are really matters for the judgment of the Secretary of State or the designated agency. Here, one has to have a balance. As I say, the onus to make a case for alteration lies with the person. The power to alter the rules of business conduct in individual circumstances is a considerable one. It has to be used with great care. That is why we believe that this safeguard provided by subsection (2) should remain part of the Bill.

Lord Graham of Edmonton

The noble Lord describes the provision as a safeguard. I think it is a cop-out. One is not talking about anything other than honesty and integrity. But it is so capable of wide interpretation that I do not think that it provides very much protection at all for the investor. I have heard what the Minister has said, I shall read very carefully what he has said, and it may be that I will come back at a later stage. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 46, as amended, agreed to.

Clause 47 [Cancellation rules]:

Lord McIntosh of Haringey moved Amendment No. 137: Page 33, line 14, leave out ("may") and insert ("shall")

The noble Lord said: With the leave of the Committee, in moving this amendment, I should like to speak to Amendment No. 138 but not to Amendment Nos. 142 and 143 which deal with clients' money, a quite different matter from cancellation. My purpose in moving these amendments—admitting the unsatisfactory form of the amendment and admitting that it is in principle undesirable to seek to use this type of clause to specify precisely what regulations should contain—is to seek information on the Government's current thinking about cancellation clauses; because there is no precision at the moment in the Bill or in regulations. The Bill simply says, such period and such manner as may be determined.

We think that a stake should be made for a substantial cooling-off period particularly when one comes to dealing with cold calling.

The position I should like to put to the Government is that there could be a cancellation period for cold calling of not less than 28 days and that something, perhaps not quite the same, for other investment deals (but still a substantial period) should be imposed. We should be very grateful to learn what is in the Government's mind and what they understand to be in the minds of the SIB and MIBOC.

In order to cut a little out of the Minister's speech, perhaps I should make it clear that I understand that SROs are regulated by Schedule 2 and that other organisations are regulated in a comparable way. These amendments were not put down in ignorance of the significance of that schedule. I beg to move.

Lord Lucas of Chilworth

I think we have first to be quite clear that the powers in Clause 47 are there to be used. The expectation is that it will be the SIB which will wield these powers. Before the SIB can have the powers transferred to it, it will have to show that its rules and regulations will comply with Clause 96(8)(b) and the schedule attached to that clause.

I think it would be unusual to impose an obligation on the Secretary of State about making rules in advance of the transfer to SIB. If the Secretary of State chooses not to use the powers which Parliament has given him, with the clear intention that rules and regulations should be made in these areas, it is to Parliament that he has to answer.

The mechansim that we adopt seems to me rather more preferable to the approach that I see in the amendment, because the amendment would introduce a quite undesirable inflexibility into the rules. The noble Lord himself knows that the financial services sector is complex. Some of the rules which the Secretary of State or the designated agency would be required to make would be quite inappropriate in some areas. I do not really think we want to see cooling-off periods for all investment agreements. How could they possibly be operated in the case of shares—perhaps options or futures—where the market is moving all the time? Certainly I suggest that we do not really want to see separate client accounts set up for business and professional investors, who are quite able to look after themselves. That moves slightly into an area which I think the noble Lord wishes to treat separately; but it is in fact very similar.

We are thinking in the rule-making procedure that perhaps a cooling-off period, where it is applicable, should be perhaps no more than 15 days. That is the intention, and we would of course be looking to see what the SIB and the SROs come up with in that direction. But the suggestion which the noble Lord makes of the much extended time would, I think, not be very practical.

Lord McIntosh of Haringey

I feared that the Minister was going to respond to the form of my amendment, which I admitted was defective, rather than to my invitation to him to be a little more explicit. But I am grateful to him for the indication he gave towards the end of his speech about the way in which the Government's mind was moving. I have to say at once that I do not believe, and consumer organisations will not believe, that a period of 15 days for a cancellation period for applicable deals—and I accept that not all investment deals are applicable—is adequate. That means that we shall have to put down, if we can find a way of doing it, some suitable amendment at a later stage. In the meantime I think it is appropriate for me to beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 138 not moved.]

Clause 47 agreed to.

Clause 48 [Notification regulations]:

Lord Cameron of Lochbroom moved Amendment No. 139: Page 33. line 36, after ("or") insert ("a person certified by a").

The noble and learned Lord said: I spoke to this amendment with Amendment No. 79. I beg to move.

On Question, amendment agreed to.

Lord McIntosh of Haringey moved Amendment No. 140: Page 34, line 16, leave out ("verified") and insert ("reported on").

The noble Lord said: With the leave of the Committee, I think that what was in the mind of my noble friend Lord Bruce was simply that the word "verified" is not a term of art in accountancy, whereas "reported on" is. On his behalf, I should like to commend this amendment to the Committee. I beg to move.

Lord Lucas of Chilworth

I am grateful to the noble Lord, Lord McIntosh, for the brevity of his proposal. I fear that I cannot copy him, however, because there is, and always has been, wide concern within the accountancy profession over the word "verify". We think that the concern is misplaced.

The obligation in Clause 48, and in Clause 91 for that matter, is on the authorised person furnishing the information to provide, when required, verification of the information he provides in a manner to be specified. That verification may take a number of forms—copies of documents may have to be certified as such, the accounts required may be those which have been audited, statutory declarations might in such circumstances be required—apart from reports from third parties. I use the word "reports" deliberately, since it is quite possible that the regulations might require verification by way of an accountant's report on the information in question. That is a matter to be covered in the regulations, and I have no doubt that the accountancy bodies will make their concerns known if draft regulations were to envisage what they would regard as unrealistic requirements.

Additionally, the proposed amendment would also narrow quite unacceptably the way in which verification might be required. It might restrict it to reports on the information provided and would rule out the other corroboration to which I have referred. That would damage the effectiveness of these powers and that is not desirable. On the basis of that, I very much urge the noble Lord to withdraw his amendment.

Lord McIntosh of Haringey

That response may not make sense to my noble friend, but it certainly makes sense to me. I am sure that he will read carefully what the Minister said. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn,

Clause 48, as amended, agreed to.

Clause 49 [Indemnity rules]:

The Deputy Chairman of Committees (Lord Airedale)

In calling Amendment No. 140A, I have to say that if it were agreed to I could not call Amendment No. 141.

Lord McIntosh of Haringey moved Amendment No. 140A: Page 34, line 25, leave out subsection (2) and insert: (" (2) Rules under this section may require recognised self-regulating organisations and recognised professional bodies and their members who are authorised persons for the purposes of investment business to participate in any scheme for indemnity established under those rules, irrespective of any additional scheme which such organisations, bodies and their members may themselves operate.").

The noble Lord said: We now come to a vital element of the safeguards which are proposed in the Bill, and I want to put it to the Committee that the admirable example which the Government set in Amendment No. 134, in seeing that there are adequate financial resources maintained in respect of those authorised to carry on investment businesses, ought also to apply to compensation to the indemnity schemes which are maintained by self-regulating organisations and recognised professional bodies and their members.

There are, of course, potential SROs to whom this amendment need not apply. I am not casting any doubt on the financial stability of the Stock Exchange or on its ability to meet any claim made under an indemnity agreement. But even with the amalgamation of SROs and with the simplification of the SRO sructure that has been discussed in the Committee, it is still not certain, or certain enough, that there are equivalent protection arrangements available to those who do business with members of SROs.

That concern has been expressed not only by myself in the amendment; the SIB in its regulation document of December 1985 made the point that a number of SROs will be unable to arrange satisfactory schemes. It is for that reason that the SIB proposes to set up a scheme of its own. It is suggested that SROs may well wish to have top-up schemes in addition, but that if they are to contract out entirely from the SIB scheme, they must match the conditions and the security given.

In addition to the question of security, there is the matter of the economy and viability of indemnity schemes. If they are, as far as possible, operated by the SIB, there ought to be an economy in management costs. There ought to be a degree of uniformity across the SROs that will make not only for economy but also for clearer understanding of what indemnity and compensation schemes are likely to be available.

In addition, there is the issue that was raised in another place and to which Government Ministers sympathetically referred, concerning the problem of precipitative withdrawal from indemnity schemes. It will be helpful if the Government can give the Committee a further indication of their current thinking on all those issues and on how the concerns expressed by the SIB are to be met in legislation or in regulations. I beg to move.

11.45 p.m.

Lord Lucas of Chilworth

Before I reply in detail to the noble Lord, Lord McIntosh, I may give him an indication that we shall want to consider this matter further. I shall return to some of his arguments, but first I want to address much the same point to my noble friend Lord Limerick. I may say to him that we should like to consider what we understand to be the purport of his Amendment No. 141A. Perhaps the Committee, to save time, will allow my noble friend to speak to his amendment. I could then draw the two together; otherwise I shall have to make virtually the same reply to both.

The Earl of Limerick

That would probably be for the convenience of the Committee. The proposed new clause that stands in my name is a probing amendment that is connected with the concerns felt by the Securities and Investments Board. Indeed, it has been the subject of some exploratory discussion between the parties concerned.

There are two separate points covered by the four subsections, the first three being connected and the last being independent. I understand from the SIB that the Government consider that the powers in Clause 49 of the Bill are appropriate to provide for indemnity to investment businesses but would not extend to investors themselves. So the powers in Clause 48, for example, could be used to require businesses to take out insurance to protect themselves against claims from investors, but not to set up compensation arrangements purely for the benefit of investors.

My further understanding is that while the SIB may indeed wish to require investment businesses to take out insurance in some cases, it believes that the greatest need is for arrangements for compensation for investors. It is far from clear that Clause 49 allows for such compensation for investors as opposed to guarantees of insolvency through indemnity for firms engaged in investment businesses. First and foremost, it is that which this amendment seeks to provide.

There are of course different ways in which such a compensation scheme could be established. My understanding is that the method which is preferred by the Securities and Investment Board will involve taking out a loan facility with a consortium of banking institutions so that in the event of a default by an investment business the board would be able to make drawdowns on the facility in order to indemnify investors up to a limit of not less than £30,000 against their losses.

In order to make it clear that such a method is permissible, my amendment specifically refers to the use of a loan facility. This should not, however, be taken to imply that this should be the only method permissible if other arrangements can be made. Specifically, it would not exclude any of the three methods specified in Clause 49(3). Subsection (1) of the new clause therefore leaves all these options open.

I turn to subsection (2). As at present worded, the powers in Clause 49 would not apply to members of a recognised self-regulating organisation or a recognised professional body unless the organisation or body had requested that they should. My amendment takes a different approach. I understand from the SIB that it believes very strongly in the importance of having one central scheme to provide for compensation to investors. In its view such a scheme would promote confidence in the system as a whole in a way that a number of disparate schemes would not. It would also avoid confusion among investors and regulators as to who is responsible for providing compensation in any particular case.

Finally, it would make for a stronger scheme, better able to withstand the changes and chances of the investment world. Subsection (2) would accordingly provide for regulations establishing a scheme for compensating investors to apply to members of recognised SROs and those authorised by certification by a recognised professional body. Such a centralised compensation scheme, however, would require one important safeguard. This is addressed by subsection (3). Members of those organisations and bodies could legitimately be concerned that, by participating in a central scheme, they would be required to subsidise different kinds of investment business or those authorised by different routes. For this reason subsection (3) would impose a duty on the Secretary of State to have regard to the need to secure, so far as it is practicable, that no class of authorised business subsidises any other such class.

What I have in mind is that, except in the case of the very largest demands on the scheme, the cost of meeting claims against a member of any particular self-regulating organisation or professional body should be borne exclusively by the members of that organisation or body: that is, by the class of practitioners undertaking that particular class of business, and not vicariously by those undertaking different classes of business. Only in the case of the very largest demands would the scheme need to provide for a subsidy between different classes of authorised business. Even then, the scheme would have to make the maximum effort practicable to reduce the impact of any cross-subsidy. In the absence of such a safeguard, members of the best controlled and most tightly regulated and managed SROs might find themselves subject to levy to compensate claimants against other SROs which engaged in more risky business or business managed less successfully or prudently. Such cross-subsidisation would not only be unfair to the prudent or low-risk practitioners but could also introduce undesirable pricing differentials between different classes of business.

Lastly, subsection (4) of the new clause deals with a different yet not wholly unrelated problem. When an investment business ceases to be able to meet its commitments, any clearing house responsible for ensuring the settlement of that firm's transactions on a particular market will wish to establish certainty in the positions of the parties to bargains transacted, and by so doing to stabilise and minimise the impact of the failure on that market. In order to do so, the clearing house needs to close out transactions for which the troubled firm is responsible. By reducing the continuing exposure of the firm to the market, it protects the market's integrity and the interests of members and others who deal on it.

However, it has never been entirely clear, so far as I am aware, what rights and liabilities, if any, such a procedure engenders and what claims might be sustained from an innocent counter-party who, having been thus closed out by the clearing house, considers himself thereby to be disadvantaged. This final part of my amendment would therefore enable the Secretary of State to resolve issues of this kind by means of regulations under the Bill.

These points are important and I believe that the Government recognise their importance. They are also complex. Some of the issues raised by the new clause, if they are valid, as I believe them to be, may well have relevance to Clause 49 as much as to this new clause. Those who drafted this amendment are certainly cleverer than I, but they are not parliamentary draftsmen and the proposals may have technical defects. If my noble friend were to accept this new clause, I think that my gratification would be exceeded only by my surprise. My purpose in advancing the new clause is to see how far my noble friend from the Front Bench can be drawn at this stage into accepting the principles which underlie this new clause.

12 midnight.

Lord Lucas of Chilworth

I am greatly obliged to the noble Lord, Lord McIntosh, and to my noble friend Lord Limerick for explaining to the Committee the purpose behind these two amendments. Let me say straight away that it is important that we get these compensation arrangements right. They are an important part of the framework of the Bill and it is right that we should give the matter careful thought.

The amendment of the noble Lord, Lord McIntosh, is essentially the same one that was considered in another place. The core of the amendment of my noble friend Lord Limerick covers very similar ground. Since the matter was discussed in another place, the SIB have made representations expressing concern that the fragmented compensation schemes will result in a lower overall level of protection than a centralised scheme could offer. There is also concern that the mechanism provided in the Bill allowing SROs and RPBs to join voluntarily in any SIB arrangements may not necessarily produce the best arrangements. These are views to which I think we must listen.

Recently the SIB put to the department revised proposals which they hoped would ease the concerns of the SROs and RPBs which might be affected by such arrangements. We are considering those proposals and certainly we shall have to collect the views of those who will be most directly affected.

One of the major reservations about an industry-wide scheme is that firms in the low-risk areas will end up bearing a disproportionate share of the contributions burden compared to firms in those areas which give rise to the greatest claims. Subsection (3) in my noble friend's new clause gives some recognition to that point. However, we have to explore this in much greater detail, although I certainly undertake to consider the matter further.

I have to tell my noble friend that I cannot at this stage undertake that we will change the Bill in the way proposed. Having considered the views expressed in Committee and the other views that we are seeking, we may conclude that the balance of advantage lies in retaining the present structure—perhaps, admittedly, with minor changes to make it more workable. But we shall consider the arguments put to us.

The noble Lord raised a number of technical points. For example, my noble friend's amendment envisages a different kind of compensation scheme, such as that under the Banking, Policyholders Protection and Air Travel Reserve Fund Acts. We shall look to see whether such a scheme is possible. We should equally be sympathetic to any proposal to operate such a scheme by way of a loan facility.

The final point to which my noble friend referred, that of subsection (4), has, I understand, only recently been raised. As I am sure he knows, there are great technical difficulties to be solved. We have to consider the position of clearing houses within the context also of insolvency law.

I cannot satisfy the points raised by direct answer. Indeed, I do not want to. As I say, we want to take into account the views expressed to us in Committee and by other bodies with a view to providing something that is acceptable. I remind the Committee that in the undertaking that I gave I did not promise to accept all or indeed any part of the amendments. We might, as I said, at that time consider that the balance remains with what is currently in the Bill.

Lord McIntosh of Haringey

There are two ways of responding to that. Wearing my Mr. Hyde hat I might say that the Government are continuing to make up the Bill as they go along, which is not a very satisfactory procedure in matters as complex and important as this. But—

Lord Lucas of Chilworth

Let me just nail that one. That is a disgraceful way to answer what I hoped was a helpful response. My noble and learned friend made it abundantly clear at Second Reading, and we have both made it abundantly clear during the course of this Committee, that we and my honourable friend in another place, the Minister responsible, remain ready and willing to listen to anything that anybody wishes to represent and to embrace it in the Bill where we can. It is not a question of making up the Bill as we go along. We are responding to the representations made to us.

If the noble Lord is going to be ill-willed about that, I assure him that I shall advise my honourable friend that we had better put before the Committee in the next two days that we have the Bill as it stands and cease to have an open-door policy in the department.

Lord McIntosh of Haringey

It is after midnight and I forgive the noble Lord for over-reacting. Had he allowed me to finish the phrase that I was using, let alone the sentence, he would have heard me say that wearing my Dr. Jekyll hat I am grateful to him—and I am saying nothing more than I would have said before his intervention—for the constructive way in which he has approached my amendment and that of the noble Earl. It would be unreasonable to expect him to go further than he has in recognition of the problems which have arisen and have been noted by the SIB. I understand that he can go no further than to say that the matters will be considered but that he can give no guarantee that either of our solutions will be adopted.

With those comments, which are no different from those that I would have made before he so intemperately interrupted me, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Cameron of Loch broom moved Amendment No. 141: Page 34, line 26, after ("or") insert ("a person certified by a").

The noble and learned Lord said: I spoke to this amendment with Amendment No. 79. I beg to move.

On Question, amendment agreed to. Clause 49, as amended, agreed to.

The Earl of Limerick moved Amendment No. 141A: After Clause 49, insert the following new clause:—

("Compensation for investors.

.—(1) The Secretary of State may by regulations establish arrangements (including arrangements operating by means of a loan facility) to provide compensation to investors in the event of a default by an authorised person.

(2) Regulations under this section may apply to members of recognised self-regulating organisations and persons authorised by certification by a recognised professional body.

(3) In making regulations applying to such members or persons, the Secretary of State shall have regard to the need to secure, so far as that is practicable, that no class of authorized business subsidises any other such class.

(4) Regulations under this section may also include provision as to the rights of creditors against any recognised clearing house.").

The noble Lord said: I thought that I had moved the amendment, but I may have been out of order. I shall move it now merely for the sake of saying that I am grateful that the welcome mat will remain at my noble friend's door. I am grateful for the response that he felt able to give. I had hoped that he might have gone just one inch further. He said that he was sympathetic to the question of the loan facility. That seems to me to be a simple, straightforward and uncontentious matter. I hoped that he may be able to give an assurance on that part of the amendment at least that the Government propose to come forward with some measure of their own. I beg to move.

Lord Williams of Elvel

I should like to comment on subsection (3) of the new clause. I imagine that I address my remarks to the noble Earl who moved the amendment. Are the Committee and the noble Earl satisfied that in practical terms it is possible to avoid cross-subsidisation among different classes of investment business in the same firm?

The Earl of Limerick

Certainly not. That was the problem addressed by subsection (3). I hope that there may be an acknowledgment of it to ensure that whatever regulations are introduced would have regard to the necessity to minimise such undesirable cross-subsidisation. If no other noble Lord wishes to comment on the amendment, I beg leave to withdraw it.

Amendment, by leave, withdrawn.

Clause 50 [Clients' money]:

[Amendments Nos. 142 and 143 not moved. ]

Lord Cameron of Lochbroom moved Amendment No. 144: Page 36, line 3, after ("or") insert (" a person certified by a").

The noble and learned Lord said: I spoke to this amendment with Amendment No. 79. I beg to move.

On Question, amendment agreed to.

Lord McIntosh of Haringey moved Amendment No. 144A: Page 36, line 12, at end insert ("and interest thereon")

The noble Lord said: This must be a probing amendment because I am conscious that it does not fully achieve my wishes on this issue. It has an honourable history in that it was carried in Committee in another place and was removed on Report without Mr. Tim Smith, who had moved it in Committee, even noticing that it was being taken out until it was too late.

It is worth reviving the issue now, even in this form, despite the fact that an amendment to a similar effect was introduced by the Government on Report in another place because the SIB has now published draft regulations on this matter. I have to say straight away that these are wholly unsatisfactory. We are talking about the issue of clients' money. We are talking about a separate fund for clients' money and for the interest thereon.

The government amendment now incorporated in the Bill provides for separate account-keeping of the interest on clients' money. The Government sought to convince another place that the very phrase that clients' money is held on trust is an adequate safeguard and that clients' money embraces the interest. However, the draft dated May 1986 from the SIB recognises that clients' money is held on trust but goes on to say that, notwithstanding the paragraph stating that it is held on trust, any interest earned on a firm's client money shall be payable to and belong to the firm and not to the clients".

That is wholly unacceptable. We could be dealing with substantial amounts of money. Even without going into the question that may have to be raised later of the interest on the amount of any claim in respect of which indemnity is to be available, I do not believe that the ordinary investor, professional or private, will be satisfied with the interest on his money held in trust accruing to the investment business rather than to himself. It is contrary to any principle of natural justice. The fact that investment businesses have got away with it for many years is no justification. I seek from the Government in this probing amendment an indication that they will discipline the SIB and indicate to it in the strongest terms that this is not an acceptable use of the interest on clients' money. I beg to move.

Lord Lucas of Chilworth

The intention of this amendment that Clause 50 should allow regulations to be made concerning the keeping of accounts and records of the interest on clients' funds held by an authorised person is already achieved by the current drafting. Amendments introduced in another place made clear that the list of powers in subsection (2) is without prejudice to the generality of the power in subsection (1) to make regulations with respect to money held in the circumstances specified in the regulations.

The wording of subsection (2)(f) makes clear that the phrase "clients' money" embraces interest. In the light of this, I am quite clear that regulations under existing Clause 50 can be made in respect of interest including the keeping of accounts and records on such interest, and that this amendment is not really necessary. However, the noble Lord said that this was a probing amendment and that he wished to hear our view on it.

The amendment could undermine the position of those who wish to see clients entitled to interest on their money. The wording of subsection (2)(d) of Clause 50 if amended would run counter to the basis of the rest of the subsection; namely, that interest forms part of the client's money. I am aware that the SIB has questioned in its draft client money regulations whether the approach of stating that clients' money includes interest is the right one. I have no doubt, however, that clients should be entitled to the interest on their money.

The Government's position on this was made clear in the White Paper. I do not believe, therefore, that provisions which would cast doubt on the entitlement of clients to the interest on their money are helpful. That is not to say that a business should not be able to agree with a client that the business should be able to keep the interest. That I think is a different issue, because that can still be possible. But the initial assumption should be that interest belongs to the client; in particular, such money should itself be covered by the client money protections, rather than fall to be dealt with as a debt from the firm to the client, with all the problems that might flow in the event of insolvency. I think that I have made the Government's position abundantly clear. I hope that will satisfy the noble Lord, Lord McIntosh.

12.15 a.m.

Lord McIntosh of Haringey

I am grateful to the noble Lord. He has indeed made the Government's position clear and he has made the Government's opposition to the SIB's draft regulations of May 1986 clear, and for that we must be grateful. I expect therefore that we shall see from the SIB before we come to Report stage revised draft regulations which reflect the attitude of the Government in this matter which is one which has the full support of Her Majesty's Opposition. If we do not see revised draft regulations which reflect these views, we shall of course take appropriate steps to see that the proper protection for investors is written into the Bill. With that I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Cameron of Lochbroom moved Amendment No. 145: Page 36, line 16, leave out from third (" of") to (" to ") in line 18 and insert (" a recognised self-regulating organisation or a person certified by a recognised professional body ").

The noble and learned Lord said: This amendment was spoken to with Amendment No. 79. I beg to move.

On Question, amendment agreed to.

Viscount Colville of Culross moved Amendment No. 146: Page 36, line 24, at end insert— (" () other than as provided specifically by a contract, where an authorised person keeps an account with a bank pursuant to rules made under this Chapter or under Schedule 2 to this Act and the bank acting in good faith and in the ordinary course of business causes or permits to be carried out in relation to that account any transaction or any part of any transaction, that bank shall not incur any liability by reason only of its failure to concern itself with the right of that authorised person to carry out that transaction. ")

The noble Viscount said: I am sorry to have at this time of the morning to raise the first of three amendments which are all quite different but which all have substance in them. However, that is the way in which this Bill is proceeding. Perhaps the Committee and my noble friend will forgive me if I take this rather more briefly than might otherwise have been the case.

The Bill at present provides that a bank which is dealing with the account of an authorised person—and that authorised person is dealing with individual clients—shall keep the money upon trust. The result of that is that if the client of the bank, that is to say, the authorised business, becomes insolvent, or if one of the persons involved in that business defalcates in some way in connection with the financial transactions, it will be the bank which is ultimately liable to the lay client, the individual investor. This is not an entirely unfamiliar situation. There are a number of other provisions including those relating to solicitors which have provided for this in law.

The dilemma is this. We are confronted by a potential number of transactions which are of very great size indeed. I have asked about the kind of examples that might be given, and I am told that a particular bank with an account with a stockbroker in the quarter ended in June this year had a turnover on that account of over £18,000 million, represented by some 13,000 transactions. The proposition is that the bank will have to look at each and every one of these transactions and make the necessary inquiries in order to make certain for its own purposes—and so as to protect the investor—that nothing has gone amiss and there is no dishonesty or any other failing on behalf of the investment organisation which has the account with the bank.

It can either do that—and if it does, the delay and the amount of manpower that would have to go into it would obviously be absolutely enormous—or have to insure. This point was raised on Second Reading, and I think that the indication given by my noble friend Lord Lucas in his speech at the end of the debate was that the banks should charge for this. The banks would simply have to carry the liability and this would have to be passed on to those who dealt with them and took their accounts.

If that is so, so be it. However, it is worth discussing because in other circumstances, for instance in solicitors' clients' accounts, there are already provisions in the law which provide for a certain protection. I am not saying that it is an indemnity, because my amendment does not provide a complete indemnity. It provides for something in between, and this is the sort of balance which I hope I have been putting forward in all the amendments which I have moved during this Bill. I do not wish to go for extremes; I believe that there should be a balance.

I hope that my noble friend will look at this matter again, because it could be a very great burden. I believe that the alternative is a charge, which would make it more expensive to carry out the ordinary transactions in the market, which is exactly the sort of thing which I should have thought this Bill is intended to avoid. I beg to move.

Lord Boardman

I speak in support of my noble friend's amendment. I raised this point during the Second Reading debate in my capacity as chairman of one of the clearing banks, an interest which I then declared. I find particularly disturbing the apparent lack of understanding about the mechanics of the operation of clearing banks. Indeed, the SIB, with which the Committee of London Scottish Bankers has been in correspondence on this matter, looks upon this particular clause in the Bill as one of the main supports of the framework for protection for investors which is intended to be afforded by the Bill.

It appears to assume that there is some mechanism by which the clearing banks are able to check the authenticity and integrity of each transaction that goes through. My noble friend Lord Colville has referred to the volume that goes through, but I think that my noble friend the Minister must also appreciate the timing. In fact, cheques presented have to be cleared on that day. In the case of town clearing—that is, cheques cleared within the City of London and presented by banks there—they have to be cleared within a matter of minutes.

It is an extremely rapid transaction in order that the wheels of commerce can operate smoothly and efficiently. There is not the slightest opportunity for any clearing bank to verify whether the transaction which is being presented, the transaction for which the clearing bank takes responsibility, is carried out on behalf of the authorised persons or organisation perfectly honourably, or whether that person is carrying it out dishonourably. Indeed, I do not know how it could be done.

Therefore, the clause as drafted at the moment, and which my noble friend seeks to amend, would provide that the clearing bank would be the bondsman for all transactions; it would have to underwrite the whole authenticity and integrity of the authorised bodies which were banking with it. I cannot believe that that is the intention of this Bill. Indeed, if that were so, much of the rest of the Bill becomes absolutely unnecessary and all it would be necessary to say is that the clearing banks will be the bondsman for every operation carried on in the City of London and they must charge accordingly.

As my noble friend said, if this obligation remains in the Bill and the banks are required to underwrite all these transactions—and that is what it would mean—their charges for doing so would have to reflect the very considerable risk that they run, and there would be no possible way in which they could protect themselves except by charging, because there is no possible way in which they could verify the transaction. Therefore, I hope that my noble friend the Minister will give support to my noble friend's amendment.

Lord Lucas of Chilworth

It is always difficult when noble friends behind one put forward such a persuasive case in defence of what in particular my noble friend Lord Boardman declares as a particular interest, but I have to say that there is on behalf of both my noble friends an element of exaggeration.

But let us start at the beginning. We have to accept, surely, that it is an important part of the approach in Clause 50 that clients' money held by authorised persons shuld be clearly seen as being held on trust. Naturally that provision is aimed primarily at imposing duties on the investment businesses to which clients entrust their money. But we believe, however, that it may be appropriate for the regulations to require not only that such money is kept separate from the funds of the business, but also in certain circumstances that it is placed in the hands of persons of a kind specified in the regulation; for instance, recognised banks.

The fact that such persons, having been notified that the money is held by the account holder on trust, can be expected to play their part in ensuring that such money is not misused is a really important additional safeguard for investors. Of course, it is quite understandable that the banks should look very carefully at a provision which they fear might impose on them an onerous, unusual or exceptional burden. We believe that these fears are exaggerated. The position in the Bill will be the same as it is with client money accounts opened under the Estate Agents Act or the current licensed dealers rules or the increasing number of firms which open accounts for clients other than under statutory provisions. Certainly we have not been made aware of any particular difficulties arising from those provisions.

Of course there are differences. I appreciate there are differences of opinion on the extent of banks' responsibilities under the present law; but I do not think it has been suggested at all that it goes beyond circumstances which put the bank on inquiry, or where it should have been aware that the customer was acting in breach of trust. What is necessary to put a bank on inquiry must be decided in all the circumstances. We do not believe a bank could reasonably be held responsible except where something strikingly unusual was attempted with respect to a client money account. For instance, in a well used account, a pattern emerges. If a large withdrawal by unfamiliar people occurred, breaking the usual pattern, we think it would be reasonable for the bank to take note of that and make an investigation. That does not seem to be unreasonable when we really are trying to protect investors' rights to their money. This is not a question at all of the—

Lord Boardman

If I may just interrupt my noble friend, can he explain to me how a branch which receives in one short period 1,000 cheques for nearly £1,000 million on one day, in a matter of minutes, or hours if you wish, is able to see whether there is anything unusual; how it could possibly trace and look through that reputable firm as it appears that all the cheques are drawn in favour of people who they believe to be absolutely reputable? How can it possibly be done? It really is a quite unrealistic picture that is being painted, and I hope that my noble friend will reflect and take further advice on it before pursuing that line.

Lord Williams of Elvel

May I say that it is not because I have taken a Trappist vow that I remain silent, but becaue the noble Lord's noble friend in my view has put an extremely cogent case, and on our side we would support it.

Lord Lucas of Chilworth

I must say I am very disappointed at my noble friend Lord Boardman. With all the technology available today in his own bank and in the whole of the banking system—with all the technology employed for the transmission of documents, of money, of information, and with all the technology that is employed to persuade us to buy different products from the bank, the fact that the banks cannot devise a system that would give them a reasonable broad check on an account which shows a variation just staggers me.

12.30 a.m.

Lord Boardman

I have not made myself clear. How is it possible among those thousand cheques to verify the payee on each of those cheques, and to say that that payee is a respectable and responsible person? No amount of computers and the rest of it can identify that Mr. Smith, or Mr. Brown, to whom a cheque for £500,000 is made payable, is a genuine person, or whether it is someone proposing to run off with the money. To do so it would be necessary to operate inside the very offices of the payer, and as I understand it no technology could possibly deal with the particular problems it would impose. If my noble friend has a solution I should be happy to hear it from him, but I cannot suggest one.

Lord Lucas of Chilworth

I think I could find a solution for my noble friend. I do not believe that it is beyond the bounds of possibility, given the other side being enjoined in it. I do not believe that the enormous manpower problem that my noble friend Lord Colville raised is at all a reasonable argument. When one looks around some of the institutions that have for years been labour intensive and have now gone on to machinery and high technology, I think it is unfair of him to suggest that to me.

I have made the position of the Government clear. The SIB in their draft regulations firmly expressed the view that a provision along the lines of that in the Solicitors Act, to which reference has been made, would largely destroy the efficacy of these regulations. We naturally attach a great deal of weight to the views expressed by the SIB on a matter of this kind.

It is late, and my noble friend Lord Colville said that because of the hour he was going to be rather briefer than he otherwise might have been. Perhaps my noble friend Lord Boardman would have liked to deploy his arguments at greater length had time been on his side. Having said that and given the view of the Government in this matter, I am without any qualification prepared to discuss the matter further with my honourable friend, but that is as far as I would go. I should not like to imply that we would change our minds in any way, but if that is helpful to my noble friends I am prepared to do that.

Lord Bruce-Gardyne

Before we return to this matter on Report, I wonder whether my noble friend would ask his officials to work out what would be the likely additional cost to those who are using the services of banks as a result of the clause standing as it is? I am sure that my noble friend Lord Boardman is entirely right that the additional cost could by miles outweigh any conceivable consequential benefit to the customers of the bank, and that surely is the crucial consideration.

Lord Lucas of Chilworth

No, that is not the crucial consideration at all. The crucial consideration is the protection of the client's money. I shall resist the invitation that my noble friend Lord Bruce-Gardyne makes. I do not believe it is for officials in my department to work out the costs. I believe that if the banks want to advance the argument that this will be a crippling expense then it is for them to produce the figures to advance that argument, not for my department.

Viscount Colville of Culross

I hope that we can leave this matter in a fairly equable way because my noble friend has said without any commitment that he will look at it again. There are two things—I shall not ask him to comment upon them—that need to be done. First, he takes the view that there are technological methods whereby one can somehow distinguish the dishonest business from the ordinary run of business. If that is the case, I have no doubt that his officials will be glad to expand on this matter that he has raised before the Committee tonight. I do not wish to go into it now.

The other thing I believe is that when one considers the extent of the burden—much of what my noble friend has said has already been rehearsed in correspondence between the SIB and the banks and I do not necessarily want to go into the merits of the arguments tonight—we shall have to deal in the end, if the Bill stays as it is, with the insurance market. It will be the insurers who will decide what is the extent of the risk and what they will charge for an insurance policy which will guarantee the client's money. I understand my noble friend's point about the client's money. Somebody in the end will have to pay for it. The way that the law works, the way that the market works and the extent of the risk are matters that the insurers in the end will have to come to grips with. I am sure that we can find out from them between now and Report stage how much this will cost. Very likely, it is not necessary for my noble friend to do that.

Perhaps we could go forward on those two constructive expeditions: one to look at the technology and the other to see what it is likely to cost. I leave my noble friend with this point. It is not actually in the ordinary run of business that the one-off major defalcation that cause the trouble in these matters arise. If he sat and listened to what happened in the criminal courts of this country he would realise that it is small amounts of money being fiddled over a long period of time in quite small individual transactions which subsequently turn out to be a substantial amount at the cost of the client. It will not be the individual large transaction that stands out. There will be no way in which the bank, as a bank passing cheques through in accordance with commercial transactions, will be able to spot that. They are being asked to be insurers and, in their turn, they will have to take insurance policies to deal with that.

I hope that when my noble friend bears these matters in mind and has a look at this later on this morning, he will be prepared to enter into discussions as he has promised. I do not wish to take him up on any commitment, but I am sure we shall be able to have further discussions on this point. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Lucas of Chilworth moved Amendment No. 147: Page 36, line 24, at end insert— (" () Where an authorised person is required to have an auditor, whether by virtue of any provision contained in or made under any enactment (including this Act) or of the rules of any such organisation or body as is mentioned in paragraph (b) of subsection (2) above, the regulations may require the examination and report referred to in paragraph (e) of that subsection to be carried out and made by that auditor. ").

The noble Lord said: This is a provision enabling the regulations made under this clause to stipulate that examination of clients' accounts shall be undertaken by the auditor of the authorised business concern. This will be, for most businesses, the most cost-effective way of proceeding. In addition, there may be benefit for investor protection by insisting on a report from this source. An auditor will have the benefit of a continuing relationship with a business; he will know his way round its accounting system and thus he is very much more likely to spot any error. I beg to move.

On Question, amendment agreed to.

Clause 50, as amended, agreed to.

Clause 51 [Unsolicited calls]:

Lord Cameron of Lochbroom moved Amendment No. 148: Page 38, line 2, after (" or ") insert (" a person certified by a ").

The noble and learned Lord said: This amendment was spoken to with Amendment No. 79. I beg to move.

On Question, amendment agreed to.

Viscount Colville of Culross moved Amendment No. 149: Page 38, line 8, leave out subsection (8) and insert— (" (8) In this section " unsolicited call" means a personal visit or oral communication made without express invitation to a person other than on the trade premises of the person who makes the call; and " trade premises " means a place where business is carried on, whether on a permanent or temporary basis, by that person.")

The noble Viscount said: Unsolicited calls, in Clause 51, have the result of the person who has been persuaded to embark upon an investment transaction being able to recover his money, and I have no doubt that that is absolutely right and I am not in any way attempting to attack the principle of the clause. The difficulty is in subsection (8) of the clause (at the top of page 38), because it is not entirely clear what the words, oral communication made without express invitation"— and that is a quotation from the subsection—mean.

If one takes a very obvious and absolutely everyday situation, a customer goes into a bank or, it may be, any other financial organisation, to get advice about what he is to do with his money. The person who is advising him deals with the immediate question that the client or customer puts, but he has some other quite good ideas of his own, as possible alternatives. On a very strict interpretation of the words in subsection (8) he would not actually be able to put forward any of those alternative suggestions unless he was specifically asked by the customer or client to do so. I cannot believe that that is what the Government mean, because it simply does not take any account of the realities of what people do in the course of their daily life. I think that my noble friend is going to say that that is not what subsection (8) means.

The difficulty about this is that he will immediately appreciate that the essence of Clause 51 is that the client who is dissatisfied subsequently about something that has happened is able to recover his money or otherwise go to court about it. And it is no use, I am afraid, making explanations in this House or giving undertakings or anything of that sort because the courts are not able to look at Hansard. Therefore, if it is intended that people should not be able to renege upon whatever investment was made as a result of advice given, without them specifically asking, while they were sitting, for instance, in the bank manager's office, we shall have to say something about it in the Bill because it is of no use just giving an undertaking in Parliament.

Until we change the law about what the courts can look at, all the understandings in the world in the Department of Trade and Industry and in the mind of my noble friend will avail us nothing. Therefore I suggest that this is one of those occasions which I have heard argued ten thousand times in your Lordships' House that it should be put in the Bill rather than left on the basis of something that is thought to be involved in this particular clause as it stands. I hope that my noble friend will be able to help me. This is very much different from the previous amendment. There is nothing between us, as I understand it. It is simply a matter of expression and draftsmanship. I beg to move.

12.45 a.m.

Lord Bruce-Gardyne

I should like briefly to support what my noble friend Lord Colville has said. I think this is a crucially important point. I have declared on a previous occasion my interest in these matters as a director of the TSB. The TSB is to some extent perhaps more concerned about this than the other clearing banks, because arguably the nature of its clientele is such that the branch bank manager of the TSB is liable to be an investment counsellor perhaps to a greater and more fundamental extent than is the case with the other clearing banks.

I could not agree more with my noble friend Lord Colville in what he said concerning the importance of not relying on what the department may say by way of interpretation of the present wording of the clause. The fact is, for the reasons my noble friend has explained, unless we have a clear definition of the ability of the branch bank manager to carry on his normal business of service to the customer along the lines of my noble friend's amendment, he is not going to be able to do that job, because the risk of the customer who finds that perfectly bona fide advice happens not to work out to his satisfaction coming back and demanding the unravelling of the consequential investment at the expense of the bank is too great. To my mind, this is one of the most important amendments which your Lordships are discussing if normal branch banking business is to continue; and I hope that my noble friend will be able to give Lord Colville the sort of reassurance that he sought.

Lord McIntosh of Haringey

We have already indicated our intention to seek to secure an effective and adequate cooling off period or cancellation period for unsolicited calls. It would not in any way strengthen our argument if the definition of "unsolicited calls" were to be too wide and if the situation, as expressed by noble Lords opposite, of the customer in a bank manager's office were to be included. Therefore, subject to the answer the Government give, in general we are in support of this amendment.

Lord Lucas of Chilworth

I should say at the outset that I am very sympathetic to the concerns which have given rise to this amendment, particularly in the case of bank managers and others who are worried about what subjects they may or may not raise when a client visits them, or indeed approaches them. There is certainly no wish on the Government's part to fetter unreasonably the advice which an authorised business may give to a client who approaches it. I know of course that SIB share that view.

However, I think that the amendment is based on a misunderstanding of the clause and in particular of the phrase "oral communication". That phrase is to bring in the unsolicited telephone call or the encounter in the street, which are as much a cold call as is the visit from the doorstep salesman. I am advised that it refers to the conversation as a whole, and not to individual subjects in that conversation. In other words, if a bank customer visits or telephones his bank manager, or perhaps communicates in any other way that he might well be able to in the not very distant future, the bank manager cannot, by virtue of changing the subject matter under discussion, be regarded as making an unsolicited call on his customer. All the bank managers that I have ever met or had conversations with have always kept a diary note of the subject of the conversation. Indeed, I have always kept a diary note of my conversations with them. I should have thought that that would outline the broad areas that had been covered. Perhaps it would not be a total defence, but it would support the contention that this was not a cold call.

We do not believe that the amendment is necessary to achieve the end which all noble Lords wish. Concentrating on where the conversation takes place, rather than on who has initiated it, gives it quite the wrong emphasis. There is some concern that Clause 51, as I have described it, does not perhaps catch some. One is invited perhaps to call to discuss one subject—the investment business, or something totally different—but the occasion is then used to discuss some unrelated investment agreement. We believe that such matters can be handled by conduct of business rules.

I have the impression from my noble friend Lord Colville that he suspected I would say something of that kind, but would not really be overly satisfied. We believe that this can be dealt within that way. We believe that there is a misunderstanding. But if what I have said does not reassure him, I would be very happy to have a further look to see whether we can tighten it, so that the misgivings which he and my noble friend Lord Bruce-Gardyne foresee are allayed in some way.

Viscount Colville of Culross

I am very grateful to my noble friend for that. The difficulty is this. He is absolutely right in trying to deal with the unsolicited telephone call and other sorts of cold calling. What will happen—and I think this is really where he needs to discuss this with his advisers and, perhaps, the draftsmen—is that there will be a number of small transactions which have taken place, pehaps in the bank manager's office, and, for all I know, accompanied by the sort of notes that my noble friend has talked about.

It will be a matter of law whether that was an oral communication which falls within subsection (8) or whether it was not. This will start in England, at any rate, in the county court, and it will go to the Court of Appeal on a particular set of facts and it will take quite a long time before a body of law is sorted out which indicates what is and what is not within the contemplation of the subsection. Far be it from me to try to deprive lawyers of their excellent fees, but I should have thought that it was the business of government to make clear what it is that they mean, so that we do not need litigation in order to establish what subsection (8) of Clause 51 means.

I think my noble friend would be very wise indeed if he looked at this a bit further. He may not like my solution—I do not mind about that in the least—but I think enough worry has been expressed here this morning for him to be enabled to go back and have another try. I think it could be tightened up and I should be grateful if he would do so as he has promised. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

On Question, Whether Clause 51, as amended, shall stand part of the Bill?

Lord McIntosh of Haringey

We have not put down an amendment to Clause 51, although unsolicited calls is a matter of very great concern to us, because,—I may have failed to secure them—we have not seen the draft rules which the SIB and MIBOC are preparing on this matter. We understood from the Parliamentary Secretary in Committee in another place many months ago that these dratft rules were expected imminently, and might even have been produced before Report in another place. In the absence of those draft rules it has been very difficult for us to see the extent to which we ought to seek to have the protections which we know will be wanted on the face of the Bill. All that I seek at the moment is any indication that the Government can give the Committee as to when we may expect to see the SIB draft rules, in the firm hope that we shall have them in adequate time before Report stage, so that we may take appropriate action.

Lord Lucas of Chilworth

I cannot help the noble Lord very much. The rules were available and published in May. They are already being redrafted in the light of the comments made. I must say that I am extremely surprised to learn that the noble Lord has not been advised of that situation and has not had an opportunity to make a study of the rules. What procedure the noble Lord adopts at Report stage is absolutely in his hands. I should not like to advise him at all.

Lord Williams of Elvel

We are not on the SIB mailing list. If we were, or if we had civil servants to back us up, perhaps we would be better informed.

Clause 51, as amended, agreed to.

Clause 52 [Restrictions on advertising]:

On Question, Whether Clause 52 shall stand part of the Bill?

Lord Cameron of Lochbroom

It is appropriate to advise the Committee that certain representations on the precise wording of Clause 52 have been received from the Law Society and from others involved in advertising. I ought to tell the Committee that in the light of those comments I expect that amendments to the drafting rather than to the substance of the clause, and to those clauses related to it, will be brought before noble Lords at a later stage in our proceedings.

Lord Williams of Elvel

Can the noble and learned Lord say whether those amendments will be available in Committee or whether they will come to us at the Report stage?

Lord Cameron of Lochbroom

I regret that it will be too late to deal with them in Committee, and that is why I have given the information I have on Clause 52 stand part. The amendments will obviously be presented on Report, or later.

Lord Hacking

Not later, I hope.

Clause 52 agreed to.

Clause 53 [Exceptions from restrictions on advertising]:

Lord Cameron of Lochbroom moved Amendment No. 150: Page 40, line 24, after ("40") insert (", 41")

The noble and learned Lord said: This amendment was spoken to with Amendment No. 114. I beg to move.

Viscount Colville of Culross

My noble and learned friend may have spoken to Amendment No. 150, but now we have reached it. Is it Clause 41 or is it Amendment No. 113 which was inserted after Clause 40—or is it both? It would seem to me that one might consider at least the new clause in Amendment No. 113 in relation to advertisements—and it refers also, of course, to exempt persons—as another candidate to be inserted at this point. I am not sure which is meant.

Lord Cameron of Lochbroom

I can only say to my noble friend that I shall have to take advice and perhaps I may write to him, to let him know what is the position. As I said, Amendment No. 150 was spoken to with an earlier amendment. I understand that it just includes Clause 41 after the reference to Clause 40.

On Question, amendment agreed to.

Lord Cameron of Lochbroom moved Amendment No. 151: Page 40, line 34, leave out ("is") and insert "(consists of or any part of listing particulars, supplementary listing particulars or any other document").

The noble and learned Lord said: With the leave of the Committee I shall speak also to Amendments Nos. 152 and 153. These amendments have been introduced in response to concern that the exemptions in Clause 53 for documents published in connection with a public offer of securities were too narrow, in that they did not allow issuers to publish listing particulars and prospectuses without falling foul of Clause 52. That was not the intention and these amendments are intended to put the matter beyond doubt.

The amendments also allow issuers to publish documents in accordance with the rules of a recognised investment exchange which has been approved for the purposes of Part V; that is, it can substitute the exchange's prospectus rules for those of the Secretary of State. An exchange will not be approved unless its rules on public offers provide effective investor protection. Certainly I would expect an approved exchange to impose rigorous standards on the non-prospectus documents it allows issuers to publish. Therefore, it seems reasonable for Clause 53 to allow documents subject to those standards to be published. I beg to move.

On Question, amendment agreed to.

1 a.m.

Lord Lucas of Chilworth moved Amendments Nos. 152 and 153: Page 40, line 35, leave out from ("Act") to end of line 37 and insert ("or by an approved exchange under Part V of this Act"). Page 40, line 42, after ("and") insert ("either the advertisement consists of a prospectus registered in accordance with that Part or"). On Question, amendments agreed to.

Clause 53, as amended, agreed to.

Clause 54 [Employment of prohibited persons]:

Lord McIntosh of Haringey moved Amendment No. 154: Page 42, line 5, after ("effect") insert (", the period for which it is to have effect").

The noble Lord said: The purpose of this amendment and Amendment No. 231 to which, with the leave of the Committee, I will speak also, is to seek more flexibility in the term of suspension or disqualification of a prohibited person.

There is a whole range of degrees of fault which may cause a person to be prohibited from employment on investment business. Some of them clearly will demand indefinite and permanent suspension. Serious fraud is clearly a matter which demands permanent disqualification. But there could be cases relating to more minor faults which ought to be reported and command disqualification, though for a more limited period. The thinking behind this amendment is that there should be an opportunity for the Secretary of State or, in this case, the SIB to prohibit a person from being employed in investment business for a more limited period which should be specified in the disqualification order.

Amendment No. 231 is on very much the same subject. It relates to Clause 89, which is connected with Clause 54 in the sense that Clause 89 provides for employers to be able to check the register which is established for disqualification purposes. Amendment No. 231 adds to the information which may be obtained by employers the reasons for and extent of the disqualification direction. This is a relatively minor matter but it seems to move in the direction of flexibility and justice. I hope that the Government will be able to treat it with some sympathy. I beg to move.

Lord Cameron of Lochbroom

I have taken note of what the noble Lord said but I think that I should make clear that the purpose of a disqualification direction is not to punish the individual but to protect investors. If an individual has been shown not to be fit and proper, it is difficult to say when he will become fit and proper or indeed whether he ever will be fit and proper.

If investors are to be protected the answer must be to make the direction for an indefinite period, and if the individual subsequently mends his ways the clause provides the Secretary of State or the agency with the power to revoke the direction. In the meantime, of course, the individual will be able to apply for consent to employment and the consent may not be refused without giving him an opportunity to have his case referred to the tribunal. For those reasons I regret that I cannot accede to the noble Lord's amendment.

Lord McIntosh of Haringey

I am of course sympathetic to the idea that disqualification should not be a punishment but should be a protection for investors. I was, and am, aware of the possibility of a revocation. I am still somewhat at a loss to understand what it is that a disqualified person may do to show after what period of time he becomes fit again to be employed on investment business. It seems to me that the revocation procedure could end up by being somewhat clumsy and in many cases this could be avoided by a definite period of disqualification rather than an indefinite period. However, I can see that there are arguments on the other side, and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 54 agreed to.

Clause 55 [Public statement as to person's misconduct]:

Lord Cameron of Lochbroom moved Amendment No. 155: Page 42, line 36, leave out from ("contravened") to end of line 38 and insert—

1. ("(a) any provision of rules or regulations made under this Chapter or of section 51 or 54 above; or
2. (b) any condition imposed under section 46 above,").

The noble and learned Lord said: I spoke to this amendment with Amendment No. 98. I beg to move.

On Question, amendment agreed to. Clause 55, as amended, agreed to.

Clause 56 [Injunctions and restitution orders]:

Lord Cameron of Lochbroom moved Amendments No. 156 to 158: Page 43, line 32, at end insert— ("or any condition imposed under section 46 above;"), Page 43, line 33, after ("provision") insert ("or condition"). Page 43, line 36, after ("provision") insert ("or condition").

The noble and learned Lord said: With leave, I should like to move Amendments Nos. 156, 157 and 158 en bloc. I spoke to these amendments with Amendment No. 98. I beg to move.

On Question, amendments agreed to.

Lord Cameron of Lochbroom moved Amendment No. 159: Page 43, line 39, leave out ("or, in Scotland, an interdict").

The noble and learned Lord said: I spoke to this amendment and the succeeding Amendment No. 160 when speaking to Amendment No. 61.I beg to move.

On Question, amendment agreed to.

Lord Cameron of Lochbroom moved Amendment No. 160: Page 43, line 40, after ("contravention") insert ("or, in Scotland, an interdict prohibiting the contravention").

On Question, amendment agreed to.

Lord Cameron of Lochbroom moved Amendment No. 161: Page 44, line 12, after ("provision") insert ("or condition").

The noble and learned Lord said: I spoke to this amendment with Amendment No. 98. I beg to move.

On Question, amendment agreed to.

Clause 56, as amended, agreed to.

Clause 57 [Actions for damages]:

Lord Hacking moved Amendment No. 162: Page 45, line 17, leave out ("or is otherwise adversely affected by it").

The noble Lord said: This is a very short, purist's amendment, which is perhaps fitting at this early hour of the day. Clause 57, regarding contravention of certain parts of Chapter V of the Bill, states that persons who have suffered loss as a result of such contravention can bring civil suits. But, as well as suffering loss as a result of contravention, there are added the further words: or is otherwise adversely affected by it".

The normal principle for civil suits is that a person has to suffer damage or loss; otherwise he is not entitled to proceed in the bringing of that suit. Subject to what the noble and learned Lord has to say about the other words, "otherwise adversely affected", it is my submission that those words are unnecessary and that purity will be added to the clause by their deletion. I beg to move.

Lord Cameron of Lochbroom

I am grateful to the noble Lord for moving the amendment. We were concerned to make sure that where an investor, for example, failed to realise a profit to which he was entitled, the use of the phrase, any person who suffers loss as a result of the contravention", might not be sufficient. I should like to think about that again. I would only say that in a later amendment in the name of my noble friend Lord Colville, No. 165A, I observe that he too uses the phrase in relation to a contravention, the loss or adverse effect". It may be that he was taking it from this clause.

With that undertaking, I hope the noble Lord may feel able to withdraw the amendment.

Lord Hacking

Indeed, I do.

Amendment, by leave, withdrawn.

Lord Cameron of Lochbroom moved Amendment No. 163: Page 45, line 20, after (" or ") insert (" a person certified by a").

The noble and learned Lord said: I spoke to this and to Amendment No. 164 with Amendment No. 79. I beg to move.

On Question, amendment agreed to.

Lord Camerom of Lochbroom moved Amendment No. 164: Page 45, line 24, leave out (" a member of such an organisation or body ") and insert (" such a member or so certified ").

On Question, amendment agreed to.

Lord Cameron of Lochbroom moved Amendment No. 165: Page 45, line 24, at end insert— (" (2A) Subsection (1) above does not apply—

1. (a) to a contravention of rules made under section (Financial resources rules) or conditions imposed under section 46 in connection with an alteration of the requirements of those rules; or
2. (b) by virtue of subsection (2) above to a contravention of rules relating to a matter in respect of which rules have been or could be made under section (Financial resources rules).").

The noble and learned Lord said: My noble friend spoke to this amendment with Amendment No. 134. I beg to move.

On Question, amendment agreed to.

1.15 a.m.

Viscount Colville of Culross moved Amendment No. 165A: Page 45, line 24 at end insert— (" () Where any person suffers loss or is adversely affected by a contravention falling within subsection (1) as a result partly of his own fault and partly of the fault of any other person or persons, any damages recoverable in respect thereof shall be reduced to such an extent as the court thinks just and equitable having regard to the claimant's share of the responsibility; and it shall be a defendant to show that, at the time of the contravention the loss or adverse effect could not reasonably have been foreseen by him.")

The noble Viscount said: I am afraid that this is a fairly important point. It is not confined to this Bill but related to legislation in general. I wholly applaud what the Government have done, which is to provide in Clause 57 that a breach of the various regulations, rules, and so on, shall give rise to an action in civil law for those who have been caused loss or adverse effect as a result. All too often in legislation a duty has been placed upon somebody, and often it is accompanied by a criminal liability, and Parliament has not bothered to say one way or the other whether there is a statutory duty which is answerable in civil courts as well if somebody is damaged by the person who has failed properly to carry out the duty.

Here the Government have done exactly that. They have said this sort of failure shall be actionable. That is absolutely fine and it is exactly what ought to be done more often. I congratulate my noble friend. The trouble is that it does not go far enough. The Law Commission quite a long time ago in its Report No. 21 had a look at that matter in one paragraph and found that there were a number of instances where Parliament when legislating had said that there was not to be civil liability or that there was. It gave some examples which are interesting, because although it reported a long time ago and there may be other examples, they all come from the department represented so ably in this Chamber by my noble friend Lord Lucas. They all relate to consumer protection in one shape or another. For instance, we have Section 3(1) of the Consumer Protection Act 1961, Section 4(2) of the Resale Prices Act 1964 and Section 7(2) of the Restrictive Trade Practices Act 1956.

Those Acts all say that the failure to comply with whatever it is shall give rise to an action in the courts, but they add the magic words: subject to the defences and other incidents applying to actions for breach of statutory duty".

Heaven knows that that means! It must have been the same draftsman for all three Acts. He took the view that there was such a thing as a defence or incident for breach of statutory duty.

I venture to suggest to the Committee that that is wrong because in practice the courts have had to look at the whole ambit of each of the Acts in which this matter has arisen and spell out the extent of the statutory duty and the defences and other incidents.

It is a pity that the noble and learned Lord, Lord Denning, is not here, because in about 1968 he took part in a case which reached the House of Lords in its judicial capacity. The case was about the duties of a manager under the Mines and Quarries Act. He eventually took the view that it was not part of the statutory duty for the manager of the mine to take precautions to deal with something which was not reasonably foreseeable. That matter had to come to the House of Lords to be decided. It was one of the incidents of that statutory duty.

In the amendment, I suggest that if we are properly putting civil liability into Clause 57 we should go that little bit further and sort out the various defences and incidents which the Department of Trade and Industry, or its predecessor, put into its legislation, so that we do not have to come to the House of Lords on litigation to find out what they are. I have invented two good ones. The first is contributory negligence. The second is reasonable foreseeability. That is an adaptation of what is now law in negligence and other kinds of tort. I have left one out because I have not dealt with joint tortfeasors.

Will my noble and learned friend the Lord Advocate please look at this matter, because we have an opportunity to make clear and certain something which at the moment has been left in a vacuum. This is an excellent opportunity to do something properly for once and not leave the Bill half-baked, as it is at the moment. I beg to move.

Lord Cameron of Lochbroom

I am grateful to my noble friend for raising this point. I shall make just two comments. The right of action which is given by the clause is given to a person who suffers loss as a result of the contravention or is otherwise adversely affected by the contravention. The problem is that the investor here is envisaged as taking the action with regard to misconduct by the other party or parties. It is difficult, at least at the moment, to see how there could be any basis for suggesting that the claimant should bear some share of responsibility for such a contravention as is set out in Clause 57.

The other matter relates to the defence of reasonable foreseeability. In one sense the clause makes quite clear that there is no issue of reasonable foreseeability in the sense that the party sued will be sued on the basis of a contravention and he must be aware, from the very terms of the clause, that if loss or other adverse effect were to arise, the investor will be entitled to take action. Again, I have some difficulty in seeing how a defence of reasonable foreseeability could arise. This is an early hour of the morning, and I do not wish to cavil at the point brought up by my noble friend. I should certainly like to consider the matter further. But it is only right that I should make my reservations known to him on both these matters. Of course, the question of joint tortfeasors is slightly different. I take note of what my noble friend said. It is not covered in the amendment. Obviously I shall also look at that matter.

Viscount Colville of Culross

I wonder whether my noble and learned friend can tell me this. He is not, I think saying that this liability is intended to be a strict liability of the sort concerned for instance, with fencing or factory machinery. Is that correct? I imagine that he envisages that there is some latitude that prevents it becoming absolutely strict.

Lord Cameron of Lochbroom

This is a matter on which I should like to think again. Judging from the way in which the clause is framed, if the person who sues establishes that there was a contravention, and that is a matter of fact, and thereafter establishes that he suffered loss or was otherwise adversely affected, it seems to me—and this seems consistent with the general principle of the Bill—that in those circumstances the business must pay for its misconduct, misconduct being the fact that it has contravened the various obligations or rules set out in Clause 57. To that extent it can be something like strict liability, although that is used, I think, in a very different context.

Viscount Colville of Culross

In that case I suggest that my noble and learned friend would be well advised to look at this again, as I am sure he will. I say that for this reason. If we, at this stage, can establish whether or not we are intending to have a strict liability, that would be a very good thing. It is not very helpful to leave it when even my noble and learned friend does not know. This is the time, when we are still at the parliamentary stage, to deal with the matter rather than leave it to the courts.

As to foreseeability, I would have thought that it was all too probable, if one has a technical contravention of one of the rules and regulations that give rise to a loss, that someone would turn up, in due course, in the courts with a situation where there was a chain of events that eventually led to a loss but where there was an argument about causation or about reasonable foreseeability and where it would not be good enough simply to say, "Ah, but there was a contravention of the rules." There will be subsidiary points. The examples that I gave about the 1960 legislation are not altogether inapposite. They are also for the purpose of protecting various people who are dealing with bodies of the sort we are concerned with here. At that time this very department put into its legislation some qualifications of the liability of the sort that I read out a moment ago. There is, therefore, a very good precedent for this when one is creating a statutory tort of this sort. There is a good deal of substantial homework that needs to be done on this matter. My noble and learned friend has said that he will do it. I am very grateful to him. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Cameron of Lochbroom moved Amendment No. 166: Page 45, line 26, leave out ("this section") and insert ("subsection (1) above applies or of a contravention of rules made under section (Financial resources rules) above or such conditions as are mentioned in subsection (2A)(a) above").

The noble and learned Lord said: This amendment was spoken to with Amendment No. 134. I beg to move.

On Question, amendment agreed to.

Clause 57, as amended, agreed to.

Clause 58 [Gaming contracts]:

Lord Hacking moved Amendment No. 166A: Page 45, line 35, at end insert— ("; or (c) any rule of the law of England and Wales whereby a contract by way of gaming or wagering is not legally enforce-able.").

The noble Lord said: It was a surprise for me, and possibly for other noble Lords, to learn that our Gaming Acts could adversely affect the investment business of an authorised person and could imperil transactions by making them void or unenforceable. However, I have done my research. It is right that there are cases from the end of the last century—in a very different world from today—which technically could affect contracts used today in the investment business in futures, and in another form of investment identified in paragraph 9 of Schedule 1; namely, contracts for differences.

At this late hour of the evening I shall not attempt to educate noble Lords on futures, let alone contracts for differences; but they are both defined in the schedule. I am satisfied, having looked up the Victorian authorities, that both those forms of investment business could fall foul of the Gaming Acts. Therefore, the question is: have the Government, in Clause 58, chosen the right formula to deal with English law? I use that terminology carefully because I am not quarrelling with the treatment that is being sought concerning the law of Scotland. I have no authority about the law of Scotland but the manner in which the Government are attempting to deal with it in Clause 58(b) concerning the law of Scotland seems to be the right way.

The difficulty concerns the English law. Noble Lords will see that it is treated differently in the Act because, with regard to the law of Scotland, the Bill simply says: any rule of the law of Scotland whereby a contract by way of gaming or wagering is not legally enforceable will not bring an investment transaction in an investment business to the position of its being void or unenforceable. Instead of using that formula with regard to England, the Government have specified in paragraph (a): section 18 of the Gaming Act 1845, section 1 of the Gaming Act 1892 or any corresponding provisions in force in Northern Ireland". Instead of treating it with the more general approach, they are limiting it to gaming contracts falling either under the Gaming Act 1845 or under the Gaming Act 1892.

This is the difficulty. After research, I find that under common law there has certainly always been doubt as to whether wagering contracts are enforceable. There is certain authority prior to 1845 in which considerable doubt was expressed about the validity of gaming or wagering contracts. It seems to me—this is the reason I have tabled this amendment—the more sensible way of approaching it would be to use the same formula as has been used for Scotland. That would remove all difficulties under both statutory and common law.

I should say that my amendment does not seek to delete paragraph (a). I have done it by way of adding another clause which, if noble Lords approved of my amendment, would become paragraph (c). The pure way of doing it—and the way that I am presenting this amendment to the Committee, albeit not in accordance with the way I have tabled it—is that paragraph (a) should go and should be replaced by the amendment that stands in my name on the Marshalled List. I beg to move.

1.30 a.m.

Lord McIntosh of Haringey

No one could have less knowledge of the law and less experience of gaming than I, but I had always thought that the enforcement of gaming contracts was exacted by taking out a contract on the life of somebody.

Viscount Chandos

Perhaps I may just refer back to the point that I made in speaking to Amendment No. 106. In that both futures contracts and contracts for differences covering in particular interest rate and currency swaps are instruments that would be predominantly, if not wholly, transacted by listed institutions, it is my understanding of Clause 58 as currently drafted that it is only authorised persons, and not exempted persons, who would thereby be clearly removed from the Gaming Acts. I do not know whether the noble and learned Lord the Lord Advocate has had a chance to clarify that since I first raised it, but I very much hope that at least before the Report stage that could be done.

Lord Cameron of Lochbroom

I am grateful to the noble Lords who have spoken. Perhaps I may say at the outset that there is no Gaming Act for Scotland, and accordingly the common law has not been ousted there, and that gives rise to the distinction between the two laws. The view which is taken and the advice which I have been given is that the common law in England and Wales has been ousted by the Gaming Acts. The Bill as a whole provides the statutory basis for regulation of business involving investment agreements and in Clause 5 specifically provides for the circumstances in which such contracts may be unenforceable and the consequences that would follow. It is therefore, I am advised, inconceivable that any court in England and Wales would attempt as a matter of public policy to apply a rule of common law to an investment agreement governed by the provisions of the Bill instead of seeking to apply the appropriate statutory provisions, and so the amendment is, in effect, unnecessary.

However, as I say, we would not wish to create any doubt as to what I understand to be the general view that the common law has indeed been ousted by statute in England and Wales, and that would be the effect of the noble Lord's amendment.

As regards the point raised by the noble Viscount, Lord Chandos, it is perfectly true that Clause 58 would apply to clearing houses, such as the International Commodities Clearing House, which may seek recognition under the Bill. Of course, once recognised, they will become exempted persons rather than authorised persons. As the noble Viscount properly observed, Clause 58 applies at the moment only to authorised persons. This matter is being looked into and we shall be returning to it on Report. I hope that that will at least resolve the noble Viscount's doubts. I hope that what I have said has been of some help to the noble Lord who moved the amendment, and that he will feel able to withdraw it.

Lord Hacking

I am not at all sure whether these statutes, or indeed statutes in general, can ever get to the position of ousting the common law, and therefore I have some doubts about the advice that has been given to the noble and learned Lord the Lord Advocate which caused him to say that my amendment was not necessary. I shall not take the debate further now. I have made the point and in the circumstances beg leave to withdraw the amendment. Perhaps a little further reflection could be taken; it is always nice to have purity, particularly if we can take that purity in Scottish form in our Bill.

Lord Cameron of Lochbroom

I shall look again with those who advise us at what the noble Lord, Lord Hacking, has said.

Amendment, by leave, withdrawn.

Clause 58 agreed to.

Clause 59 [Scope of powers]:

Lord Cameron of Lochbroom moved Amendment No. 167: Page 46, line 5, after ("person") insert ("or, except in the case of the power conferred by section 60 below, any apppointed representative of his").

The noble and learned Lord said: I beg to move Amendment No. 167. My noble friend spoke to this when speaking to Amendment No. 114.

On Question, amendment agreed to.

Lord Cameron of Lochbroom moved Amendment No. 168: Page 46, line 16, at end insert ("or has contravened any prohibition or requirement imposed under this Act").

The noble and learned Lord said: I beg to move Amendment No. 168. I spoke to this amendment with Amendment No. 98.

On Question, amendment agreed to.

Lord Cameron of Lochbroom moved Amendment No. 169: Page 46, line 27, leave out ("a person") and insert ("(a) an authorised person").

The noble and learned Lord said: My noble friend spoke to this Amendment with Amendment No. 170 when speaking to Amendment No. 114, and I beg to move.

On Question, amendment agreed to.

Lord Cameron of Lochbroom moved Amendment No. 170: Page 46, line 38, leave out ("(a)").

On Question, amendment agreed to.

Lord Cameron of Lochbroom moved Amendment No. 171: Page 46, line 29, after ("or") insert ("a person certified by a").

The noble and learned Lord said: I beg to move Amendment No. 171. I spoke to this amendment with Amendment No. 79.

On Question, amendment agreed to.

Lord Cameron of Lochbroom moved Amendment No. 172: Page 46, line 30, leave out ("(b").

The noble and learned Lord said: My noble friend spoke to this amendment with Amendment No. 173 when speaking to Amendment No. 114. I beg to move.

On Question, amendment agreed to.

Lord Cameron of Lochbroom moved Amendment No. 173: Page 46, line 32, at end insert ("or (b) an appointed representative whose principal is a member of such an organisation or body and is subject to the rules of such an organisation or body in carrying on the investment business in respect of which his principal has accepted responsibility for his activities;").

On Question, amendment agreed to.

Lord Cameron of Lochbroom moved Amendment No. 174: Page 46, line 36, leave out ("or body of which he is a member") and insert ("of which he is a member or any such body by which he is certified").

The noble and learned Lord said: I spoke to this amendment with Amendment No. 79, and I beg to move.

On Question, amendment agreed to.

Clause 59, as amended, agreed to.

Clause 60 agreed to.

Clause 61 [Restriction on dealing with assets]:

Lord Cameron of Lochbroom moved Amendment No. 175: Page 47, line 8, after ("person") insert ("or appointed representative").

The noble and learned Lord said: My noble friend spoke to this amendment and Amendment No. 176 when speaking to Amendment No. 114, and I beg to move.

On Question, amendment agreed to.

Lord Cameron of Lochbroom moved Amendment No. 176: Page 47, line 9, after ("person") insert ("or, as the case may be, representative").

On Question, amendment agreed to.

Clause 61, as amended, agreed to.

Clause 62 [Vesting of assets in trustee]:

Lord Cameron of Lochbroom moved Amendment No. 177: Page 47, line 16, after ("person") insert ("or appointed representative").

The noble and learned Lord said: This amendment and Amendments Nos. 178 and 179 were spoken to by my noble friend when speaking to Amendment No. 114, and I beg to move.

On Question, amendment agreed to.

Lord Cameron of Lochbroom moved Amendment No. 178: Page 47, line 18, at end insert ("or appointed representative"). On Question, amendment agreed to.

Lord Cameron of Lochbroom moved Amendment No. 179: Page 47, line 22, after ("person") insert (or, as the case may be, appointed representative").

On Question, amendment agreed to.

Clause 62, as amended, agreed to.

Clause 63 [Maintenance of assets in United Kingdom]:

Lord Cameron of Lochbroom moved Amendment No. 180: Page 47, line 33, after ("person") insert ("or appointed representative").

The noble and learned Lord said: My noble friend spoke to this amendment and Amendment No. 181 in speaking to Amendment No. 114. I beg to move.

On Question, amendment agreed to.

Lord Cameron of Lochbroom moved Amendment No. 181: Page 47, line 35, after ("person") insert ("or, as the case may be, appointed representative").

On Question, amendment agreed to.

Clause 63, as amended, agreed to.

Clause 64 agreed to.

Clause 65 [Notices]:

Lord Cameron of Lochbroom moved Amendment No. 182: Page 48, line 19, leave out ("at the request") and insert ("on the application").

The noble and learned Lord said: This is a technical amendment. I beg to move.

On Question, amendment agreed to.

Clause 65, as amended, agreed to.

Clause 66 [Breach of prohibition or requirement]:

Lord Cameron of Lochbroom moved Amendent No. 183: Page 49, line 1, leave out ("27, 32").

The noble and learned Lord said: I spoke to this with Amendment No. 98. I beg to move.

On Question, amendment agreed to.

Clause 66, as amended, agreed to.

Lord Lucas of Chilworth moved Amendment No. 184: After Clause 66 insert the following new clause—