§ 3.17 p.m.
§ The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Lucas of Chilworth)My Lords, I beg to move that the House do now again resolve itself into Committee on this Bill.
§ Moved, That the House do now again resolve itself into Committee.—(Lord Lucas of Chilworth.)
§ On Question, Motion agreed to.
§ House in Committee accordingly.
§ [The LORD ABERDARE in the Chair.]
§ Clause 67 [Interpretation]:
§ [Amendment No. 186 not moved.]
§
Lord Lucas of Chilworth moved Amendment No. 187:
Page 49, line 37, leave out paragraph (b) and insert
§
("(b)) that the property in question is managed as a whole by or on behalf of the operator of the scheme.")
§ The noble Lord said: In moving Amendment No. 187. it may be for the convenience of the Committee if I also speak to Amendment No. 188. These two amendments have been brought forward in response to representations that certain elements of the definition of "collective investment scheme" required clarification and that the necessarily wide definition in Clause 67(1) goes rather too far.
§ The change of substance is in the second amendment which will exclude from the definition of "collective investment scheme" certain arrangements which consist of a series of discretionary investment management contracts on standard terms the manager of which buys and sells investments for more than one portfolio at the same time. This amendment is the one foreshadowed in the Chancellor's announcement last Thursday in the context of personal equity plans.
§ The common management arrangements which are excluded from the definition—and hence from the controls imposed by this chapter—are ones in which there is no pooling of the participants' interests but where the investor remains the owner of his investments and is entitled to withdraw them from the arrangement at any time.
565§ I should emphasise that, perhaps contrary to the impression given in press reports over the past few days, we are not talking about conventional unit trust-type pooling schemes but about arrangements under which the investor owns particular investments which are. for convenience, managed for him along with the investments of other investors.
§ Although excluded from Chapter VII, these arrangements will not be removed from the scope of the Bill. This is because the exclusion relates only to securities and other investments under the Bill. Accordingly, a person operating such arrangements will be managing investments and thus will require to be authorised. His investment management activities will be subject to the conduct of business rules. I beg to move.
§ Lord Williams of ElvelI shall wait to comment on this amendment until we come to the Question, Whether Clause 67 shall stand part?
§ On Question, amendment agreed to.
§
Lord Lucas of Chilworth moved Amendment No. 188:
Page 50, line 3, at end insert—
§
(" () Arrangements are not a collective investment scheme if—
§
§ On Question, amendment agreed to.
§ [Amendment No. 189 not moved.]
§ Lord Lucas of Chilworth moved Amendment No. 190:
Page 50, line 10, at end insert—
("(bb)) arrangements where each of the participants is a body corporate in the same group as the operator.
(bbb) arrangements where—
- (i) each of the participants is a bond fide employee or former employee (or the wife, husband, widow, widower, child or step-child under the age of eighteen of such an employee or former employee) of a body corporate in the same group as the operator; and
- (ii) the property to which the arrangements relate consists of shares or debentures (as defined in paragraph 19(2) of Schedule 1 to this Act) in or of a member of that group;").
§ The noble Lord said: In moving Amendment No.190 perhaps I may also speak to Amendments Nos.191 and 192. I commend to the Committee these amendments, which modify the definition of a collective investment scheme, first, by excluding from its scope certain internal arrangements operated within groups of companies (including employee share schemes) and specifically excluding building societies and industrial and provident societies from the wide definition; and, secondly, by enlarging the scope of the 566 definition of an open-ended investment company to include investment companies which in practice redeem their shares when requested to do so even though they offer no guarantees of redemption. I beg to move.
§ On Question, amendment agreed to.
§
Lord Lucas of Chilworth moved Amendments Nos. 191 and 192:
Page 50, line 33, leave out from ("body") to ("shall") in line 35 and insert ("incorporated under the law of. or of any part of. the United Kingdom relating to building societies or industrial and provident societies or registered under any such law relating to friendly societies, and no other body corporate other than an open-ended investment company;").
Page 51. line 9. after ("repurchased") insert (". or which (otherwise than under Chapter VII of Part V of the Companies Act 1985 or the corresponding Northern Ireland provision) are redeemed or repurchased from them,").
§ The noble Lord said: I beg to move Amendments Nos. 191 and 192, to which I have just spoken.
§ On Question, amendments agreed to.
§ On Question, Whether Clause 67, as amended, shall stand part of the Bill?
§ Lord Williams of ElvelWe have come to a part of the Bill which is of particular interest to the Committee, because whereas in previous parts of the Bill we may have been dealing with professional business, we are now dealing with investment schemes which are widely available to the general public. It is therefore important—indeed, more than ever important—that the provisions of the Bill should be right, and properly understood.
In the course of the Committee on this Bill we have tried to maintain a constructive opposition. I announced at the beginning of the Committee proceedings that we were not here to obstruct the Bill but that we were here to act in our position as a responsible Opposition to revise where necessary and to attempt to put into the Bill where we thought necessary provisions that would make the Bill a better Bill.
We have in front of us in the third Marshalled List—and I remind the Committee that we are in the third day of a four-day Committee—22 new government clauses. One of these clauses, I must tell the Government, was received by me—and, indeed, was tabled after the last day of Committee last Wednesday—when I came back from the weekend at 11 o'clock last night. Twenty-two new clauses constitute a major new Bill. If we have a Bill which starts off with 177 clauses, as this one did, and a number of schedules, and we then get 22 new clauses, that seems to me to be a major amendment of the Bill.
We in the Opposition have two difficulties. We have difficulties in resources and we have difficulties in time. We have difficulties in resources because in order to understand what the Government are getting at in these new clauses we have to consult elsewhere, we having no civil servants at our disposal; and difficulties in time in that through the usual channels we have agreed that we shall try hard to get this Bill through the Committee of your Lordships' House in four days. If we have to deal with 22 new clauses—and I leave aside the whole number of government amendments to 567 clauses of which the noble Lord, Lord Lucas, has just moved two or three, or even six—it is difficult for us to respond in a constructive manner, performing our role as the Opposition in a revising Chamber, and it starts to look as though this Committee is being used as some sort of sausage machine.
The Government have simply put down new clauses, maybe as a result of commitments in another place and maybe as a result of commitments to people who have made representations or of discussions that have taken place. The only way that I think we can deal with this, as the Opposition, is for us to comment briefly on what the Government have put down but to reserve our position entirely when the Bill comes back on Report. I can think of no other way of handling this.
§ Baroness SeearI should like to reinforce what the noble Lord, Lord Williams, has said. This is a complicated Bill which requires a great deal of study. The way in which the Government are handling it in putting down new clauses, let alone a great long list of amendments, makes it practically impossible for the Opposition to do their job properly. We protest that this is no way in which to put a major Bill through your Lordships' House.
§ Lord DenningMay I add a word from this Bench? It is most difficult to follow any Bill when you have no previous notice of it, but here, not only was there obscurity in the Bill itself as it originally stood but how are we to understand amendments which are only received an hour or two before the Committee sits to consider them? It is impossible to consider them or to make any constructive suggestion about them. But I equally understand that this is a most important Bill for the City of London, and that it is most important that it should get through without undue delay. Therefore, although I support the Bill itself I must make that protest meanwhile in the hope that the Bill can be better considered on Report.
§ Lord Williams of ElvelI am most grateful for the interventions of the noble Baroness, Lady Seear, and the noble and learned Lord, Lord Denning. The noble and learned Lord is quite right. This is an important Bill, and it is important to the City of London. However, may I say to the noble and learned Lord—and I am sure he would agree with me—that it is vitally important that this Bill should be right. It is not a question of getting through any Bill: it is a question of getting through a Bill that is right.
Therefore, I would lay emphasis on what the noble and learned Lord has just said about the difficulty of the Committee being able to consider amendments and new clauses which come before us very late in the time of the Bill. After all, the Bill went through the whole process in another place; it was not guillotined. It went through Standing Committee and it went through Report and all the processes, and it has come through two days of our Committee. Yet we are still getting Government amendments and new clauses, and I have no doubt that we shall get some more.
However, let me pass on to Clause 67. As I said when I started, in the case of collective investment schemes—and here we are talking essentially about 568 unit trusts and investment trusts—we are dealing with not just professional activities. We are dealing with instruments that will be sold, and sold in numbers and at great length, to the public at large. We must have some clear understanding of what exactly the Government intend in their legislation.
The Committee might think, since our discussion on I think Monday of last week on what constitutes an investment, that the definition of "investment" would be carried through to collective investment schemes. Indeed, it was the noble and learned Lord, Lord Denning, himself who opposed my amendment. I refer to Clause 1, and the definition of "investment." Perhaps I may read the provision:
In this Act, unless the context otherwise requires, 'investment* means any asset, right or interest falling within any paragraph in Part I of Schedule 1 to this Act".The noble and learned Lord, Lord Denning, rightly pointed out earlier that in many statutes there should be the provision "unless the context otherwise requires". Nevertheless when discussing "collective investment schemes" it is in my view reasonable to suppose that the investments about which we are talking should have the same definition as those which are contained for professionals in Schedule 1. This is not the case. Collective investment schemes deal with investments which are much wider than the investments defined in Schedule 1 to the Bill. In making that rather bald statement I must say that I have tried very hard to understand what this clause is about. If I come to any wrong conclusions, I apologise to the Committee and I am sure the Minister will correct me; but if I come to the wrong conclusions, then the popular understanding may well be wrong. We must not only have right legislation; it must be understood.The definition of "investment" under "collective investment schemes" which is set out in Clause 67(1) is "property of any description". In the Notes on Clauses it specifically says that this goes much wider than the investments described in Schedule 1. "Property of any description" means property of any kind. It means real property, and the noble Lord, Lord Ezra tried at an earlier stage of the Committee to introduce the idea of commercial buildings as being an investment under Schedule 1. As I understand it, commercial buildings are included in the definition of investment for collective investment schemes. I also understand that residential buildings are also so included. I also understand that works of art are so included—precious metals, jewellery, all sorts of things which are not Schedule 1 investments. I understand that because I personally know of a lot of collective investment schemes. I think it is quite right that the Bill should be drafted like this. The collective investment schemes I know of specialise in these particular items and assets and should properly be called investment schemes.
I start off with a problem: will the public at large understand that investment for the purposes of Clause 67 and Chapter VII of this Bill is different from the definition of investment as defined by Schedule 1? If that is not made entirely clear, in my view the public will be deceived.
There are two types of collective investment scheme defined in Clause 67. There is the unit trust. I think the 569 Committee will be fairly familiar with what is constituted by a unit trust. It is now a well-known phenomenon. It is what I personally, using the language of financial institutions, would describe as an open-ended investment institution; but I shall come to that definition in a minute. I have no particular questions on the definition of a unit trust because it has been set up in previous statutes, and this is just bringing up to date what has been set out previously.
There is a second form of collective investment scheme, which is described as an open-ended investment company. Apparently in Clause 67(6):
No body corporate, other than an open-ended investment company, and no body registered under the enactments relating to friendly societies, shall be regarded as constituting a collective investment scheme".The noble Lord has moved an amendment refining some of this. I have two problems with the definition of "open-ended investment company", apart from the general problem that the use of the word "open-ended" is contrary to the normal use of "open-ended" in financial language. "Open-ended", in the 20 years that I have been around in this business, means a company or a trust with variable capital that may be extended or retracted. Indeed, in the United States they are called "mutual funds". These are regarded as open-ended. In the Republic of France, they are called sociétés investitoires á capitaux variables, which means literally variable capital. A company is essentially a closed-end operation. In other words, its capital is fixed. I accept that in subsection (7)(b):the rights of the participants are represented by shares in or securities of that body which … the participants are entitled to have redeemed or repurchased by, or out of funds provided by. that body".Clearly here we have something resembling open-ended. We have a body which can redeem or repurchase out of its own funds, and hence its capital to that extent is open-ended.Then we go on to subsection (7)(b)(ii) where it is stated,
the body ensures [that those shares) can be sold by the participants on an investment exchangeand we come to something which is not open-ended at all. All we are saying here is that an investment trust—because that is what we are talking about—shall ensure that its shares can be sold on the investment exchange. That is nothing to do with open-ended. What it means is that an investment trust—I shall ask the Minister in a moment why we cannot use the expression "investment trust", which has been quite carefully defined in the Income and Corporation Taxes Act 1970—will ensure (note the word) that its shares can be sold by participants.I assume that by "ensure" the Minister and the Government mean that it is enough to ensure a listing on the appropriate stock exchange. But that does not satisfy the word "ensure", which as I understand it in the English language means "to make sure". If there is no market in the shares, the company cannot ensure that the shares can be sold. Perhaps "ensure" does not have that meaning, and no doubt the noble and learned Lord, Lord Denning, will instruct me on this that the courts would say "ensuring" means simply that shares are listed on the appropriate exchange and 570 it does not matter whether there are any buyers or sellers.
Later in the subsection we come to an even more obscure definition, because not only must the investment company ensure that its shares can be sold by participants on an investment exchange, but it must ensure that those shares,
can be sold … at a price related to the value of the property to which they relate".Any share is sold at a price related to the property to which the share relates. Indeed, one might say that the shares of any industrial company are sold at a price in some way related to the value. It may be 10 per cent. of net asset value; it may be 100 per cent. of net asset value; it may be at 10 times earnings or 50 times earnings, or whatever valuation one likes to put on it. But if I may say so, it is wholly tautologous to say that at an investment exchange prices are fixed at a price, "related to the value of the property to which they relate"All prices are fixed in some way, in some undefined relationship—the relationship is not defined—to the underlying property to which they relate.
I believe that that sentence is meaningless. I have further difficulties with this because this definition seems to me to embrace bodies corporate which are indeed not investment trusts, but have a price which is quoted on the basis of a percentage of the net asset value of the company. Most property companies fall into this category. Perhaps I may mention one such company. British Land plc ensures (if that is the correct definition) that its shares can be sold by participants on an investment exchange at a price related to the value of the properties to which they relate. British Land has a net asset value which it publishes regularly, and under that definition it would appear to me, if I am not misunderstanding what the Government have in mind, that British Land would become an open-ended investment company. I therefore have problems with that definition.
If I may turn backwards, I should like to consider subsection (5) and the exemptions. The exemptions under subsection (5)(a) start with,
arrangements operated by a person otherwise than by way of business".In other words, that subsection means that any arrangement and any scheme which is operated by any person, unless he is doing that as some sort of business, will be exempt. Up and down the land, as the Committee will know, there are things called "investment clubs". People get together, perhaps in the pub on a Sunday, and they say, "There are five of us here; we will pool our funds and have Lord Williams, who is an expert in this business, handle our investments on our behalf. As I understand it, if Lord Williams then says, "I am not taking any money for this; it is a purely gratuitous operation on behalf of this investment club", that investment club is exempt from the collective investment scheme provisions. If, on the other hand, Lord Williams is rather mean-minded and says, "I will manage your investments on your behalf but I will take a flat fee or perhaps 10 per cent. of the profits and, by the way, I happen to be an authorised person in the investment business in my own right", it appears, from what the Bill says, that that will become a collective investment scheme with all the problems that flow from the remainder of Chapter VII.571 I now wish to turn to subsection 5(b) which concerns,
arrangements where each of the participants carries on a business other than investment business and enters into the arrangements for commercial purposes related to that business".This is clearly designed, as the Notes on Clauses say, to avoid joint ventures coming into the collective investment scheme category. However, what happens if the participants are engaged in investment business perfectly legitimately? As the noble Lord, Lord Boardman, would point out to me if he were in his place, there are one or two, such as banks, who enter into arrangements for commercial purposes such as factoring. These are indeed commercial operations; nevertheless, as I read the Bill (although no doubt the noble Lord will tell me I am mistaken) the factoring joint venture would fall into the collective investment scheme definition.Perhaps I may now turn to subsection 5(e). I understand from the Notes on Clauses that this subsection is drawn so as to exclude time-sharing arrangements. These are arrangements where people buy part of a property, wherever it may be, and from time to time they go there and from time to time other people go there. In the slightly Victorian words of the Bill as drafted, they,
share in the use or enjoyment of a particular property".There are other arrangements that fall into that category which are not necessarily time sharing. As a rather extreme example I would mention the business of marketing stallion shares, where stallions are marketed in the state of Kentucky and in Ireland and, indeed, more and more in this country, and shares are bought in stallions. A signal example of this was the late-lamented Shergar. Perhaps I may also mention the Forties and Claymore units sale which might fall into this category. I shall leave that question open because I am unsure of the answer.I now wish to turn to subsection 5(f) where the arrangements specifically exclude American deposit receipts and indeed European deposit receipts which are mentioned in Schedule 1 as being investments. American deposit receipts are perfectly simple instruments. They are designed to represent shares in, say, British companies which can be traded in New York, which requires what are known as "heavier" shares than the London market. That is a straight-forward and transparent arrangement. The same is true of European deposit receipts which are issued for a different purpose. Europeans, for one reason or another, tend not to like to have their names on share certificates. They like to have bearer certificates because with bearer certificates nobody quite knows the identity of the ultimate owner. For a small honorarium I can arrange for your Lordships a collective investment scheme which invests in ADRs and EDRs which will, as I understand it, be exempt from the collective investment scheme arrangements under this fund. My honorarium will not be great because it is something any competent lawyer could devise. But we have in these definitions and in these exemptions things which, in my view, are not fully thought through.
I understand that the Government have to implement in our law the Directive on Undertakings 572 for Collective Investment in Transferable Securities, known as UCITS. However, this does not have to come into force until the middle of 1989 and my suggestion to the Government is that they should take back the definition of what constitutes collective investment schemes under UCITS and bring forward something which your Lordships can understand and which I can understand and, more importantly, which the public at large can understand. I believe that the public at large will not be able to understand Clause 67, and it is for those reasons that I wish to oppose the Question that Clause 67 stand part of the Bill.
§ Lord TryonIt would be a great help to the Committee and certainly to me if the Minister could, at a fairly early stage, tell us what an open-ended investment company is. Despite my experience in the City, I am completely lost. I do not believe that it can include an investment trust, because otherwise there are many other points, as the noble Lord, Lord Williams of Elvel, has pointed out, which do not add up to the rules governing an investment trust. Perhaps the Minister can answer that point.
§ Lord Lucas of ChilworthMay I, at the outset, apologise to the noble Lord, Lord Williams of Elvel, and to the Committee for the fact that some of the amendments that the Government tabled were tabled late last week. In fact, only four of those involved substantive change and all but one were tabled by Wednesday. The other one was tabled on Thursday.
I realise that it has been difficult not only for the official Opposition but also for other Members of your Lordships' Committee, including ourselves, to keep up with the changes. I wish to repeat that many of these changes were as a result of what I described the other evening to the noble Lord, Lord McIntosh of Haringey, as the open-door policy in that we, like the rest of the Committee, want to get this Bill as nearly right as is humanly possible using the revising facilities of your Lordships' House. I do not believe that there have been any amendments of substance that have been tabled at short notice. All of these amendments have come about as a result of consultations; these have been kept going over the last few months and have, at the end of the day, resulted in amendments being tabled.
I recognise straightaway that it is the wish of the noble Lord, Lord Williams of Elvel, who is speaking from the Opposition Front Bench on the Bill, to meet what I think is a good-hearted and certainly open-hearted desire to complete the Committee stage in four days. This has so far proved extremely difficult, and no doubt the next few hours today and the hours that are to follow tomorrow will prove just as difficult. Nevertheless, I am assured by the noble Lord opposite—and I hope that he will be reassured by my words—that there is good intent and good will on both sides so far as this Bill is concerned, and we must do the best we possibly can. I have no doubt that on Report there will be a number of matters that perhaps will have to be examined in greater depth, if not necessarily amended, and we shall have the opportunity, perhaps over the next few weeks, to give consideration as to whether some of these rather long and rather complicated new clauses will need to be amended further. I am rather hopeful that they will 573 not have to be amended once there is an understanding.
I turn to the debate on clause stand part and some of the matters which the noble Lord, Lord Williams, has raised. This clause defines collective investment schemes which are the subject matter of this part of the Bill. The wide definition is certainly complex, but there are really three essential elements. first, there is a participation by persons in profits or income, secondly, the participants do not have day-to-day management control; and, thirdly, there is either pooling of contributions and of profits or income, or the operator of the scheme manages the property of the scheme as a whole.
This definition is very wide and it was designed so. It is necessary in order to include all of the schemes and all of the arrangements which have an element of pooling and collectivity. However, I think the definition is very clear because we have specifically and quite explicitly excluded from its scope all of those arrangements which we do not wish to regulate here, either because they are not strictly investment or because they are already subject to regulation. In addition, the definition has the great benefit of being flexible. The Clause 2 power to amend the definition of "investment" can be used to amend definitions in this clause.
Much of the argument that I advanced when we discussed Clause 1 of the Bill which sets out definitions of "investment" I am not going to repeat here, but I advance again. Unless we have some central core of what we mean by these things, there is no opportunity to add or delete as we go along.
There were a number of specific points that the noble Lord mentioned. I am not sure whether he mentioned them to test the water, so to speak, or whether he genuinely wanted to know, for example, why time sharing was excluded. It is excluded because essentially we do not believe that time sharing is an investment product. We think it would be wrong to regulate it as such.
§ Lord Williams of ElvelI did not ask why time sharing is excluded. I understand perfectly why time sharing is excluded. I was not asking that question, although I might ask a supplementary question. If there are two properties in a time-sharing scheme, that would appear to come into a direct investment scheme, while if there were only one, that would appear to be excluded.
§ Lord Lucas of ChilworthIf the noble Lord would let me finish, perhaps I could complete the answer. The exemption for time-sharing arrangements will apply only if the predominant purpose of a scheme is the personal use or enjoyment of the property. If the rights in a time-sharing scheme are sold as an investment, they most certainly will have to be included in the Bill.
The noble Lord also asked a number of other questions—
§ Lord TordoffI am sorry to interrupt the noble Lord. I wonder whether he can explain what he meant by his last words on time sharing. To me they did not seem to make too much sense.
§ Lord Lucas of ChilworthWhat I said was that the exemption for time sharing will apply only if the predominant purpose of a scheme is personal use or the enjoyment of the property, whether it be a house, a boat, a flat, or whatever it may be. If the rights in the time-sharing arrangement are sold as an investment, they will be included in the Bill. It is quite simple. It depends upon what product is sold. If the time-sharing scheme is sold as an investment, it is included in the Bill. If the scheme is sold as the right to enjoy for a week or a fortnight the boat in the Med or the cabin in the Cotswolds, it will be excluded. If the noble Lord, Lord McIntosh, wishes to address a question to me on that, I shall be quite happy to give way—presumably he does not.
The noble Lord, Lord Williams, asked me about investment clubs. If a fee is taken for the running of such a club and that fee is taken by way of business, the scheme will be included. The effect will be that membership of the club may not be offered to the public unless it becomes an authorised unit trust scheme.
The noble Lord asked about open-ended investment companies and the redemption of units at a price related to the value of the property. He questioned the words,
at a price related to the value of the property".The relation of the unit price to the value of the property will be laid down in regulations to be laid under Clause 73. These will set out the charges which may be made by the manager. The relationship will thus be fixed, as the relationship has been fixed for a great number of years—I think somewhere around 40 years—by the Board of Trade price formula.An open-ended company, as the noble Lord. Lord Williams, indicated, is just like a unit trust company except that it is a company and issues and redeems shares in itself. Hence, it is a variable capital company—which is exactly what he said; it is so, rather than consisting of units. The principle is the same as unit trusts, although the legal form is rather different.
There have been a number of schemes based elsewhere in the European Community which are covered by the directive and which are open-ended companies such as have been described. They have to be included. The property is shares. The idea is that a scheme, instead of redeeming, may deal in its own shares on the Stock Exchange to keep the price in line with asset values.
Here, I should perhaps say something about the unitisation of properties, which we touched upon in our deliberations some little while ago. I think that it is right that I should refer to a commitment given in another place by my honourable and learned friend the Minister to consider whether we should amend the Bill to enable a particular type of unitised scheme to be promoted to the general public. I refer here to proposals which have been developed by the Royal Institute of Chartered Surveyors and Mercantile House. We propose, subject to further consultation with those concerned, to bring forward amendments at a later stage, and we envisage that these will exclude this type of scheme from Chapter VII and regulated by other means.
575 Lastly, the noble Lord, Lord Williams, referred again to subsection (5)(a), which deals with arrangements operated by a person otherwise than by way of business. I think we have fully debated what we mean by the phrase "by way of business". I seem to recall that the noble Lord spoke about his dealing in regard to the Paris Racing Club. I think the noble Lord in fact referred to the Paris Racing Club and that it was within the context of whether, if he sold shares, he would be in business. I do not think I can add any further explanation to what I said at that time. The noble Lord referred to a number of other points in this connection, but I do not propose to take them one by one because I think that then the Committee would be here until long after teatime, and we have a long way to go. I think it might be better if I wrote to him at some length and explained exactly what is meant. I hope that will help the Committee to believe that the clause is a necessary part of the Bill and should stand part of it.
§ 4 p.m.
§ Baroness SeearI am very sorry to come back to this question of the time share, because we are not trying to be difficult but it is something about which there is great development. Some noble Lords will know—because I tell them boringly often—that I have a cottage which I sometimes let. Suppose I sell half of that cottage, say, to my noble friend Lord Tordoff (which I have no intention of doing) and when I am not there I let. and when he is not there he lets. Is that a collective investment? I am genuinely asking a question: I am not selling it to my noble friend.
§ Lord Lucas of ChilworthIf the noble Baroness does this by way of business, it most certainly is. On the other hand, she may do it out of the goodness of her heart. The noble Baroness may be in the business of doing this regularly—we discussed all this very much earlier, when we debated the phrase "by way of business"—but if it is a one-off or an occasional occurrence it cannot be considered to be "by way of business". In other words, if the noble Baroness owns a number of cottages and does this regularly, engaging in a business of letting to her friends who can then enjoy a variety of benefits, then it is a business and then it is regulated by this Bill.
§ Lord Mackie of BenshieDoes that mean that everyone who has a cottage and lets it occasionally is in business?
§ Lord Lucas of ChilworthNo, it does not.
§ Lord TryonBefore the noble Lord sits down, may I ask a question? Does a United Kingdom-registered quoted investment trust company come within the scope of this clause, or not? The noble Lord, Lord Williams, suggested that it might well do so. If that is so. then I do not think half the rest of the clause makes any sense at all, because different laws would apply to such companies. Could we have an answer to that, please?
§ Lord Lucas of ChilworthI am sorry I did not give an answer to the noble Lord, Lord Tryon. No, they are not included.
The Duke of AthollMay I point out to my noble friend that an extra "by" has crept into subsection (5)(a)? It reads as printed:
arrangements operated by a person otherwise than by by way of business;".It seems to me rather "over-byed".
§ Lord Lucas of ChilworthPerhaps it is a longstop.
§ Lord Williams of ElvelBefore replying to the noble Lord, may I ask him about something he said? I understood him to say that the relationship between the share price for an open-ended investment company and the value of the property to which those shares relate would be fixed by order. Is my understanding right, or did I mishear the noble Lord?
§ Lord Lucas of ChilworthThe noble Lord's understanding is quite correct, under regulations in Clause 73.
§ Lord Williams of ElvelI am grateful for that piece of information, and also for the information the noble Lord gave to the noble Lord, Lord Tryon, that investment trusts are not included in open-ended investment companies, because I cannot for the life of me see what open-ended companies are if they are not investment trusts.
I do not really believe that the Government have got this right. I believe there is plenty of time before Report stage and before the UCITS directive has to be put into effect for collective investment schemes to be properly defined in a manner which will be understandable to our courts, understandable to your Lordships' Chamber and, above all, understandable to the people who are investing in them. Therefore, I continue to oppose the Question that Clause 67 stand part of the Bill.
§ 4.5 p.m.
§ On Question, Whether Clause 67, as amended, shall stand part of the Bill?
§ Their Lordships divided: Contents, 98; Not-Contents, 71.
577| DIVISION NO.1 | |
| CONTENTS | |
| Alport, L. | Cullen of Ashbourne, L. |
| Ampthill, L. | Dacre of Glanton, L. |
| Annan, L. | Davidson, V. |
| Atholl, D. | De Freyne, L. |
| Auckland, L. | Denham, L. [Teller.] |
| Bauer, L. | Derwent, L. |
| Beloff, L. | Dilhorne, V. |
| Belstead, L. | Drumalbyn, L. |
| Bessborough, E. | Ellenborough, L. |
| Birdwood, L. | Elles, B. |
| Boardman, L. | Elliot of Harwood, B. |
| Boyd-Carpenter, L. | Elliott of Morpeth, L. |
| Brabazon of Tara, L. | Elton, L. |
| Brougham and Vaux, L. | Fraser of Kilmorack, L. |
| Buckinghamshire, E. | Glanusk, L. |
| Butterworth, L. | Glenarthur, L. |
| Caithness, E. | Gray of Contin, L. |
| Campbell of Alloway, L. | Gridley, L. |
| Carnock, L. | Grimthorpe, L. |
| Colville of Culross, V. | Hailsham of Saint |
| Constantine of Stanmore, L. | Marylebone, L. |
| Cottesloe, L. | Halsbury, E. |
| Hanson, L. | Murton of Lindisfarne, L. |
| Harmar-Nicholls, L. | Newall, L. |
| Henderson of Brompton, L. | Northesk, E. |
| Hives, L. | Nugent of Guildford, L. |
| Holderness, L. | O'Brien of Lothbury, L. |
| Hooper, B. | Orr-Ewing, L. |
| Killearn, L. | Peyton of Yeovil, L. |
| Kinnoull, E. | Rankeillour, L. |
| Knollys, V. | Reay, L. |
| Lane-Fox, B. | Rodney, L. |
| Lauderdale, E. | Romney, E. |
| Layton, L. | St. Davids, V. |
| Limerick, E. | Sanderson of Bowden, L. |
| Lindsay, E. | Seebohm, L. |
| Long, V. | Sempill, Ly. |
| Lucas of Chilworth, L. | Stodart of Leaston, L. |
| Luke, L. | Strathspey, L. |
| Lyell, L. | Sudeley, L. |
| McFadzean, L. | Swinton, E. [Teller.] |
| Macleod of Borve, B. | Terrington, L. |
| Mancroft, L. | Trenchard, V. |
| Manton, L. | Vaux of Harrowden, L. |
| Margadale, L. | Vickers, B. |
| Maude of Stratford-upon- | Vivian, L. |
| Avon, L. | Whitelaw, V. |
| Merrivale, L. | Wise, L. |
| Milverton, L. | Wynford, L. |
| Mowbray and Stourton, L. | Young, B. |
| NOT-CONTENTS | |
| Addington, L. | Kilmarnock, L. |
| Airedale, L. | Kinloss, Ly. |
| Ardwick, L. | Leatherland, L. |
| Aylestone, L. | Listowel, E. |
| Beswick, L. | Llewelyn-Davies of Hastoe, B. |
| Blyton, L. | Lloyd of Kilgerran, L. |
| Bottomley, L. | Longford, E. |
| Brockway, L. | McIntosh of Haringey, L. |
| Bruce of Donington, L. | Mackie of Benshie, L. |
| Caradon, L. | McNair, L. |
| Carmichael of Kelvingrove, L. | Manchester, D. |
| Chitnis, L. | Mishcon, L. |
| Cledwyn of Penrhos, L. | Molloy, L. |
| David, B. [Teller.] | Morton of Shuna, L. |
| Davies of Penrhys, L. | Nicol, B. |
| Dean of Beswick, L. | Ponsonby of Shulbrede, L. |
| Denington, B. | [Teller.] |
| Denning. L. | Rathcreedan, L. |
| Diamond, L. | Ritchie of Dundee, L. |
| Donaldson of Kingsbridge, L. | Seear, B. |
| Elwyn-Jones, L. | Shackleton, L. |
| Ewart-Biggs, B. | Shepherd, L. |
| Fisher of Rednal, B. | Silkin of Dulwich, L. |
| Fletcher, L. | Stedman, B. |
| Gallacher, L. | Stewart of Fulham, L. |
| Gladwyn, L. | Stoddart of Swindon, L. |
| Graham of Edmonton, L. | Strabolgi, L. |
| Greenway, L. | Taylor of Blackburn, L. |
| Grey, E. | Taylor of Mansfield, L. |
| Hampton, L. | Tordoff, L. |
| Hanworth, V. | Tryon, L. |
| Harris of Greenwich, L. | Underhill, L. |
| Hayter, L. | Wallace of Coslany, L. |
| Ilchester, E. | Wells-Pestell, L. |
| Jenkins of Putney, L. | Wigoder, L. |
| John-Mackie, L. | Williams of Elvel, L. |
§ Resolved in the affirmative, and Clause 67, as amended agreed to accordingly.
§ 4.13 p.m.
§ Clauses 68 and 69 agreed to.
§ Clause 70 [Authorisation orders]:
§
Lord Williams of Elvel moved Amendment No. 193:
Page 53, line 27, leave out from ("misleading") to end of line 29.
§
The noble Lord said: I beg to move Amendment No. 193 standing in my name on the Marshalled List, and it may be for the convenience of the Committee if I speak to Amendments Nos. 194 and 195. We are dealing here with the authorisation orders for a collective investment scheme, and I refer your Lordships, first, to subsection (5) of Clause 70, where the Bill as drafted states:
the purposes of the scheme must be reasonably capable of being successfully carried into effect".
§ I can see a number of problems here. The SIB, as I think it will be, who will be giving the authorisation on behalf of the Secretary of State—and I hope I have that right—will have to decide whether a collective investment scheme has purposes that are reasonably capable of being successfully carried into effect.
§ There have been many collective schemes, the purposes of which, first, are simply to make money—and I do not know whether the SIB will be qualified to pronounce on that—and which, secondly, may change from time to time. They may start off by saying, "We are in the business of natural resources", and then, as we have seen recently on a number of occasions, "We have stopped being in the business of natural resources and have gone into some other business". I put it to your Lordships that if the SIB, at any given point of time, were asked to pronounce on whether a scheme was reasonably capable of being successfully carried into effect, this would be loading a burden on the SIB which I think it would find extremely difficult to carry.
§
If I may go on to Amendment No. 194, this, again, comes back to the question that the price should be,
related to the net value of the property to which the units relate and determined in accordance with the scheme".
§ My amendment is to insert the word "equivalent" instead of the word "related", really as a probing amendment to find out what relation is intended by the Government. I think that the noble Lord the Minister may have given me half an answer in our last debate. I hope very much that he will give us a full answer to this now, because to say that something is related to something else does not mean any more than saying that the whisky bottles sold in Glasgow are related to the number of bishops in Jamaica. But that is not a cause and effect problem.
§
If I may go on to Amendment No. 195, line 33 on page 53 of the Bill as drafted reads:
but a scheme shall be treated as complying with this subsection if it requires the manager to ensure that a participant is able to sell his units on an investment exchange at a price not significantly different from that mentioned in this subsection".
§
Again I come back to the word "ensure". What does that mean? And what do the words,
not significantly different from that mentioned in this subsection",
§ mean? I shall be most grateful if the noble Lord can help us on this. I beg to move.
§ Lord Lucas of ChilworthAll these amendments relate to the criteria for the authorisation of unit trust schemes, and I regret that I shall have to resist all three; but perhaps the explanations might help the noble Lord, Lord Williams, to accept my suggestion.
The requirement in Clause 70(5) that,
the purpose of the scheme must be reasonably capable of being successfully carried into effect",579 will be judged by the Secretary of State, or indeed the designated agency—that is the specific point which the noble Lord raised—and it is there to ensure that a scheme which has no prospect of achieving its investment objectives is not authorised. This might be because the scheme intends to invest in a very special-ised market even though it is thought that that market does not exist. For example, and perhaps being a little frivolous, there is the widget industry. The fact that there are not widget companies to provide an adequate spread of investment risk might be a very good reason for that judgment to be made. At the same time, there has to be a judgment taking into account the requirements of the Clause 73 regulations.On the noble Lord's second amendment, which he described as probing, the requirement that the redemption price must be related to the net value of the property rather than equivalent to it recognises that—and I think this is the point—in calculating this price the starting point is the net value of the fund and that there are then deductions before arriving at the final redemption price of units. These deductions take account of the dealing costs which are likely to be incurred because of the need to realise investments to meet the redemption request, which it is only fair should be met. by the person redeeming his units. Managers, as now, will not be completely free to decide the size of these deductions. The regulations to be made under Clause 73 will govern the way in which issue and redemption prices are calculated.
Clause 70(6) allows an alternative means of providing for redemption—indirectly on an investment exchange. This is by way of a paving provision, which reflects an alternative redemption method allowed by the UCITS (unit trust) Directive. Whether or not this approach to redemption will be allowed will again be determined by the regulations to be made under Clause 73. The proposed regulations will be the subject of a consultative document in the near future.
The noble Lord asked what we meant by the word "ensure". I rather thought that I had explained earlier that certain schemes may intervene on The Stock Exchange to maintain share prices instead of redemption. They will not be authorised unless there is a guarantee that the manager will act in such a way. That is a fairly reasonable example of what is meant by that description of "ensure".
§ Lord Williams of ElvelI am most grateful to the noble Lord for his response. I now understand that we are dealing with organisations that can intervene with their own funds on the stock market to keep their shares up or down as the case may be. It is, if I may say so, a somewhat surprising concept beyond the stabilisation period which is normal in terms of new issues. Nevertheless, if that is what the noble Lord says, then so be it. I understand that we shall get a consultation document on the latter part of subsection (6) and that the consultation document will no doubt answer all my questions. I am a little concerned that we are writing into statute things that we will not know until the consultative document appears. But I understand that if you are going to have a statute you might as well write in the UCITS Directive and see 580 what it says afterwards. In the light of all that, and in the spirit of getting on with the Committee's business, I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ [Amendments Nos. 194 and 195 not moved.]
§ Clause 70 agreed to.
§ Clause 71 [Revocation of authorization]:
§
Lord Lucas of Chilworth moved Amendment No. 196:
Page 54, line 14, at end insert ("or has contravened any prohibition or requirement imposed under this Act").
§ The noble Lord said: I spoke to Amendments Nos. 196, 197 and 198 when we were discussing Amendment No. 98. I beg to move.
§ On Question, amendment agreed to.
§
Lord Lucas of Chilworth moved Amendments Nos. 197 and 198:
Page 54, line 21, after ("rules") insert (", prohibitions and requirements").
Page 54, line 22, at end insert ("and any prohibition or requirement imposed by virtue of those rules.").
§ On Question, amendments agreed to.
§ Clause 71, as amended, agreed to.
§ Clause 72 agreed to.
§ On Question, Whether Clause 73 shall stand part of the Bill?
§ Lord Williams of ElvelI have a simple question about Clause 73. Will the regulations that the Secretary of State or the designated agency makes stipulate the ownership of management companies of authorised unit trust schemes and the level which other operators in the investment business may hold?
§ Lord Lucas of ChilworthThe department will be publishing within the next two weeks or so a document inviting views on the scope and nature of the regulations governing authorised unit trust schemes which would be made under this clause. It will need to take into account the provisions of the UCITS Directive and the consultative document will also seek views on the various options available under the directive. A number of regulations will be covered in practice; but on that to which the noble Lord refers specifically, the answer is, no.
§ Lord Williams of Elvel:I am grateful to the noble Lord for his indication that a consultative document on yet another clause will be published. I hate to come back on this question, looking as I do at the noble Earl, Lord Limerick, who is a very distinguished figure in an institution which has a large holding in a management company of a unit trust scheme—but I do not wish to single out the noble Earl, there are other people involved. Indeed, there are other banks which have ownership in management companies of unit trusts.
I wonder whether in the consultative document the noble Lord will accept that the whole question of the relationship between management companies and the ownership of management companies—I speak of management companies of unit trust schemes—could be looked at.
§ Lord Lucas of ChilworthThere has been no indication given to us until the noble Lord mentioned it that this area should be looked at. I can only repeat that it still is not our intention so to do.
§ Lord MonsonI take it that we are discussing the Motion, That Clause 73 stand part of the Bill.
§ Lord MonsonThank you. I think these things have gone rather faster than I expected. There seems to be one serious omission from the list of requirements contained in Clause 73. There is no obligation to inform the customer clearly how much he is paying for the services of unit trust managers. More often than not the front end loading, normally called the initial charge, of 5 per cent. or so and the annual management fee, which has crept up in recent years from 0.5 percent. or 0.75 percent. to 1 percent. or 1.5 per cent., is given in minuscule 3 point or 4 point type. It escapes the notice, I suspect, of many prospective purchasers of unit trusts. I wonder whether the noble Lord will consider at the next stage of the Bill introducing a requirement that these charges should be advertised in the same sized type face as the rest of the advertisement.
§ Lord Lucas of Chilworth:In answering specifically the noble Lord, Lord Monson, I recognise what he says. Matters of this kind will be subject to the conduct of rules, as, of course, will every other organisation.
§ Clause 73 agreed to.
§ On Question, Whether Clause 74 shall stand part of the Bill?
§ Lord Williams of ElvelI have a very simple question. Clause 74(2) refers to the trustees giving notice to the Secretary of State of any proposal to replace the manager of the scheme. Would the trustees also be obliged to notify the Secretary of State if the existing manager of the scheme—the company managing the unit trust in question—were bought by somebody else—in other words, if there was a change of ownership or control?
§ Lord Lucas of ChilworthI understand that that would be so.
§ Lord Williams of ElvelI am most grateful to the noble Lord for his assurance.
§ Clause 74 agreed to.
§ Clause 75 [Restrictions on activities of manager]:
§
Lord Williams of Elvel moved Amendment No. 199:
Page 56, line 34, leave out paragraph (b).
§
The noble Lord said: The clause deals with the restrictions on the activities of a manager of a unit trust. In Clause 75(2)(b), the activities in which the manager shall not engage are specified as,
activities for the purposes of or in connection with those mentioned in paragraph (a) above".
§ The problem that I have with Clause 75—and I hope that the noble Lord recognises that this is the major 582 thrust of a number of the amendments that I have put down—is the relationship between the managing company of the unit trust, the owners of that managing company, and the unit trust itself.
§ There are many unit trusts whose management companies are owned by organisations who do other than run unit trusts. I can mention in front of the noble Earl, Lord Limerick, Kleinwort Benson, which has a large holding in M&G. Fleming's has a large holding in S&P. Schroeder's runs its own unit trust organisation, and so do Baring's and a number of other organisations. The question that I put to the noble Lord is this: what restriction, if any, is placed on those organisations that own the management company of a unit trust, as opposed to the management company of a unit trust itself? How would any such restriction be enforced?
§ 4.30 p.m.
§ Lord Lucas of ChilworthIf the Committee accepted this amendment, it would limit unnecessarily the activities that the manager of an authorised trust scheme could carry on. Clause 75 gives effect to a provision of the UCITS directive, which places limits on the activities that a manager of a unit trust may undertake. The aim of that provision is to try to ensure that all the activities of the manager are regulated in some way. That is a common provision in such directives, certainly in the absence of a wider, harmonised regulatory framework at Community level.
The directive allows incidental activities to be carried on by unit trust managers—for example, the operation of a share exchange scheme—but only where they are carried on in connection with or for the purpose of the manager's activities as a manager of a collective scheme. There is therefore no need to delete subsection (2)(b) as the noble Lord proposes.
I suspect that there is behind this amendment a suggestion that there may be concern about a conflict of interests arising when the investment business is undertaking dealing and management activities. In the first place, those are issues that will be regulated by conduct of business rules. Secondly, the deletion of subsection (2)(b) would not be an effective way of seeking to avoid such a conflict by primary legislation. It would just impose unnecessary restrictions on the unit trust manager. I believe that explanation fully answers the noble Lord's questions.
§ Lord Williams of ElvelI am grateful to the noble Lord, although his was in a sense a half answer. The half of his answer that was right was that I am dealing with questions of conflicts of interest between people who own management companies of unit trust schemes and the unit trusts themselves. It must be fundamental—and as I understand it, this is in this legislation—that unit trusts shall be independent, self-standing bodies that will not be subject to pressures from people who might own the management company.
It so happens that many management companies of unit trusts are either owned outright or have large shareholdings owned by organisations that do other business, such as underwriting or the marketing of securities. At present, there is a gentleman's agreement 583 between those management companies and the shareholders that there will not be too much pressure placed on one side and not too much placed on the other. If the noble Lord is saying that such an agreement is the one that the Government favour, then that is an answer. I am not sure that it is a terribly satisfactory answer, but it is an answer.
The noble Lord is correct in saying that I am addressing myself to the problem of conflict of interests between people who set up to undertake one kind of business and who then manage funds on behalf of third parties, and who may use those funds in the future to help them with their other business. That is the point I am trying to put across. If the noble Lord will give me the other half of the answer, I shall be most grateful.
§ Lord Lucas of ChilworthI suggest to the noble Lord that such a situation will be regulated by the conduct of business rules. That is where we rest on that aspect. There will be no more concrete a rule. We discussed that matter when the noble Lord, Lord O'Brien, participated in our debate when the noble Lord opposite spoke earlier to Clause 23. We felt then, and we still feel, that the conduct of business rules will provide a sufficiently robust barrier to ensure that the various interests are not in conflict.
§ Lord Williams of ElvelI am most grateful to the noble Lord. We shall wait to see what the conduct of business rules actually state. If they are unsatisfactory then we shall have to return to this point in some manner or form. I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Clause 75 agreed to.
§ Clause 76 agreed to.
§ Clause 77 [Publication of scheme particulars]:
§
Lord Lucas of Chilworth moved Amendment No. 200:
Page 57, line 13, at end insert "(; or").
§ The noble Lord said: In speaking to Amendment No. 200, it may be for the convenience of the Committee if I speak also to Amendments Nos. 201, 202 and 203. The amendments all make minor adjustments to Clause 77, which requires the publication of scheme particulars—that is, a document giving information about an authorised or recognised collective investment scheme. The amendments reflect representations made by both the Stock Exchange and the Law Society, and they have mainly concerned Parts IV and V, which we shall be discussing later.
§ The fact that "scheme particulars" must be continuously available will make it unnecessary for the regulations to require a significant mistake to be corrected. The fact that the documents continue to be published and that there is liability for publishing untrue or misleading information—such as a significant mistake—will mean that in practice the publisher will be obliged to correct it without the regulations saying anything. The publisher will find himself liable if he does not.
584§ Conversely, it seems reasonable that the publisher should be put to the trouble of changing the document to accommodate a new matter only when the new matter is significant. Finally, the amendment to Clause 79(3) is intended to clarify that, for example, the person who types the document should not be held liable for any untruths within it. The regulations will specify who is responsible for the scheme particulars. In practice, that is most likely to be the manager or the operator of the scheme. I beg to move.
§ On Question, amendment agreed to.
§
Lord Lucas of Chilworth moved Amendments Nos. 201 to 203:
Page 57, line 14, after ("a") insert "(significant").
Page 57, line 17, leave out from "(prepared") to end of line 20.
Page 57, line 23, leave out ("the preparation of).
§ On Question, amendments agreed to.
§ Clause 77, as amended, agreed to.
§ Clause 78 [Schemes constituted in other member Stares]:
§
Lord Williams of Elvel moved Amendment No. 204:
Page 58, leave out line 4 and insert ("that the protection offered to the investor does not").
§ The noble Lord said: It seems to us important that the public understand what is being offered under Clause 78. Even though a scheme is recognised by an official body in the United Kingdom, it does not offer the same protection that a recognised unit trust scheme in the United Kingdom offers. We believe that in the authorisation that is given, that information should be set out, so that those who purchase such schemes should be under no illusion about what they are purchasing. I beg to move.
§ Lord Lucas of ChilworthThe effect of this amendment would be directly contrary to our obligations under the UCITS directive which this clause seeks to implement. Under that directive a UCITS authorised in any member state in accordance with the directive is free to market its units in any of the other member states. We are not allowed to make a second judgment as to the protection which the schemes offers to investors. The only ground for refusing to allow a UCITS which wishes to market in the United Kingdom to do so is that the proposed method of marketing appears to contravene United Kingdom marketing laws.
§ Lord Williams of ElvelI am grateful to the noble Lord for his explanation. I did not know what he has just told the Committee and I understand that, however unsatisfactory it may be, it probably has to be contained in our statute. I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§
Lord Lucas of Chilworth moved Amendment No. 205:
Page 58, line 34, after ("operator") insert ("or trustee").
§ The noble Lord said: This amendment is consequential on an amendment made in another 585 place to Clause 23. It makes clear that in accordance with the UCITS directive the rules made under Clause 45 apply only to activities which the trustee undertakes in relation to the marketing of the UCITS in the United Kingdom and matters incidental to such marketing. I beg to move.
§ On Question, amendment agreed to.
§ Clause 78, as amended, agreed to.
§ Clause 79 [Schemes authorised in designated countries or territories]:
§
Lord Lucas of Chilworth moved Amendment No. 206:
Page 59, line 20, leave out ("(other than those excluded by virtue of subsection (1)(b) above)") and insert ("of the class to be specified by the order").
§ The noble Lord said: This amendment is consequential on an amendment made in another place to Clause 79(1)(b). It provides a procedure whereby the Secretary of State may designate a country if he is satisfied that its law on the authorisation and supervision of collective investment schemes affords United Kingdom investors with protection at least equivalent to Chapter VII of the Bill. The designation may be for some types of schemes only. In essence that is what this amendment seeks to do. I beg to move.
§ On Question, amendment agreed to.
§ 4.45 p.m.
§
Lord Williams of Elvel moved Amendment No. 207:
Page 59, line 24, at end insert ("and any order under this section shall contain a statement to this effect").
§ The noble Lord said: It may be for the convenience of the Committee if I speak also to Amendment No. 210. We are dealing here with schemes which are authorised in designated countries or territories, and these seem to be somewhat different from those schemes which are authorised under Clause 78.
§ On my previous amendment I asked for a health warning to be put on schemes authorised under Clause 78. I am now asking for a similar health warning to be put on schemes authorised under Clause 79 in the form of—if I may put it this way—a statement to the effect that this is what it is rather than what it might be or what the promoters might necessarily hold it out to be.
§ The noble Lord might say that this is contrary to the UCITS directive, in which case I shall have to withdraw, but it does not seem much to ask that a proper statement be made about what is being offered to the public. The same point is true in respect of Amendment No. 210. I beg to move.
§ Lord Lucas of ChilworthI am grateful to the noble Lord, Lord Williams. The amendments draw attention fairly sharply to a change of some significance which the Bill makes. Although the noble Lord asks whether there can be a health warning I think that because of this significant change I should reply at some length so that there is no misunderstanding.
586 The Bill requires foreign schemes to be recognised if they are to be promoted to the general public. We do not feel that the two amendments to which the noble Lord, Lord Williams, has just spoken do anything to protect investors. The first amendment seems to have no real effect. An order made by the Secretary of State under the clause can be made only if he is satisfied that the law of the country concerned gives investors in the United Kingdom protection at least equivalent to that of authorised unit trust schemes. There is no need to state that fact in the order as the noble Lord proposes.
The second amendment makes the assumption that the protection afforded to investors in a scheme recognised under Clause 80 will be less than with Clause 79 schemes. Certainly the two clauses work differently, but it does not follow that there will be different standards. Clause 79 operates in relation to all schemes of a specified class authorised in a designated country, whereas Clause 80 requires schemes to apply individually to the agency for recognition. However, the standards expected of the two kinds of schemes will be the same. These standards will be those of authorised unit trust schemes. Under Clause 79 the designated country must have a system which affords protection equivalent to that standard. For Clause 80 schemes they must provide protection which is adequate by reference to that standard. It will be for the Secretary of State or the designated agency—who will set the standards for authorised schemes—to judge "adequacy" on a case-by-case basis.
I agree with the noble Lord, Lord Williams, that it is important for investors to know that the scheme in which they invest is a foreign one and that, although investors are adequately protected, the UK authorities have less control compared to a UK-based authorised scheme. We believe that this can be achieved much more effectively through the regulations which require schemes recognised under Clauses 79 and 80 to publish scheme particulars. In the case of such schemes I would expect there to be a requirement that the particulars disclose, in suitably prominent terms, that the scheme is a foreign one. Investors will therefore have the health warning that the noble Lord is looking for, and I hope that that will reasssure him.
§ Lord Williams of ElvelI am grateful to the noble Lord for his very full response. I think the proper thing for me to do is to read in the Official Report what he said and, if necessary, come back on Report. In the meantime I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§
Lord Lucas of Chilworth moved Amendment No. 208:
Page 59, line 39, leave out subsections (5) and (6).
§ The noble Lord said: In moving this amendment I shall speak to Amendment No. 211 and also Amendment No. 213—a new clause: "Refusal and revocation of recognition."
§ I realise that Amendment No. 213 is a fairly long new clause which may need studying. Perhaps I may briefly explain its purpose. The two amendments and 587 the consequent new clause correct an omission in Clause 79 as it stands now. The circumstances in which the Secretary of State or the designated agency may revoke the recognition of a scheme under the clause are not stated, and we feel that it is desirable that they should be. This is achieved by bringing together, in a single new clause, the provisions governing the refusal and revocation of recognition of schemes under both Clauses 79 and 80. I hope that the Committee will agree that that is a useful clarification of those provisions. I beg to move.
§ Lord Williams of ElvelThe noble Lord said that he was speaking also to Amendments Nos. 211 and 213. I accept that these are extremely complicated questions. This is a whole new clause. I should prefer to read the provisions quietly and come back to the matter with any amendments that we may have when we come to the Report stage in your Lordships' House.
§ On Question, amendment agreed to.
§
Lord Lucas of Chilworth moved Amendment No. 209:
Page 60, line 7, after ("operator") insert ("and, in the case of an operator who is not an authorised person, references to publishing particulars as references to causing them to be published")
§ The noble Lord said: If I may, I shall speak also to Amendment No. 212.
§ I commend these amendments to the Committee. They make it clear that the "scheme particulars" of recognised schemes should be published only by someone who is an authorised person. These documents will constitute "investment advertisements" and the general rule is that only authorised persons should issue advertisements. Where the operator of a recognised scheme is not authorised (as sometimes may be the case), he must arrange for the "scheme particulars" to be published by an authorised person. I beg to move.
§ On Question, amendment agreed to. Clause 79, as amended, agreed to.
§ Clause 80 [Other overseas schemes]:
§ [Amendment No. 210 not moved.]
§
Lord Lucas of Chilworth moved Amendment No. 211:
Page 61, line 21, leave out from ("section") to end of line 23.
§ The noble Lord said: I spoke to this with Amendment No. 208 a few moments ago. I beg to move.
§ On Question, amendment agreed to.
§
Lord Lucas of Chilworth moved Amendment No. 212:
Page 61, line 35, at end insert ("and. in the case of an operator who is not an authorised person, references to publishing particulars as references to causing them to be published.")
§ On Question, amendment agreed to.
§ Clause 80, as amended, agreed to.
588
§
Lord Lucas of Chilworth moved Amendment No. 213:
After Clause 80, insert the following new clause:
§ ("Refusal and revocation of recognition
§
§ On Question, amendment agreed to.
§
Lord Lucas of Chilworth moved Amendment No. 214:
Insert the following new clause:
§ ("Facilities and information in the United Kingdom.
§
§ The noble Lord said: With this I shall speak also to Amendment No. 220.
589§ These amendments introduce two new investor protection powers which the Secretary of State or the designated agency may exercise in relation to any recognised foreign scheme. The Secretary of State or the agency may, by regulations, require the operator of such a scheme to provide specified facilities in the United Kingdom; for example, to enable participants to redeem their units here without the trouble of becoming involved in dealing directly with the foreign offices of the operator of the scheme. In addition, the Secretary of State or the agency may direct the operator to add an appropriate note in investment advertisements, brochures or other advertising material where, for example, the name of the scheme is likely to be confusing to investors here.
§ The sanction for contravention of those requirements will be the same as that for contravention of any other provision of this chapter and could for schemes under Clauses 79 and 80 include revocation of their recognition. I beg to move.
§ Lord Williams of ElvelI have to make the same response as I made before on new clauses. We shall have to study them and if we have any problems we shall have to move amendments on Report.
§ On Question, amendment agreed to.
§
Lord Lucas of Chilworth moved Amendment No. 215:
Insert ihe following new clause:
§ ("Directions Powers of intervention.
§
§ The noble Lord said: In speaking to this amendment, I should like also to speak to Amendments Nos. 216, 217 and 230.
§ I recognise that we are talking about another new and very long clause. If I speak briefly to set the scene, that may enable members of the Committee to give the amendments the proper consideration which I suspect that they will want to at a different time.
§ These new clauses introduce new and important powers over collective investment schemes that are promoted to the general public. The amendments are being introduced in response to representations— notably by the Securities and Investments Board but also by the Law Society—that such powers of intervention are needed to ensure the effective regulation of authorised unit trust schemes.
§ The powers would enable the agency, which will be responsible for authorising schemes and will have power to withdraw that authorisation, to take appropriate action to protect participants' interests where necessary. In the case of authorised schemes, this could range from requiring the issue of units to be suspended to applying to the court for the removal and replacement of the manager and the trustee. It is important that the agency should have the flexibility to act in respect of schemes which it has authorised, and these powers will undoubtedly reinforce that ability, especially in cases where it does not have direct regulatory responsibility for the manager and the trustee.
§ The new clauses also introduce a similar, although more modest, power in relation to schemes recognised under Clauses 79 and 80. The fact that such schemes are based overseas rules out the Secretary of State or the designated agency having a wider range of powers. Nevertheless, we feel that the extra power to suspend recognition should be a useful addition to the armoury of regulator}' control. I beg to move.
591§ Lord Williams of ElvelI am most grateful to the noble Lord for introducing these new clauses, which are almost tantamount to a new Bill. We shall have to look at them carefully. Again, it is impossible for me to respond at this stage, as I am sure he recognises. If necessary, we shall move amendments on Report.
§ On Question, amendment agreed to.
§
Lord Lucas of Chilworth moved Amendments Nos. 216 and 217:
Insert the following new clause:
§ ("Notice of directions
§
§
Insert the following new clause:
§ ("Applications to the court
§
§ On Question, amendments agreed to.
§ Clause 81 [Investigations]:
§
Lord Lucas of Chilworth moved the Amendment No. 218:
Page 63, line 4, at end insert—
§
("() Any such report shall be written or printed as the Secretary of State may direct and the Secretary of State may, if he thinks fit—
§
§ The noble Lord said: This amendment introduces provisions concerning the publication of reports by inspectors appointed under Clause 81 to investigate the affairs of a collective investment scheme. It makes the same provision in this regard as the Companies Act 1985 does in relation to the reports of company inspectors. I beg to move.
§ 5 p.m.
§ Lord Morton of ShunaI have not checked with the Companies Act, but I should be surprised if it is in the same wording. It appears to us that this poor inspector is being directed to produce a written rather than a printed report. Does the Minister really mean that? The amendment provides:
Any such report shall be written or printed as the Secretary of State may direct".It sounds rather like doing lines at school.It appears that the inspector has to furnish a copy before the report is published. Is that what is meant? The purpose of the amendment would seem to be suitable, but surely it could be worded in a happier way. What is the necessity for "written or printed"? Why can it not be published as the Secretary of State may direct?
§ Lord Lucas of ChilworthThe purpose is to make clear, first, in what circumstances the Secretary of State may publish a report made by an inspector who has investigated the affairs of a collective investment scheme or its manager, operator or the trustee. The effect is that the,
Secretary of State may, if he thinks fit", publish the report or send copies on request and on payment of a fee to the manager, trustee, operator or any participant in a scheme, or any other person mentioned in the report.Whether it should be written or printed is somewhat obscure. I do not have the 1985 Act at my elbow and so I would not challenge the noble Lord, Lord Morton of Shuna, on whether the words are different from those in that Act. The purpose is the same. If I were allowed a guess this afternoon, I would guess that the words "written or printed" meant that the report can be published in a variety of different ways. It is probably to take care of modern, technological advances such as print outs and things of that nature.
§ On Question, amendment agreed to.
§ Clause 81, as amended, agreed to.
§ Clause 82 [Contraventions]:
§
Lord Lucas of Chilworth moved Amendment No. 219:
Page 63, line 10, after ("or") insert ("certification by a").
§ The noble Lord said: I spoke to this amendment with Amendment No. 79. I beg to move.
§ On Question, amendment agreed to.
593
§
Lord Lucas of Chilworth moved Amendment No. 220:
Page 63, line 11, at end insert—
§
(" (2) Subsection (1) above applies also to any contravention by the operator of a recognised scheme of a requirement imposed under section (Futilities and information in the United Kingdom) (2) above."')
§ On Question, amendment agreed to.
§ Clause 82, as amended, agreed to.
§ Clause 83 [The Financial Services Tribunal]:
§
Lord Morton of Shuna moved Amendment No. 221:
Page 63, line 22, at end insert ("and such persons shall include persons qualified in Scots law.")
§
The noble Lord said: May I speak to this amendment and Amendment No. 223 which is linked with the same purpose? This is a matter which I raised on Second Reading. The provisions relating to Scottish cases are wholly inadequate. The provisions are that the chairman of the tribunal shall be a person with,
legal qualifications appointed by the Lord Chancellor after consultation with the Lord Advocate".
§ That is all.
§ It is essential that in a Scottish case the tribunal should be chaired by a person qualified in Scots law and should sit in Scotland. The amendment brings in the second part of Amendment No. 223 in which I have attempted to define what is a Scottish case. It perhaps illustrates the difficulty. The person upon whom a notice is to be served may have a place of business or residence in Glasgow, Edinburgh or Aberdeen. Why in what may be a totally Scottish business should he be forced, apparently openly, to come down to London as the defendant or accused to appear before lawyers who have no knowledge of Scots law?
§ I am sure that the Committee recognises that considerable financial interests have their places of business in Scotland. It is necessary that that should be recognised rather than merely have the vague suggestion that the Lord Advocate consulting the Lord Chancellor should clear up difficulties. I think the subsection is a copy of what is in taxes legislation and which does not work. Special commissioners arrive in Scotland to deal with matters and they do not know the differences between Scottish law of trusts and English law of trusts. I beg to move.
§ Lord Brabazon of TaraI do not consider that these two amendments, which are concerned with Scotland, are necessary. As the noble Lord, Lord Morton of Shuna, pointed out, the clause provides that my noble and learned friend the Lord Chancellor consults the Lord Advocate on appointments of legally qualified persons to the tribunal panel. I can give the assurance that my noble and learned friend the Lord Advocate can be trusted to suggest a Scottish lawyer without an express instruction to do so. I am sure that that would hold good for any Lord Advocate in the future.
There are also difficulties, as the noble Lord, Lord Morton of Shuna, said, about defining Scottish cases in the way proposed by the other amendment. If a notice is served on an authorised business, it may be 594 necessary to serve several copies of the notice on employees, for example. If any one of the recipients is served with a notice in Scotland, it would be a Scottish case. That cannot be right.
Perhaps a more suitable definition can be found, but the question of where the tribunal is to sit can be left to the procedural rules. The choice of tribunal chairman is a matter which is better decided in the circumstances of a particular case. If a case does not raise particular points of Scottish law, it may occasionally be desirable to appoint an English lawyer as chairman if, for example, that enabled there to be a speedier start to the case. That could work both ways, with the appointment perhaps of a Scottish lawyer to an English case.
For those reasons I do not feel that the amendments are necessary . I hope that the noble Lord will feel able to withdraw them.
§ Lord Morton of ShunaIt may well be that the present Lord Advocate and any successor would "suggest" to the Lord Chancellor. That may well happen; I suspect that it would. That does not necessarily take one far, as the noble Lord. Lord Brabazon, will no doubt appreciate. The Lord Advocate can suggest, but it is the Lord Chancellor who appoints. All the Lord Chancellor need do is to consult. There is no necessity to have anybody qualified in Scots law on the tribunal. This is a matter about which, as the Government are well aware, the Law Society of Scotland and others are very worried. Subject to reserving the right to come back at a later stage of the Bill I ask leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§
Lord Graham of Edmonton moved Amendment No. 222:
Page 63, line 27, at end insert—
§
("(2A) When deciding who should be appointed under the provisions in subsection (2)(b)above the Secretary of Slate shall consult organisations representing those employed by authorised bodies").
§
The noble Lord said: Those who are following the Bill closely will appreciate that the amendment deals with the composition of the financial services tribunal. We are talking about the establishment of a panel of not fewer than 10 persons to serve as members of the tribunal. Clause 83(2)(a) and (b) contains words to which I take no exception relating to the kind of people to be borne in mind when these appointments are made. My amendment seeks to add in a small way what might be said to be special pleading for a special category of person. Clause 83(2)(b) says,
persons appointed by the Secretary of State who appear to him to be qualified by experience or otherwise to deal with the cases that may be referred to the Tribunal".
§
I am saying that,
When deciding who should be appointed under the provisions of subsection (2)(b) above the Secretary of State shall consult organisations representing those employed by authorised bodies".
§ This is, if I may say so, a benign amendment. It is an amendment that I shall be happy to withdraw following a short exchange with the Minister. I wish the Minister first to understand that all I am seeking is consultation. The Minister and his advisers may 595 respond by saying that if there is consultation with one organisation, there has to be consultation with all. How can one know those who will feel aggrieved if the Bill lays down consultation with a particular group of individuals but not others? I do not believe that any other group of people can claim to be so affected by the provisions of the Bill as those employed by the authorised bodies. I have no wish for a moment to belittle the enormous sums of money, the high finance and the very great matters that are being considered. I am, however, talking about the livelihood and careers of individuals and the ability of a decision of the tribunal to deprive individuals of their livelihood.
§
The Minister will be aware that in discussions in another place and earlier, in respect of how to bring some sense of fairness and equity into these matters, we have talked in terms of a centralised register of those who sell insurance. The Minister has laid great stress—I can understand his reasons—on Clause 54 of the Bill. Clause 54 states:
If it appears to the Secretary of State that any individual is not a fit and proper person to be employed in connection with investment business or investment business of a particular kind he may direct that he shall not, without the written consent of the Secretary of State, be employed in connection with investment business".
§
That is, of course, the black list. It is possible under the Bill—I do not quibble about this—for a person who falls foul of the rules and regulations, in effect, to have his ability to earn a living withdrawn. Of course, he has to commit what the Minister and myself agree are very serious misdemeanours. I take no exception to that. To find out what can be visited upon an individual who is held under Clause 54 to be derelict, we need to turn to Schedule 4. We find in the schedule the kind of punishment that can be meted out. Schedule 4, relating to the Financial Services Tribunal, states at line 38 on page 157,
Any person who without reasonable excuse refuses or fails to attend in obedience to a summons issued by the Tribunal or to give evidence; or alters, suppresses, conceals or destroys or refuses to produce a document which he may be required to produce for the purposes of proceedings before the Tribunal, shall be guilty of an offence".
§
I come to the point that I want to make. Given that under this procedure an individual is found guilty of an offence, what in fact can be visited upon him? Again, under Schedule 4 paragraph 5(4)(a)the Bill states:
on conviction on indictment to imprisonment to a term not exceeding two years or to a fine or to both".
§
and then, under (b):
on summary conviction, to a fine not exceeding the statutory maximum".
§ I believe that those who can have that kind of punishment visited upon them are in a special category. I am asking that the Minister, in making up the number of people who, in his opinion, are qualified to serve on the tribunal, should consider a range of matters, including those to which I have referred. Surely, it is not unreasonable that those who represent the interests of people working in the business should have a voice. I am not talking about voices. I am talking about a voice on the tribunal that will look at these matters. This is, I believe, a reasonable request. I hope that the Minister can indicate that when the 10 596 individuals—men or women—of experience are called upon or invited to serve it will be possible for those employed in the industry at least to be considered. My amendment simply asks that they should be consulted.
§ Of course, I should like the Minister to go further. I would hope that when consultation took place, the Minister would be favourably impressed by the case that was made and that these organisations would find that they were sitting on the tribunal, having a voice in looking after the interests of those employed in the business and also discharging their duties in an impartial manner on a range of matters. My noble friend Lady Turner is, unfortunately, not able to be present. However, the Minister will recall that my noble friend made a great many points at Second reading expressing the views of the confederation of trade unions in the insurance industry. My noble friend has asked me to indicate her support and general interest on these matters. I know that she will be interested in what the Minister has to say. I beg to move.
§ 5.15 p.m.
§ Lord Brabazon of TaraI am grateful to the noble Lord, Lord Graham of Edmonton, for his explanation of the amendment. I am bound to say, however, that we do not believe that it would be appropriate to consult organisations representing employees. There is possibly a misunderstanding about the primary purpose of the tribunal. The tribunal is to consider issues directly affecting the business; yet there is no requirement that organisations representing investment business should be consulted; nor should there be. The tribunal will not be adjudicating between employers and employees. There is no need for its composition to strike a balance between them. It would not be appropriate therefore for the Secretary of State to consult employee representatives or other outside interests before making appointments to the panel.
There is only one exception in respect of other tribunals. That is the industrial tribunal. It is an exception because its role is to adjudicate between employers and employees. The whole purpose of appointing practitioners to the tribunal alongside lawyers is to ensure that the tribunal is better able to understand what are often likely to be complex cases, turning in part on what is best market practice. The practitioners on the tribunal will in no sense be representing either employers or employees.
I have to say to the noble Lord that, while one may have sympathy with the case for the employees, that is certainly not the kind of situation where there should be a statutory representative on the tribunal. I therefore cannot accept the amendment of the noble Lord.
§ Lord Graham of EdmontonIt could very well be—and not for the first time—that there is misunderstanding about the purposes of parts of this Bill. Do I understand the Minister to say that the consequences resulting from Clause 54 will form no part of the remit of those who serve on tribunals? Clause 54 relates to the employment of prohibited persons, as the Minister knows. I put forward my arguments on the premise that part of the responsibilities of those on the tribunals will be to take 597 account of, to adjudicate, to arbitrate or to give effect to, Clause 54. The Minister tells me that is not so; but if that is so I make this simple point. If one talks of having a friend in court—that is the tribunal—or one simply wants to make sure that the body of 10 people are representative of all types of people affected by the Bill, surely those who are employed are entitled to such representation?
I listened with care to the Minister. We are talking about the professionals who are running the business. This is not an industrial court nexus with employers and employees. If this indicates that the remit of those on the tribunal is wholly outwith anything to do with the implementation of Clause 54—I shall not say that I am content—then I am content to leave it until we read what the Minister has said. However, if giving effect to Clause 54 is to be part of the remit of those on the tribunal, in my view there ought to be someone there, not to represent the employees, but who, among his qualifications, has knowledge of their experience. Perhaps the Minister can help me?
§ Lord Brabazon of TaraI should like to intervene. I want to make it clear that I did not say the operation of Clause 54 was not covered with the tribunal. If the noble Lord understood me to say that, I must correct that straight away. Clause 54's disqualification directions against employers is only one of the categories of case which can be referred to the tribunals. Clause 54 cases may not be adjudicating between employer and employee. They will be considering his conduct and whether he has complied with the rules. I should like to make that quite clear.
§ Lord Graham of EdmontonI am grateful to the Minister. No one better understands the situation of an employee selling insurance than someone representing their interests. If we have 10 good and true men or women who are looking at the way in which these matters work out in practice—as I see it, that is to be the remit of the tribunal—surely they would be better served if at least one of them had some recent experience of life at that sharp end? The other nine may be better qualified on a range of other matters, but no one will be as well qualified to understand as someone representing those who work in the industry. They will understand, and not condone or plead the case for them. We are not arguing about the industrial tribunal nexus. We are talking about the application of the provisions of Clause 54 and others.
I do not intend to press this amendment in any way. I believe that there is a strong argument for the Minister to consult with the representatives of those employed in the industry before constituting the tribunal. If it appears that in this tribunal there is no one with experience of those who work in the industry then the Minister must understand that those who work in the industry will feel that this is a rough kind of justice when the livelihood of their members is at stake and can be taken away. The Minister ought to understand that with all the problems on his plate he can avoid that one very easily, not by additional representation, but by agreeing to consult.
598 Perhaps I shall come back at a later stage. In the meantime, I beg leave to withdraw the amendment.
§ Amendment, by leave withdrawn.
§ [Amendment No. 223 not moved.]
§ Clause 83 agreed to.
§ Schedule 4 [The Financial Services Tribunal]:
§
Lord Morton of Shuna moved Amendment No. 224:
Page 158, line 9, at end insert—
§
("() A person shall not under this paragraph be required to disclose any information or produce any document which he would be entitled to refuse to disclose or produce on grounds of legal professional privilege in proceedings in the High Court or on grounds of confidentiality as between client and professional legal adviser in proceedings in the Court of Session except that a lawyer may be required to furnish the name and address of his client.").
§
The noble Lord said: This amendment relates to the procedure of the tribunal and to the evidence given. The tribunal may by paragraph 5 require a person to give evidence.
Any person who without reasonable excuse—refuses or fails to give evidence",
§ shall be guilty of an offence. I read that briefly.
§ Clause 81(5)—with which we dealt some 20 minutes ago—enshrines the provisions relating to confidentiality and legal privilege in relation to investigations by reporters into the working of unit trusts. This amendment is seeking to put in the same clause specifically to protect the legal profession if someone has to give evidence in relation to somebody to whom they have given advice before the tribunal. It is in my view necessary that this provision should be made.
§ The Government may no doubt respond that this might be a reasonable excuse under Schedule 4, paragraph 5(1). However, when we have the provision about privilege set out in Clause 81(5), in my submission it would be better to add this provision to the schedule to make it entirely clear that the legal privilege still exists. Otherwise, any lawyer summoned would be caught in a catch-22 situation. He would either be struck off for giving evidence and revealing what is confidential, or he is in contempt of the tribunal and liable on conviction to a term of imprisonment of two years or a fine or both. I hope that the Government will see fit to accept this amendment.
§ Lord Brabazon of TaraI am happy to say that the noble Lord has made a very good case indeed for his amendment. We are very pleased to be able to accept it.
§ On Question, amendment agreed to.
§ Schedule 4, as amended, agreed to.
§ 5.30 p.m.
§ Clause 84 [References to the Tribunal]:
§
Lord Taylor of Gryfe moved Amendment No. 224A:
Page 64, line 5, at end insert—
("() who has been refused recognition under section 18 above;").599
§ The noble Lord said: Like other noble Lords, I am in some difficulty about this amendment as the Bill has been substantially rewritten, particularly regarding the recognition of professional bodies. I tabled Amendment No. 86A on 23rd July; but as the Minister announced at that time that this particular schedule was to be rewritten, the amendment was not called. This amendment relates to the same problem. If it is not technically in order, perhaps the Minister will guide me as to how the issue which it raises can best be dealt with so that we may return to it on Report.
§ The amendment relates to the question of recognition of professional bodies. I was invited by the Institute of Chartered Secretaries and Administrators to table this amendment so that there may be an appeals procedure against non-recognition of what may be a reputable and worthy organisation. It is in order to provide for such appeals procedure that the amendment is submitted. I hope that the Minister will guide me as to whether it is appropriate and acceptable, and that he will look at his revised schedule on Report to see where best this proposal could be introduced. I beg to move.
§ Lord Brabazon of TaraAt present I am not quite sure to what the noble Lord was referring when he suggested that we were to revise the schedule; but I shall certainly look into the matter. I have to say that in any case we cannot sympathise with the main drift of the amendment.
The purpose of the tribunal is to provide a safeguard against the Secretary of State or agency when using executive powers against a particular authorised business or individual. It will be concerned with powers which can directly affect the ability of the people concerned to earn a living through investment business.
The decision to refuse a recognition order to a professional body would not have this direct effect on people's livelihoods. If one professional body is not recognised, businesses may be able to seek authorisation from another or from a recognised self-regulating organisation. In all cases authorisation may be sought from the Secretary of State or agency.
The need for a safeguard against loss of livelihood does not therefore arise in this case on refusal of a recognition order. The decision to refuse recognition involves assessment of many complex and wide-ranging criteria, and that is best left to those who are continuously involved in regulation.
I am now advised that the Government amendments to the recognition of professional body clauses, which we discussed last Wednesday, would have no effect on the amendment and would not achieve what the noble Lord is seeking to achieve. Therefore, I must ask the noble Lord to withdraw the amendment.
§ Lord Taylor of GryfeI shall beg leave to withdraw the amendment. As the noble Lord has just said, last Wednesday (at 5.45 p.m., col. 251 of the Official Report) we discussed the new schedule on the requirements for recognition of professional bodies. The rewriting took up one and a half columns of the 600 Official Report. It is extremely difficult to draft appropriate amendments when new schedules are introduced. That has been a common feature of our discussions on this Bill. However, I shall certainly look at what the Minister has said and see where is the appropriate place to introduce this particular concern. I thank the Minister and beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Clause 84 agreed to.
§ Clause 85 [Decisions on references by applicant or authorised person etc.]:
§
Lord Morton of Shuna moved Amendment No. 225:
Page 65, line 39, leave out ("accordingly") and insert ("forthwith in accordance with the Tribunal's report")
§ The noble Lord said: The purpose of this amendment depends on my understanding of the meaning of Clause 85(1) being correct. Therefore, I had better make clear what I understand that clause to mean. As I understand it, once the tribunal has reported, the Secretary of State has to decide the question in accordance with the tribunal's report. In other words, the Secretary of State has no review provision; he has to come out with a judgment which is the tribunal's judgment.
§ The difficulty about the present wording of the clause, which the amendment seeks to correct, is that there is no time limit. It just says that the Secretary of State shall decide the matter accordingly. Of course, what may well have happened under the tribunal procedure is that a person—it could be either a body or an individual—has been prohibited from carrying on his business. The tribunal may decide that is wrong and the appropriate decision is that the matter should be recalled. It makes a great deal of difference to the person who should be allowed to continue in business to get that decision through quickly. If. for one bureaucratic reason or another, the Secretary of State does not decide the matter accordingly within a matter of weeks or months, it may cause severe financial loss to the individual who has been, as it were, acquitted by the tribunal.
§
Therefore, the amendment suggests that the Secretary of State is to decide the matter,
forthwith in accordance with the Tribunal's report".
§ From what I understand to be the department's intentions, I think that the amendment expresses what the department hopes will happen. I beg to move.
§ Lord Brabazon of TaraI am bound to say to the noble Lord, Lord Morton of Shuna, that the intention in the Bill as drafted is precisely as he has just described in that it should be reported as soon as possible. I am also grateful to the noble Lord for having moved the amendment because it expresses the position in better words than the Bill as drafted at present. Therefore, once more I am pleased to accept the noble Lord's amendment.
§ On Question, amendment agreed to.
§ Clause 85, as amended, agreed to.
§ Clauses 86 to 88 agreed to.
601§ Clause 89 [Register of authorised persons and recognised organisations etc.]:
§ Lord Lucas of Chilworth moved Amendments Nos. 226 to 230:
Page 68, line 18, leave out ("other than section 15").
Page 68, line 26, leave out paragraph (f).
Page 68, line 35, leave out from first ("organisation") to end of line 37 and insert ("or certification by a recognised professional body, the name and address of the organisation or body; ").
Page 69, line 5, leave out ("15 or").
Page 69, line 19, at end insert ("and. in either case, such other information as the Secretary of State may determine.")
§ The noble Lord said: I beg to move Amendment No. 226 together with Amendments Nos. 227, 228 and 229 because I spoke to those amendments with Amendment No. 79. For the convenience of the Lord Chairman, I should also like to move Amendment No. 230 because I spoke to that a few moments ago with Amendment No. 215.
§ On Question, amendments agreed to.
§
Lord Morton of Shuna moved Amendment No. 231:
Page 69, line 21, after ("of) insert ("the reasons for and extent of the disqualification direction and").
§ The noble Lord said: As the Bill stands, this provision entitles a person to discover whether a disqualification direction is in force in relation to a particular person. However, unless he can satisfy the Secretary of State that he has good reason for seeking the information, he will not be able to inspect the list to find out the extent of the disqualification or the reasons for the disqualification. It appears that there is no real reason why that should not be open to the public. It is open to the person involved, but why should the public not be able to know the reasons for the disqualification and the extent of the disqualification? It is a very simple point. I beg to move.
§ Lord Lucas of ChilworthI have to confess that I am not able to give the noble Lord an answer. I had noted that the noble Lord had already spoken to this and dealt with it on an earlier amendment. I had assumed that this amendment was not going to be moved. I just wonder how I can deal with it other than to say that I had better give due consideration to what the noble Lord has said in this matter.
§ Lord Morton of ShunaSubject to one correction I think that the noble Lord is correct. This point was discussed on Wednesday when, unfortunately, I was not able to be present. It was mentioned by my noble friend Lord McIntosh of Haringey. In the hope that the noble Lord will look at this again I shall withdraw the amendment.
§ Amendment, by leave, withdrawn.
§
Lord Lucas of Chilworth moved Amendments Nos. 232 and 233:
Page 69, line 40, at end insert ("or").
§
Page 69, line 43, leave out from ("effect") to end of line 2 on page 70.
§ The noble Lord said: I beg to move Amendments Nos. 232 and 233. I spoke to these with Amendment No. 79. I beg to move.
§ On Question, amendments agreed to. Clause 89, as amended, agreed to.
§ Clause 90 [Inspection of register]:
§
Lord Williams of Elvel had given notice of his intention to move Amendments Nos. 234 and 235:
Page 70, line 10, leave out from ("register") to end of line.
§
Page 70, line 15, leave out subsections (2), (3) and (4).
§ Lord Morton of ShunaThese amendments are linked to Amendment No. 231. and therefore I do not propose to move them.
§ [Amendments Nos. 234 and 235 not moved.]
§ 5.45 p.m.
§
Lord Morton of Shuna moved Amendment No. 236:
Page 70, line 33, at end insert ("at least one of such places being in Scotland").
§
The noble Lord said: This amendment is a completely separate provision. There is no provision in Clause 90, which is the clause of the Bill regarding inspection, as to where the places will be. They are just such,
times and places as the Secretary of Stale may appoint".
§
All that is intended to be added is,
at least one of such places being in Scotland".
§ I hope that that will be the intention, but it might as well be on the face of the Bill. I beg to move.
§ Lord Lucas of ChilworthI apologise to the noble Lord, Lord Morton, for my confusion a few moments ago. May I say formally that we shall give consideration to what he said about Amendment No. 231, and take Amendments Nos. 234 and 235, and it I may, I shall write to him in full on how we feel about them.
Turning to the amendment before the Committee, of course I entirely agree that there should be facilities in Scotland for inspecting the register. Scotland is an important financial centre and it must have ready access to the register. However, I fear that I cannot agree to the amendment. Were I to do so, I am sure that I should call down on my head the wrath of those people in Cardiff, Belfast, Manchester, Birmingham and all the other financial centres who might feel unfairly discriminated against.
The important point here is that people in all parts of the United Kingdom should have ready access to the register. I know that this is what the Securities and Investment Board, who will be responsible for maintaining the register if functions are indeed transferred to them, are planning. They have already said that they intend to publish the details of the register annually, with more regular updates. It is therefore possible to envisage a situation where such lists are stocked by the larger libraries or other public reference points.
I think that in this age of electronic communication the designated agency—or SIB, who may well be the 603 designated agency—have said that they intend to make the register available in a computer readable form on a continuous basis. I do not believe it is too difficult to envisage a situation where arrangements can be made for public access to computer terminals situated in suitable locations throughout the United Kingdom and linked to the central register. I am sure that those responsible will read what has been said this evening and certainly will ensure that the closer locations include places in Scotland as well as in the financial centres elsewhere in the United Kingdom.
§ Lord Morton of ShunaThat reply is not entirely satisfactory. If I may put on my Scottish hat rather than a party hat, I would say that Scotland is a separate jurisdiction and has a separate legal system, and it should be recognised as such. There are tendencies in this Bill not to do so. The Government have made certain improvements as they have gone along, but when by statute, there is a Registrar of Companies in Scotland I can see no reason why the Government are so afraid of putting in the amendment I have suggested. Subject to the remark that I may come back to this at a later stage, I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Clause 90 agreed to.
§ Clause 91 [Power to call for information]:
§
Lord Morton of Shuna moved Amendment No. 237:
Page 71, line 10, leave out ("verified") and insert ("reported on").
§ The noble Lord said: I move this amendment which is in the name of my noble friend Lord Bruce of Donington. It really is a case of pure semantics. My information is that the word "verified" is not a term of art in accountancy and that the words "reported on" are ones that accountants understand. It seems that Clause 91(3) is basically a matter for accountants and that it would be better to give them words they at least understand the meaning of. I beg to move.
§ Lord Lucas of ChilworthI know that I spoke to this with Amendment No. 140 in relation to Clause 48 when we were dealing with much the same point. I can offer the noble Lord opposite nothing more than I offered then, and that was of course to stick to the words which we felt put the position rather more clearly.
§ Lord Morton of ShunaCertainly I do not wish to divide on this amendment and so I beg leave to withdraw it.
§ Amendment, by leave, withdrawn,
§ Clause 91 agreed to,
§ Clause 92 [Investigation powers]:
§
Lord Lucas of Chilworth moved Amendment No. 238:
Page 71, line 28, after ("or") insert ("a person certified by a").
§ The noble Lord said: I spoke to Amendment No. 238 with Amendment No. 79. I beg to move.
§ On Question, amendment agreed to,
§ Clause 92, as amended, agreed to.
§
Lord Lucas of Chilworth moved Amendment No. 239:
After Clause 93, insert the following new clause—
§ ("CHAPTER IXA
§ AUDITORS
§ Appointment of auditors.
§
§ The noble Lord said: I beg to move Amendment No. 239, and speak at the same time to Amendments Nos. 240, 241, 242, 243, 246 and 349. All these clauses, to which I shall speak together, concern the role of auditors in the financial services sector.
§ My honourable friend the Parliamentary Under-secretary for Corporate and Consumer Affairs announced the policy to which these provisions give effect in another place on 9th June. We believe that they provide a framework within which a constructive relationship between auditors and supervisors can develop, without undermining the auditor's relation-ship with his client or transferring responsibility for regulation from the supervisor to the auditor. I should stress that I accept that it is the supervisor's job to supervise. He lays down the rules, monitors compliance with them and enforces them. He decides what checks are necessary if he is to fulfil his task. These proposals do not change that responsibility. But the supervisor can do his job much more effectively if communications with an auditor are so facilitated that the supervisor can benefit from the knowledge of an investment business which the auditor, in the course of his work, will develop.
§ The first new clause provides that rules may be made requiring those businesses, authorised directly by the Secretary of State or under the Clause 30 arrangements in the Bill, to appoint an auditor. It will be possible for these rule-making powers to be transferred to a designated agency. The intention is to 605 ensure that all investment businesses, however they are constituted, can be required to appoint an auditor who will be able to enter into that constructive relationship with a supervisor from which benefit may flow. It is not intended that the exercise of these rule-making powers should cut across other statutory provision concerning auditors. So these rules will not apply to those investment businesses already required to appoint auditors under other statutes: the most obvious example of this is the Companies Act; and so this provision will apply to investment businesses which are not companies. But many investment businesses will not be companies and it is right to be able to require them to have an auditor in office.
§ The new clause also contains what on first sight seems a formidable list of the contents of rules concerning the appointment of such auditors. I should point out to the Committee that the content of rules parallels those provisions concerning the appointment of auditors in the Companies Act. It is not intended that an entirely new set of provisions concerning the appointment and role of auditors should be created.
§ The scope of the clause does not extend to businesses which are authorised entirely by virtue of SRO or RPB membership. It will be for those bodies to determine whether they wish to impose such a requirement. But they will have to match the standard of investment protection available under the conduct of business rules which, as the Committee agreed last week, will include provisions concerning the keeping of accounts. They will also have to have adequate arrangements for enforcing compliance with their rules. Many SROs and RPBs may conclude that this is best achieved by insisting that their members appoint an auditor. But they will be able to make other arrangements—and some may find this a more attractive proposition provided that these arrangements achieve effective enforcement of their rules.
§ The power for the Secretary of State to require a second examination of information supplied by a business on which an auditor has reported is intended to enable work of an apparently sub-standard nature to be checked by another person. This is not intended to reflect on the high standard of professionalism set by the major accountancy bodies in the United Kingdom. But the Bill does not enable the Secretary of State or the designated agency to dictate who shall be an auditor for an investment business, and there should be some route open to the regulator to take a second opinion if he has any doubts.
§ The third clause concerns communications made by the auditor to the Secretary of State or, if appropriate, to a SRO or a RPB. Information may be given at the request of the appropriate supervisor, in response to a question put by him or, occasionally, at the auditor's initiative. Usually such reports will be made with the knowledge of the business concerned, but on some occasions it may be appropriate for the business not to be informed. The clause provides that the auditor in making such a report in good faith shall not contravene any duty to which the auditor may be subject. So the auditor will not be liable for any loss suffered as a result of his report. This provision is intended to remove any inhibition which an auditor 606 might otherwise feel kept him from discussing matters with a supervisor.
§ It is intended that the circumstances in which an auditor should be expected to give information to a supervisor—especially on his own initiative—will be defined very carefully. This will ensure that the individual auditor knows where he stands and will not feel obliged to volunteer much irrelevant information to the supervisor in order to safeguard his position. I hope that these circumstances will be set out in professional guidance agreed between the supervisor and the professional body. I feel confident that both sides will approach the task of agreeing this guidance positively.
§ Contravention of the terms of such guidance would be subject to whatever disciplinary proceedings the relevant professional body decides to impose. So in essence we are looking for the professional bodies as well as the agency to fix guidelines which are acceptable to those who will be practising. If by any misfortune there are some professional bodies which either do not want or cannot agree on terms of guidance, it will be possible for the Secretary of State to make rules specifying the circumstances in which auditors should communicate with the supervisor. This is a reserve power which it is hoped will not need to be exercised. The Secretary of State will alone be able to make such rules. The function will not be transferred to a designated agency. If an auditor fails to make reports in accordance with these rules, it will be possible for him to be disqualified from auditing authorised businesses: I want to emphasise that this sanction applies when the auditor is subject to rules made by the Secretary of State, not in the case where satisfactory guidance is in place.
§ I hope that that is a sufficiently broad explanation of this rather long clause. I commend the provisions of the clauses in these amendments to the Committee. I beg to move.
§ Lord Morton of ShunaAs my noble friend Lord Williams of Elvel said in relation to earlier new clauses, on this side of the Committee we have not had time to study in full these clauses in this difficult area or to have consultation with those interested in them. Therefore, I intend to say nothing more than that we may come back on this at Report stage.
§ Lord DiamondBefore the matter is left at this stage can the Minister say what kind of consultations were made with the professional bodies before these clauses were framed? I am particularly concerned with regard to the very difficult issue of an auditor being put in the invidious position of having to disclose information against a client who pays him for doing it. As the noble Lord will be aware, most auditors charge on a time basis. The only product they have to sell is skilled use of time. Let us suppose that an auditor is required to spend seven hours, for example, reporting to the Secretary of State on matters about which the Secretary of State has inquired. Under the statutory compulsion that it is proposed should be laid down in this Bill the auditor will incur a considerable charge. Under the Bill the Secretary of State and the 607 Government are requiring an auditor to spend time, to incur charges, to be paid for by his client, presumably, in giving information which his client does not know about, and which, if he did know about, he would not wish to be given. Therefore, I ask the Minister what consultation took place before this particular scheme was put forward.
§ 6 p.m.
§ Lord Lucas of ChilworthI am grateful to the noble Lord, Lord Diamond, for putting his question so simply. May I preface my answer by reminding the Committee that the provisions we are discussing now are concerned with very carefully defined circumstances? This is not a general reporting duty. The business will be aware of what the auditor should report, and only the business which is behaving improperly need worry. Against that background I have to tell the noble Lord and the Committee that we had very, very extensive discussions over a number of months with all the bodies concerned and those extensive consultations going over many, many months did include matters dealing with disclosure of information. My understanding is that generally the profession appreciates that there is a responsibility upon them. I understand that generally they accept that responsibility; naturally they wish to make sure that it is not a general reporting duty.
I appreciate what the noble Lord, Lord Diamond, has said about time. 1 am afraid that the answer to that question is that the client will in fact have to pay for the time consumed. However, as I believe I said earlier, the client will normally know about the information being given. It may be that during a meeting with a supervisor, and then only rarely, an auditor would disclose something behind the back of his client. I do not think one seeks that kind of situation. Perhaps one might imagine, if fraud was suspected at an extremely senior level where the law might have to take a different course, that that might pose different kinds of problems. However, I believe that the guidance which the profession have agreed to give (and they are indeed already doing that) should take care of the eventualities which the noble Lord poses.
§ Lord DiamondIt will be obvious to the noble Lord that I have not had the opportunity of consulting my own professional body as to their reaction to this. The presumption is, since they have not written to me objecting strongly, that they do not object strongly. Nevertheless, I have grave anxieties about this and I am bound to draw the Minister's attention to one or two things which he said. For example, he said that he did not think there would be many occasions when an auditor would be put under compulsion and that that would only occur when things had gone wrong. However, that cannot be the case. Of course the Secretary of State will want to know whether things have gone wrong simply because they will appear to have gone wrong. The whole purpose of requiring further information from the auditor will be either to confirm the Secretary of State in his suspicions or to contradict those suspicions.
608 Until the information is available he will not know what has happened. Indeed, there would be no point in getting such information if the Secretary of State was clear as to whether the matter fell on one side of the line or the other with regard to improper conduct.
The Minister said something which did not coincide entirely with what I understood him to say in introducing the clause; namely, there would not be many occasions on which the auditor would have to disclose information behind the back of his client. It is a very curious situation when an auditor is required at the expense of his client to give information to the Secretary of State to the possible detriment of his client. It is a very unusual situation.
If matters went further and there was a prosecution in the courts, of course an auditor would then be required to disclose information. He does not have the privilege in such matters that legal representatives have. To my distress and unhappiness, such privilege is limited to lawyers, and accountants must tell the truth in court about their clients whether it is to the benefit of that client or the reverse. I understand that very well, but the court knows how to look after such privileges and a judge is there to see that justice is done and that the procedure is both just and fair.
However, that is not the case where the Secretary of State is examining an auditor in private. Therefore, I am bound to say that I am very glad that the noble Lord who is moving this amendment stated that he had not had time to consider it and that he might have to come back to it at Report stage. There are many things which I think are not yet clear or satisfactory.
§ On Question, amendment agreed to.
§
Lord Lucas of Chilworth moved Amendments Nos. 240 to 243:
After Clause 93, insert the following new clause:—
§ ("Power to require second audit.
§
§
After Clause 93, insert the following new clause—
§ ("Communication by auditor with supervisory authorities.
§
§
After Clause 93, insert the following new clause—
§ (' 'Overseas business.
§
§
After Clause 93, insert the following new clause—
§ ("Offences and enforcement.
§
§ On Question, amendments agreed to.
§ Clause 96 [Power to transfer functions to designated agency]:
§
Lord Silkin of Dulwich moved Amendment No. 243A:
Page 75, line 29, leave out paragraph (a) and insert:
§
("(a) that a body corporate has been established which is able and willing to discharge all the functions to which this section applied in respect to persons generally or to any such class of persons as is referred to in subsection (11) below:").
§ The noble Lord said: With this amendment, and others which I shall invite the Committee to consider at the same time, we come to the very important Chapter XI concerning transfer of functions to designated agencies, and in particular to Clause 96. The history of how Clause 96 comes to be in the form in which it comes before your Lordships is unusual and I think the clause itself was described by the noble and learned Lord the Lord Advocate at Second Reading as a novel one. The clause makes provision, as it stands at the moment, for the Securities and Investments Board Limited to be the first body to which, by order, functions shall be transferred by the Secretary of State. That is to say, it records the intention of the Government that when the Bill becomes law the Securities and Investments Board Limited should be established as what I think it is fair to call a quango in the full sense of the word—a quasi-autonomous non-governmental organisation. That is indeed what it appears to be. It will be designated as having the task of assuming many and indeed most of the functions of the Secretary of State himself in relation to organising the SROs.
§ That arose in an unusual way. The Bill as it originally appeared, as I understand it, had in it no reference to the Securities and Investments Board Limited although it existed as a company and although, in the course of debates in another place, there was pressure from this side of the Chamber for a statutory body to be set up which, as I understand it, had a good deal of support. But at the end of the day, I am informed as a result of a compromise proposed by Government supporters, the clause was redrafted in the way in which it now appears, not so much setting up the Securities and Investments Board Limited but taking it as being the body which would be the first to which the functions of the Secretarv of State under this 611 chapter would be delegated. So we have a position in which this board or company will have extremely important statutory powers while at the same time not being, as the Bill provides at present, a public body as such—to which, indeed, refer the provisions of the schedule to which a later amendment is linked. We seek to correct that.
§ Yet the body will have virtually all the powers, as I mentioned, of the Secretary of State himself. In fact, if I have correctly followed the provisions of Clause 96 in particular, especially in subsection (5), which exclude certain functions which the SIB are not to have, they are functions, I think, relating to court proceedings, and in certain cases the clause provides that the functions can only be exercised (or the Secretary of State may order that the functions can only be exercised) by the designated agency, the SIB, together with the Secretary of State himself.
§
What is the point of these various differences is very difficult to understand. There are further difficulties of comprehension as far as I am concerned inasmuch as the clause commences, as it stands at the moment, with the condition that it must appear to the Secretary of State,
that a body corporate has been established which is able and willing to discharge all or any of the functions to which this section applies".
§
Provided that that is satisfied, then the rest of the clause and the consequential matters follow. Why is it sufficient that the body corporate is able and willing to discharge any of the functions? Why not all of them—or, at any rate, all that are material to particular classes of SROs. Because of that difference, the amendment which we are now discussing has been put down. We seek to change it to read:
that body corporate has been established which is able and willing to discharge all the functions to which this section applies in respect to persons generally or to any such class of persons as is referred to in subsection (11) below"—
§ that is to say, the relevant SROs that will form part of the SIB's or the other designated agencies' empires.
§ The other amendments to which I wish to speak in connection with this one, if I may enumerate them, are Nos. 243B, 247A, 248A, 254C, 254D, 254E, 254F and 254G. These are in each case designed to follow through the logic of what we seek to do in the amendment I am speaking to; that is to say, to provide that in the circumstances of the designation the SIB or other designated body should have under its control all the functions which the Secretary of State would have under his control with the exception of those which are expressly excepted in subsection (5), and should not be left with part of those functions; and, when it comes to Clause 97, which deals with the resumption of the transferred functions, that there again, while the Secretary of State might take back all the functions of designated agencies, he would not be entitled to take back only some of them, leaving the designated agency in part with the relevant function.
§ The effect of that, we accept and assert, would be that the designated agency would enjoy virtually the full status, I must not say of a "statutory body" for it would be a statutory body in any event as it is enshrined in the statute, but of a public body with the relevant functions, subject only to the Secretary of State's power to divest it entirely of those functions or 612 to do so in relation to any specific group of SROs. It would not be left in this rather peculiar and, I suggest, compromise half-and-half state in which I described it as being a quango, or whatever description one would give to it. It appears to be almost on probation, as far as we can see quite unnecessarily; and it would be much better for Parliament to decide, if we are not going to set up a new body, that this is going to be the body which will control the operation of this machinery with all the powers that the Secretary of State would have if he were the controlling body.
§ In that respect, this is a perfectly familiar situation in a field with which perhaps I am more familiar than I am with this one. One finds a similar situation in relation to the Director of Public Prosecutions. He has very wide powers indeed, but he is answerable to the Attorney-General. Here, too, the SIB would have very wide powers but in the end, because it is necessary that such a body with such powers should be answerable to Parliament, it would be answerable through the Secretary of State. The Secretary of State would be the Minister who would be required to speak for it and explain its actions if they were called in question.
§ I do not wish to weary the Committee by going through these amendments one by one. I think that for the most part they speak for themselves and that they are seeking to give effect to the broad principle which I have suggested is the right one. I shall be more than interested to hear whether the Government accept this as being the correct principle and whether they are prepared to give further consideration to the matter. After all. the clause as it now stands was, as I said, very much a compromise in another place, and no doubt compromises can be looked at again. If neither of those possibilities is the position, I shall be very interested to learn how the Government distinguish between the body which is at present envisaged under Clause 96 and a full-scale public body which I have suggested as the right approach. I beg to move.
§ Lord Lucas of ChilworthI am very grateful to the noble and learned Lord for his explanation of this rather long list of amendments. I wonder whether I may start by saying—and I may actually repeat it— that we are not talking here about a quango. We have made it quite clear that this is to be a private sector body. If we were to accept any of the amendments the noble and learned Lord has proposed, it would remove an important element of the flexibility in the provisions for transferring functions to a designated agency, or whatever particular name or set of initials we use for it at this time. If the amendments were accepted, they would make it quite impossible for the Secretary of State to give to the agency some functions relating to a class of persons while retaining for himself others relating to those persons.
We do not yet know whether it will be desirable to transfer all the transferable functions to the designated agency. It will depend very largely on whether any body seeking to become a designated agency meets the criteria laid down in the Bill. For example, it may be that the body will not want to take on the whole range of functions. Equally, it might well be that when the Secretary of State comes to consider the body's proposals he will conclude that the body is unable to discharge a particular function.
613 We have identified only a few of the transferable functions which we would be unwilling to transfer. Two aspects of the power to make rules for authorised unit trusts may be retained by the Secretary of State. They concern permitted investments and investment limits. The power to prosecute may be transferred gradually and there may be some offences, such as those concerned with fraud, which will not be transferred.
The effect of the amendments would be that if the body's proposals were inadequate in respect of a single function, or if the body did not wish to assume a single function, it would not be possible to leave only that function out of the package. Unless he could carve out a group of functions relating to a specified class of persons, the Secretary of State would be prevented from transferring any of the functions. He would then be obliged to look for another body or to exercise the functions himself. That would not be a satisfactory outcome.
Similar considerations arise on the amendments to Clause 97. These amendments would remove an element of flexibility in the provisions for resuming functions from the agency. The existing Clause 97 strikes a careful balance between the need for flexibility in resuming functions and the objective that the Secretary of State should not be able to intervene at a highly detailed level in the operation of the agency.
The power to resume functions is one of the most important ways of securing the accountability of the agency. The Secretary of State will have to answer in Parliament for his use of the power or for a decision not to use it. and it provides a means whereby both the Secretary of State and Parliament can put effective pressure on the agency to improve its standards. For the power to work most effectively some element of flexibility really is necessary.
The new subsection (6) to Clause 96 is really unnecessary. The Bill already has the effect that if any function is transferred, any duties or obligations relating to it which the Secretary of State would have undertaken would also be transferred to that agency. I do not think either that it is necessary to provide that the draft rules and guidance of the agency should accompany the delegation order when it is laid before Parliament. I would take this opportunity to assure the Committee that the final draft will be publicly available when any delegation order is laid. As to reservations made under Clause 96(7), the Secretary of State will be able to give his reasons in the debate on the delegation order.
There is in fact nothing sinister in the Government wishing to retain flexibility in transferring functions. We hope that it will be possible to transfer almost all the functions which the Bill makes it possible to transfer. But when the Securities and Investment Board and the Secretary of State come to consider the detailed arrangements which have to be made they may well identify minor matters which are best left to the Secretary of State. They may indeed find that there are some functions which the agency is simply unable or unwilling to discharge in accordance with the criteria set out in the Bill.
614 We cannot be sure at this time, and certainly not until proposals are fully worked out by the board, exactly which functions will be transferred and which functions will not, because there is still much practical work to be done. In the meantime, as we are considering this Bill, I believe it would be quite wrong to limit the flexibility with which the transfer of functions is handled. Clause 96(11) provides that no transfer of functions may take place without the approval of both Houses of Parliament. So again I suggest to the Committee that there will be ample opportunity to debate the detailed arrangements for transfer, and of course at that time the approval of your Lordships will be necessary.
All these amendments are unacceptable to the Government. In effect the amendments, in particular Amendments Nos. 254F and 254G, seek to reverse a central feature of the Government's policy. The noble and learned Lord opposite explained that. The central feature of the Government's policy is that the regulatory body at the heart of the regime shall be a private sector body. If we accepted Amendments Nos. 254F and 254G, that would turn this body into a Crown body—the quango which the noble and learned Lord described. We need a body which can operate flexibly, rapidly and effectively, free of bureaucratic control. These amendments would make the expenditure of the agency public expenditure, subject to all the controls that would normally involve. The amendments would mean that the chairman and members of the governing body would become crown servants, as would the agency staff. Their pay, pensions and other conditions of service would be set, as a matter of policy, by the Treasury. Furthermore, the strong presumption is that they would be not merely Crown servants, but civil servants, and be treated accordingly. We do not believe that this is the way to secure the needed participation of expert practitioners from the City at either board or staff level.
When we commenced our deliberations the noble Lord, Lord Williams, began by saying at col. 42 of Hansard:
We should have a body at the top that carries the same authority as did the Takeover Panel—in other words, the authority of government".—[Official Report, 21/7/86; col. 42.]I find that a curious argument because the Takeover Panel does not derive its authority from the Government. It derived and continues to derive its authority from the commitment of the practitioners who set it up.
§ 6.30 p.m.
§ Lord Williams of ElvelI am sorry to intervene, but the noble Lord has mentioned my name and what I said. I specifically said that at the time the Takeover Panel was set up in 1968 it derived its authority from the Bank of England, and at that time the Bank of England had very great authority in the markets. The Bank of England has no longer such authority in the markets, which is why I am saying that a commission is required, an SIB, which has that same authority over a wide range as that which in my view the Bank of England no longer has.
§ Lord Lucas of ChilworthThat may well be so, but I was merely suggesting that the Takeover Panel today derives its authority from the commitment of its practitioners; those who set it up, largely, and who continue to operate it.
§ Lord Williams of ElvelPerhaps we may reserve this discussion of the authority of the Takeover Panel and its consequences until we come to that amendment.
§ Lord Lucas of ChilworthI am quite happy to do that. I used the quotation to illustrate the curiosity of the argument that is before us now, that this regulatory authority should have a governmental or a quango element, as the noble and learned Lord suggested it should be.
§ Lord Silkin of DulwichxThe Minister must not mislead the Committee. I said very clearly that as it is at the moment it appears to be a quango—a quasi autonomous non-governmental organisation. We want it to be a public body. It would not be non-governmental.
§ Lord Williams of ElvelLike the Bank of England.
§ Lord Lucas of ChilworthBoth noble Lords have said exactly the same thing twice over. When the noble and learned Lord, Lord Silkin, was speaking to us earlier he said that he saw this as a quango. I wrote down, "No, it is not a quango; it is a private sector body". That is how we see the operation; quite distinct from the way the noble and learned Lord apparently sees it.
When we framed our proposals for a designated agency we wanted to draw on the commitment of practitioners. So we see this as an agency, as a body, created by the City. The Securities and Investments Board Limited was set up last year by Sir Kenneth Berrill and Sir Martin Jacomb. We believe that as a result it will enjoy greater support in the City and hence be more effective. We are not entirely relying on voluntary commitment, although that is of prime importance. The Bill provides for a wide range of statutory powers to be given to the agency. So the commitment will be reinforced by the authority of statute.
It is not necessary to give the agency the authority of government, as was suggested by the noble Lord, Lord Williams, in his recent intervention when he described to me the origin of the Takeover Panel, which included the Bank of England and indeed the authority of the government. We do not see it that way at all. We see the voluntary commitment reinforced by the authority of statute. We do not believe it is necessary to give the agency the authority as such of government. To make the agency an arm or an agent of the government machine, as these amendments propose, would be quite undesirable, because it could not operate free from the expenditure controls which apply in the public sector—controls which, I suspect, will apply for some while yet.
The Bill already provides for a strong body at the heart of the new regulatory regime. To turn it in any 616 shape or form into a Crown body, far from strengthening it, would weaken its effectiveness. Nothing would be gained. Flexibility would be lost. The commitment of the City to supporting its work could well be lost.
For those reasons we see our solution as being the better solution in bringing protection to the investors. That is what the Bill is about. It is not about a Government authority: it is about protecting investors, such protection being devised and monitored by the practitioners themselves—and, added to that, within a statutory framework.
§ Lord BoardmanI support what my noble friend the Minister has said. My only purpose in intervening is to not let go unchallenged the comments of the noble Lord, Lord Williams, who referred to the Bank of England as now lacking any authority. I hope that—
§ Lord Williams of ElvelI am sorry to intervene so early in the noble Lord's intervention, but I did not say that the Bank of England lacked any authority. I said that the Bank of England, which had the authority to set up the Takeover Panel as a direct dependency of the Bank in 1968, did not in my view have the authority to supervise the SIB or to set up direct dependencies today. That is why I would resist the idea that the SIB should be a dependency of the Bank of England. I believe that the SIB should be a dependency of the Crown. That was the argument I was making. Whereas in 1968 the Bank was very powerful in that area, we are now on a wider canvas and I think the SIB should be based on the Crown.
§ Lord BoardmanI accept that my noble friend is comparing the authority at one time with the authority at another. I think it would be a waste of the time of the Committee to enter that argument, but I believe it would have been most unfortunate if it had been left on the record that the Bank of England's authority had been diminished in the way in which I thought the noble Lord, Lord Willaims, had suggested. I believe that its authority is very great, not only within the City of London but far beyond, and the respect in which it is held throughout the world is very great. It would be a pity if anything was said which eroded that.
§ Lord Williams of ElvelI would certainly accept what the noble Lord, Lord Boardman, has said. If I said or implied in any way that the Bank of England's authority over the banks under its supervision, or the Bank of England's general status, had been undermined, I certainly withdraw the remark I made. What I was trying to imply was that the Takeover Panel was created, as the noble Lord, Lord O'Brien, will tell us if he intervenes, under certain circumstances in 1968 when the Bank of England enjoyed a role in life slightly different from the role it enjoys at the moment. Perhaps I may refer to the regulation of the London Metal Exchange, over which, when I knew it, the Bank of England had very little authority other than that there was a small commodities division inside the bank which looked after certain matters. As Professor Gower pointed out, 617 the London Metal Exchange and other commodity markets were substantially unregulated.
While not meaning to reflect on the authority of the Bank of England, or to diminish its status in any way, I was arguing, and I shall continue to argue, that the Bank of England is not the body that should be supervising the SIB. The body that should be supervising the SIB, and from which the SIB should derive its authority, is the Crown. I persist in that argument.
§ Lord O'Brien of LothburyI am afraid that I returned to the Committee after a brief absence and in the middle of this debate and so I cannot claim to know all that has been said. However, the Bank of England and the Takeover Panel has been mentioned, and the noble Lord, Lord Boardman. has put the question in context. It must be remembered that in 1968 the Takeover Panel was an effective instrument in a fairly narrow field, and it still is today. We are here talking about a SIB operating over the whole field of securities business.
Although it is a long time since I had anything to do with the Takeover Panel, I believe that it still operates very effectively. Like all regulatory systems, it has its troubles from time to time, but I do not believe that it has fallen into disrepute or has disappointed myself as its creator. However, it is a fairly small affair, and I believe it is one that should be largely left undisturbed in the overall context of supervision of the securities industry.
The SIB is a much bigger affair. The Bank of England will undoubtedly exercise much influence. That does not mean to say that it exercises control. The bank is a very curious institution. It is effectively the controller of the banking system and nothing more. But over its nearly 300 years of existence its influence, which is very great, has spread into many areas—into industry, the commodity markets and the securities business because it is an influential body. Some of its influence has been highly informal, and perhaps, some would say, over-extended. Be that as it may, the Bank of England is there, and I still believe that it does a very good job in that position. I would be very much against the SIB being something that was an arm of government specifically laid down by statute. I feel that it should be the peak of a practitioner-regulated system, if one does not like self-regulation—and I believe that some people do not.
§ Lord GrimondI may return to ponder a little on exactly what is the SIB. We have been assured by the Government that it is not, as the noble and learned Lord, Lord Silkin, suggested, a quango. It has been described by the Government as a private sector body. The Government say also that it derives authority from statute, which is undoubtedly true, but that it does not derive authority from the Government.
The point that interests me is exactly what powers Parliament will have over the SIB. The Minister pointed out that subsection (10) lays down that:
No delegation order shall be made unless a draft of it has been laid before … each House of Parliament".618 We all know that the consideration of orders by both Houses of Parliament is in many respects unsatisfactory. Am I right in thinking that that is the only power Parliament will have over the SIB? That is to say. once a delegation order has been made, and once that body has been set up, the Government intend to treat it as they do any other limited company. Am I right in thinking that it will be a private sector company answerable to the City and possibly to the Bank of England but not directly answerable to Parliament? I am not certain that such is what the Minister intended, because he seemed to be saying at one point that the SIB's authority derives from statute and that certainly there was public interest in its doings. I am interested to know how that public interest will be expressed. I am interested to know how the Minister's power over that body. which I believe is undoubted, will be examined by Parliament.If the Minister argues that such is rather wide of the amendment, all I can say is that the discussion has gone fairly wide already, to discuss the commodity markets and the role of the Bank of England, which arc very big matters indeed. I would have thought that my points are as relevant to the amendment as many of the others that have been made. I shall be grateful to the Minister if he can clear up exactly what will be the nature of this private sector body and what powers, if any, Parliament will have over it.
§ 6.45 p.m.
§ Lord Lucas of ChilworthFor example, am change in Clause 1, which defines investments, will have to be approved by the Secretary of State and will have to be put before Parliament. Other matters that we have been discussing would have to come before Parliament by way of both affirmative and negative resolutions. The appointments to the body are made by the Secretary of State and by the Governor of the Bank of England, which will give one arm of authority. There will be a requirement to provide an annual report, and that will have to be laid before Parliament and could of course be debated in the usual way. There will be power for the Secretary of State to remove all functions or blocks of functions under Clause 97, which we shall be reaching shortly.
The Secretary of State himself will be answerable to Parliament on all those powers. So I believe that however unsatisfactory the noble Lord. Lord Grimond, may find some of the procedures through Parliament, there is an adequate route for the Government to be informed through the powers retained by the Secretary of State and for the Secretary of State's answerability to Parliament as well as for both the Government and Parliament to hold some of the reins in their hands.
§ Lord GrimondI thank the Minister very much for that reply, but it seems to show that the SIB is by no means a normal private sector body. That is the point that I had in mind.
§ Lord Silkin of DulwichI am grateful to noble Lords who have contributed to this debate, particularly those who have brought a great deal of knowledge of the City 619 of London with them. I may say that I am particularly grateful to the noble Lord, Lord Grimond, because his remarks illustrated the weakness of the position in which the Government now find themselves, by virtue of the compromise that they accepted in another place.
What is being set up is neither fish nor fowl. The virtues claimed for it are of a private company that is a practioner-recruited body, whereas the truth is that the SIB could not exist without the statutory powers that are being given to it under the Bill. It is in almost all respects in the same position as a public body created by statute. The difference ascribed by the Minister was in part the desirability of having flexibility. I accept that there is that need. However, I find it very difficult to understand why at this stage, after all the discussion in the debates in another place in reaching the compromise I mentioned, the Government could need further time to ascertain which functions the SIB or other designated agency must have in order to do its job properly that are not already apparent on the face of it.
The only other virtue of the system proposed by the Minister is that the SIB would not be bound by Treasury control on expenditure. I wonder how important that really is to such a body. Is not the reality the point made—admittedly not supporting me—by the noble Lord, Lord O'Brien, that the great difference between the Takeover Panel and the SIB, or other designated agency, is that the Takeover Panel could quite properly operate because it was operating over a very small field, as the noble Lord said, but that in the SIB we have a body which will operate over the whole field of control of the SROs? As the Minister rightly said, the whole purpose of this system is to protect the investor. It is done through a tiered system, with the SROs and above the SROs, to control them, another body. This in the Bill is the SIB. Then above that other body we have the powers of the Secretary of State and, as we learned from the reply of the Minister to the noble Lord, Lord Grimond, the Secretary of State we have Parliament exercising its powers of supervision. How it properly fits into that scheme that the SIB should be this private sector body which, in everything except name, is a statutory body—because it would not exist without the statutory powers that are being granted to it—I find it very difficult to see.
In this case at any rate, it seems to me that the issues are very clearly before the Committee. It is one thing or the other, and we wish to test the opinion of the Committee upon that.
§ 6.51 p.m.
§ On Question, Whether the said amendment (No. 243A) shall be agreed to?
§ Their Lordships divided: Contents, 56; Not-Contents, 102.
620| DIVISION NO.2 | |
| CONTENTS | |
| Amherst. E. | Boston of Faversham, L. |
| Ardwick, L. | Brockway, L. |
| Barnett, L. | Carmichael of Kelvingrove, L. |
| Birk, B. | Cledwyn of Penrhos, L. |
| Blyton, L. | David, B. [Teller.] |
| Davies of Penrhys, L. | Pitt of Hampstead, L. |
| Dean of Beswick, L. | Ponsonby of Shulbrede, L. |
| Gallacher, L. | [Teller.] |
| Graham of Edmonton, L. | Prys-Davies, L. |
| Gregson, L. | Rhodes, L. |
| Grimond, L. | Seear, B. |
| Hampton, L. | Shackleton, L. |
| Hatch of Lusby, L. | Silkin of Dulwich, L. |
| Hooson, L. | Stallard, L. |
| Houghton of Sowerby, L. | Stedman, B. |
| Howie of Troon, L. | Stewart of Fulham, L. |
| Jeger, B. | Stoddart of Swindon, L. |
| John-Mackie, L. | Taylor of Blackburn, L. |
| Kennet, L. | Taylor of Gryfe, L. |
| Kilbracken, L. | Taylor of Mansfield, L. |
| Kirkhill, L. | Tordoff, L. |
| Llewelyn-Davies of Hastoe, B. | Underhill, L. |
| Lloyd of Kilgerran, L. | Wells-Pestell, L. |
| Lovell-Davis, L. | Whaddon, L. |
| McIntosh of Haringey, L. | White, B. |
| Mackie of Benshie, L. | Williams of Elvel, L. |
| McNair,. L. | Wilson of Rievaulx, L. |
| Morton of Shuna, L. | Ypres, E. |
| Nicol, B. |
| NOT-CONTENTS | |
| Ampthill, L. | Layton, L. |
| Atholl, D. | Long, V. |
| Bauer, L. | Lucas of Chilworth, L. |
| Beaverbrook, L. | Lyell, L. |
| Belhaven and Stenton, L. | McFadzean, L. |
| Beloff, L. | Macleod of Borve, B. |
| Belstead, L. | Mancroft, L. |
| Bessborough, E. | Margadale, L. |
| Bethell, L. | Marshall of Leeds, L. |
| Boardman, L. | Maude of Stratford-upon- |
| Boyd-Carpenter, L. | Avon, L. |
| Brabazon of Tara, L. | Merrivale, L. |
| Bridgeman, V. | Milverton, L. |
| Brougham and Vaux, L. | Monk Bretton, L. |
| Butterworth, L. | Mottistone, L. |
| Caithness, E. | Mountevans, L. |
| Campbell of Croy, L. | Mowbray and Stourton, L. |
| Carnegv of Lour, B. | Munster, E. |
| Carnock, L. | Murton of Lindisfarne, L. |
| Colville of Culross, V. | Napier and Ettrick, L. |
| Colwyn, L. | Northesk, E. |
| Constantine of Stanmore, L. | O'Brien of Lothbury, L. |
| Cottesloe, L. | Onslow, E. |
| Craigavon, V. | Orr-Ewing, L. |
| Craigmyle, L. | Plummer of St Marylebone, |
| Cullen of Ashbourne, L. | L. |
| Davidson, V. | Rankeillour, L. |
| Denham, L. [Teller.] | Renwick, L. |
| Drumalbyn, L. | Rodney, L. |
| Elles, B. | Romney, E. |
| Elliot of Harwood, B. | St. Davids, V. |
| Elliott of Morpeth, L. | Sanderson of Bowden, L. |
| Elton, L. | Sempill, Ly. |
| Faithfull, B. | Shannon, E. |
| Fraser of Kilmorack, L. | Sharples, B. |
| Glanusk, L. | Stodart of Leaston, L. |
| Glenarthur, L. | Sudeley, L. |
| Gray of Contin, L. | Swinfen, L. |
| Grcenway, L. | Swinton, E. [Teller.] |
| Gridley, L. | Terrington, L. |
| Hailsham of Saint | Tranmire, L. |
| Marylebone, L. | Trefgarne, L. |
| Hanson, L. | Trumpington, B. |
| Harmar-Nicholls, L. | Tryon, L. |
| Henley, L. | Vaux of Harrowden, L. |
| Hives, L. | Vickers, B. |
| Holderness, L. | Vinson, L. |
| Hooper, B. | Vivian, L. |
| Hylton-Foster, B. | Whitelaw, V. |
| Kimball, L. | Wise, L. |
| Kinloss, Ly. | Wynford, L. |
| Lane-Fox, B. | Young, B. |
| Lauderdale, E. |
§ Resolved in the negative, and amendment disagreed to accordingly.
621§ 7 p.m.
§ Lord Brabazon of TaraMy Lords, in moving that the House do now resume, I suggest that we do not return to further consideration in Committee on this Bill until eight o'clock. I beg to move that the House do now resume.
§ Moved accordingly, and, on Question, Motion agreed to.
§ House resumed.