HL Deb 15 March 1988 vol 494 cc1112-9

8.25 p.m.

The Parliamentary Under-Secretary of State, Department of Transport (Lord Brabazon of Tara) rose to move. That the draft order laid before the House on 24th February be approved [19th Report from the Joint Committee.]

The noble Lord said: My Lords, I beg to move the first order standing in my name on the Order Paper and I believe it will be for the convenience of the House if I deal with the three orders separately.

The Financial Services Act 1986 (Investment Advertisements) (Exemptions) (No. 2) Order specifies certain exemptions from the requirement imposed by Section 57 of the Act that no person other than a person authorised under the Act may issue or cause to be issued an investment advertisement in the United Kingdom unless its contents have been approved by an authorised person. It complements the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1988 which was made on 25th February. Together these orders and Sections 57 and 58 or the Act replace the existing restrictions on the distribution of investment circulars contained in Section 14 of the Prevention of Fraud (Investments) Act. The approach adopted, which was the subject of a consultation document issued in November, has been to follow as closely as possible the existing regime. In the order before us most of the exemptions are in fact a reformulation of exemptions either in the Prevention of Fraud (Investments) Act itself or in general permissions issued under that Act.

In addition to this order and the other two in my name on the Order Paper, certain orders have also been laid recently which were subject to negative resolution procedure. These orders covered the following areas: restriction of the scope of the definition of investment business; exemptions from the investment advertisement restrictions which I have already mentioned; certain supplemental exemptions relating to the management of small occupational pension schemes; and the investment and borrowing and pricing of authorised unit trusts.

The order on pricing of authorised unit trusts, having been made by the Secretary of State, has been included in the delegation order, so that the board can have responsibility for this as well as the other detailed operational matters relating to unit trusts. An order has also been laid extending the scope of the definition of investment business in certain respects, which will also be subject to affirmative resolution procedure.

With these orders the framework envisaged in the Act is now virtually in place, and we are on course to implement the key provisions of the Act in April. Some will say that this is premature—that they have not had enough time to prepare. Others have complained that we have not implemented the Act quicker. We have taken considerable steps to publicise the Act's requirements and to encourage early applications for authorisation so that the businesses can familiarise themselves with what is needed to be done. Early implementation of the Act is desirable in the interests of investors. I trust that noble Lords will support this order. I beg to move.

Moved, That the draft order laid before the House on 24th February be approved [19th Report from the Joint Committee.]—(Lord Brabazon of Tara.)

8.30 p.m.

Lord Williams of Elvel

My Lords, the House is grateful to the noble Lord, Lord Brabazon, for introducing the order which he has discussed. I am grateful to him for separating the orders into their own components, because they cover different aspects of the Financial Services Act and its implementation and because some of them raise rather contentious problems about the operation of the Act and the present state of affairs, if I may put it that way, in the regulation of the City of London.

I reserve my comments on those points for the discussion of the second order—the Financial Services Act 1986 (Delegation) (No. 2) Order 1988. On the order that the noble Lord introduced—the Financial Services Act 1986 (Investment Advertisements) (Exemptions) (No. 2) Order 1988—I simply note that this is part of a mass of subordinate legislation which has the effect of changing the primary legislation. Under Section 58 of the Act the Secretary of State has powers to change many things which are in that Act. I simply note that in passing, because it is a point we made when the Bill was before this House—that it was in many ways a broad enabling Bill which allowed the Secretary of State to bring in orders to change clauses in due course. I believe that in a way it was suitable for this type of legislation but we would have preferred a much stronger supervisory body without all the delegation business, to which we shall come later, and with much more freedom of operation.

I put one question to the noble Lord before I start on the order he has introduced. I understood him to say that the restriction of scope order was under the negative procedure and therefore we would not have the opportunity of debating it in this House. Am I right in thinking that that is the order which governs the operation of the Eurobond trading and Eurobond dealing activity? If that order, which I understood would be under the affirmative procedure, is to be under the negative procedure perhaps the noble Lord will be good enough to tell me when he replies so that I can consider how we shall respond. From what he said this evening I understand it now appears to be under the negative procedure.

Turning to the order introduced by the noble Lord, I have some questions to put to him on which I should like to have his replies. I turn to the section entitled, Investment advertisements issued for the purpose of promoting or encouraging industrial or commercial activity or enterprise". I refer to paragraph (2)(a) in the typescript that I have. I apologise for referring to a typescript but the order has not been printed as of today. Paragraph (2)(a), which is a definition of a body corporate, reads: A body corporate falls within this paragraph if—(a) it is a body corporate which has as its principal objector one of its principal objects the promotion or encouragement of industrial or commercial activity or enterprise in the United Kingdom or in any particular area of it". I shall be grateful if the noble Lord can spell out exactly what is meant by that. I am sure there is a category of enterprise that falls within this definition of "a body corporate", but I should be interested to know exactly what the Government mean.

My next point refers to page 4 of the typescript, and I hope the noble Lord can follow me because these are typescript documents. Paragraph (3) begins: The requirements referred to in paragraph (1)(c) of this Article". I hope that he can see the point to which I refer. There is a large section on pages 4 and 5 which states that advertisements of this nature are required to carry what I can only describe as a health warning in the terms stipulated in the order.

I have no objections to health warnings as such—in fact, I have some objections but I shall come to those later—but I wonder whether in advertising in any specific media it is convenient to include the entire wording of this health warning. To take the example of a television advertisement, it would be difficult to incorporate all that text into the advertisement.

My particular point on the health warning, as I name it, is on page 5 of the typescript. I refer to the final paragraph of this health warning, which I quote in full: The persons to whose order this advertisement has been issued have taken reasonable steps to ensure that the information it contains is neither inaccurate nor misleading". I ask the noble Lord whether that is consistent with Section 47(1) of the Financial Services Act, which states, I remind the House: Any person who—

  1. (a) makes a statement, promise or forecast which he knows to be misleading, false or deceptive or dishonestly conceals any material facts; or
  2. (b) recklessly makes (dishonestly or otherwise) a statement, promise or forecast which is misleading, false or deceptive,
is guilty of an offence". I can understand that it is right that everyone should check whether the information that is contained in the advertisement produced is not misleading, but what about the information that is not contained in the advertisement which may be misleading? I ask the noble Lord whether the health warning is sufficient and whether there should not be a further health warning that not only have the advertisers taken reasonable steps to ensure that the information contained is neither inaccurate nor misleading but also that they have gone to great pains to make sure that all the relevant information is in the advertisement in question.

Turning to takeovers of and offers for private companies, Article 4(1)(b), on page 6, describes a "relevant offer". It states: 'Relevant offer' means an offer of the kind described in Part II of the Schedule to this Order for shares in or debentures of a body corporate of the kind described in Part III of that schedule". I turn to Part II of the schedule, which defines "relevant offer", and I shall then refer to Part III, which defines "a body corporate". Part II of the schedule defines "an offer" as: an offer for all the shares in, or all the shares comprised in the equity or non-equity share capital of, an offeree company". What is the situation where an offer is made for not all the shares but perhaps for a large majority? Does it mean that all advertisements which are exempted by this order are caught by the provisions of Section 57 of the Act? Furthermore, can the noble Lord define what he means by non-equity share capital? I was brought up to believe that share capital in either ordinary or preference form was part of the equity of a business. It may be I am wrong; but I should be grateful if the noble Lord can assure me that I am wrong, and tell me in what respect I am wrong.

In paragraph (a) at the bottom of page 2 of the schedule the provision is that the offer is only relevant if its terms have been recommended by all the directors of the offeree company. Supposing there are 10 directors of the offeree company, nine of whom recommend the offer and one who says, "I do not recommend the offer." Does that situation immediately vitiate the advertisement and is it then caught by Section 57 of the Act?

Turning onwards towards paragraph (g) in this part of the schedule, I noted the expression "the offer document". I am now looking on my typescript at page 5 paragraph (g) of Part II of the schedule. It refers to the offer document. So far as I can see, this is the first time that the offer document is referred to in the schedule. Does that mean that there has to be an offer document setting out the terms of the offer and that this is not simply a verbal arrangement—which often happens in the case of private companies—between one group of people and another? Does there have to be an offer document setting out the offer as defined in Part II and hence triggering the exemptions from Section 57 in the schedule?

Continuing from there, I am assuming from the definition of the noble Lord of "private company" in Part III of the schedule, that the body corporate to which this order refers (being a private company) has the same characteristics of a private company that is exempt from the takeover code because its shares have not been quoted and because of other rules in the takeover code of which the noble Lord will be well aware. I assume that Part III tracks the takeover code. I shall be most grateful if the noble Lord can confirm that. If he cannot do so, perhaps he can explain why Part III does not attract the takeover code. It is important to get these matters properly in order.

I am sorry to have taken the time of your Lordships on this order, but it is a very important one. It constitutes almost a Bill in itself. I am not surprised, because I warned the House at the time of the passage of the Financial Services Bill when it was before your Lordships. I said that we would have a lot of this kind of subordinate legislation amending the primary legislation. I am sorry to have asked the noble Lord a certain number of questions which may be rather technical, but I believe that we need the answers.

8.45 p.m.

Lord Boardman

My Lords, I have great sympathy for my noble friend being faced with such a complexity of points, many of which are such that I believe that Law Lords would reserve judgment for some time in order to decide what are the correct answers. It is undoubtedly one of the problems with this highly complex piece of legislation and the regulations that flow from it.

I have one simple point for my noble friend, and I hope this is an appropriate moment at which to raise it. It comes under the terms of the Financial Services Act 1986 (Restriction of Scope of Act) Order 1988. That is a negative instrument. I believe it is one about which my noble friend commented in his opening remarks and perhaps I may raise the issue now. Briefly, the effect of that is to permit exemption of international self-regulatory organisations from the scope of the Financial Services Act. This is of some concern to the International Stock Exchange. It is perhaps right that here I should declare an interest. A subsidiary company of a bank of which I am chairman is a member of the International Stock Exchange.

I am sure that my noble friend is familiar with the arguments on that point. It is one which has been put to his noble friend the Secretary of State by Sir Nicholas Goodison, chairman of the International Stock Exchange. In particular I refer to a letter of 10th March of which I am sure my noble friend is aware. I understand that the present intention under the order is to permit the Association of International Bond Dealers to continue to provide bond services within the United Kingdom. I understand that the order as it has been drafted would permit the Association of International Bond Dealers or anyone else, to be granted exemption to run a market in equities. I suggest that goes too far. Organisations which are granted such exemption because they cannot or do not want—whatever the case may be—to comply with the requirements for recognition are given a very considerable advantage over those that are bound by rules.

I understand that there is no objection so far as concerns the International Stock Exchange, to the AIBD continuing to provide services to the bond market, but an extension of that exemption into equities would give them a very unfair competitive advantage. It would also create a precedent which could be of acute embarrassment and damage to the interests of the International Stock Exchange and to those authorised bodies under the Financial Services Act. I hope that my noble friend can give some reassurance to us on that point.

Lord Brabazon of Tara

My Lords, I shall try to deal with some of the points that have been raised. I shall first of all deal with the Restriction of Scope of Act Order which is not something which we are debating this evening. It is true that the Restriction of Scope of Act Order is subject to the negative resolution procedure under Section 2(5) of the Act. It is the order which makes provision for the exclusion of the activities of an international securities self-regulating organisation if certain conditions are satisfied. However, the activities of members of the organisation will continue to be regulated under the Act. I am sure that noble Lords do not need my ad vice on the steps that should be taken if they wish to have a debate on that order.

Lord Williams of Elvel

I am sorry to interrupt the noble Lord, but since he was kind enough to talk about this Act I have to apologise that I thought it was under the affirmative procedure rather than the negative procedure. I now recognise that it is under the negative procedure. Perhaps the Minister can tell us whether the Government are prepared to consider the arguments of the noble Lord, Lord Boardman, although we are not debating this particular measure?

Lord Brabazon of Tara

With respect to the noble Lord, I was about to launch into a little explanation regarding this matter. I believe it is an important point which has been raised by my noble friend and also by the noble Lord, Lord Williams of Elvel. I should like to stress that the power introduced in the Restriction of Scope of Act Order to exclude certain activities from the scope of the Act is simply a power. No decisions have yet been taken about whether it will be exercised in particular cases. No application has yet been made for the power to be exercised.

I do not believe it is any secret that in introducing the amendment the Government have particularly in mind the representations made to us by the Association of International Bond Dealers. Sir Nicholas Goodison has recently written to my noble friend the Secretary of State expressing concern at the possible effect of this power if it were exercised in a particular way. My noble friend reiterated those concerns tonight. It is important to remember that, as Sir Nicholas said in his letter, the current activities of the AIBD in the United Kingdom fall short of providing all the services of an investment exchange.

That is also the understanding of the Government; and it was on the basis of that understanding that the amendment was made. If an application for approval is made by AIBD, it will be assessed against the criteria laid down, including the very important condition that there should be no undue risk to investors in the light of the circumstances prevailing at the time. If those circumstances should subsequently change—for instance, if AIBD were to extend its activities in the way that has been suggested—I confirm that the question of approval would be reconsidered. For technical reasons it would be extremely difficult to frame the amendments so that such a review followed automatically with a change in circumstances. I hope that with this assurance my noble friend and the noble Lord, Lord Williams, will be somewhat mollified.

The noble Lord, Lord Williams, asked me a number of detailed questions on the order before us which I shall do my best to answer. If I do not manage to answer them this evening, I shall write to the noble Lord. He asked about Article 2. The order has been printed. It is designed to cover local enterprise agencies. These are already covered under General Permission 2 under the Prevention of Fraud (Investments) Act, but are specified in the schedule. The present order is designed to replace this approach with a general definition.

The noble Lord asked about the concealment of facts in advertisements. The concealment of material facts is an offence under Section 47(1) only if it is dishonest and is intended to induce a person to do any of the things listed in that subsection. If a person, in compliance with the requirements of the order, has taken reasonable steps to ensure that the information in the advertisement is not inaccurate, he can hardly be accused of dishonest concealment of material facts. On the other hand, if he has dishonestly concealed material facts he cannot claim that he has taken all those reasonable steps.

Lord Williams of Elvel

My Lords, I apologise for intervening again. Section 47(1) refers to: Any person who—(a) makes a statement, promise or forecast which he knows to be misleading". It continues in subsection (1)(b): recklessly makes (dishonestly or otherwise) a statement". In other words, it is not dishonest or otherwise; it is because he is reckless. That is the point I was trying to get at.

Lord Brabazon of Tara

My Lords, I am sure that it is a very good point.

The noble Lord also asked me about non-equity share capital. That is any share capital of a company which neither as respects dividends or capital carries any right to participate beyond a specified amount in a distribution. The order defines equity share capital.

The noble Lord asked me about an offer document. That is defined in paragraph 1 of the schedule. Part III of the schedule trails the takeover code. The noble Lord asked about takeovers of private companies under Article 4(1)(b). He asked whether, if an offer is not for all the shares, it is caught by Section 57. The answer to that is, yes. If the offer is recommended by all the directors, that again would be caught by Section 57.

I said at the beginning that I would try to deal with the points as best I could. I know that the noble Lord spent many hours on the passage of the Act and many of those matters were discussed at that time. I shall read what the noble Lord has said and if I can add any further detail to my replies this evening I shall of course write to him. In the meantime, I commend the order to the House.

On Question, Motion agreed to.