Lords Sitting of 31 January 1989

Preamble
The House met at half-past two of the clock: The LORD CHANCELLOR on the Woolsack.
Prayers—Read by the Lord Bishop of Liverpool.

LORD SAINSBURY OF PRESTON CANDOVER
Sir John Davan Sainsbury, Knight, having been created Baron Sainsbury of Preston Candover, of Preston Candover in the County of Hampshire, for life—Was,in this robes, introduced between the Lord Sainsbury and the Lord Prior.

Chemical Weapons
2.47 p.m.
Lord Campbell of Croy Lord Campbell of Croy asked Her Majesty's Government:
What progress is being made in reaching an up-to-date and effective international agreement on the prohibition of the use of chemical weapons.
The Minister of State for Defence Procurement (Lord Trefgarne): My Lords, the use of chemical weapons in war is already banned under the 1925 Geneva Protocol to which over 120 states, including the United Kingdom, are party. Negotiations aimed at achieving a global, comprehensive and verifiable ban on the development, production and possession as well as use of chemical weapons continue at the conference on disarmament in Geneva. Progress has been made, but complex issues remain to be resolved particularly concerning verification.
Lord Campbell of Croy: My Lords, I thank my noble friend for that Answer. Although reports of the recent international meetings are encouraging, are the Government optimistic about verification provisions being included in any agreement when it appears that factories producing chemical weapons can easily be disguised as ordinary manufacturing plant?
Lord Trefgarne: My Lords, my noble friend is right to point to the difficult issues involved in the verification of a chemical weapons ban. Speaking for myself, I believe that no such verification regime is likely to be effective if it does not include a provision for challenge inspection. I believe that that is also the view of the Government.
Lord Cledwyn of Penrhos: My Lords, can the Minister say what will be the effect of the successful conclusion of the recent Paris conference on the Geneva talks on chemical weapons which have continued for the past 14 years?
With reference to the 1925 protocol referred to by the noble Lord in his Answer, can he say what action the Government would support if a nation was in breach of that protocol, as some nations are alleged
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to be? Would Her Majesty's Government be in favour of taking sanctions against such a country?
Lord Trefgarne: My Lords, that is a difficult question. As the noble Lord will understand, although there are a number of allegations about the use of weapons which may be in breach of the convention, very few have been proven. One of the benefits from the recent Paris conference was that 10 more nations have indicated their intention to adhere to the 1925 protocol, for all its imperfections.
Lord Cledwyn of Penrhos: My Lords, I am obliged to the noble Lord for that full reply. With regard to the first part, does he not agree that the case of using chemical weapons was proven beyond doubt against Iraq in relation to the recent war with Iran and in relation to the Kurds?
Lord Trefgarne: My Lords, I am aware of the allegations to which the noble Lord has referred. I must agree that there is powerful circumstantial evidence to support them. However, they are denied by the country concerned and I understand that the Geneva Protocol does not make provision for the type of sanctions which the noble Lord has in mind.
Lord Mellish: My Lords, is the Minister aware that it is very unusual these days that anyone says anything nice about Britain? However, is it not time to put on the record that Britain neither makes chemical weapons nor has a stockpile of them?
Lord Trefgarne: My Lords, I am grateful to the noble Lord for his intervention. Of course, it is the case that the United Kingdom abandoned its chemical weapons capability many years ago.
Lord Grimond: My Lords, in the case of Iraq, is it not true that casualties who were clearly identified as suffering from the effects of chemical weapons were examined by impartial doctors from other countries and that the charges are proved to the hilt?
Lord Trefgarne: My Lords, it is the case that we saw some casualties from Iraq who, it was alleged, were suffering from the effects of chemical weapons. It is very difficult to be certain in such cases; nevertheless, as I said in answer to the noble Lord, Lord Cledwyn, the circumstantial evidence was considerable.
Baroness Seear: My Lords, can the noble Lord tell us what evidence there is, contrary to the evidence of the doctors, that it was not chemical weapons which were used against these people?
Lord Trefgarne: My Lords, as I recall it, there was no doubt about the cause of the injuries concerned; namely, the presence of certain chemicals. However, whether those chemicals came to those people in contravention of the 1925 protocol is another matter.
Lord Elwyn-Jones: My Lords, in view of the gravity of the allegations against Iraq, should there

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not be an appropriate international inquiry? If what is alleged is true, it is outrageous and should be condemned internationally.
Lord Trefgarne: My Lords, the difficulty is that the 1925 protocol, as I have said, is a very imperfect instrument for these purposes. Agreed, as it was, so long ago in very different circumstances, as I understand it, it provides only for prohibition of the use of chemical weapons between contracting parties to the protocol. It is not clear that that is what happened in this case. For example, I am not entirely certain that the Kurds were contracting parties to the protocol. Of course, that is not to say that we do not deplore the use of chemical weapons wherever it may occur.

The Design Centre
2.56 p.m.
Lord Reilly Lord Reilly asked Her Majesty's Government:
Whether they intend to take any action over the proposal to privatise the Design Centre.
The Secretary of State for Trade and Industry (Lord Young of Graffham): My Lords, as a member of the Design Council the noble Lord, Lord Reilly, will know that the council is an independent body to which the Design Centre premises are leased. In the circumstances a decision on the proposal to privatise the Design Centre is one for the council alone to take.
Lord Reilly: My Lords, I thank the noble Lord for that reply. I believe that I should declare an interest. For many years—this was some time ago—I was a director of the Design Council. At that time I should have been very pleased by the Answer. However, I gather that the Design Council not only receives a much larger grant in aid now than it did but that it is also much more dependent on the goodwill of the DTI. I therefore ask the Government to reveal a little more about its relationship with the Design Council.
Lord Young of Graffham: My Lords, the Department of Trade and Industry supports the Design Council at around £6 million a year. However, that is about half of the council's income which also comprises income from differing activities; namely, from contract work and sponsorship. The decision to close the shop and to privatise it is for the Design Council alone. It has recently decided that its main objectives should be to promote better attention to design by industry and to ensure that design is adequately covered by all levels of education. It felt that the maintenance of the design shop was detracting from those activities.
Lord Peyton of Yeovil: My Lords, will my noble friend make clear on behalf of the Government that they fully appreciate the invaluable work which has been done by the council and very particularly the example shown by the noble Lord who asked the Question?
Lord Young of Graffham: My Lords, yes, I am happy to assure my noble friend that the Government are very well aware of the good work which has been done by the Design Council. However, all those in the design sphere today, and it is a billion pounds a year activity, will pay testimony to the way in which the Government have supported design throughout this decade. I suspect that we have done more for design than any government previously through our recognition of its importance in helping to restore British industry.
Lord Vinson: My Lords, will the Minister agree that over the years the Design Council has played a very important part in trade promotion? If that part of the council's activities is to cease, it will leave London as the only major capital city in the world without a permanent standing exhibition of the best of its products. Can the Minister assure us that his department will look favourably upon and encourage alternative arrangements to promote British exports in such ways?
Lord Young of Graffham: My Lords, I appreciate what my noble friend tells me, but it seems to me that the best way to help to expand British exports is by having British manufactured goods which are properly designed, properly made, sold at the right price and delivered on time. Design is a very important element in that. The Design Council, which is charged with the conduct of its work, has decided that the retailing and marketing activities—the Design Centre label scheme—has caused confusion and does not help in carrying out its main activities. It considers its main activities to be promoting better attention to design by industry and covering that at all levels of education. Those are the sort of judgments which it is best placed to make.
Lord Peston: My Lords, I agree that it is vitally important to encourage first-class British design throughout British industry. Given that the Design Centre was once a marvellous showcase for the best of British design, can the noble Lord say why the conclusion has been reached that we do not need such a showcase? Can he offer your Lordships any explanation as to why we no longer need a design centre?
Lord Young of Graffham: My Lords, I assure the noble Lord that we have a design centre whose work is continuing. The Design Council has decided that it does not require a shop. It is no good having one centre of excellence to show off products in the centre of London. The council has decided quite rightly that good design belongs out in industry enabling British products to be properly designed and so sell all the better.
Lord Peston: My Lords, that is not an anwer to my question. Simply to say that it is no good is not an explanation of why other nations feel that such showcases are so important and why, to repeat the point, in its heyday the Design Council gave enormous leadership not only to industry but to many of us as consumers by educating us into design. I should still like an explanation of why the shop is not needed any more.
Lord Young of Graffham: My Lords, I am not sure whether the noble Lord is telling me that in its heyday in the 1960s and 1970s the Design Council did such a good job. When I go round the world now I hear nothing but congratulations to British industry for having got out of the time of the 1960s and 1970s when design and quality were so poor. Today we are seeing a resurgence of British industry. It is about time that Ministers left industry to get on with its job, and that is precisely what we are doing.
Lord Taylor of Blackburn: My Lords, is the Minister aware that several of us go round the world, visiting other countries, and for many generations we have been proud of the work of the Design Council and the way that British design has led us, and not just at the present time?
Lord Young of Graffham: My Lords, I was not referring to the work of the British Design Council but to the quality of design which was evident in British goods exported in the 1960s and 1970s. If the noble Lord is not aware of that, then he has not travelled as extensively as I know he has.
Lord Aldington: My Lords, is my noble friend aware that in the 1960s and 1970s, when many of us were engaged in industry, British industry was highly successful in many parts of the world? Its share of world trade was considerably greater than it is now. The balance of trade on manufactures was very positive. While I am not arguing with my noble friend about the great improvements in quality and efficiency in the past few years, is it really helpful to denigrate what was done in the past? That was greatly helped, as I and many others know, by the leadership given within the Design Council by the noble Lord who asked the Question and by the display of the results of that leadership, which was a symbol—in fact, more than a symbol—in the pursuit of better design throughout manufacturing industry in Britain and in the world, which was much enjoyed by many people all over the world.
Lord Young of Graffham: My Lords, I must assure my noble friend and noble Lords opposite that they should not confuse the two matters. No government have been more to the fore than the present one in promoting design and in bringing home to industry the necessity for design. It is not merely myself as a member of that Government who is saying so: it is repeated to me by all those concerned with design.
However, we are talking about a shop in the middle of the Design Centre—a centre which will continue to exist—a shop which sells articles chosen for their design value. It is much better that we bring to industry itself, and indeed to all levels of education, the real value of design, which includes much more than the appearance of objects so that British industry as a whole will benefit.
Lord Cledwyn of Penrhos: My Lords, will the noble Lord be good enough to set aside his prejudices for a while, listen to the excellent factual intervention of his noble friend and keep the shop open?
Lord Young of Graffham: My Lords, I am sorry to disappoint the noble Lord the Leader of the Opposition but I will not interfere with the Design Council. The Design Council, under the leadership of Sir Simon Hornby, is well equipped to decide the best way to promote good design in this country. We should leave it that way. Surely it is not for people like me to tell the Design Centre how to do its job.
Viscount Caldecote: My Lords, can my noble friend tell the House whether the design and advisory service will continue to be available to industry? Further, will the grant-in-aid to the Design Council continue at its present level in real terms in the next financial year?
Lord Young of Graffham: My Lords, our support for the Design Council continues unabated. In this Question we are referring to a small part of the Design Council and considering whether it feels that the best use of that space in a valuable part of London is to be achieved by running a shop. It is a matter for the Design Council. The work of the Design Council continues. The exhibition continues. We are talking now merely about a shop.

London Traffic Flow: Study
3.4 p.m.
Lord Sefton of Garston Lord Sefton of Garston asked Her Majesty's Government:
What are the terms of reference given to Marcial Echenique and Partners in respect of the survey of traffic flow in the London area.
The Parliamentary Under-Secretary of State, Department of Transport (Lord Brabazon of Tara): My Lords, Marcial Echenique has been engaged by my right honourable friend the Secretary of State for Transport to pursue the possibility of developing a computer model in connection with the London Assessment Studies.
The model will be used in the assessment of options to take account of the interaction between transport and a wide range of factors such as location of employment, support services and residential and leisure facilities.
Lord Sefton of Garston: My Lords, I thank the Minister for that reply. Is he aware that the company still does not know what the Government intend it to test? Is he further aware that the company has had no response from the Government as to what is to be tested on the computer? Before that information is given, will this House have an opportunity to hear the details of the Government's recommendations for testing? Will that include the examination of the present delays caused by using one-man operated buses in London?
Lord Brabazon of Tara: My Lords, I am surprised that the noble Lord says that the company does not know what it has been asked to do. It has already produced a preliminary report and we expect the full report to be produced in a few months' time.

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The model will be used to test the interaction between land use and transportation against a background of present government policies. The potential for sensitivity testing and for varying these policies has not yet been evaluated. Once the model has been built, that potential can be better assessed.
Lord Underhill: My Lords, is it not the case that this will be the ninth study of transport in London which has been commissioned and either reported upon or is in the process of being reported upon? 1 have information about six road reports which have been commissioned and two rail studies which have been commissioned. Although the Secretary of State for Transport says that he does not want a central scheme for transport but wants to be more flexible, does not that mean looking piecemeal at the problem in London? If the reports are to be considered together, it means that only the Secretary of State and his department will be making decisions.
Lord Brabazon of Tara: My Lords, the noble Lord is aware of the four London assessment studies covering different areas of London and the improvements that might or might not be made in those areas. This present study is very much supplemental to those. It is using brand new technology and has not previously been tried on this scale. We feel that it might be useful, but we shall not know until we have the information produced. Having obtained that, it will be a question of whether it can be integrated into the other assessment studies. It is not separate from them.
Lord Marsh: My Lords, does not the Minister agree that the problems of traffic and movement in London do not arise from the shortage of studies but from the fact that the division and control of transport in London between three authorities—the police, the department and the local authorities—makes it impossible to look at the problems of London as a whole? Does not the Minister think that the time is long overdue to study not simply the problem but the possibility of having a single authority for London transport?
Lord Brabazon of Tara: My Lords, we are straying somewhat from the Question on the Order Paper, which relates purely to this study being carried out by one company. However, in general terms, I believe I answered a Question on this subject not long ago. We have had single authorities in the past. They have not produced an integrated London transport policy and we do not want to repeat those mistakes.
The Earl of Halsbury: My Lords, do the terms of reference—the subject of this Question—include investigating better collaboration between statutory authorities which have the rightto make holes in the streets and then fill them up again? My street has been taken to pieces at least six times in the past year. As one part of the traffic flow, I just am not flowing.
Lord Brabazon of Tara: My Lords, I sympathise with the noble Earl, but, no, this study is to discover
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what traffic is attracted to an area when new transport infrastructure is produced.
Lord Sefton of Garston: My Lords, will the Minister accept from me—my Question deals with the whole terms of reference of this particular firm—that what the noble Lord, Lord Marsh, said is perfectly true and seems to agree with the concept that in studying the traffic problems of London one must also study the whole aspect of movement and congestion in London, including land use?
The Minister said that he was surprised to be told that the firm had not yet been told of the Government's intentions. I quote from a letter that I received last week from the company concerned:
"The set of policies to be tested has still to be decided by the department."
That is contrary to what the Minister said. Can he now have a word with his advisers? If they are going to brief him they should at least brief him correctly.
Lord Brabazon of Tara: My Lords, in his original Question the noble Lord asked me what policies are set for the model to test. I replied to that Question. I do not believe that there is anything that I can add to that now.

Manufactured Goods: UK Share of Trade
3.10 p.m.
The Viscount of Oxfuird The Viscount of Oxfuird asked Her Majesty's Government:
Whether the United Kingdom's share by volume of world trade in manufacturing industries is increasing or decreasing.
Lord Young of Graffham: My Lords, the Autumn Statement forecast shows that the United Kingdom's share of world trade in manufactures has changed little since 1981, after decades of decline.
The Viscount of Oxfuird: My Lords, I thank my noble friend the Secretary of State for that reply. Can he tell the House how he views the recent report of Mr. Henry Neuburger, which has been submitted to the Leader of the Opposition in another place, particularly as regards the comment on the future of manufacturing industry in 1992?
Lord Young of Graffham: My Lords, I was puzzled by that statement. From looking at the actual facts I find that since this decade began British manufacturing industry has increased productivity at a rate greater than that of any nation in the world including Japan. Our manufactured exports continue to increase the whole time; and this country is being recognised internationally as the right environment for manufacturing industry. I believe that 1992 will present a great opportunity for manufacturing industry in the United Kingdom and not be the subject of such doom and gloom, as that forecast seems to suppose.
Lord Bruce of Donington: My Lords, is the noble Lord aware that, according to the figures issued by

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his own department on Friday last, there is a deficit in our visible trade of over £20 billion, of which no less than £17 billion is in relation to manufactured goods? Is the noble Lord further aware that he cannot ride away with the suggestion that most of this is comprised of capital goods because they occupied only 17 per cent. of our imports in 1988? Does the noble Lord believe that he can continue to gloss over this whole question indefinitely?
Lord Young of Graffham: No, my Lords. What the noble Lord describes as a gloss I would describe as a repetition of the facts. It is true that we have adeficit on manufactured goods. I was recently shown the report of a Professor Supple who declared that not since 1800 has the visibles sector been in credit. Well over 100 years ago the nation was concerned about the apparent deficit in visibles and the increase in invisibles. In important sector after important sector, like aerospace, radio and electronic capital goods, the iron and steel industry, basic electrical equipment, electrical instruments and control systems, the nation still runs at a surplus. It is important that the nation itself should be prosperous and that it should be seen to have the right environment. That is neither a matter for government Ministers nor, with the greatest respect, for those opposite who form that view. The outside world is forming that view as we have seen in the past few days.
Baroness Seear: My Lords, does the noble Lord not agree that the most recent issue of the Economist shows that this country ranks sixth in terms of increased industrial production among the 13 industrial nations quoted? Does the noble Lord not agree that the boasted increase in industrial production to which he so frequently calls our attention is an increase from an extremely low base? Is it not correct that it is always much easier to get an increase from a low base than from a high base? Will the Minister not agree that, bearing in mind those two facts and the statement he has made this afternoon, there has been no UK share increase in the volume of trade in industry and that he is somewhat overdoing his enthusiasm concerning improvements in the British economy?
Lord Young of Graffham: My Lords, I understand and I appreciate everything that the noble Baroness has said. Before we talk too much of the low base of the United Kingdom, it is well to remember that we still export more manufactured goods per capita than Japan. The famed disappearance of the industrial base should be looked at in that light.
When I look at the value share of world trade in manufactured goods, I find that the provisional figures for 1986, 1987 and 1988 show that the British share is 5·7 per cent., 6 per cent. and 6·2 per cent. We went through decade after decade of decline both in the volume and the value share. We have now seen that the volume share has stabilised over the past few years. Over the past three years we have seen an increase in the value share. I believe that those figures give an indication of the way in which matters are going.
Lord Jay: My Lords, is the noble Lord aware that, though our visibles trade in total has always shown a deficit, our trade in manufactures showed a surplus until a very few years ago?
Lord Young of Graffham: My Lords, that may well be so. It is no good looking at particular sectors. We have to realise that the world changes and that the balance of manufactured goods themselves has changed. Perhaps in 1820 we produced half of the world's steel and over half of the world's textiles, but since then other nations have learnt the secret of producing both steel and textiles. If we are to keep our place under the sun and to have productivity and an economy that will maintain standards that citizens wish to see, then we have to create wealth. Often the creation of wealth is in the provision of services and not necessarily in the making of products. That is the important matter to which the Government must continue to pay attention.
Lord Rochester: My Lords, despite what the Secretary of State has said about the past three years, according to statistics prepared this month by his department, the United Kingdom share by value of world trade in manufacturing industries is still very much lower than it was in 1980?
Lord Young of Graffham: My Lords, it is true that in 1980 the share by value was 7·8 per cent. It dropped very rapidly in a few years after that. We are talking about share of world trade. World trade continues to expand. We are but one nation of some 60 million people or less sharing in that world trade. In the past three years we have seen that share increase until today it stands at a level that has not been seen since the early 1980s. The important matter is that we continue to maintain our place and even to improve it in the face of rapidly expanding world trade.
Lord Dean of Beswick: My Lords, does the noble Lord not agree that according to his Answer we shall have to do much better than we are doing? We have been almost static since 1981 in percentage terms. Does the Minister not agree that we have to bear in mind that in the foreseeable future the Government will lose, or will suffer a very large diminution of the benefit arising from our oil revenues? Does he not agree that that is the time of reckoning, and that we should be doing much better than we are in order to cushion the effects of that situation when it happens?
Lord Young of Graffham: No, my Lords. The Government have lost a share of oil revenues due to accidental causes in the past six or so months. What we have seen is British productivity in manufacturing industry increasing at a rate faster than anywhere else. In the past three months to December the export of manufactures was 3 per cent. higher than a year ago. The Autumn Statement forecasts growth in manufacturing exports of over 8 per cent. in 1989 which is close to the projected growth of world trade. We have seen the United Kingdom export of manufactured goods continue to increase.
Lord Wolfson: My Lords, as 1992 approaches what steps are the Government taking to improve the

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financial arrangements in Europe where two-thirds of our visible deficit lies? Perhaps there could be some arrangement on the lines of the old sterling area where balances were cleared quite comfortably.
Lord Young of Graffham: My Lords, I am very grateful to my noble friend Lord Wolfson. If, by an interesting method, the noble Lord is introducing the concept of exchange rate mechanism or any other system in Europe, that is an entirely different question.

Business
3.19 p.m.
Lord Denham: My Lords, at a convenient moment after 3.30 p.m. this afternoon my noble friend Lord Hesketh will, with the leave of the House, repeat a Statement that is being made in another place on the National Health Service Review. It may be for the convenience of the House if I announce that the Committee stage of the Companies Bill will be adjourned at approximately 7.30 p.m. for approximately one hour. During this adjournment the Electricity and Pipe-line Works (Assessment of Environmental Effects) Regulations 1988 and the Harbour Works (Assessment of Environmental Effects) (No. 2) Regulations 1988 will be taken.

National Maritime Museum Bill [H.L.]
The Parliamentary Under-Secretary of State, Ministry of Agriculture, Fisheries and Food (Baroness Trumpington): My Lords, I understand that no amendments have been set down to this Bill and that no noble Lord has indicated a wish to move a manuscript amendment or to speak in Committee. Therefore, unless any noble Lord objects, I beg to move that the order of commitment be discharged.
Moved, That the order of commitment be discharged.—(Baroness Trumpington.)
On Question, Motion agreed to.

Companies Bill [H.L.]
3.20 p.m.
Lord Strathclyde: 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 Strathclyde.)
On Question, Motion agreed to.
House in Committee accordingly.
[The LORD ABERDARE in the Chair.]
Clause 18 [Power to alter accounting requirements]:
Lord Mottistone Lord Mottistone moved Amendment No. 155:
Page 31, leave out from beginning of line 43 to ("or") in line 44.
The noble Lord said: This is a probing amendment to ask the Government why they have allocated to
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the Secretary of State the broad powers contained in this paragraph. At present the Secretary of State has powers assigned to him by Schedule 4 of the Companies Act 1985 but those do not seem to be as wide as the powers we are discussing at this moment. I beg to move.
Lord Strathclyde: The Government's view is that, as under the existing Act, any regulations which impose more onerous duties on companies should be subject to positive resolution procedure.
The noble Lord's amendment would introduce an exception to this principle. If the Committee as a whole considers the principle to be wrong, or accepts that there are strong grounds for departing from it when the more onerous duty consisted of adding to the material to be included in the accounts and the directors' report, then the Government would be prepared to reconsider. But as things stand we believe we have the balance the right way round.
Lord Mottistone: I thank my noble friend for that reply. I shall study what he said. This was a probing amendment and I may come back with it at a later stage. For the moment, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
On Question, Whether Clause 18 shall stand part of the Bill?
Lord Bruce of Donington: Clause 18 is the kind of clause that one finds only too frequently in Bills. I refer to the provisions whereby, notwithstanding anything already in the Bill, the Secretary of State reserves the right to introduce all kinds of regulations. We are well familiar with this. In Section 256 of the Companies Act 1985 there are already extensive powers for the Secretary of State to make regulations. We accept the noble Lord's point that such regulations as the Secretary of State brings before Parliament must be assented to by affirmative resolution. That is at any rate something.
I wonder why in this instance the Secretary of State needs these additional powers. The Bill states that the regulations can be limited to those that add to the class of documents required to be prepared, those that restrict the classes of company which have the benefit of any exemption or otherwise render the requirements of the part more onerous. There have been divisions in the Committee. Some noble Lords, mainly perhaps on the other side, although I do not insist on that point, think that the requirements are already too onerous; other noble Lords think that they are not onerous enough. Would it not be better if the Secretary of State indicated what kind of regulations he had in mind and what impelled him to take the extra powers in the Bill?
Subsection (4) of the clause states:
"Regulations under this section may—
(c) contain such incidental and supplementary provisions as the Secretary of State thinks fit".
These are extensive powers to give to a Secretary of State. They may even depend on his subjective state of mind. Are we quite sure that we want to give the Secretary of State powers on this scale when during

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our discussions in Committee we have already gone into tremendous detail after considerable debate? Surely we can have a little more from the noble Lord on exactly what he has in mind.
This is not to say that we on this side of the Committee want to restrict unreasonably the powers or the Secretary of State. We well realise that, with the passage of time and with the coming into operation of the provisions of the Bill, circumstances may change. New factors may emerge which necessitate regulations being issued. Under the freedoms so eloquently enunciated by the Secretary of State the patterns of commercial and financial activities arc forever changing. We do not want to restrict him unreasonably but we should like a little more idea of exactly what he had in mind when this clause was put into the Bill.
Lord Strathclyde: The noble Lord, Lord Bruce, believes that any government who give themselves powers to change primary legislation by statutory instrument must be treated with the maximum of suspicion. I wonder whether any government could escape his disapproval on that basis.
Lord Bruce of Donington: No.
Lord Strathclyde: The noble Lord shakes his head in agreement.
The power contained in Section 256 of the 1985 Act, on which this clause is based, has existed since the Companies Act 1948. This, and other powers to alter parts of the principal Act, have been re-enacted with amendments in 1976, 1980 and 1981. They are all powers to change primary legislation. Moreover, there are notable examples of powers to amend or extend primary legislation by regulations in other areas.
I readily agree that the present clause contains a slightly wider power than the corresponding provision of the 1985 Act. But the power is not unlimited. It is only a power to modify and, moreover, can be exercised only within the four corners of the primary legislation. The result of these limitations is that the power is confined to matters relating to the accounts of companies and their audit; it cannot be used to replace the original provisions with radically different provisions, nor to introduce completely extraneous subject matter.
We all have a deep respect for the primary legislative process and for the role which noble Lords play in creating it. But we need to be realistic. Technical legislation of the kind we are discussing is not about high principles: it is about detailed rules. Much of the substance of these rules lies in the precise way in which they are expressed. Much of the expertise in these areas lies outside the Government and indeed perhaps outside this Chamber. To secure the best possible legislation, therefore, it is highly desirable to circulate a text in good time for interested parties to study and comment on it. In the real world, and with the best will in the world, it is not usually easy to follow this prescription when producing primary legislation. I believe that that has been the experience of successive governments. However, it is much easier to circulate draft regulations in good
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time for comments to be received and the regulations to be amended, if necessary, before they are discussed in Parliament.
The noble Lord, Lord Bruce of Donington, asked me for some examples. As I said, this power is designed to enable the legislation to be kept up to date in a highly technical area. We hope that the Bill has got it right for the present, but we may on occasion need to change it. For example, we intend to use the power to assist in the implementation of the bank accounts directive which is due for implementation next year.
We have extended the power to enable the whole or part of Part VII of the 1985 Act to be kept right up to date rather than just the contents of accounts. It is a highly technical area which is subject to continual developments. Therefore I hope that the noble Lord will sympathise. I also hope what I have said has shown that the power sought in Clause 18 is not at all unreasonable and is not unprecedented. We cannot expect to have a new Companies Bill every time we wish to make a technical amendment.
The use of the power conferred by the clause will be confined to matters already covered by Part 1 of the Bill, and any regulations made will be subject to parliamentary procedures. I believe that that provides an appropriate means of keeping this technical area of company law up to date in the future. I beg to move that Clause 18 stand part of the Bill.
3.30 p.m.
Lord Lloyd of Kilgerran: I entirely agree with what the Minister said. When one sees a clause in a Bill of this kind, especially a somewhat technical Bill such as this, one has to be suspicious of giving more powers to the Secretary of State to legislate in that way. My suspicions about the clause were somewhat diluted by the observations made by the Minister when we were considering the amendment moved by the noble Viscount, Lord Caldecote, which put forward the proposal that references to research and development should be introduced into the accounts. Therefore I wonder whether the Minister can say, without any commitment, that generally such an amendment would be suitable and would be received sympathetically by the Government for legislation by regulation.
I am worried that such a proposal might fall because of the words contained in subsection (2)(d). It refers to regulations which,
"otherwise render the requirements of this Part more onerous".
Would not the introduction of more facts into, for instance, statements of account be more onerous? They might be matters such as those mentioned by the noble Viscount, Lord Caldecote, which had great support throughout the Committee. Further, it might be in the public interest that there should be information in the accounts about the energy efficiency of firms or the amount of expenditure in relation to energy matters. As 1 said, would that not be onerous?
It is therefore most difficult to give support to the Bill before having further indication about what is meant by "more onerous". I have also had difficulties

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about the word "classes". Subsection (2)(a) refers to "classes of documents". Those words are simple to understand. In subsection (2)(b) it says "classes of company". I think that I also understand what that means. However, in subsection (2)(b) it says:
"require additional matter to be included in a document of any class".
I cannot quite understand what is meant by "any class" in that context. Perhaps the noble Lord can help us a little further as regards the matters raised by the noble Lord, Lord Bruce of Donington, and those to which I have just referred regarding the wording of this new section.
Viscount Caldecote: At the end of the debate which we had upon the amendment in which I proposed to include R&D expenditure in company accounts, my noble friend Lord Strathclyde gave an assurance that Clause 18(2)(c) would enable the Secretary of State to make an order requiring research and development expenditure to be included in company accounts. Can he confirm that the "document of any class" includes company accounts? Further, can he also confirm that what he said yesterday is still the case after he has given the matter further consideration?
Lord Williams of Elvel: Perhaps I may just add my voice to that of my noble friend Lord Bruce of Donington and those of the noble Lord, Lord Lloyd of Kilgerran, and the noble Viscount, Lord Caldecote. In his first reply to my noble friend the noble Lord mentioned the problem of bank accounts. As he will know, last night, if I may put it that way, 1 did not move a series of amendments dealing with banking companies. However, will the provisions under this section deal with bank accounts and the bank problem that I foreshadowed on Second Reading and raised again last night but did not press? If that is the case, why do we not simply pass a Bill saying that the Secretary of State shall do whatever he feels necessary to make whatever regulations he feels appropriate for any company to do whatever it likes in accounts? It seems to me that if we are going to do this, we must make the primary legislation a little more specific than the Government have at present.
Lord Strathclyde: Many Members of the Committee have asked detailed questions on this clause. Perhaps I may first turn to the remarks of the noble Lord, Lord Lloyd of Kilgerran. He asked whether this "more onerous" provision would work within this meaning. "More onerous" governs parliamentary procedure, not ability to use the regulations. Therefore the words "more onerous" add to the requirements. For instance, documents can be changed in accounts and reports.
As regards the question of my noble friend Lord Caldecote—which he raised yesterda and upon which I gave him an assurance that we would come back to the matter—I say this. It is precisely such matters which could be changed by using this clause. Therefore I hope that he will feel happier with the provisions of the Bill as a whole.
The noble Lord, Lord Williams of Elvel, asked whether the regulations would be used for bank
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accounts. The answer is that they can be. This regulation, or the regulations arising out of this clause, can be used to change the matters he raised yesterday.
Lord Williams of Elvel: I do not want to prolong the debate because I am most grateful to the noble Lord for what he said. However, does that mean that all the amendments I tabled on the question of bank accounts, transfers of any reserves and a true and fair view of banks are otiose because the Government have power to do whatever they want under the Bill as drafted?
Lord Strathclyde: I must return to what I said in my opening words: the principal point of the clause is to deal with a highly technical piece of company legislation. It can be used for some of the points which the noble Lord, Lord Williams, raised. Indeed, I do not think that I need add to that.
Lord Williams of Elvel: I am grateful the noble Lord and again I must say that I do not wish to prolong the debate. However, it seems to me that changing the status of banks as to whether they should provide a true and fair view in their accounts as opposed to their accounts being in conformity with the legislation, is a major change. If the Secretary of State wishes to take those powers, we ought to know about it.
Perhaps I may ask the noble Lord whether he would be prepared in the light of this discussion to give an undertaking on behalf of the Government that the orders which this section envisages should not only be discussed widely in the various professions which are implicated but also be circulated before they come to this Chamber in printed draft to other noble Lords who are interested so that we may also have our input. As he well knows, we cannot amend orders in this place. We should like to have our input before we reach the point of having to debate the order.
Lord Strathclyde: That is what we are doing now. We are discussing what is going into the primary legislation. As I said, that is to enable us to adjust technical points. We set out our present intentions in the Bill, but we reserve the right to change technical points after a great deal of consultation with the industry and after taking into account the comments which were made in Committee yesterday and which will be made today and what the noble Lord has just said. I cannot see why the noble Lord continues to object to the point.
Lord Williams of Elvel: The point that I am trying to impress upon the noble Lord is that we on this side—I believe that I speak not only for the Opposition but for noble Lords in other parts of the Committee—would like to have the same privilege as professional associations and others when a draft order is put out for consultation by the department.
We do not want to be presented with an order upon which the Institute of Bankers, the CBI and the Law Society have commented and we find that we have not received a copy of that draft order. That has been the case over and over again with draft Bills and

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orders. I repeatedly receive telephone calls from people in those institutions who say that they have received an interesting draft of a consumer protection Bill or something else on which they would like to have my opinion. The Opposition have not received the draft. May we have an assurance that we will receive the drafts when they are circulated to the associations in question?
Lord Boyd-Carpenter: I hope that my noble friend will not dismiss the point that the noble Lord, Lord Williams of Elvel, has put to him because it raises an echo in my mind and, I guess, that of a number of my noble friends. Outside consultation is a good thing, but it happens from time to time, I am afraid, that on technical issues where there has been full outside consultation noble Lords in all parts of this place are not consulted but are faced with approving or disapproving—in most cases the conventionally cannot disapprove—an order.
I should welcome—I do not know whether my noble friend feels able to give it but his noble friend Lord Young of Graffham who is sitting beside him would be in a position to give it—some indication, although not in all cases because that would be a wearisome prolongation of discussion, that in cases where difficult or important points will arise, consultation with outside interests will be followed by consultation with at any rate some noble Lords in this place who have shown some interest in the subject matter. I do not believe that that is an unreasonable request.
Lord Strathclyde: I fully appreciate the concern of the noble Lord, Lord Williams of Elvel, and my noble friend Lord Boyd-Carpenter who spoke clearly on the subject. I am therefore more than happy to give the undertaking that such draft orders will be circulated so that we can have noble Lords' informed comment before we put them to this place, subject, of course, to parliamentary proprieties. In principle, I must confirm my undertaking that noble Lords will be included in all consultations.
Clause 18 agreed to.
Lord Strathclyde: I beg to move that the House do now resume.
Moved accordingly, and, on Question, Motion agreed to.
House resumed.

The National Health Service
3.45 p.m.
Lord Hesketh: My Lords, with the leave of the House, I shall now repeat a Statement made in another place by my right honourable friend the Secretary of State for Health. The Statement is as follows:
"Britain enjoys high and rising levels of health care and, at its best, our health service is as good as any in the world. I believe that the principles underlying the NHS still hold good today and they will continue to guide it into the next century. The
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NHS is—and must remain—open to all, regardless of income, and financed mainly out of general taxation.
"But if those principles remain unchanged, the health service itself—and the society in which it operates—are changing for the better. We need constantly to improve and strengthen the NHS so that it can provide ever better care to those who rely on it. At the moment there are wide variations in performance across the country. We want to maintain the best of the health service, and bring the rest of it up to that very high standard.
"That is why the Government set out upon a fundamental review of the NHS last year. We have today published our conclusions in the White Paper entitled Working for Patients. They build on and evolve from the improvements that the Government have already made to the service in the past 10 years. They reflect a change of pace rather than any fundamental change of direction. All of our proposals share a common purpose—to make the health service a place where patients come first and where decisions are increasingly taken at a local level by those most directly involved in delivering and managing care.
"The main proposals apply to all the United Kingdom but there are separate chapters devoted to Wales, Scotland and Northern Ireland explaining how they will be applied in those countries. Implementation of the proposals will have to follow a process of discussion with many people in the service. We shall be issuing in the course of the next week or two eight detailed working papers as the basis for those discussions.
"Before I turn to the key proposals on management and the use of resources contained in the White Paper, I want to describe the kind of hospital service that I believe every patient has a right to expect. All hospitals should provide individual appointment times that can be relied upon. They should offer attractive waiting areas with proper facilities for patients and children. They should be able to deliver proper counselling to those who need it and give clear and sensitive explanations of what it going on. In addition, patients should be able to pay for a number of optional extras such as a wider choice of meals, a bedside telephone, a television, or a single room. The best hospitals already provide this and I want to see the whole service treating patients properly as people.
"We shall also ensure that patients are freer to choose and change their General Practitioner. And we shall give more encouragement to those GPs who, by offering the kind of service that people want, succeed in attracting more patients. To achieve that, we are proposing to increase the proportion of GPs' pay which comes from the number of patients on their lists from 46 per cent. to at least 60 per cent.
"People look to their GPs to prescribe the medicines they need, and GPs must have the necessary flexibility to do so. But at present, drug costs in some places are nearly twice as high per head of population as in others, even where the

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incidence of illness is much the same. The drugs bill is the largest single element of all spending on the family practitioner services. At £1.9 billion in 1987–88, it as more than the cost of the doctors who wrote the prescriptions. In each of the past five years, spending has risen by an average of 4 per cent. over and above the rate of inflation. Unnecessarily expensive prescribing is wasteful and takes up resources that should be used in other ways. Over-prescribing is not in the best interests of patients. We shall therefore introduce a new budgeting scheme whereby GP practices will receive indicative budgets for their prescribing costs. The scheme will be operated in a way that ensures downward pressure on the cost of prescribing without inhibiting the ability of doctors to provide necessary medicines for their patients.
"At present, because of the way that hospitals are funded, GPs are not always able to offer their patients a full choice as to where they will be treated. We want to change this by giving GPs in large practices the opportunity to hold their own National Health Service budgets. They will be able to use these to purchase as they judge best certain types of hospital services for their patients. They will, in other words, be able to provide the hospitals they choose for their patients with the NHS funds required to finance the services the hospitals perform.
"These GP practice budgets will cover inpatients, out-patients and day care treatments —for instance hip replacements and cataract removals. They will also cover prescribing costs and diagnostic tests, such as X-rays and pathology tests. Large practices will be free to decide whether or not to join the scheme. It will at first only be open to practices with at least 11,000 patients—that is twice the national average. Over 1,000 UK practices could join, covering about one in four of the population. All of those practices could have their own NHS budgets of about £½million a year. Giving GPs the resources to finance services for their own patients will provide a real incentive to hospitals to improve the service they offer to those GPs. It will also enable GPs to provide a better service to patients; for example by referring them to where waiting lists are shortest. I am quite sure that GPs will want to judge the quality of service at least as much as the cost of services when they decide where to refer their patients. We have important proposals on the quality of medical service to which I shall turn later.
"But it will not just be through GP practice budgets that money will follow the patient to where work is done best. The principle will apply throughout the health service as a whole. As part of this new way of getting resources to hospitals, the present elaborate system known as RAWP will come to an end. Over the last 12 years it has made an important contribution by helping to equalise the resources available to each region, but that task has now very largely been achieved. Now we are in a position to replace it with an altogether more
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simple and fair system based on population numbers weighted for age and health and the relative costs of providing services. It will be much quicker to compensate those regions which treat large numbers of patients from elsewhere in the country. We shall move to a system which finances regions and districts on exactly the same system, with a 3 per cent. addition for the Thames regions because of the inescapable extra problems of providing health care in the capital.
"In future the money required to treat patients will be able to cross administrative boundaries more freely, so that those hospitals which best meet patients' needs get the funds to do so. All National Health Service hospitals will be able to offer their services to different health authorities and the private sector. All district health authorities will be able to provide finance for health services to whatever hospitals they choose in other districts or their own. As a result, we shall not in future have the frustrating situation whereby a good, efficient hospital that attracts more patients runs out of money and has to slow down its work or close wards. This new system will start in 1990 for regional health authorities and 1991 for districts.
"But improving the hospital service is not just a matter of changing the way in which hospitals receive their funds. We also want to change the way in which they are run and managed. We want all hospitals to have more responsibility for their own affairs so that they can make the most of local commitment, energy and skills, and can get on with what they are best at- providing care.
"Management can be strengthened throughout the whole health service. The better the management the better the care it can deliver. Financial accountability and value for money will be improved by transferring audit of the health authorities and other National Health Service bodies to the independent Audit Commission. The role of the National Audit Office will not be affected by this change. On management matters, it is nonsense that the Ministers of any Government should be directly involved in the detail of the day-to-day running of the whole National Health Service. We shall therefore set up a new National Health Service Management Executive chaired by the new Chief Executive, Mr. Duncan Nichol, and responsible for all operational decisions. It will be accountable to an NHS policy board chaired by the Secretary of State for Health who will determine policy and strategy for the service.
"The prime responsibilty of health authorities will be to ensure that the population for which they are answerable has access to a full range of high quality, good value services. Their job will be to judge the quality of services, to choose the best mix of services for their resident population and to finance those services. They will no longer provide and run all their local services, which will be increasingly the role of the hospital and unit managers themselves. Authorities will need to be organised as more effective decision-making and managerial bodies. We shall therefore be changing their composition to make them smaller and to include executive and non-executive members. The

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non-executive members will he appointed on the basis of the personal skills and expertise they can bring to the authority and not as representatives of interest groups. Although there will no doubt continue to be people who will combine being members of local health authorities with being local councillors, local authorities will lose their present rights to appoint direct their own members. At the same time we shall also be strengthening the management of' family practitioner committees along similar lines. We shall also make them accountable for the first time to regional health authorities so as to improve the links between planning for the hospital, community and family practitioner services.
"We must devolve responsibility across the whole health service. But I believe that we can also go one stage further. The next logical step in the process of extending local responsibilty is to allow individual hospitals to become self-governing. Let me make it absolutely clear that they will still be as much within the National Health Service as they are now. They will be no freer to leave the National Health Service than any unit has been throughout its 40-year history. They will have far more freedom to take their own decisions on the matters that affect them most without detailed supervision by district, region and my department. Known as National Health Service hospital trusts, they will be free to negotiate with their own staff on rates of pay, and within limits to borrow money. They will be able to offer agreed services for agreed resources through the National Health Service, and indeed in the private sector too. There will of course be safeguards to ensure that essential local services continue to be delivered locally. I believe that this new development will give patients more choice, produce a better quality service, build on the sense of pride in local hospitals and encourage other hospitals to do even better in order to compete. I expect the first National Health Service hospital trusts to he set up in April 1991.
"In all these reforms we intend to concentrate on the quality of care as much as quantity and cost. I admire the progress with which the medical profession is devising systems which doctors call `medical audit' to assess clinical performance and outcomes. We intend to work with the profession to ensure that good systems of medical audit are put in place in every hospital and GP practice as soon as is practicable. What matters for all patients is that high standards of medical performance are maintained and where possible improved, and such systems should secure that.
"I turn finally to the area of perhaps greatest public concern—waiting times. All the measures I have so far outlined by making resources flow more directly to those parts of the service that deliver the best care will help to cut the length of time that people sometimes have to wait for elective surgery. The waiting list initiative will continue but we shall also introduce a number of other initiatives designed to have a more direct and immediate impact. First, we intend all GP practices to have the basic information systems they need to know where treatment is available quickest. Secondly, we
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shall introduce a new tax relief to make it easier for people aged 60 and over to make private provision for their health care. This will reduce the pressure on the National Health Service from the very age group most likely to require elective surgery, freeing up resources for those who need it most. Thirdly, we shall manage consultants' contracts more effectively so that the very best use is made of their time and expertise. We shall also reform the distinction award system to ensure that commitment to the service and involvement with the management of the National Health Service are included among the criteria for awards.
"Fourthly, we shall increase the number of consultants by 100 over the next three years over and above the increase in the number of consultants already planned. These additional consultants will be appointed in those specialties and in those districts where waiting times are most worrying. Finance will be made available to cover the costs of the new appointments and the supporting service for their workload. This will help us keep up the attack not only on waiting times but also on long hours worked by junior doctors.
"Taken together, these proposals add up to the most formidable programme of reform in the history of the National Health Service. They are the latest step in our drive to build a stronger, more modern, more efficient health service. For an NHS that is run better will be an NHS that can care better. They will of course mean change, but change of the kind we need if we are to have a service that is fit for the future. I trust that all those who, like me, truly believe in a health service which offers high quality care to all our people will lend their support to these reforms, and I commend them to the House".
My Lords, that concludes the Statement.
4 p.m.
Lord Ennals: My Lords, I thank the noble Lord for repeating the Statement. What is proposed, as he accepted in his last paragraph, is a massive shake-up of a fine service that has suffered in the past from too little money and too many ill-conceived reorganisations at the hands of successive Conservative governments.
This White Paper bears all the hallmarks of a thoroughly botched up job. There is a hastily announced review conducted by a secretive hole-incorner cabal of politicians and civil servants without proper consultation with those who work in the National Health Service. There is also a blatantly leaky review team who seem unable to hang on to their own secret documents. I believe that the document, in spite of its wording, is deeply insensitive to the commitments and concerns of those who need and use the health service. It implies some fundamental changes, in spite of assurances in the Statement just read, that it proposes only a change of pace.
There is mention of a massive opt-out of hundreds of hospitals which would cease to be responsible to health authorities. They will be in competition with

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each other to win contracts from health authorities. Under these proposals people may get operations they do not need, if there are profits to be made, and may be refused operations they need if there is no money to be made.
Free standing, independently run, cash limited GP teams are proposed. These will be in competition with other GP teams. For the first time doctors will be given a financial motive to deny treatment to patients whom they have the right to refuse. Further, tax relief for the elderly is proposed to promote private health insurance. This was previously opposed by the Secretary of State himself. Further—this was not announced, but it was inevitable—a massive burden of bureaucracy, American style, will be imposed on the health service.
It is proposed to sack elected councillors from health authorities, thus ending any question of local democracy. I believe this is a further step towards the politicisation of the health service. I strongly object—I believe the public will too—to the National Health Service being used as a political football. Those on the other side of the House ignore consensus and seem to welcome confrontation. They will achieve that objective from these Benches, because we will fight for a principled, patients before profits, health service.
Over the weekend the Secretary of State for Health seemed to he saying, "Watch my lips—no privatisation". But the proposals he has announced today amount to a major move towards a private system of health care. Private agencies will be competing with each other to run the hospitals, community services and family doctor services. The health service will be pushed away from being a public service, as it has been for over 40 years. Health care will be bartered in the market place. It is no good the Secretary of State pretending that these provisions are not to be a boost for the private sector. This has been the Prime Minister's objective from the beginning. She has made it quite clear.
I believe there are grave dangers inherent in the argument that profits should replace patient needs as the principal objective of health authorities. The US system proves that. The logic of the survival of the fittest is the neglect of the most needy, the elderly and the handicapped.
Contrary to what is said in the Statement, I believe these proposals will not meet the challenge of patient choice. The trend will be for patients to be pushed to accept the cheapest option, whether it is drugs or anything else. That option may not be the best option. It is claimed that patients will have freedom to choose their general practitioners. But there will also be freedom for general practitioners to refuse to accept patients who might make heavy demands on a GP's budget.
I wish to ask the noble Lord some questions. I have given him notice of most of these questions. What is the future of the laboratory services, which fulfill a vital service today? There is a need to extend the preventive health services. Those services are accepted on all sides of the House as being an essential part of our health system. What will happen
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to them? What is the future for community care? That has still not been answered in the Statement.
I hope that the noble Lord will say something about the cost to the National Health Service of training for personnel who later work in the private sector. What are the cost effects of this new type of health service? Will the noble Lord say something about incentives to National Health Service hospitals to go independent? Who supports these proposals? Certainly they have not gained the support of doctors. The BMA has announced its opposition. What about the nurses and other professionals? What about the ancillaries who play such an important part in the health service? It seems sad to me that this Government see no point in seeking to achieve a consensus, as has been the case in the past.
I conclude by assuring the Minister that support for the fundamental principles of the health service crosses party lines totally. We have demonstrated that in your Lordships' House on many previous occasions. We on these Labour Benches will vigorously oppose any plans which undermine the ability of the National Health Service to meet the health needs of all the people, rich and poor. We shall fight vigorously to safeguard the principle that patients must always take priority over profits. We shall want a very early debate on this White Paper.
Lord Winstanley: My Lords, on behalf of my noble friends on these Benches I too wish to thank the noble Lord for repeating this extremely cleverly worded, though nonetheless disquieting, Statement. I am sure the noble Lord will accept that, along with other noble Lords, I do not approve of long speeches on Statements. I have no intention of making a long speech. But I ask the noble Lord to accept that many noble Lords on these Benches. and I am sure in all parts of your Lordships' House, will wish at some stage to speak at some length on many of the matters itemised by the noble Lord, Lord Ennals.
I underline in particular the suggestion of the application of cash limits to family practitioner committee services and the somewhat bizarre suggestion to allow individual hospitals to become self-governing, whatever that may mean. Finally, I emphasise the omission of any reference at all in the Statement—I cannot say whether this is the case in the review, as I have not read it—to the report of Sir Roy Griffiths, or even to the report of your Lordships' Select Committee on priorities in medical research. We were promised a full response to both of those reports in the National Health Service review.
Is the noble Lord aware that in your Lordships' House there is a fund of experience, expertise and wisdom on National Health Service matters that is unequalled anywhere else? It is perhaps even unequalled within the BMA and the DHSS. It therefore follows that, if a full debate on these matters could be arranged very soon, it might save the National Health Service from catastrophe. It might also perhaps save the Government from the consequences of their own folly. I point out that it is the former of those considerations with which we are most deeply concerned. I hope that the noble Lord will consult with his noble friend the Leader of the House and tell him that there is a very strong feeling

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that these very important matters should be fully debated in your Lordships' House as soon as possible.
Lord Hesketh: My Lords, possibly predictably, the noble Lord, Lord Ennals, accused this Government of reducing expenditure and not supervising the beneficial development of the National Health Service. Before answering any questions, I should like to remind your Lordships' House that expenditure, since this Government took office on the National Health Service has risen in real terms, after inflation, by some 40 per cent. None of us should forget that fact.
The noble Lord, Lord Ennals, went on to describe opting out. The White Paper does not talk about opting out anywhere. It mentions doing something for which this Government is constantly berated from the Benches opposite. We are constantly accused of centralisation. A White Paper is presented to your Lordships' House which proposes genuine decentralisation. It proposes to return the National Health Service genuinely to the communities which it serves. We have no intention of affecting the future of the National Health Service other than in an entirely beneficial way.
I should have hoped that it might have been obvious from the Statement that the standards that we have chosen to set as the benchmark of excellence are not those of the private sector or of the United States—they are those of the National Health Service itself. Those are the standards that we have chosen as a basis for setting the standard.
I hope that the noble Lord, Lord Ennals, has observed that the first chief executive of this revamped and improved service comes not from industry, not from overseas, has not been headhunted from Wall Street: he comes from within the management of the National Health Service. Those are important points which demonstrate our commitment to the National Health Service.
The noble Lord, Lord Ennals, mentioned tax relief. All that we are suggesting is that those who have provided for themselves before retirement, and in that way assisted the National Health Service, should be allowed to continue to do so after retirement.
The noble Lord, Lord Ennals, spoke of bureaucracy. There is always the great difficulty that when one talks about management one is accused by the Labour Party of bureaucratic expenditure. The only bureaucracy which the White Paper intends to encourage is bureaucracy that saves money so that more patients can be treated in a bigger and better National Health Service.
The noble Lord, Lord Ennals, was unhappy about what he regarded as the possible destruction of local democracy in the health service. When the new arrangements for hospitals come about the hospitals will be run by people who are consultants, National Health Service managers and nursing officers. In my experience such people live close to the hospitals. The management will be committed to those hospitals as never before.
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The noble Lord, Lord Ennals, asked about the future of laboratories. I can assure the noble Lord that no central initiative is mentioned in the White Paper in that regard.
The noble Lord, Lord Winstanley, together with the noble Lord, Lord Ennals, quite properly mentioned community care and the Griffiths Report. The review has focused closely on the funding and management of the health services and on hospitals and family doctors in particular. The interaction of health and social care in the field of community care needs further study. That work is well in hand and the results of the review will help to advance it further.
The noble Lord, Lord Ennals, also inquired why the review has been so secretive. That is not so. It has not been secretive. Internal reviews of policy happen all the time in government departments. We have welcomed the public debate in the past year and in our deliberations we have taken account of all the contributions.
Finally, the noble Lord, Lord Ennals, asked about training with reference to a possible levy. 1 think that he may have forgotten that the private sector already makes a welcome contribution to post basic specialist nurse training. The department and private sector representatives have recently agreed to the setting up of a joint working party with the aim of increasing the total stock of skilled staff available to both services.
We have increased expenditure. We are making a commitment to a better health service on a truly accountable basis. We are decentralising rather than centralising.
4.12 p.m.
Lord Boyd-Carpenter: My Lords, first perhaps I may support the appeal of the noble Lord, Lord Ennals, to my noble friend for an early debate in your Lordships' House on this immensely important Statement. Your Lordships' House has much to contribute and I think that it would be very helpful, not least to the Government, were an early debate to be arranged.
In the same context perhaps I may ask whether legislation is involved in any of the massive changes which my noble friend has outlined. If there is to he major legislation, that to some extent helps to answer the request for a debate but I do not think that it cancels it out. I think that a general debate on the whole of this important Statement is very strongly indicated and I hope will be sympathetically considered by my noble friends on the Front Bench.
As one who was in another place when the late Mr. Bevan introduced the National Health Service Bill 40-odd years ago, I think that it is plain that these proposals are the biggest development, reform or change—whatever word one likes to use—in the history of the National Health Service. Though they will have to be debated, and debated in fall, they confirm the immense care and trouble which our right honourable friend the Secretary of State for Health has taken in seeking to bring the health service and its organisation into a shape in which it can face the changing problems of this changing age.
There are so many points in the Statement that one would delay your Lordships by referring to them.

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However, I want to say how enthusiastic I am about two of those points. The first concerns the proposals for hospitals. To some extent they seek to reverse the mistake which I think that the late Mr. Bevan made in submerging the organisation and administration of the hospitals in the general system. It will help to restore to the hospitals a measure of independence and thereby help them to resume the very high standard that they maintained under the old system and the stimulus that comes from being in some measure independent.
The other point is the very interesting proposal to increase to 60 per cent. the proportion of a doctor's remuneration which relates to the number of patients on his list. That must be a good stimulus to doctors—if they need it, and some perhaps do—to give patients the service which makes patients want to stay with them and other patients to join them. I shall be interested to hear why that proposal stops at 60 per cent. If a doctor is giving service which appeals enormously strongly to people in his area and they come to his practice, I question whether it is right to limit the remuneration to 60 per cent. of his salary and whether a higher figure might not be contemplated.
Finally, I should like to congratulate my noble friend on reading this immensely impressive Statement in such an admirable way and ask him to convey to his right honourable friend the Secretary of State the approval of many of us of the great work which he has obviously done in originating it.
Noble Lords: Hear, hear!
Lord Hesketh: My Lords. I should like to thank my noble friend for his very kind remarks and to answer the three points which he raised. With regard to the 60 per cent. remuneration for GPs, the noble Lord said that that may not have gone far enough. My answer to him is that we have gone quite a long way.
With regard to the matter of legislation before your Lordships' House, I am sure that it will come as no surprise to my noble friend that a considerable amount of primary legislation will be required for which the Government are committed to bringing forward a Bill at the earliest opportunity.
Lord Boyd-Carpenter: My Lords, in this Session?
Lord Hesketh: My Lords, finally, I shall certainly draw to the attention of my noble friends who are in charge of such matters the desire for a debate at the earliest opportunity.
Lord Kilmarnock: My Lords, we on this Bench should also like to thank the noble Lord for repeating this extremely important Statement. In some respects the tone of the Statement is rather strange. On the first page it refers to a change of pace rather than any fundamental change of direction, yet on the last page, as the noble Lord, Lord Boyd-Carpenter, has already pointed out, it claims to be the most formidable programme of reform in the history of the NHS. Those two statements do not appear to be entirely compatible.
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It is not our practice to make knee-jerk reactions to government statements of this kind. I think that on balance, to make an analogy with E. M. Forster's Two Cheers for Democracy, one can give one cheer for the Statement.
I agree with all noble Lords who have said that we need a full debate, but I should like to ask the noble Lord four brief questions. I think that the proposals with regard to hospitals give least cause for worry. We favour an internal market to reduce waiting lists. as advocated by my right honourable friend David Owen. I think that some progress could be made in that respect. However, we certainly did not envisage the opting out of nearly 300 district general hospitals. Can the noble Lord comment on the meaning of the phrase in the Statement:
"They will be no freer to leave the National Health Service than any unit has been throughout its 40-year history".
I wonder whether he can comment on what is behind that phrase.
I believe that the area that gives the greatest cause for concern is that of general practice. Cash limiting of general practice must raise extremely serious ethical problems. The doctor's duty is to his patient rather than to his budget. I should like to know whether the Minister has thought about that question and whether he has taken into account the considerable advances that have already been made on more responsible prescribing both through the limited list and generic prescribing on a voluntary basis that is very much encouraged by the Royal College of General Practitioners. On reflection, does the Minister think that the voluntary route is the best way forward in that particular sphere? Does he agree that this may well set up a ping-pong effect between general practitioners and hospitals as to who will foot the drugs bill?
As regards the eight detailed working papers mentioned in the Statement, can the noble Lord say what degree of consultation there will be on those matters? Will GPs, the BMA and other interested bodies have a proper opportunity to comment and make their own proposals or counter-proposals? After all, even Aneurin Bevan consulted the doctors, but there is not much sign that that is the line which the Government want to take.
My fourth question on community care has already been dealt with. The noble Lord said that it was irrelevant. However, that is not the case. I understand that 60 psychiatric hospitals are likely to close in the next 10 years, pushing out into the community 20,000 patients. That is a massive problem which certainly ought to have received attention in such a review.
Finally, perhaps he can tell me when the Government will reply to the Griffiths Report. With regard to the financial aspects, I deplore the tax break. It goes against the principle of a neutral fiscal policy which has always been proclaimed by the Chancellor. I believe that the Secretary of State was not too happy about it either. Can the noble Lord say whether the tax break for elderly people who already have private insurance, which will not in fact generate very much more money into the health system, is simply the thin end of the wedge with a view to

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extending the practice to the whole of the community? That is obviously the logical direction to which it tends.
I should be very grateful if the noble Lord would answer those questions. Of course I support all the recommendations for an early debate.
Lord Hesketh: My Lords, the fact is that the hospitals will be no freer at all to leave the National Health Service. I must emphasise the important point about the Government's proposals for allowing hospitals to become self-governing. They will become self-governing as National Health Service trusts. They will be part of the National Health Service.
The object is not to let them opt out of the National Health Service but to provide a better service at a local level. As regards consultation, we have had a considerable amount of discussion both within and outside the department, including the professions, the professionals and all those involved in the health service. As regards cash limits, the introduction of some discipline through the use of budgets is by no means the same as cash limiting. The objective of the scheme is to place downward pressure on drug expenditure.
The key word in relation to prescriptions is "indicative". Many of your Lordships may have watched "TV AM" this morning and seen an interview with a GP, who found it interesting to learn where certain sums of his money were going and was able to take action to reduce the level of his expenditure. The word is "indicative". It is not "trying to strongarm" or "force". The word is "indicative".
The noble Lord said that tax breaks could be the thin end of the wedge. That is far from the case. As I said earlier, the object of the exercise is to allow people who have contributed to private insurance schemes all their lives to continue to do so in retirement. I am sure that your Lordships' House approves of a concept which will not only help those who take part in the schemes but reduce pressure on the fastest growing sector of the National Health Service and also encourage people to spend money on their health rather than on imported consumer durables. I think that that makes fiscal as well as medical sense.
Lord Broxbourne: My Lords, I should like to ask my noble friend about the rather oddly named "indicative drug budgets". It could mean almost anything. The scheme is referred to in Chapter 7.15 of the White Paper. The operation of the scheme is described in Chapter 7.18 as:
"The Secretary of State for Health will publish shortly a working paper which will set out the detail of how the scheme will be implemented, for discussion with interested parties".
Can my noble friend say in this context what "shortly" means? Who are the interested parties? As my noble friend inquired, will legislation be involved? Shall we receive all this information before the debate?
Lord Hesketh: My Lords, I fear that my noble friend is somewhat pre-empting the matter with his assumption that a date for the debate has already
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been fixed. I believe that I am correct in saying that the period of time of which we are speaking is within the next one to two weeks with regard to the discussion document. As regards the interested parties, it will of course be those parties who are interested in this subject.
Lord Nelson of Stafford: My Lords, I congratulate my noble friend on repeating the Statement this afternoon. As chairman of the Select Committee which investigated medical research, I should like to record some disappointment that there has so far been no mention of research in this review, as we have heard it described today. Our studies showed that there were considerable inadequacies in the National Health Service in relation to the provision of clinical research and health services research. I hope very much that the Minister will have something to say this afternoon or certainly during the debate on this important topic. There is no doubt that research has a very important contribution to make to the very objectives that the Minister has outlined to the House. If it is not included, it seems to me to be a lost opportunity to bring into this review the important aspect of research and the contribution that it can make to the objectives that he has outlined to us.
Lord Hesketh: My Lords, I am very grateful for my noble friend's comments. I am sure he is aware after having heard the Statement that the review has concentrated on hospitals and family doctors in particular. I am certainly well aware of the importance of medical research and will draw his remarks to the attention of my right honourable friend the Secretary of State.
Lord Tordoff: My Lords, I must comment on the adequacy of the response to the noble Lord, Lord Nelson of Stafford. I understand that the report of the Select Committee was in the Government's hands almost a year ago—in fact in February last year. The reply from the Government to your Lordships' House was delayed because it was intended to include it in the White Paper review. Why has it not been included in the White Paper review after the promise given to your Lordships' Select Committee?
Lord Hesketh: My Lords, research is covered in the White Paper review on pages 37 and 38.
Lord Rippon of Hexham: My Lords, while I warmly welcome much of the Statement. perhaps I may press my noble friend on one point. Why do the Government persistently regard democratically elected councillors as unrepresentative of local interests and concerns?
Lord Hesketh: My Lords, I am very grateful to my noble friend Lord Rippon for raising that point. I should point out to him that he will see in the White Paper a very important statement; namely, that the object of the programme that we are proposing, whereby we shall be reducing the numbers involved on boards, is to reduce membership to people who have in part a straightforward technical contribution to make. There are other people who will not be on the board, such as contractors and those who might

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have an interest from another side and another place, as well as other parties. This is in no way an attack on local authorities.
Lord Rippon of Hexham: My Lords, on that analogy, why do we not leave government to the Permanent Secretaries?
Lord Trafford: My Lords, I should like to ask my noble friend, if he can, to reassure us on a point which I think will concern a lot of people: namely, there is the possibility raised in the rather short outline of the White Paper that he has given that hospital services going under the hospitals trusts (320) could lead to a two-tier hospital service. I am sure he will agree that one of the great functions of the National Health Service over 40 years has been to disseminate talent and equality of care, and good care, all over the country. Can he reassure us that this will not be reversed; that this process which has gone on for 40 years will continue and that there will be no question of two-tier-type hospital services?
Lord Hesketh: My Lords, I am grateful to my noble friend for his question. He is entirely correct in stating that on paper some 320 hospitals could fit the profile but I think it is true to say that we in the department are certainly not expecting 320 hospitals to be in National Health Service trusts right away, or probably ever. The key is to provide a shining example which will be to the advantage of every hospital up and down the kingdom and which will result in standards not only being equal but improving.
The Lord Privy Seal (Lord Belstead): My Lords, may I intervene for just one moment? I think it is fair to say that my noble friend has dealt with the questions that have been put to him comprehensively and succinctly. For that reason we could probably go on for a long time, but we are well over the period the House itself thinks is right for a Statement. May I suggest that we take a question from the noble Baroness, Lady Lockwood? I also know that the noble Lord, Lord Tordoff, has a point that he particularly wants to make; and then I think we ought to pass on to the next business. Meanwhile, I give an assurance that I have certainly taken on board the fact that the House expects a debate on this matter.
Baroness Lockwood: My Lords, I wonder whether the Minister can assure us that the two very bland paragraphs on pages 37 and 38 on training and research are not the only responses that the Government are going to make to the House of Lords Select Committee on priorities in medical research. These two paragraphs do not in any way address themselves to the recommendations of that Select Committee report.
Lord Hesketh: My Lords, that is certainly not the case. I can assure your Lordships that responses to the Secretary of State's letter of 21st November 1988 to the regional health authority chairmen on your
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Lordship's Select Committee are being considered at this very moment.
Lord Tordoff: My Lords, I thank the noble Lord the Leader of the House for what he said, but in this case the noble Baroness has made the point for me.

Prevention of Terrorism (Temporary Provisions) Bill
Brought from the Commons; read a first time, and to be printed.

Companies Bill [H.L.]
4.33 p.m.
House again in Committee.
Clause 19 [Parent and subsidiary undertakings]:
Lord Bruce of Donington Lord Bruce of Donington moved Amendment No. 156:
Page 32, line 37, leave out from ("it") to ("the") in line 38 and insert ("actually exercises a dominant influence over").
The noble Lord said: I am very hopeful that the remainder of Part I of the Bill will result in some degree of harmony between ourselves and the Government. We, for our part, would like to see it go through as quickly and smoothly as possible, bearing in mind the time we have necessarily spent upon the Statement.
I beg to move this amendment which, as noble Lords will see, refers to the definition of a parent and a subsidiary undertaking. It may well be for the convenience of the Committee if we take Amendment No. 162 at the same time. That amendment bears on the same point. At the moment Section 257(2) reads as follows:
"(2) An undertaking is a parent undertaking in relation to another undertaking, a subsidiary undertaking, if—"
and we go to subsection (c) which says,
"it has the right to direct the operating and financial policies of the undertaking—".
Our amendment seeks to delete the words,
"has the right to direct the operating and financial policies"
and to substitute the words,
"actually exercises a dominant influence over".
I shall return to the question of the "dominant influence over" when discussing at the same time Amendment No. 162, which is concerned with the definition of control and control contract. That is referred to in subsection (5)(b). Perhaps I might read out the point so that one may ascertain exactly where Amendment No. 162 comes in and what its effect is. In subsection (5)(b),
"a 'control contract' means a contract in v,riting conferring such a right which"—
and then it gives two definitions in (i) and (ii). We desire to put in there as a new sub-paragraph (c),
"(c) 'dominant influence' over an undertaking means controlling the financial and operating policy decisions (including dividend policy) of that undertaking".
Our desire is to make the definition a little more precise and to bring it closer to the definitions that are

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set out in regard to the first amendment in the seventh directive and, in the second, to the statement of accounting practice which refers again to "dominant influence". Perhaps I can read the appropriate sections to your Lordships so that we may define it even more closely. According to the seventh directive, Article 1,
"A Member State shall require any undertaking governed by its national law to draw up consolidated accounts and a consolidated annual report if that undertaking (a parent undertaking):"—
and then at (c) we see this:
"has the right to exercise a dominant influence over an undertaking (a subsidiary undertaking) of which it is a shareholder or member, pursuant to a contract entered into with that undertaking or to a provision in its memorandum or articles of association, where the law governing that subsidiary undertaking permits its being subject to such contracts or provisions."
We think that by incorporating the words that are set out in the amendment we are more closely following the seventh directive.
In Amendment No. 162 we have followed this time the appropriate SSAP No. 1, which is an extract and which refers to:
"Significant influence over a company essentially involves participation in the financial and operating policy decisions of that company (including dividend policy) but not necessarily control of those policies".
I think probably that we may be knocking at an open door in asking the Government to accept these amendments, which I would submit more adequately reflect in legal terms what the Government are trying to do and may present fully the safeguards that the Government themselves had in mind. There is nothing dogmatic about this. The. noble Lord may prefer the words that are now there. We think that our words are an improvement, but if the noble Lord does not consider them to be so we shall not press the matter. We are trying to be helpful, that is all. I beg to move.
Lord Ezra: I should like to support the amendment proposed by the noble Lord, Lord Bruce of Donington, on the simple grounds that a difference in wording between the seventh directive and this legislation could create confusion. It would be highly desirable to use the same wording wherever possible.
The Earl of Harrowby: I should like to point out that according to my reading we are not talking about the same thing. A dominant influence is a very different matter from a right to direct. I think the Committee should recognise that before any amendment is pressed. 1 am not quite sure which wording is required, but it is quite clear that we are talking about two different aspects.
Lord Boyd-Carpenter: There is a point on the drafting of the amendment:
"actually exercises a dominant influence over".
How would that apply in cases that arise where a company has a right to interfere in the operations of a subsidiary but as a matter of policy does not? The words "actually exercises" would seem to suggest that, although a company had the right to apply a dominant influence, it did not actually exercise it and therefore the amendment did not bite. I should be interested to know how the noble Lord explains that.
Lord Strathclyde: The noble Lord, Lord Bruce of Donington, prefaced his remarks by saying that he sought harmony between us. I always hope that that is the case between himself and myself. With the permission of the Committee, I too shall speak to Amendments Nos. 156 and 162.
I should like to comment first on Amendment No. 156. New Section 257(2)(c) gives effect to Article 1.1(c) of the seventh directive: in the terminology of the Bill one undertaking is to be regarded as the parent undertaking of another if it has the right to direct the operating and financial policies of that other, either by virtue of provisions in that other's constitution or by virtue of what the Bill terms a "control contract". New Section 258(5) explains what is meant by,
"a right to direct the operating and financial policies of an undertaking",
and by a "control contract" in this context. The former term is defined as a right to give directions with respect to the operation and finances of the dependent undertaking which its directors must comply with, whether or not they are for the benefit of the dependent undertaking. A "control contract" is defined as a contract in writing conferring such a right which is permitted both by the constitution of the undertaking concerned and by the law of the country where it is established.
I should make it clear that these provisions, despite their complexity, are unlikely to have much application where the putative subsidiary is a company incorporated in the United Kingdom. We are introducing this into our law because the directive requires this and because the provisions are of utility in the few cases where they apply—principally putative subsidiary undertakings established elsewhere; that is particularly in West Germany.
The noble Lords, Lord Bruce of Donington and Lord Ezra, questioned why we have departed from the language used in Article 1.1(c) of the seventh directive, which uses in this context, as the noble Lord, Lord Bruce, mentioned,
"a right to exercise a dominant influence".
Our obligation is to enact the intended effect of the directive and not necessarily its literal wording. Use of the actual words of the directive here may have caught a considerable number of undertakings where it was entirely inappropriate for the company to be consolidated by the parent. For example, those words could have required one of our major retailers to have to consolidate its suppliers because that company takes a close interest in the affairs of its suppliers. That is not the sort of case that Article 1.1(c) of the directive is aimed at. Rather, that provision is aimed at the German type of control contract that I have already mentioned. I hope that the noble Lord will come round to our way of thinking having heard that.
I shall now turn to Amendment No. 162, which seeks to define "dominant influence". We gave very careful consideration to a possible definition of "dominant influence" when we were framing this legislation. In our view any definition is likely either to narrow or widen the natural meaning of those words. In the end we decided that there was merit in

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following, without attempting to gloss, the language of the directive. Our intention is to curb the use of off balance sheet financing schemes through controlled non-subsidiary undertakings. Any definition of the term will encourage attempts to avoid the provision by artificial constructions with the intention of escaping from the letter of the definition. By leaving the term undefined in the legislation there is scope for guidance as to its meaning for practical purposes to be given in statements of standard accounting practice.
4.45 p.m.
Lord Bruce of Donington: I am most grateful to the noble Lord for his explanation. I am immediately with him on the fact that the whole reason for adopting a Community decision in the form of a directive is precisely to give the Government the responsibility of enacting their provisions in their own way and in accordance with their own laws. There is no compulsion for any government to follow slavishly the words of any directive coming from the European Community or any interpretation that the Commission itself might put upon the words. The very term "directive" as defined in Community law is that it gives a member state complete freedom to implement the directive in its own way. I am in full agreement with the noble Lord on that. 1 would not favour at any time the slavish following of any word or phrase appearing in a European directive.
On those grounds I think the Minister has satisfied me, although I feel that the words we have used are a little more precise and probably achieve the purpose better than the words that the noble Lord has put down. But I should like to have an opportunity of looking at that aspect of the matter again when we come to the Report stage.
As regards Amendment No. 162, the only degree in which the SSAP came into the matter was to bring into sharp focus the question of policy decisions. The Government may be unwise in not taking our amendment on this occasion because it places considerable reliance on SSAPs, which, as the noble Lord realises, are produced after very considerable research and thought by the six chief accountancy bodies, normally in collaboration with the DTI. so I am given to understand. Therefore, unless it is absolutely necessary one should not depart from the whole sense of the statement of accounting practice which I read to the Committee this afternoon.
I would not wish to insist upon the amendment this afternoon. In broad and general terms the noble Lord has satisfied us to quite a degree, but after having studied what he has said, and since we are talking about a very technical matter, we must reserve the right to return to this at Report stage if necessary. but I hope that it will not be necessary. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Bruce of Donington Lord Bruce of Donington moved Amendment No. 157:
Page 32, line 41, after ("contract") insert ("valid in United Kingdom law").
The noble Lord said: Once again this is a probing amendment. Once again we are referring to new Section 257(2)(c)(ii), which defines an undertaking as a,
"parent undertaking in relation to another undertaking. a subsidiary undertaking, if"—
and then we come down to the definition which we were discussing on the previous amendment—
"it has the right to direct the operating and financial policies of the undertaking… by virtue of a control contract".
We have ventured to suggest that there be inserted the phrase "valid in United Kingdom law" to delineate it a little more closely. We hope that that will commend itself to the noble Lord. I beg to move.
Lord Strathclyde: The noble Lord said that he was probing here, so perhaps I may explain further what is meant by a "control contract" in this context. It is a contract giving a right to direct the operating and financial policies of another undertaking—in the special sense of new Section 258(5)(a)—which is both authorised by that undertaking's constitution and is permitted by the law under which that undertaking is established.
Thus, where a putative subsidiary undertaking is established in Great Britain, it is under our law that the validity of a control contract to which it is a party must be tested. Where a putative subsidiary is established elsewhere, it must be tested under local law. In such a case conformity of the control contract with our law is, in a sense, irrelevant. The amendment therefore seems misconceived.
We envisage a control contract, as defined, as being lawful under our law for a subsidiary company only in exceptional circumstances. These are where a control contract is expressly authorised by the memorandum or articles of the company. In the light of that explanation. I hope that the noble Lord will be able to withdraw his amendment.
Lord Bruce of Donington: I am obliged to the noble Lord. Perhaps he will now see the advantages of an amendment which we tabled yesterday which was the subject of some disputation: it required subsidiary companies to state not only the country in which they operated but also their registered office and address. I am satisfied with the explanation given by the noble Lord and ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Mottistone Lord Mottistone moved Amendment No. 158:
Page 33. leave out lines 5 to 12.
The noble Lord said: Subsection (4) of the new Section 257 incorporates an optional definition which is given in Article 1.2 of the seventh company law directive. Being optional. it does not have to be incorporated in our law, though I note from the Notes on Clauses that the Government say they are taking advantage of most of the opportunities for optional definitions. I am advised by the CBI, as the Committee knows, and it suggests that this optional definition is not helpful and does not assist in providing a suitable definition of a subsidiary for the purposes of definition with respect to off balance sheet financing. It therefore believes that the

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Government would be better advised not to take up this option. I hope that my noble friend will be able to tell me why he wants to do this, if he believes it to be essential. Alternatively, perhaps he will give it another look in view of the advice from these experienced people. I beg to move.
Lord Strathclyde: New Section 257(3) contains a test for a parent/subsidiary relationship that is new to our law. What we are getting at here is the practical control of one company over another. An undertaking is to be regarded as the parent undertaking of another if it has what is termed a "participating interest" in the other and if it actually exercises a dominant influence over it, or if it and the other are managed on a unified basis. What is meant by a participating interest is set out in new Section 260, inserted by Clause 20. A participating interest essentially arises where one undertaking exercises a significant influence over another as a result of an interest in the share capital of that other; it is presumed to exist where 20 per cent. of the shares in that other are held.
My noble friend Lord Mottistone asked why we have implemented the member state option in Article 1.2 of the directive. That is in response to widespread concern over the use by some companies or groups of what, as my noble friend mentioned, are known as off balance sheet financing schemes.
Typically these schemes involve the use of a company which is controlled by the reporting company or group but which technically is not a subsidiary. Borrowing, for example, is channelled through the controlled non-subsidiary with the result that it does not appear on the balance sheet of the reporting company or the consolidated balance sheet of the reporting group. Accordingly the financial position may appear healthier than it otherwise would. That there is widespread concern over these schemes has been made clear to the department from the responses to extensive consultation on the issue. Although this change will not be welcomed by the companies, which may feel that their room for manoeuvre is restricted, this is a practical response to a genuine problem. The provisions in the Bill are, in our view, necessary to ensure the continual usefulness of consolidated financial statements. It is also illustrated by the work of the Accounting Standards Committee which has led to the publication of Exposure Draft 42 on special purpose transactions.
I hope that what I have said will put my noble friend's mind slightly more at rest and that he will feel able to withdraw his amendment.
Lord Bruce of Donington: I immediately associate myself with everything that the noble Lord has said on this matter. It is absolutely vital that the conclusions reached in the new SSAP 42 are given full effect to. We are satisfied that new Section 260, together with this new section, encompasses exactly that. We sincerely hope that the Government will resist the amendment.
The Earl of Limerick: I am seeking clarification. I was wholly with my noble friend Lord Strathclyde on the reasoning which led him to prefer the wording in
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the Bill to the wording in the amendment of the noble Lord, Lord Bruce. The concept of exercising a dominant influence may be difficult to interpret. If we look at the other phrase which appeared in the second amendment to which the noble Lord, Lord Bruce, was speaking the words "financial and operating policy" occur. Putting the two of those together in relation to subsection (3)(a), a company is in this position if:
"it actually exercises a dominant influence".
This may be in a financial or commercial sense.
Using the old demonology, what is the position of the small supplier to Woolworth's who finds his prices being squeezed and discovers that his commercial policy is very much at the behest of his main or his only customer? Is there perhaps some difficulty in this definition? I am inviting a statement of the origin of the phrase, "it actually exercises a dominant influence". Is it one that is well tested and tried and can we be sure that it has a meaning that is readily interpreted?
Lord Strathclyde: We are returning to amendments which have already been dealt with. The definition of the phrase "the dominant influence", to which my noble friend referred, was introduced by the noble Lord, Lord Bruce of Donington. I hope that 1 gave an adequate reply a few minutes ago. My noble friend gave an example of Woolworth, which has no participating interest. Therefore it does not need to be consolidated under this clause.
Lord Bruce of Donington: Perhaps the noble Lord understands why I wish to return to the matter at Report stage. Had the definition been adopted it would have helped the noble Lord in his restriction—and I consider it to be a desirable restriction—on any wider use of the term "dominant".
Lord Mottistone: Although I am grateful to my noble friend for his contribution, I should like to forget the side argument relating to the earlier amendment.
I understand what the Minister said. I am not sure that those who advise me will be as convinced about the validity of every one of his arguments as I may be, so I may return to the issue at a later stage. However, I now beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
5 p.m.
Lord Strathclyde Lord Strathclyde moved Amendment No. 159:
Page 33, line 26, leave out ("or controls").
The noble Lord said: The amendment cures a technical defect in the Bill. At present new Section 258(2)(a) applies both in relation to subsection (2)(a) of new Section 257 and to subsection (2)(d) of that section. In practice, it is unnecessary to apply it for the purpose of the latter subsection and in certain circumstances to do so results in ambiguity. The present amendment ensures that the provision will apply only for the purposes of subsection (2)(a). I beg to move.
Lord Bruce of Donington: We accept the amendment.
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 160:
Page 33, line 29, leave out from ("account") to end of line 34 and insert I", that is, shall not he regarded as held by any person or as forming part of the voting rights in the undertaking").
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 161:
Page 33, line 42, leave out from beginning to end of line 4 on page 34 and insert—
("(4) The right to appoint or remove a majority of the board of directors means the right to appoint or remove directors holding a majority of the voting rights at meetings of the board; and for this purpose an undertaking shall be treated as having the right to appoint to a directorship if—

(a) a person's appointment to it follows necessarily from his appointment as director of the undertaking, or

(b) the directorship is held by the undertaking itself,

but a right to appoint or remove which is exercisable only with the consent or concurrence of another person shall be left out of account unless no other person has a right to appoint or, as the case may be, remove in relation to that directorship.").
The noble Lord said: This is a technical amendment which replaces the existing subsection (4) of new Section 258 with a revised version. It has the effect of adding a new case where a putative parent is to be treated as having the right to appoint to a directorship in an undertaking, even though it would not normally be regarded as having such a right. This is where the putative parent can make an appointment to a directorship only with the consent or concurrence of another person, but no one else can make an appointment to that directorship.
If a right to appoint was not to be treated as arising in such a case, purely nominal requirements to seek the consent or concurrence of another person could be introduced into arrangements with the intention of avoiding a parent-subsidiary undertaking arising. I beg to move.
Lord Bruce of Donington: We accept the amendment. We believe that it clarifies the position in the way the noble Lord desires.
On Question, amendment agreed to.
[Amendment No. 162 not moved.]
Lord Bruce of Donington Lord Bruce of Donington moved Amendment No. 163:
Page 34, line 21, at end insert—
("( ) "Managed on a unified basis" means that the financial and operating policy decisions (including dividend policy) of the undertaking and the subsidiary undertaking are determined as if the two undertakings were a single entity").
The noble Lord said: The amendment seeks to define more closely the meaning of the phrase "managed on a unified basis" which appears in the text of the clause. We suggest the insertion of the following paragraph:
" 'Managed on a unified basis' means that the financial and operating policy decisions (including dividend policy) of the undertaking and the subsidiary undertaking are determined as if the two undertakings were a single entity".,
We propose to insert that paragraph for clarification under subsection (5) in the new Section 257(2)(c). We may have helped the noble Lord on this
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occasion but if he does not want our assistance we shall not take that amiss. I beg to move.
Lord Strathclyde: We do not dissent from the general drift of the formulation used by the noble Lord. However, as I explained in the context of the phrase "the dominant influence" in respect of the earlier amendment, we do not consider it necessary or appropriate to define the phrases "managed on a unified basis" or "dominant influence" in this context.
Lord Bruce of Donington: I believe that on more mature consideration by the next stage the noble Lord will come round to the views which are set out. In the meantime, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Strathclyde Lord Strathclyde moved Amendment No. 164:
Page 34, line 23, leave out from ("only") to first ("the") in line 28 and insert ("when the circumstances have arisen, and for so long as they continue to obtain, and when").
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 165:
Page 35. line 9, after ("undertaking") insert ("of its").
The noble Lord said: the amendment is tabled for clarification. It makes clear the fact that the subsidiary undertaking referred to at the end of new Section 258(7)(c) is a subsidiary undertaking of the putative subsidiary referred to earlier in that paragraph and not a subsidiary undertaking of the putative parent. I beg to move.
Lord Bruce of Donington: We accept the amendment.
On Question, amendment agreed to.
[Amendment No. 166 not moved.]
Clause 19, as amended, agreed to.
Clause 20 [Other interpretation provisions]:
Lord Strathclyde Lord Strathclyde moved Amendments Nos. 167 and 168:
Page 36, leave out lines 10 and 11 and insert ("(3) The reference in subsection (I) to an interest in shares includes").
Page 36, line 38, leave out ("18") and insert ("19").
The noble Lord said: With the leave of the Committee, I shall deal with Amendments Nos. 167 and 168 en bloc. Amendment No. 167 is a drafting amendment. At present subsection (3) of new Section 260 purports to apply for the purposes of subsection (2) of that section as well as subsection (1). That is not the intention. The amendment ensures that subsection (3) applies only for the purposes of subsection(1).
Amendment No. 168 corrects a wrong reference. I beg to move.
Lord Bruce of Donington: We concur with the amendments.
On Question, amendments agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 169:
Page 36, line 47, after ("company's") insert ("annual").
The noble Lord said: This is a technical amendment. New Section 261(2) may quite unintentionally permit to be shown in the notes to the accounts items that should not be shown on the face of the accounts. The amendment removes that doubt. I beg to move.
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 170:
Page 37, leave out lines 1 to 3 and insert
("(2) References in this Act to a company's annual accounts, or to a balance sheet or profit and loss account, include notes to the accounts giving information which is required by any provision of this Act, and required or allowed by any such provision to be given in a note to company accounts.").
The noble Lord said: This is also a technical amendment and it removes any doubt which previously existed. I beg to move.
Lord Bruce of Donington: These words present a distinct improvement and we concur with this amendment.
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 171:
Page 37, line 9, leave out ("provisions not applying to") and insert ("treatment of").
The noble Lord said: This corrects a cross-reference and has no substantive effect. I beg to move.
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 172:
Page 37, leave out lines 28 and 29.
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 173:
Page 38, line 7, at end insert—

("associated undertaking (in Schedule 4A)

paragraph 19 of that Schedule")

The noble Lord said: These amendments make minor corrections to the defined terms in the new Section 263(3) and insert a reference to a further definition into the list. Government and Opposition have tabled two identical amendments. 1 beg to move.
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 174:
Page 38, line 34, column 2, leave out ("260") and insert ("261").
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 175:
Page 38, line 37, column 2, leave out ("261") and insert ("260").
On Question, amendment agreed to.
Clause 20, as amended, agreed to.
Clause 21 agreed to.
Schedule 7 [Amendments consequential on Part I]:
Lord Strathclyde Lord Strathclyde moved Amendment No. 176:
Page 162, line 23, leave out ("under section 235").
The noble Lord said: With the leave of the Committee, I shall take Amendments Nos. 176, 177, 178, 180, 181, 182, 183 and 184 together. These are all minor changes to the schedule of consequential amendments. I beg to move.
Lord Benson: I do not wish to oppose the amendments. However, I ask the noble Lord, when the matter is looked at by parliamentary draftsmen, to look at paragraph 1(2) which has some unusual wording. It states:
"If the balance sheet was prepared for a financial year of the company".
That is not technically correct. The balance sheet is prepared at a date. Perhaps that could be corrected.
Lord Strathclyde: We shall certainly look into that point.
On Question, amendment agreed to.
5.15 p.m.
Lord Strathclyde Lord Strathclyde moved Amendment No. 177:
Page 162, line 30, at end insert—
("For the purposes of an auditors' report under this subsection the provisions of this Act shall be deemed to apply with such modifications as are necessary by reason of the fact that the balance sheet is not prepared for a financial year of the company.").
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 178:
Page 163, leave out line 9.
On Question, amendment agreed to.
[Amendment No. 179 not moved.]
Lord Strathclyde Lord Strathclyde moved Amendment No. 180:
Page 165, line 21, leave out second ("of') and insert ("or").
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 181:
Page 165, line 42, leave out ("received") and insert ("receivable").
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 182:
Page 166, line 19, leave out ("obligations") and insert ("contributions").
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 183:
Page 166, line 46, at end insert—
(" . In paragraph I2(b) of Schedule 4, for "section 238" substitute "section 233".").
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 184:
Page 169, line 16, at end insert—
("Company Directors Disqualification Act 1986 (c. 46)
. In section 3(3)(b)(i) of the Company Directors Disqualification Act 1986, for "section 244" substitute "section 242(4)".").
On Question, amendment agreed to.
Schedule 7, as amended, agreed to.
Lord Williams of Elvel Lord Williams of Elvel moved Amendment No. 185:
Page 39, line 12, at end insert ("Supervision is to be exercised by a statutory bod to which the Secretary of State shall delegate the powers granted to him under this Part.").
The noble Lord said: We now embark on Part II of the Bill and the batting order is somewhat changed. I am glad to see the noble Lord, Lord Brabazon, on the Front Bench and I shall be taking over from my noble friend in order to look after Part II.
Article 2 of the eighth directive makes it clear that the authorities of member states may approve only firms of auditors which satisfy certain conditions; in other words, there is a statutory obligation on member states to introduce legislation which is applicable to their own state to satisfy that provision. At the end of the day, it is the statutory authority which authorises auditors to conduct their business.
We have had a number of consultation documents from the Government on how to implement this. As the Bill demonstrates, the Government have come down on a system which, to us, seems to replicate the system in the original Financial Services Bill. In other words, it has a relatively weak top and a relatively detailed bottom, in the sense of monitoring through the organisations which will be appointed as monitoring agencies— which, for practical purposes, are the various institutes in the United Kingdom.
As we know, in the Financial Services Act that has led to a number of problems. The SIB was a private company—and probably still is for all I know—which was the receiver of a delegation order delegating to it the powers under the Financial Services Act to supervise the financial services system and also to set up and indeed authorise a number of SROs which had rule books which were to be approved by the SIB.
The problem with this structure has been that the delegation of powers has been such that the underlying agencies, the SROs, had to produce enormously detailed rule books in order to comply with the SIB requirement imposed by the statute. At a later stage in this Bill, we shall argue that the SIB should have the power to make general points of principle which do not have the force of law, but SROs will be asked to make their own rule books in a very flexible manner. We shall be arguing, I hope with the support of some Members of the Committee opposite, that the whole system should be stronger at the top and more flexible underneath.
In moving this amendment my concern is that the Government are falling into the same trap as they fell into during our proceedings on the Financial Services Bill when it came before this place in the summer of 1986. There is to be a relatively weak top in the sense that although it is the Secretary of State there is to be no central authority to which the Secretary of State delegates his powers. Underneath there is a mass of regulations about how the bodies chosen to run this part of the Bill—that is,supervisory auditors—are to conduct their business.
I recognise that in this debate I do not have the support of the Institute of Chartered Accountants in
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England and Wales or the Institute of Chartered Accountants of Scotland. Indeed other institutes have indicated to me that they do not support my amendment. Nevertheless, I believe that I am right in saying that if there is to be a flexible system of monitoring underneath, which I believe some of those institutes want, there should be a strong statutory authority at the top.
In this amendment what I have in mind is not dissimilar from the General Medical Council. I put forward this point on Second Reading. I believe that there should be a statutory body to which the Secretary of State delegates his powers. That body—if I had my choice; but of course it is not mine though it is the way I would argue—should be composed of people who are practitioners and also a number of people who represent those who use the services of accountancy firms, if I may put it that way.
That body would put forward general principles and guidelines to the institutes which are under its general control, and the institutes, if that is what they are and will be, should be able to interpret and monitor those in a relatively flexible way. I believe that if the Secretary of State is left with the power of recognising, or, to use an inelegant word, derecognising supervisory bodies of auditors it will be a recipe for a Financial Services Act type of system because the Secretary of State has only the power that Parliament gives him to make statutory instruments and to decide on and impose statutory rules on the supervisory bodies.
The other point I wish to make is that this part of the Bill gives the Secretary of State the ability to set up such a body. He may exercise that power if he feels that in some way the supervisory bodies are not doing their duties or performing their functions. When on Third Reading of the Financial Services Bill we moved a Motion which would have enabled the Secretary of State optionally to take reserve powers to set up a panel to administer the conduct of takeovers we were told from the Government Benches that, once optional powers are set up for the Secretary of State, in the course of time they will be used. I suppose that the Government are consistent and that if that argument was put forward in the summer of 1986 it will no doubt be supported again by the Government today.
We should like to see a system which, as I said, has something like the General Medical Council—a general accounting council. We should like to see that council given delegated powers from the Secretary of State with the ability to authorise supervisory bodies to operate flexibly underneath. We are worried that the way the Government have approached this whole problem, and the implementation of the directive, will lead to another Financial Services Act. Members of the Committee and those outside will know the problems associated with that. I beg to move.
Lord Brabazon of Tara: I should like to begin by making a few general remarks about Part 11 of the Bill and the Government's broad approach to the supervision of auditors which I think follow on from the remarks made by the noble Lord, Lord Williams of Elvel. This is partly because in a Bill which covers such a wide range of matters it is useful to get one's

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bearings again as we embark on an entirely new subject and partly because I think it is important to have the whole structure of the part in view in considering the noble Lord's amendment.
As the noble Lord reminded the Committee, the purpose of Part II is to implement the eighth company law directive. Briefly, that directive requires auditors of companies to be approved. It lays down conditions as to their qualifications and provides that only persons of good repute can be approved. It also requires there to be safeguards to ensure that audits are conducted independently and with integrity. Most importantly, it allows professional bodies to he designated as the approving authorities.
In this country we have a long history of public functions being exercised by such self-regulatory bodies. In the accountancy field there has been, under the direction of the major bodies, a progressive improvement in the education and training of accountants and in the standards and guidelines to which they are subject. The high reputation of the accountancy profession and the quality of recruits which it attracts are a testimony to the success of its professional bodies in raising standards. It is imporant that any new supervisory system for auditing builds upon that success and retains the element of self-regulation which has been so crucial to it.
Community law does not, however, allow us simply to designate the professional bodies and leave it at that. Community law requires there to be a system which makes it certain in law that effect will be given to community directives. Part II of the Bill is designed to provide the framework for such a system and to do so in a way which preserves the central role of the professional bodies. The essential feature of the system is that professional bodies are enabled to apply for recognition from the Secretary of State and he is able to consider and determine their applications against criteria which are laid down in the Bill. Noble Lords should note that under the Bill the Secretary of State does not himself approve auditors or make the majority of rules to which they will be subject. As we have heard, he may transfer his functions to a statutory body, but those are not the functions of approving auditors or of drawing up professional rules.
How does this brief description of the purposes and effect of this part of the Bill help us in considering the amendment? The first point to make on the amendment is that this debate is not about whether the profession should be supervised directly by professional bodies, by the Secretary of State or by a statutory body. Under the noble Lord's amendment, as in the Bill as introduced, the function of supervising auditors would rest with recognised supervisory bodies and the function of awarding professional qualifications would rest with recognised qualifying bodies. The functions which would be exercised by the Secretary of State or a statutory body would largely be the functions of recognising the professional bodies and thereafter monitoring them to ensure that they kept up to the requirements in the Bill.
Nor is the debate on this amendment about whether the recognition functions should or should
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not be exercised on a statutory basis. Both the Secretary of State and a body set up under Clause 44 would for these purposes be acting under statute and would be exercising statutory powers.
There is therefore no fundamental question of principle dividing us from the noble Lord. This is all the more so because, as had been explained, the Bill already allows for the Secretary of State to set up a stautory body and transfer certain of his functions to it. The issue is therefore the relatively narrow one of whether the Bill should allow the Secretary of State discretion whether or not to transfer his powers, or whether he should he obliged to do so.
I can envisage circumstances in which there could be advantages in the system as a whole being headed up by a new statutory body. We would scarcely be seeking to take power to transfer functions were that not the case. It would allow the involvement of practitioners at the apex of the regulatory structure. Equally, broader interests, particularly the interests of those who make use of auditors and of audited accounts, could be represented.
In addition, the Bill enables the Secretary of State, when transferring his functions under the Bill, to confer supplementary and incidental functions on the body. In other words, the continuing work of supervising the recognised bodies might be exercised alongside other functions. A body might, for example, find itself taking on a more general role as the focus of the profession, perhaps in relation to subjects such as the development of accountancy and auditing standards. Potentially that could be a very significant step. Needless to say, the profession itself would have to be satisfied that it was the right step to take. But it seems wise at least to permit the possibility and that is one reason why the option of transferring functions to a statutory body exists.
However, all this is somewhat speculative. Moreover, it is hardly characteristic of the present Government to set up statutory bodies at the drop of a hat. The functions under the Bill can be exercised by the Secretary of State with the help of his department. The case for transferring them only becomes strong if the statutory body has a distinct role to play. It is not apparent to us that as yet there is such a distinct role; neither does it appear that others concerned with these matters believe that there is.
In considering the regulatory framework for auditors, we consulted, and canvassed the idea in a consultation document that a statutory body might be set up. Although the idea was supported in some quarters it would be fair to say that the larger part of the profession did not welcome the possibility of being governed by a statutory body but preferred to come under the wing of the Secretary of State. The noble Lord, Lord Williams, acknowledged that fact. Neither was there general support from outside the profession. The noble Lord, Lord Williams, will not therefore find that there is widespread support for his amendment either inside or outside the profession.
In these circumstances, we are sure that it is right that the functions should be exercised, at least in the first instance, by the Secretary of State. On the other hand, because, as I have explained, we believe that the time may come for a statutory body, we have kept open that possibility for the future. If I may say so,

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that seems to combine sound common sense with foresight.
The question arises of whether we will be setting up the statutory body, and, if so, when. The answer is that the case for implementing the permissive power only arises if and when the conditions are right. I believe that we should first give the profession the opportunity to come to terms with the setting up of the new supervisory system, with any decisions which are taken on the restructuring of the accountancy bodies, and with any decisions taken on the way that accountancy standards are enforced, in the wake of the Dearing Report. It may be that in time the profession will find some positive advantages in the setting up of a statutory body to oversee it. That is why we believe that the Bill should allow for that possibility. But I am equally clear that it would be premature to be committed to implementing this option as soon as the Bill takes effect.
The noble Lord, Lord Williams of Elvel, referred to the comparison with the Financial Services Act. The statutory body has no role in making the rules on the conduct of audit work; neither will it authorise auditors to conduct audits. The position of the SIB under the Financial Services Act is different. The SIB has the power to make the rules and to authorise people to conduct investment business.
Requirements that bodies must meet are set out in Schedules 8 and 9 to the Bill. They are in many cases matters of principle and do not inevitably lead to a legalistic approach in the body's role. I do not necessarily accept the criticisms that the noble Lord, Lord Williams of Elvel, made of the financial services regulations. I believe the noble Lord also said that if one takes optional powers they will be used, or words to that effect. 1 cannot be responsible for everything said in earlier debates. It depends on the context and the situation. I certainly would not accept that the alleged quotation is true in the present context. In the light of the explanations that I have given I hope that the noble Lord will feel able to withdraw this amendment.
Lord Williams of Elvel: I am most grateful to the noble Lord for his exposition of what Part II is about. Generally I agree with his exposition. I am grateful to him for responding to some of the points I made. The Minister is absolutely right in drawing the attention of the Committee to the point that the institutes that are operating in this sector at the moment do not support the amendment that I am moving. Nevertheless, I say to them that if they want (I believe they do) a flexible system of monitoring, it is my belief that that can only be achieved by a statutory body with practitioner participation at the top. Otherwise the noble Lord is going to lead us, as the Bill does, down the path of a very firm Secretary of State with primary legislation and stipulating what is required. Those institutes will then have to monitor on a statutory basis.
I should like to move slightly differently. This is a very important point. I believe that the noble Lord, Lord Benson, will later move certain amendments as regards the question of monitoring the burden that is placed on accounting institutes in the Bill. I am
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saying indirectly to the noble Lord that I should certainly support those amendments were they put in the context of some strong body at the top which had a kind of practitioner-based SIB role and allowed bodies like the various institutes to perform their role flexibly underneath.
I cannot see how we can have more flexible monitoring by the supervisory bodies underneath without having some arrangement of the kind that I propose in my amendment. I do not know whether the noble Lord, Lord Benson, wishes to comment on what I have said.
Lord Benson: No, thank you.
Lord Williams of Elvel: The noble Lord does not wish to comment on what I said. Having invited him to do so, I rest my remarks simply where they are. I do not believe that the institutes for which the noble Lord, Lord Benson, speaks will have much joy from this side if they ask for flexible monitoring underneath without a proper regulatory system on top. I take what the noble Lord said. This is a difficult matter. It goes to the heart of Part II of the Bill.
I do not believe that this is the time or the place to do other than study what the noble Lord said. With us it is a point of some importance that at the end of the day there should be a statutory body. The noble Lord indicated that that may come in the future when the institutes fail to do their duty under the Act, as it will then be. We believe that the Government should start out on that basis and then have a flexible system underneath. That is the burden of our dispute with the Government.
Nevertheless, having aired that point at this stage in the Committee, I reserve the right to come back to it in a more definitive manner when we reach the next stage. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn. Clause 22 agreed to.
Clause 23 [Eligibility for appointment]:
Lord Brabazon of Tara Lord Brabazon of Tara moved Amendments Nos. 186 to 188:
Page 39, line 18, leave out ("not").
Page 39. line 19, leave out ("unless") and insert ("only if he").
Page 39, line 20, leave out ("he").
The noble Lord said: These are purely drafting amendments. I beg to move.
On Question, amendments agreed to.
Lord Brabazon of Tara Lord Brabazon of Tara moved Amendment No. 189:
Page 39, line 29, leave out ("appointment as company auditor") and insert ("the appointment").
The noble Lord said: I should like to speak at the same time to Amendment No. 190. These amendments clarify the position of partnerships which succeed to the practice of another partnership. As Clause 23(1) makes clear, in order lawfully to be appointed as an auditor of a company, a person must be eligible for the appointment; that is to say, it is not enough for him to be eligible for appointment as a company auditor in a general sense: he must be

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eligible for appointment as that company's auditor. A person might, for example, be allowed under the rules of a recognised supervisory body to audit companies, but he might be ineligible for a particular appointment because under Clause 24 he is not independent of that company. The amendments make clear that this is to be the case also for partnerships which succeed to the practice of another partnership. I beg to move.
On Question, amendment agreed to.
Lord Brabazon of Tara Lord Brabazon of Tara moved Amendment No. 190:
Page 39, line 32, leave out ("appointment as company auditor") and insert ("the appointment").
On Question, amendment agreed to.
Clause 23, as amended, agreed to.
Clause 24 [Ineligibility on ground of lack independence]:
Lord Brabazon of Tara Lord Brabazon of Tara moved Amendment No. 191:
Page 39, line 42, at end insert (";
and for this purpose an auditor of a company shall not be regarded as an officer or employee of the company.").
The noble Lord said: I should like to speak at the same time to Amendment No. 192 standing in the name of the noble Lord, Lord Benson. The government amendment makes clear that an auditor of a company is not to be regarded as an officer or employee of it for the purposes of determining whether a person is to be ineligible for appointment as a company's auditor on the ground that he is such an officer or employee. Obviously to allow any other construction would make nonsense of the restriction in the clause. I hope that our amendment covers the point made by the amendment of the noble Lord, Lord Benson. I beg to move.
Lord Lloyd of Kilgerran: I rise briefly to support the amendment. Perhaps it will be helpful for the Committee to know that the court has decided on several occasions that an auditor is an officer of the court. In those circumstances it is essential to make it clear that, for the purposes of this clause, an auditor shall not be regarded as an officer or employee of the company.
On Question, amendment agreed to.
[Amendment No. 192 not moved.]
Clause 24, as amended, agreed to.
5.45 p.m.
Clause 25 [Effect of ineligibility]:
Lord Brabazon of Tara Lord Brabazon of Tara moved Amendment No. 193:
Page 40, line 20, leave out ("body") and insert ("company").
The noble Lord said: This is a drafting amendment which aims at greater precision. Its purpose is to make it clear that "the body" referred to in line 20 on page 40 of the Bill as that to which an auditor must give notice when he vacates office by reason of ineligibility is the company of which he was the auditor. I beg to move.
On Question, amendment agreed to.
Clause 25, as amended, agreed to.
Clause 26 [Power of Secretary of State to require second audit]:
Lord Brabazon of Tara Lord Brabazon of Tara moved Amendment No. 194:
Page 40, line 40, leave out ("company auditor") and insert ("auditor of the company").
The noble Lord said: The amendment establishes that the person who reviews an audit carried out by an ineligible person must himself he eligible to be that company's auditor rather than just eligible to audit companies in a general sense. I beg to move.
Lord Williams of Elvel: Can the noble Lord explain why we have the new version "auditor of the company" in this amendment while in Amendment No. 196 we have a new version which incorporates the words "company auditor"?.
Lord Brabazon of Tara: I am not certain that I can answer that question straight away. I suspect that the circumstances are different. The company auditor in Amendment No. 196 does not refer to a specific appointment whereas Amendment No. 194 does. I hope that that answers the noble Lord's point.
Lord Williams of Elvel: I am most grateful to the noble Lord.
On Question, amendment agreed to.
Lord Brabazon of Tara Lord Brabazon of Tara moved Amendment No. 195:
Page 41, line 20, after ("appointment") and insert (", or continues to act,").
The noble Lord said: There are two circumstances in which a person could wilfully conduct a company audit when ineligible: if he accepted an appointment as auditor when he knew he was ineligible or if he failed to vacate office once he knew he had become ineligible. At present Clause 26 would allow a company to recover its costs in complying with the requirements of the clause from a person who had accepted the appointment knowing he was ineligible but not from one who had, knowing that he had become ineligible, failed to vacate office. The amendment would remedy that defect. I beg to move.
On Question, amendment agreed to.
Clause 26, as amended, agreed to.
Clause 27 agreed to.
Schedule 8 [Recognition of supervisory body]:
Lord Brabazon of Tara Lord Brabazon of Tara moved Amendment No. 196:
Page 171, line 24, at end insert—
("Provided that, a firm which has ceased to comply with those conditions may be permitted to remain eligible for appointment as a company auditor for a period of not more than three months.").
The noble Lord said: This amendment would permit recognised supervisory bodies to give firms a period of grace of three months in which to comply again with the requirements in paragraph 4 of the schedule. The requirements in that paragraph are

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drawn from Article 2 of the directive. The article permits the authorities in member states to give a period of grace of up to two years. We have decided that three months would give the right degree of flexibility. I beg to move.
On Question, amendment agreed to.
Lord Benson Lord Benson moved Amendment No. 197:
Page 171, line 35, leave out ("partners") and insert ("voting rights in the partnership are held by").
The noble Lord said: I should like at the same time to speak to Amendments Nos. 198 and 199. These are purely drafting amendments. No point of principle is involved. They are designed only to get right a small lacuna in the wording. The auditors can he either an incorporated company or a firm. The schedule defines the composition in each case. It also defines how the voting control shall be exercised. Subparagraph (2)(b)(i), which refers to the company, states that the voting rights shall be in a certain way. Subparagraph (2)(c)(i) gives a different form of voting. The latter implies that all partners have the same votes, but they do not. Partners have different votes and very often salaried partners have no votes at all. To put the record straight, it is proposed in the amendment that subparagraph (2)(c)(i) shall say,
"a majority of the voting rights in the partnership are held by".
The rest reads smoothly. I hope that that will be acceptable. I beg to move.
Lord Brabazon of Tara: The noble Lord is right to say that paragraph 4 of Schedule 8 needs to be amended so that the majority of voting rights in a partnership are held by individuals who hold an appropriate qualification or firms which would be eligible for appointment as a company auditor. However the amendments tabled by the noble Lord are not quite right as they give no definition of the meaning of voting rights in a partnership.
If the noble Lord will look at paragraph 5(2) he will see that we have had to give a definition of voting rights in bodies corporate, and we will similarly have to give a definition in the case of partnerships. In addition, although the amendment recognises quite properly that in order to give effect to the directive we must ensure that, where management of a partnership's affairs is delegated to a group of partners, a majority of those partners must he appropriately qualified or eligible for appointment.
The amendments would not deal adequately with the case in which management of the partnership's affairs had not been delegated. In that case, the "administrative or management body" of the firm would consist of all the partners, and the directive obliges us to ensure that a majority of those fulfil the relevant conditions. If the noble Lord will agree to withdraw the amendments, in the light of what I have said, I shall undertake to bring forward appropriate government amendments at a later stage.
Lord Benson: I am quite willing to agree to that. Accordingly, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 198 and 199 not moved.]
Lord Benson Lord Benson moved Aendment No. 199A:
Page 173, line 25, leave out ("arrangements and").
The noble Lord said: With the permission of the Committee I should like to take Amendments Nos. 199A to 199D together. They deal with the question of monitoring. It is a question of wording and not so much a point of principle. The present provision in the Bill says that the supervisory body,
"must have adequate arrangements … for the … monitoring … of compliance with its rules".
We read that to mean that before the professional body can apply for membership, or apply to be appointed, it must monitor on a continuous basis all the many thousands of auditing firms and over 100,000 individuals who have the right to carry out audits. Such a proposal would be impracticable.
Professional bodies accept at once that they have an obligation to monitor. Indeed, they go further; they are willing and anxious to use that process in appropriate cases. However, they cannot use it generally over everyone on a continuous basis; it must be used as appropriate. The only purpose of the amendment is to straighten out the wording so that we know exactly what our obligations are. The amendment merely changes the wording to read:
"the body must have adequate resources to monitor compliance with its rules",
which is what it can do and what we wish it to do.
I should perhaps explain to the Committee why it is quite impossible to contemplate a general monitoring service over the whole field. It is estimated that the number of firms which will carry out auditing will be between 10,000 and 20,000. The number of persons who will have the right to carry out audits will be something over 130,000. Therefore it is quite inconceivable that a monitoring service covering the whole of that field on a continuous basis could be possible.
The monitoring of a firm is a difficult job. It always takes days and it may even take weeks. It requires highly skilled and experienced staff; it cannot be delegated to subordinate staff and partners. Monitoring a firm or a collection of persons who are engaged in auditing is quite different from the monitoring required when one sends an inspector into a restaurant to see whether there are cockroaches in the kitchen; it is a very different proposition altogether. What it amounts to is that there are not enough people of the right quality to do the monitoring. Moreover, even if there were, the cost would be wholly prohibitive. I say merely in parenthesis that the cost of auditing for industry is already uncomfortably high and if this requirement were to be imposed on it it would make the cost altogether unacceptable.
Perhaps I may make another point here which I think is most helpful in this respect. Broadly speaking the Bill is designed to give effect to the eighth council directive. There is no demand in that directive for monitoring. I have made inquiries and I am informed that none of the other 11 member states have installed or are intending to install a monitoring process along the lines against which I am protesting. Therefore it

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would be unreasonable for this member state alone to be an odd ball under such conditions.
The City and the Government have already discovered the crushing burden under the Financial Services Act 1986 of bureaucracy and supervision. Moreover, during the Second Reading debate the Secretary of State was kind enough to say that he would he careful to avoid that mistake occurring in this Bill. If the words remain in the Bill as they are at present and are interpreted in the way in which I think they must be—which we find unattractive— all
I can say is that the Bill will repeat the same mistake which was made in the Financial Services Act 1986.
I should like to make one further point. Bad auditing—the sort of auditing which must be stoped—is sometimes due to bad procedures but as often as not it is due to an error of judgment. No amount of monitoring today will prevent an error of judgment being made tomorrow.
For all those reasons I hope that the interpretation which I have sought to put before the Committee is the one which will be acceptable and that the interpretation created by the amendment will be accepted.
It remains only for me to add—although I hesitate to do this, but it perhaps rounds off the whole point—that my institute has for 109 years made the highest possible efforts to maintain professional standards. It has done so by education and training; by continuing professional education; by organising seminars up and down the country on every subject which touches our profession all through the year; and by adopting strict disciplinary procedures. Indeed, in that respect the institute is unique.
Of all the professional bodies in the whole world the three big professional bodies in this country are the only ones which have a special disciplinary procedure to deal with matters of public concern which particularly touch the question of auditing. The reports of that disciplinary committee are available to the public for inspection.
Therefore we have the resources to enforce our rules, which is what the schedule provides. We want to monitor where it is appropriate and we have the will to do so; we merely ask that we should not be required to contemplate the monitoring of between 10,000 and 20,000 firms and over 130,000 individuals on a continuous basis, because it is wholly impractical. I beg to move.
Lord Williams of Elvel: The noble Lord, Lord Benson, has spoken to Amendments Nos. 199A to 199D together. I should like to follow his example in so doing. The noble Lord put forward a persuasive case for the inability, if I may say so, of the existing institutes to have laid upon them the burden which this schedule implies. Previously I expressed my sympathy with the noble Lord's view. It seems to me that a statutory requirement on the supervisory bodies, which in practice will be the various institutes, to both monitor and enforce compliance of their rules, lays them open to action if they do not so enforce. I sympathise with the noble Lord when he says that the institutes really do not have the resources to carry out that statutory obligation.
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Further, I believe that the Bill is wrong in its interpretation of the eighth directive— that it should be the statutory body, as authorised by the Secretary of State, which would carry out the monitoring and enforcement function. I can find nothing in the eighth directive which lays that obligation on the Secretary of State or, indeed, anyone.
When I moved my earlier amendment, I indicated to the noble Lord, Lord Benson, that I should be perfectly content with a statutory body at the top which had the monitoring and enforcement obligation, leaving the institutes as the noble Lord, would like them left. I invited the noble Lord to intervene but he refrained from doing so. I said, and the noble Lord, Lord Brabazon, confirmed, that that proposal does not gain the support of the profession. That does not mean it is a bad argument. I have some sympathy with the noble Lord, Lord Benson, in his amendment. I merely say that one cannot have one's cake and eat it. One must either accept the monitoring function as laid down, deriving from statute, or one must accept some form of statutory body which will do that. Those are the two alternatives which the profession must he prepared to accept. I do not care which; but it must be one or the other. I prefer the statutory body.
6 p.m.
Lord Lloyd of Kilgerran: I too had some difficulty in understanding whether the able presentation of the noble Lord, Lord Benson, covered the problems that he has in mind. I recognise that he has also received—indeed he may have written or edited it—the briefing note on arrangements for monitoring by the Institute of Chartered Accountants. I agree with everything he said about the desirability of reducing costs in relation to all these matters. He says that his amendments would do that.
The noble Lord said that the requirements for recognised supervisory bodies to have arrangements for monitoring which appear in Schedule 8(10) under the heading "Monitoring and Enforcement" go beyond the terms of the directive. I am not sure whether that is a difficulty which the Government have in mind. It seems to me, having read the relevant EC directive, that the amendments go beyond the terms of the directive. The Minister may like to indicate why the Government desire to go beyond the terms of the EC directive in this matter.
Further, I am not satisfied that the difficulties of the noble Lord, Lord Benson, with his great experience in these matters, will be alleviated to any extent, even with the amendments.
Lord Taylor of Gryfe: I have no intention of repeating the persuasive arguments put by the noble Lord, Lord Benson. The Institute of Chartered Accountants of Scotland fully subscribes to the amendments.
The Earl of Harrowby: I too should like to support the noble Lord, Lord Benson, although I wonder whether the amendments achieve what he has in mind. They still leave him with obligations he does not wish to accept. The noble Lord, Lord Williams, said that the profession has the option of accepting

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one course or the other. That is not true, because it ought to have the option of maintaining the status quo. It performs its function extremely well and adequately. The country has long been indebted to those professions for the way they have performed their duties. I do not understand the need for change.
Lord Williams of Elvel: Perhaps the noble Earl will allow me to say from these Benches, as opposed to a pronouncement from the Government Benches, that the Bill is designed to implement the eighth directive. That means that the present situation cannot continue.
The Earl of Harrowby: It means that the amendments tabled by the noble Lord, Lord Benson, are in the same position. He has expressed the impossibility of complying with permanent monitoring, which is the present position. If the noble Lord, Lord Williams, is saying that that is no longer an option, no doubt he is correct. I regard the proposal for permanent monitoring and investigation as totally impractical.
Lord Williams of Elvel: Perhaps I may reply briefly to that point. We must go over to a system which is embodied in law. That is the directive's requirement. My point is that the monitoring of auditors is conducted either by supervisory bodies, which is what the Bill proposes, or by some general statutory body which the Secretary of State will set up and to which he will delegate his powers. I do not see that there is the middle course as described by the noble Lord. There may be one; it escapes me for the moment.
Lord Alexander of Weedon: I support the amendment proposed by the noble Lord, Lord Benson. I watch with considerable concern the suggestion that there should be monitoring of the activities of those supervised by the professional bodies. What does it mean? Monitoring is a positive obligation. How frequently is it to be carried out? By whom? What are the standards to be? How efficient will it be? That of course will depend entirely upon who conducts the monitoring and how frequently it is conducted. I view this proposal as a superimposition of yet another regulatory activity over the actions and work of professionals which requires the fullest justification.
If it is obligatory under the eighth directive that we get into this, then so be it. If not, we should carefully consider whether we do not rely upon the enforcement powers which are available to the profession, together with the standards which have traditionally been set by the various institutes. I respectfully ask the Secretary of State to say whether he considers the wording to be necessary to comply with the directive and, if not, carefully to consider the burdens that the Government would otherwise be imposing upon the professions and, let us never forget, indirectly upon those who use the services of the professions and have to pay for them.
Lord Williams of Elvel: I find myself in the embarrassing position of defending the Government,
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which is not my job. Of course monitoring is conducted regularly by all the institutes. They know perfectly well what is meant by monitoring. There is no problem. They know the people whom they suspect are not terribly good. In the profession of the noble Lord, Lord Alexander, there are people who are known to be good and those who are known to be not so good. The noble and learned Lord the Lord Chancellor will no doubt sort all that out in time.
I do not see that monitoring itself creates any great problem. I return to the point that either—this is where I join forces with the noble Lord—there is some body to which powers are delegated by the Secretary of State, which conducts the monitoring process, or it is left flexible in the way that the noble Lord implies. At the end of the day the Secretary of State has to enforce the monitoring. The Government are caught in a little bit of a cleft stick, but I do not like to deviate from the basic view that we must implement the directive. In implementing the directive we are moving to a statutory system. We shall support the Government in it because we have to, but within that system there are two choices. I do not think that the Government have thoroughly thought this through. Perhaps the noble Lord will now respond to the noble Lord, Lord Benson.
Lord Chorley: I support the amendments. I speak as an accountant who has been in practice for some 20 years. I doubt whether any accountant in practice would disagree with the general sentiments of paragraph 10 of Schedule 8, that is to say that his professional body must have adequate monitoring arrangements to see that its rules are complied with.
However I suggest there is a need for clarity when this general sentiment is enshrined in statute. A general sentiment is not sufficient guidance and that is what the debate seems to be about. As was said, the general range of what might be construed as effective monitoring is vast. We have heard that there are 10,000 to 20,000 firms involved and over 100,000 practitioners in company audits. I do not think I need to go over the arguments again; they have been fully expressed by the noble Lord, Lord Benson, and others.
It seems to me that if we are to have effective and efficient monitoring it will need to change and develop in order to deal with changing circumstances. The supervisory body will therefore need to adapt its procedures. It cannot do that if there is a lack of clarity in the scope of the legislation. The apparently innocuous phrase in paragraph 10 will, I believe, be a brake on an efficient and effective audit. It may be that the wording of the amendment to paragraph 10 is not quite right, but it would be nice to hear what the Government have to say, to see whether it strikes a chord with them.
Lord Brabazon of Tara: We have had an interesting debate on this subject; it is not that I did not wish to reply earlier but many noble Lords wanted to take part. I am grateful to the noble Lord, Lord Williams, for some of the remarks he had made.
Lord Williams of Elvel: Very regretfully!
6.15 p.m.
Lord Brabazon of Tara: We covered the point that the noble Lord was making on the first amendment dealt with this afternoon. In my reply to that amendment I outlined the reasons why we have to do that in order to come into line with the directive, which the noble Lord, Lord Williams, reinforced just now.
The auditing profession has long been run on a self-regulatory basis and in general standards are very high, as members of the Committee and not least the noble Lord, Lord Benson, have pointed out. We do not expect the Bill to result in major regulatory changes. It will build on existing good practices and ensure that standards continue to remain high at a time when competitive pressures are increasing. The initiative for developing the regulatory regime will remain, as now, with the profession. If one looks at the requirements in Schedule 8 for recognition as a supervisory body, it is apparent that the bodies now recognised under Section 389 of the Companies Act already have rules and practices covering most of the topics listed.
The main areas in which additional regulation may be necessary are, first, procedures for maintaining competence and, secondly, the area on which Members of the Committee have focused—the monitoring and enforcement of compliance with the rules. These are both areas in which the profession has itself already recognised that more needs to be done. Auditors once qualified must keep themselves up to date with changing requirements and methods. Professional bodies need to ensure that standards are maintained. Other countries are already ahead of us in developing ways of achieving this objective through, for example, peer review in the United States or practice review in Canada and Ireland. I do not suggest that these are necessarily the right models for the UK, but the reputation of the UK profession rightly stands high in the world and we must ensure that it remains so.
Turning now to consider more specifically amendments of the noble Lord, Lord Benson, the effect would be to weaken—one might say emasculate—the requirements on a recognised supervisory body's monitoring and enforcement. This might well render nugatory the other requirements imposed on such a body by the Bill and through it on auditors. There is, after all, little point in having rules and requirements if they are not adhered to. if the Committee were to accept these amendments, it would be in the position of saying that these were the standards that it expected auditors to aspire to and achieve, but the Committee was not being serious in saying so. Certainly we do not wish to impose unnecessary burdens on the profession. But it seems to us to be necessary for the integrity of the supervisory system that recognised supervisory bodies have adequate arrangements for monitoring and enforcing compliance, and that the result is that the bodies' rules are effective.
Of course we are determined not only that regulation should be effective, but also that it should be no more onerous than is necessary to secure that objective. I have to say that I had some difficulty in recognising the elaborate and costly system that has
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been described this afternoon and the terms of paragraph 10. That paragraph does not say that there has to be a full review of a significant number of audits. Clearly it means that the system should go beyond responding to complaints, but I do not think that spot checks need be too onerous a system or that well-run firms should fear them. It would not be the case that such spot checks would require the questioning of the professional judgment of one auditor by another. What it might well mean is looking at the system of internal controls within a firm for ensuring that the firm complies with the requirements of its professional body.
We shall be continuing to work with the profession to secure that the system of regulation is effective but not over-burdensome. But in our view the wording of paragraph 10 as it is will provide a considerable degree of flexibility in reaching a sensible and balanced conclusion on the arrangements for monitoring and enforcement. It does not need any dilution.
Let me emphasise that we are determined to avoid the dangers of over-regulation. I do not think there is any dispute that auditors should be subject to a satisfactory supervisory system, and of course the eighth directive obliges us to place certain requirements upon auditors. But, as I have explained, the profession's own bodies will be drawing up the detailed rules under the Bill and we expect them to seek to minimise the burden they place on their members.
There is a further part of the Bill to which I should draw the Committee's attention—the competition regime in Schedule 11. This is designed to ensure that the rules are no more anti-competitive than is reasonably justifiable in the light of the purposes of the supervisory system. Particularly burdensome or costly requirements could well fall foul of these provisions.
On the question which a number of noble Lords have raised about whether it is necessary within the eighth directive to have these monitoring arrangements, we are not claiming that the form of our monitoring provisions is required by the eighth directive. But it was foreshadowed in our consultative document. It is not necessary for implementing the directive to use these precise words, but we want to keep the effect sought, which is not to be excessively costly. It is true that many of the directive's requirements are for the most part cast in terms of the standards which must be reached in order for a person first to become qualified and not on the subsequent maintenance of a high standard. We believe that it would be a significant loophole in the system if post qualification standards were allowed to drop and auditors were allowed to let their skills and knowledge become outdated. As regards monitoring and enforcement, I would not accept that the directive makes no requirements. It requires us to have arrangements in place to ensure that only persons of good repute are approved as auditors and that audits are conducted with integrity. We do not think that we could be said to have ensured that audits are conducted with integrity if we do not have arrangements in place to pick up audits which are not so conducted. I should be surprised if Members of the

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Committee considered that a person who had allowed his standards to fall so low that he was, for example, incompetent in the conduct of his audit work could be said to be of good repute or to be acting with integrity. The Bill's provisions as to monitoring and enforcement are part of the arrangements we propose to put in place to give effect to those requirements.
I do not believe that a great point of principle arises here, provided it is accepted that monitoring is needed. I thought that the noble Lord, Lord Benson, accepted that some form of monitoring was needed. The Government attach importance to some check on a systematic basis of the performance of auditors. We are of course prepared to discuss further with the professional bodies how monitoring can be adequate without imposing excessive costs. I hope that with that assurance the noble Lord will be able to withdraw the amendments.
Lord Williams of Elvel: Before the noble Lord, Lord Benson, decides what to do with his amendments, I wish to clarify one point. Is the noble Lord, Lord Brabazon, ruling out or ruling in the system of peer review that exists in the United States?
Lord Brabazon of Tara: I mentioned the system of peer review. We are aware that that is sometimes seen as a bureaucratic and costly system of reviewing a firm's work. However, we do not believe that paragraph 10 requires a system on those lines. As I have said, we would be happy to discuss with the profession its ideas on a possibly less onerous system. Having said that, if the profession came back to us and said that it wanted the peer review system, we would not rule it out. It is not necessary, however, to use that method.
Lord Williams of Elvel: I hope that the profession will advise the Government to rule it out. It gives no satisfaction to firms and very little satisfaction to those who use auditors' services.
The Earl of Harrowby: Before the noble Lord, Lord Benson, replies, I should like to make one point. The Minister used some new words. He referred to "spot checks". Spot checks inevitably mean checking on site. I ask the Minister to bear in mind the amount of management time that is absorbed by audits in their present form. If industry is occasionally to have imposed on it in addition spot checks which would go through the whole procedure again, it would find that totally unacceptable.
Lord Lloyd of Kilgerran: As I listened to what the Minister said, it seemed to me more and more unnecessary for paragraph 10 to be headed: "Monitoring and enforcement". The Institute of Chartered Accountants has stated that the,
"arrangements for monitoring (Schedule 8, paragraph 10) go beyond what the Directive requires".
The institute further states that we shall be the only country that has these supervisory obligations. The Minister referred to the desirability of maintaining the competence of auditors. Paragraph 9 of Schedule
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8 deals with that point. The Minister then talked about the discipline that was necessary in order to be afforded membership of the institute. That is dealt with by paragraph 11, which is headed: 'Membership, eligibility and discipline". It states:
"The rules and practices of the body … must be fair and reasonable and include adequate provision for appeals".
If the Minister is going to discuss these matters with the professional bodies, he might consider whether in these circumstances a statutory enforcement as regards monitoring is necessary.
Lord Williams of Elvel: Following on from what the noble Lord, Lord Lloyd, has said, I want to ask the Minister exactly what form the consultations with the profession will take and what their result will be. Will there be a modification to the schedule? Will guidance be given? What will happen as a result of the consultations?
Lord Brabazon of Tara: I have volunteered consultations on the way that monitoring takes place. However, I have not at all said that we will reconsider whether any kind of monitoring should take place. I make that crystal clear to the noble Lord, Lord Lloyd of Kilgerran, and to other Members of the Committee. The consultations with the representative bodies will concern how monitoring can be conducted. I doubt whether any change would need to be made in the schedule. The text we have permits a range of outcomes which I hope will be acceptable to the profession. I cannot at the moment see any need for a change in the schedule.
Lord Benson: I am grateful to the Members of the Committee who have supported this amendment. It is only necessary for me to comment on the remarks of one Member who gave support; that is, the noble Lord, Lord Williams of Elvel. I detected that his support was conditional on support for another measure which is very close to his heart. I do not think the two are connected at all. I was speaking to the physical problems of monitoring on a huge scale. That interpretation could be put on the Bill. Whether the Secretary of State or another body enforces that control is not relevant to that point.
Peer reviews have been tried in America. Broadly speaking, they are a failure. They do not command the respect of the profession or of the public. They are appallingly expensive and are not to be commended. I hope that we shall never go to that system. We should be able to find something a great deal better, in so far as it is necessary at all.
On the broad question of the amendments, I shall not ask the Committee to divide. It is helpful to know a little of what is in the Government's mind. But I still have not been able to divine from what the Minister has said exactly what the Government have in mind by the use of the words in the Bill. Perhaps they are waiting for the institutes to come and make positive suggestions to them. There seems to be almost an invitation to do so. On the basis that those consultations will go on and that something sensible will emerge, I beg leave to withdraw the amendment
Amendment, by leave, withdrawn.
[Amendments Nos. 199B to 199D not moved.]
Schedule 8, as amended, agreed to.
Clauses 28 and 29 agreed to.
Schedule 9 [Recognition of professional
qualification]:
Lord Benson Lord Benson moved Amendment No. 200:
Page 177, line 15, leave out ("substantial").
The noble Lord said: This amendment has nothing like the same importance as the amendment to which I have just spoken. With the permission of the Committee, I shall speak also to Amendment No. 201. The schedule deals with the training which must be given to an auditor. The present sub-paragraph states that the,
"qualification must be restricted to persons who have completed at least three years' practical training of which a substantial part was spent being trained in company audit work".
We do not question that qualification at all. We are quite content with it. It has been in operation for years. But we do question the meaning of the word "substantial". I raise that point on two grounds. First, as I mentioned on an earlier amendment, the Bill is designed to give effect to the eighth council directive. That directive does not use the word "substantial" at all. It sensibly uses the words inter alia. We did not think inter alia was a very elegant phrase; therefore we suggested the words "in particular". We felt that that was much more satisfactory and entirely in keeping with the eighth council directive. That is why the words "in particular" have been used in Amendment No. 201. We see no reason why this provision should go beyond that.
Further, the difficulty is that Ministers and civil servants change. What may be substantial to one is not substantial to another. It is very difficult to know exactly what is meant by this provision. Therefore we would prefer the words in the amendment to be used instead.
The training of an auditor cannot be almost, wholly or very largely dependent only on company audit work. There must be practical and theoretical training too. That has been the case for years. But there are other aspects of accountancy knowledge which must be dealt with at the same time, such as taxation, management accounting, a knowledge of mercantile law, liquidation and receiverships. All those things are necessary in order to give an auditor a rounded experience so that he is capable of making a balanced judgment. I do not know whether extraneous subjects which have always broadened the tradition of our profession would be disregarded as being part of the company audit experience required. We would be much relieved if the word "substantial" could be removed altogether.
Alternatively, if it is not removed and the amendment is not accepted, perhaps the Government could advise us whether the training that we have conducted for many years and which must be well known to officials in the department is accepted as being satisfactory training in accordance with what is intended by the Bill. I beg to move.
6.30 p.m.
Lord Brabazon of Tara: I think that in considering the present requirements in the Bill relating to practical training one has to bear in mind the purposes of the supervisory system. The system is about ensuring that company auditors are properly trained and equipped for their role arid that they are subject to appropriate rules on such matters as integrity and independence once qualified. It is not about accountancy in a wider sense, and it will be quite open for persons to qualify as, for example, chartered accountants without meeting all the criteria in the Bill.
The Bill requires audit trainees to undergo practical training of at least three years' duration. Not surprisingly, since the Bill is concerned with company auditors, it requires that a substantial part of that period of practical training is spent on being trained in company audit work. If the students were to spend their time being trained on things other than company audit work, one might wonder what the purpose of prescribing the period of practical training is.
Perhaps I could just add that "a substantial part" is not as great a test as might at first be supposed. It does not mean the major part.
However, I have listened carefully to the points which the noble Lord, Lord Benson, has made, particularly about training in other fields helping the auditor in his primary task. In the light of the noble Lord's comments, I undertake to look again at the wording of paragraph 6 to see whether any changes would be desirable. I am sure that it would also be useful for officials to speak again to the professional bodies about their concerns. On the basis of that assurance I hope that the noble Lord will be able to withdraw the amendment at this time.
Lord Benson: I am grateful to the noble Lord and I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 201 not moved.]
Schedule 9 agreed to.
Clause 30 [Approval of overseas qualifications]:
Lord Lloyd of Kilgerran Lord Lloyd of Kilgerran moved Amendment No. 202:
Page 43, line 9, leave out ("The Secretary of State may declare that").
The noble Lord said: With the permission of the Committee, in moving Amendment No. 202 I shall also speak to Amendments Nos. 203, 205, 206 and 207, all of which are in my name.
We are now dealing with an interesting clause of the Bill relating to professional qualifications of auditors. Perhaps I may remind the Committee that Clause 28 deals with the "Meaning of 'appropriate qualifications'". There is no reference to the Secretary of State in that clause of the Bill. Clause 29 is entitled:
"Qualifying bodies and recognised professional qualifications".
I have no quarrel with that. The Secretary of State is not mentioned by name.
Turning to Clause 30, in relation to which I have proposed a number of amendments, that clause deals with "Approval of overseas qualifications". In that clause the Secretary of State is brought in to decide about matters relating to the approval of qualifications for persons from overseas wishing to practise in this country. The tenor of all my amendments is to remove the necessity of bringing the Secretary of State into this matter and to leave the decision on the approval of overseas qualifications to the professional institutes and supervisory bodies.
Thus my first amendment deals with subsection (1) of Clause 30, which now says:
"The Secretary of State may declare that persons who—

(a) are qualified to audit accounts under the law of a specified country or territory outside the United Kingdom, or

(b) hold a specified professional qualification in accountancy recognised under the law of a country or territory outside the United Kingdom, shall be regarded for the purposes of this Part as holding an approved overseas qualification".

My amendment would strike out the words
"the Secretary of State may declare".
Therefore persons who fall under paragraphs (a) and (b) which I have just read should be regarded for the purposes of this part as holding an approved overseas qualification.
I agree that some kind of supervision or arrangement should be introduced to ensure that the person concerned holding those overseas qualifications would be able competently to deal with matters in the United Kingdom.
Turning to subsection (4) of this clause, I again strike out the words:
"The Secretary of State may direct that",
and leave the rest of the subsection, which would then read:
"A person holding an approved overseas qualification shall not be treated as holding an appropriate qualification for the purposes of this Part unless he holds">
—and these are the important words—
"such additional educational qualifications ensuring that such persons have an adequate knowledge of the law and practice in the United Kingdom relevant to the audit of accounts".
By removing, as I have suggested, the entry of the Secretary of State with all his powers into these matters relating to approval of overseas qualifications and leaving them to be dealt with by the professional institutes and supervisory bodies, subsections (2) and (3) become unnecessary. My other amendments require that those subsections be deleted.
It seems to me, in this era when we avoid regulations as much as possible, that the few safeguards in subsection (4) of this clause would be adequate. Not only do persons from abroad have to have their overseas qualifications; they must also have an additional educational qualification ensuring that they have an adequate knowledge of the law and practice in the United Kingdom relevant to the audit of accounts. It is not necessary and not very helpful that the Secretary of State should be brought in to deal with such matters. I beg to move.
Lord Williams of Elvel: I too shall speak to the grouping to which the noble Lord, Lord Lloyd, has
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referred, with the addition of Amendment No. 204 (which is the amendment in my name and that of the noble Lord, Lord Peston) and—perhaps with impertinence—to Amendments Nos. 208 and 218.
I have a good deal of sympathy with what the noble Lord, Lord Lloyd of Kilgerran, has said. In the clause as drafted the Secretary of State has decisive powers to approve or disapprove any auditor. That could be an auditor from a perfectly respectable overseas jurisdiction to which the Secretary of State for one reason or another might take exception.
My problem with the amendments of the noble Lord, Lord Lloyd, is that I believe that the eighth directive will require the Secretary of State in a member state to give authorisation within the member state. I am therefore concerned—and no doubt the Minister will be able to enlighten us on the point—that the noble Lord's amendment would take us outside the eighth directive.
That is why we put down an amendment, which I agree is somewhat general, which provides that such approval shall not be withheld unreasonably. In other words, we are seeking the same end as the noble Lord, Lord Lloyd, but we remain within the ambit of the directive. We should like to see some arrangement whereby an auditor from another country who is approved under the recognised procedures in that country should be allowed some form of appeal if the Secretary of State in this country denies him the right to practise here. I think that the noble Lord, Lord Lloyd, and I are basically aiming at the same target. I hope very much that the Government will listen to what we have said and respond positively.
Lord Morris: The noble Lord, Lord Lloyd of Kilgerran, put forward a very attractive case. However, I strongly believe that it would be unthinkable for any Secretary of State not to consider very carefully the advice that he receives—and indeed that he ought to seek—from the professions. They are ideally placed to give such advice. They have many relationships with correspondents and firms in other countries and throughout Europe. He should listen and consider very carefully any advice with regard to practice standards.
However, there will undoubtedly be other factors which any responsible government have to take into account because of the movement of labour between countries. There are issues well outside matters of professional practice and standards which the Secretary of State would have to consider most carefully. That is absolutely correct and no doubt why other countries within the EC insisted on broad brush governmental involvement.
For that reason I find the amendment of the noble Lord, Lord Williams, rather more attractive, though I wonder whether it may put too strong or unreasonable a fetter on the freedom to act of the Secretary of State.
6.45 p.m.
Lord Brabazon of Tara: First, I should like to answer the point made by the noble Lord, Lord Williams, before I turn to the main substance of this amendment. The noble Lord is quite right. The

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amendments of the noble Lord, Lord Lloyd, would take us outside the directives. One needs to bear that in mind from the start.
However, there are two pieces of background information which it is worth bearing in mind when considering Clause 30 and these amendments. First, the existing provision on eligibility to audit—Section 389 of the Companies Act 1985—already allows the Secretary of State to authorise foreign nationals on the grounds that they hold a qualification similar to that which is obtained by becoming a member of one of the recognised UK bodies. The section allows the Secretary of State to withhold recognition on the grounds of reciprocity; that is, because the overseas country or territory does not confer a corresponding right on UK-qualified persons to audit accounts in its jurisdiction.
This system has worked well, and a number of overseas qualifications have been recognised. Very broadly, the system in Clause 30 would operate on similar lines. One difference is that under the current system foreign nationals do not need to demonstrate a knowledge of UK law and practice.
The other piece of background information is what the directive allows and requires us to do. The relevant provision is Article 11. This article allows the authorities in a member state to approve persons who have qualified in another country if they wish. I am sure the Committee will understand why we have exercised that option. Apart from anything else, UK auditors could hardly expect to operate overseas if we were not prepared to let holders of overseas qualifications work here, subject to their being of the appropriate standard.
It is on the question of appropriate standards that the article makes requirements of the UK. It provides, among other things, that if the authorities in a member state exercise the option to approve holders of overseas qualifications they may only approve them if they consider the qualifications equivalent to those required in that member state in accordance with the directive. This is the purpose of giving the Secretary of State a discretion whether or not to approve overseas qualifications, and requiring him to be satisfied that they afford an assurance of professional competence which is equivalent to that afforded by a recognised professional qualification. I must therefore tell the noble Lord, Lord Lloyd, that the main effect of his amendments would be contrary to the UK's obligations under the directive. In fact, I have already said that.
Article 11 also provides that before a person holding an overseas qualification can be approved he must have furnished proof of the legal knowledge required in that member state for the purpose of auditing company accounts. The article allows member states to waive that requirement if they consider legal knowledge obtained in other states to be sufficient.
Subsection (4) of the clause implements these provisions of the article. I appreciate that the article allows a member state to insist that overseas persons furnish proof of their knowledge of local law, and that that is the effect of one of the noble Lord's amendments; but I hope that he can be persuaded
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that the Secretary of State should be allowed a little discretion in this area.
It is true that overseas law and practice can be different from that in the UK, and it can therefore be expected that the Secretary of State will in general require holders of a recognised overseas qualification to obtain an additional educational qualification. However, there may well be cases where such further qualifications are unnecessary. For example, law and practice in the UK and the Republic of Ireland have, for historical reasons, developed along similar lines, and that may be an example of a case in which the Secretary of State would wish to consider the possibility of not requiring additional educational qualifications. Of course, this is hypothetical. I cannot anticipate what decisions the Secretary of State may make in a particular case.
Turning to the amendment tabled in the name of the noble Lord, Lord Williams, I can assure the noble Lord, and indeed my noble friend Lord Morris, that the Secretary of State will be subject to the normal constraints of administrative law in exercising this discretion. This means that if he were to act unreasonably in refusing to recognise an overseas qualification he would be subject to judicial review. The amendment of the noble Lord, Lord Williams, is therefore superfluous.
Finally, the government amendments, Amendments Nos. 208 and 218, would allow the Secretary of State to withdraw his approval of an overseas qualification on the same grounds of inadequate standards and lack of reciprocity as those on which he would initally have been able to refuse to grant approval. This blocks an obvious loophole in the system. If functions under the clause were to become exercisable by a body established under Clause 44, it would, before exercising the power to withdraw approval on the grounds of a lack of reciprocity, have to obtain the consent of the Secretary of State—just as it would have to do if it were minded to refuse recognition on those grounds.
Perhaps I may now answer two other points raised by the noble Lord, Lord Lloyd. The first concerned delegating to regulatory bodies. I think that the reciprocity power in Clause 30(3) cannot be delegated to a private sector body. Under Section 44 even a statutory body has to seek the Secretary of State's consent to refusing to approve overseas qualifications on grounds of lack of reciprocity. But—and this was a point made by my noble friend Lord Morris—the Secretary of State will probably wish to take advice from bodies about the quality of a particular overseas qualification.
I hope that after hearing the explanation I have given the noble Lord, Lord Lloyd, will feel able to withdraw his amendments and that the Committee will accept the two government amendments when we come to them.
Lord Lloyd of Kilgerran: I am grateful to the Minister for his careful presentation of the position. I was fully aware of Article 3 of this directive, which states that,
"The authorities of a member state"—

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and of course the authorities of a member state in the case of the United Kingdom would no doubt be the Secretary of State—
"shall grant approval only to persons of good repute".
That will create a lot of trouble. if the Government take the position that the Secretary of State must be brought into these proceedings because of this directive—and I appreciate that this is not a hurdle that could not be overcome—it seems to me, as the noble Lord, Lord Williams, has pointed out, that it should be necessary to have embodied in this Bill some kind of procedure for appeal against the decision of the Secretary of State.
In his remarks the noble Lord referred rather loosely and graciously to the fact that anybody who did not agree with the Secretary of State could go to the High Court on what is known as a judicial review. A much simpler and less expensive technique should be adopted to enable any overseas person who feels that he qualifies to operate or practise in this country to have a right of appeal before a much cheaper tribunal. Tribunals now exist where that person could appear. The Act should embody a right of appeal; the position should not be left broadly that the laws of this country will enable anyone to have a judicial review. A simple and straightforward appeal should be possible from the decision of the Secretary of State.
I do not know whether the noble Lord, Lord Williams, wishes to say more but I should like to know from the Minister, if he asks me to withdraw my amendment, whether he is in sympathy with having an appeal procedure.
Lord Brabazon of Tara: That is a new point not covered by the amendments, I think I am right in saying. Therefore we would have to give consideration to it. I undertake to give consideration, obviously without commitment at this stage, as to whether it is a good thing or not.
Lord Williams of Elvel: With respect to the noble Lord, this is not a new point: we have been discussing it for the last 19 minutes. What actually happens if the Secretary of State decides that someone with qualifications in another country is not fit to conduct an audit in this country? What mechanism is there for that decision, and hence what mechanism is there for the appeal?
I join with the noble Lord, Lord Lloyd of Kilgerran, in being somewhat distrustful of the judicial review procedure. It is expensive; it is unreliable; it is long; and the judge will take a view on what a reasonable Secretary of State could have done in reasonable circumstances at any reasonable time; not on what this Secretary of State has done in the case he is reviewing.
The amendment I have tabled, Amendment No. 204, lays the burden of proof in the event of refusal of qualification in the United Kingdom fairly and squarely on the Secretary of State. The amendment seems to me to embody an appeal procedure. If the aggrieved party decides that the Secretary of State has acted unreasonably he can go to the court and say
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so. The noble Lord says that this is superfluous. If it is superfluous, why not have it on the face of the Bill? It would make so much more sense for those people who have to operate the legislation: the laymen, people living in France, Germany, Spain or wherever it may be. They need to know where they are; they will not be reading the noble Lord's explanations of what the Government have in mind. As we know perfectly well, the noble Lord's explanation as to what the statute says has no relevance whatever to how the courts will construe it.
Lord Morris: I am sure the noble Lord had no intention of trying to mislead the Committee. But, surely, if his amendment were carried, the burden of demonstrating that the Secretary of State had been unreasonable in withholding his approval would lie with the appellant or the plaintiff and not with the Secretary of State. I may be wrong; I am no lawyer.
Lord Williams of Elvel: I certainly did not mean to mislead the Committee in any way whatever. I am most grateful to the noble Lord for the point he has made. I am trying to make precise the conditions under which the Secretary of State has to operate when giving his approval or non-approval and what recourse an aggrieved party has.
Lord Brabazon of Tara: I am not sure that there is a great deal I can add. On the question of appeal, we think that formal appeal procedures would become bureaucratic and that United Kingdom nationals would not necessarily benefit from comparable arrangements overseas. However, this is not a fundamental sticking point. I have already said to the noble Lord, Lord Lloyd of Kilgerran, that we shall look at this appeal procedure in the light of the discussion we have had.
Lord Mishcon: I wonder whether the noble Lord will permit me to intervene. This is rather an important point. As the noble Lord rightly says, our own professionals, especially after 1992, will want to carry out their practices in other countries. And, naturally, we want the amount of reciprocity which the noble Lord very fairly said was one of the considerations in the Government's minds.
I am not quite sure that I understand the noble Lord's reasoning when he says that the words "not to be unreasonably withheld" should not take their place on the face of the Bill. He said that the Minister should not act unreasonably. If there is no appeal procedure set down in the Bill, it means that the Minister's discretion, as I understand it, will be a paramount consideration. If he decides that he does not think professional people coming from X land really come up to the standard he himself likes, he refuses the application.
Must there not be an onus, expressly stated in the Bill, in order that those of foreign nationality may see exactly where they stand and requiring that recognition—and we recognise it on the face of the Bill—must be reasonably reached by the Secretary of State? Is there any reason why the Secretary of State should not go even further and state his reasons for refusing the permission? It can be properly argued, I

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should have thought, that this is one of those occasions when the Minister could concede (without its ruffling anyone wherever they may be, in his department) that the permission to practise should not be unreasonably withheld, as my noble friend has asked.
If, in addition, as he very courteously said to the noble Lord, Lord Lloyd of Kilgerran, he would like to look into the possibility of an appeals procedure, so be it. But let us not leave this clause without the words suggested by my noble friend being on it, at all events at this stage.
Lord Brabazon of Tara: I understand the noble Lord's point about clarification. However, in framing any particular law, we must remember that the law is a seamless web. If we, so to speak, clarify the law here, we potentially call into question provisions made elsewhere which are intended to have the same effect—that a Secretary of State's discretion be exercised reasonably—but which do not contain the clarification. Such a calling into question. I submit, would become undesirable. However, as I have said, I have agreed to look at this point and I honestly do not feel I can go any further.
Lord Lloyd of Kilgerran: I am very grateful to the noble Lord, Lord Mishcon, for his intervention, which has been most helpful in clarifying the situation. I am also grateful to other Members of the Committee who have spoken on this amendment, as well as to the Minister for having said that he will look into the question of appeal in connection with the clause as it now stands. Will the Minister write to me about it? I understand from his nod that he will indeed write, conveying the Government's position in regard to the aspect of appeal. In the circumstances I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 203 to 207 not moved.,]
Lord Brabazon of Tara Lord Brabazon of Tara moved Amendment No. 208:
Page 43, line 36, at end insert—
("(6) The Secretary of State may if he thinks fit, having regard to the considerations mentioned in subsections (2) and (3), withdraw his approval of an overseas qualification in relation to persons becoming qualified as mentioned in subsection (1)(a), or obtaining such a qualification as is mentioned in subsection (1)(b), after such date as he may specify.").
The noble Lord said: This amendment has already been spoken to. I beg to move
On Question, amendment agreed to.
Clause 30, as amended, agreed to.
Clause 31 [Eligibility of individuals retaining only 1967 Act authorisation]:
7 p.m.
Lord Williams of Elvel Lord Williams of Elvel moved Amendment No. 209:
Page 43, line 43, leave out ("quoted") and insert ("listed").
The noble Lord said: I beg to move Amendment No. 209, standing in my name and that of my noble friend Lord Peston. With it, for the convenience of
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the Committee, perhaps I may speak to Amendment No. 210, in the name of the noble Lord, Lord Young of Graffham. I am not entirely certain what the noble Lord will say about that amendment, but I will try to guess.
Our amendment is really quite simple. It is trying to bring up to date the language in the Bill. Nowadays we talk about listed securities rather than quoted securities. It seems that the Bill has slipped back again into the old language. There may be reasons for that which the noble Lord will be able to explain to us, but at the moment we cannot see them.
Amendment No. 210 addresses a slightly different point. Instead of the word "quoted", or "listed" as we suggested, the Government are producing the word "offered". Therefore I imagine that they include in that securities on the unlisted securities market. We discussed that earlier today and, if that is the case—I am trying to anticipate what the noble Lord is going to say in support of the Government's amendment—I suspect that the Government's wording is rather better than ours and that it should be accepted. I beg to move.
Lord Brabazon of Tara: The noble Lord's amendment would substitute the word "listed" for "quoted" in relation to the shares of an unquoted company or its parent or subsidiary. I appreciate that "listed" is the more modern term, but I fear that the noble Lord's terminology has the effect of extending the number of companies that persons retaining a 1967 Act authorisation may audit. That is because, if the noble Lord's amendment were accepted, they would be able to audit firms quoted on, for example, the unlisted securities market.
The directive allows us to give grandfather rights to those with an existing right to audit, and we have exercised that option. But we think we would be on dangerous ground if we were to extend the rights of those with a restricted qualification, which is the effect of the noble Lord's amendment. Therefore I hope that the noble Lord will not wish to press it.
The government amendment, however, adds some words which were accidentally omitted when earlier enactments were consolidated in the Companies Act 1985. The amendment has the effect of reflecting the scope of the eligibility granted by Section 13 of the Companies Act 1967, so that it does not cover a company whose shares were offered in Great Britain or elsewhere, just as it does not cover a company whose shares were quoted on a stock exchange in Great Britain or elsewhere. I hope that that explanation is satisfactory.
Lord Williams of Elvel: I take the noble Lord's point about our amendment and I shall not press it. I can only express some surprise that the wording in the Companies Act 1985 which was erroneously included on consolidation has subsisted to this day without any challenge. That seems a rather extraordinary phenomenon. Nevertheless, I accept what the noble Lord has said and I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Brabazon of Tara Lord Brabazon of Tara moved Amendment No. 210:
Page 43, line 44, after ("elsewhere)") insert ("or offered (whether in Great Britain or elsewhere)").
The noble Lord said: The amendment has been spoken to. I beg to move.
On Question, amendment agreed to.
Clause 31, as amended, agreed to.
Clause 32 [The register of auditors]:
Lord Williams of Elvel Lord Williams of Elvel moved Amendment No. 211:
Page 44, line 10, leave out ("jointly").
The noble Lord said: I beg to move Amendment No. 211, standing in my name and that of my noble friend Lord Peston.
We come to a rather difficult matter here—the register of auditors. Under the Bill as drafted, recognised supervisory bodies are required jointly to maintain a register of individuals and firms who are eligible under their rules, and there are various requirements for each person's entry in the clause that we are now discussing.
Certain of our advisers have expressed the view that a joint register might prove extremely difficult in practice for the various supervisory bodies to implement. I am told that it is difficult enough even to keep a register of members of a particular institute without having to ask other institutes to pool their list of members.
I move this amendment on advice because I am not a member of an institute and, having discussed this Bill for a period of time, I do not propose to attempt to become a member of an institute or an auditor because I think the burden would be too great for me to carry. I am advised that "jointly" creates a practical problem, and I can see no particular reason why there should not be individual lists kept by individual supervisory bodies. I beg to move.
Lord Benson: The professional body on behalf of which I speak would very much like the word "jointly" to be removed, since that is likely to lead to administrative difficulty. I support the amendment.
Lord Brabazon of Tara: Our purpose in providing that the responsibility to maintain the register should be a joint one was to ensure that the responsibility was properly discharged. Article 28 of the directive requires the names and addresses of persons who are eligible for appointment as auditors to be available to the public. It seems to us that to meet that requirement a person should be able at least to go to one place and be shown there a complete list of eligible persons. That objective obviously becomes more difficult in circumstances in which, naturally enough, there may be more than one recognised supervisory body, but we do not wish to create a further tier of bureaucratic responsibility just for the register. We therefore intend that the bodies should be under a joint responsibility to maintain a single centralised register. We believe that recognised bodies should be capable of so organising themselves
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that they are capable of discharging the responsibility jointly.
Because it would appear to allow recognised supervisory bodies to maintain separate, incomplete registers, the noble Lord's amendment would appear to be incompatible with the requirements of Article 28. However, having said that, and in view of the fact that the noble Lord, Lord Benson, has supported the amendment, I think it would be only right if I were to take another look at the wording to see it we can go some way to meet the noble Lord's concern.
Lord Williams of Elvel: I am most grateful to the noble Lord. If I may say so—I hope his advisers and officials will agree—I do not think that accepting my amendment as it is would be in contravention or lead to contravention of Article 28(1) of the eighth directive, but that is for the Government to decide. In the meantime I am grateful to the noble Lord for his consideration and I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Brabazon of Tara Lord Brabazon of Tara moved Amendment No. 212:
Page 44, line 13, leave out ("carry out") and insert ("are responsible for").
The noble Lord said: It is quite common for some of the day-to-day work involved in conducting audits to be carried out by untrained people under the supervision of qualified persons who take responsibility for their work. The amendment clarifies the point, as elsewhere in the Bill, that every individual involved in an audit need not himself hold an appropriate qualification. It is rather the person responsible for the audit who must be so qualified and must be included in the register. I beg to move.
On Question, amendment agreed to.
Clause 32, as amended, agreed to.
Clause 33 (Information about firms to be available to public):
Lord Brabazon of Tara Lord Brabazon of Tara moved Amendment No.213:
Page 44, line 35, at end insert—
("( ) For this purpose a person's "address" means—

(a) in the case of an individual, his usual residential or business address:

(b) in the case of a body corporate or Scottish firm, its registered or principal office in Great Britain.").

The noble Lord said: This amendment makes clear that people may, if they wish, give their business address rather than their home address for the purposes of information that a recognised supervisory body must make available to the public on the firms eligible for appointment as a company auditor under its rules. This was a point which the professional bodies asked us to take on board. I beg to move.
On Question, amendment agreed to.
Clause 33, as amended, agreed to.
Clause 34 agreed to.
Clause 35 [Power to call for information]:
On Question, Whether Clause 35 shall stand part of the Bill?
Lord Williams of Elvel: I have a problem with Clause 35. It is very widely drafted indeed. As far as I can see, the Secretary of State can require any institute to give him any information as long as he can demonstrate that it is for the purposes of this part of the Act, as it will then be. As we have already established, this part is extremely wide and be could ask an institute reasonably for justification for a German, or indeed a Russian, auditor or anything else. Secondly, he may require that information to be given to him in the timescale, at the moment and in the place that he specifies. I am not trying to quarrel with the need for the Secretary of State to have the ability to call for the information, but does the clause have to be drafted quite so widely? Are we not as a Chamber of Parliament under some obligation to make sure that the Secretary of State's—the executive's—powers are in some way qualified so that he cannot simply say "I want this, that and thus to be delivered to my office in 24 hours" and that is the end of it. He has the statute to back it. That is the burden of my complaint about Clause 35.
Lord Lloyd of Kilgerran: I entirely agree with the presentation and the views of the noble Lord, Lord Williams, that Clause 35 is widely drafted. I go further than the noble Lord and say that in the circumstances of Clause 34 this clause is totally unnecessary. The previous clause reads:
"The Secretary of State may require a recognised supervisory or qualifying body —

(a) to notify him forthwith of the occurrence of such events as he may specify in writing and to give him such information in respect of those events as is so specified;

(b) to give him, at such times or in respect of such periods as he may specify in writing. such information as is so specified".

Subsection (2) presses the matter further:
"The notices and information required to be given shall be such as the Secretary of State may reasonably require for the exercise of his functions under this Part".
In reading the subsections of Clause 34, I cannot see why it is necessary to have this mandatory extra clause, Clause 35.
Whenever I read a Bill I am always seeking an opportunity of striking out part of it to save space and the time of lawyers having to construct another clause. I fear that Clause 35 is widely drafted and in my view is totally unnecessary in the circumstances of the previous clause.
7.15 p.m.
Lord Taylor of Gryfe: I can see the concern of the noble Lords who have just spoken, but at the same time I am slightly reassured by the content, which says that "reasonably" is the important term here:
"as he may reasonably require for the exercise of his functions"—
and in subsection (2):
"within such reasonable time".
I should have thought that that might allay the concerns of the noble Lord, Lord Williams of Elvel, because he feared that the Secretary of State may demand something within a somewhat unreasonable timetable. We have to incorporate into the Bill and emphasise the Secretary of State's powers. He must have the authority. It must be in the Bill and I should have thought that the word "reasonable" might be reassuring.
Lord Brabazon of Tara: As the noble Lord, Lord Lloyd of Kilgerran, indicated, this clause supplements Clause 34. That clause enables the Secretary of State to require a recognised supervisory or qualifying body to provide on a regular basis or in relation to predetermined events information which he may reasonably require for the exercise of his functions under this part of the Bill. This power could be used to require notification of the occurrence of specific events—for example, perhaps a change in the curriculum for a training course—or it could be used to require periodic reports on, for example, the operation of the disciplinary proceedings.
What the Secretary of State could not do under Clause 34 would be to make an ad hoc request for information. This is the purpose of Clause 35. Naturally he can only ask for information relevant to the exercise of his functions, but it is easy to think of examples in which he might need to use this power. For instance, the European Commission might complain that some action that a recognised body had taken was contrary to the requirements of the eighth directive. The Bill gives the Secretary of State the power to intervene in such circumstances, but before doing so he would probably wish to find out from the body what it had done and the reasons for it. This clause gives him the power to do so. It is a necessary part of the machinery.
I can assure the Committee that my noble friend the Secretary of State has no intention of using the power to intervene in the day-to-day affairs of a recognised body. In practice, I would expect the power to be used very rarely. Normally if the Secretary of State were concerned about something, an informal request would give him the information he wanted. But he must be able to insist if necessary. There may be occasions on which a recognised body prefers to have a formal request, perhaps because it is being asked to disclose confidential information about a person's affairs. As the noble Lord, Lord Taylor of Gryfe, pointed out, there is a safeguard against excessive intervention in that the Secretary of State can ask only for information which he may "reasonably require" for the exercise of his functions. These functions are essentially supervisory and do not give him any right to intervene in the day-to-day affairs of a recognised body except in strictly limited circumstances. I do not think that the Committee need fear that this power will prove to be unduly onerous or bureaucratic.
I hope that with that explanation the noble Lord, Lord Williams, will be content for this clause to stand part of the Bill.
Lord Lloyd of Kilgerran: I thank the Minister for that personal explanation, but may I point out not only to the Minister but to the noble Lord, Lord Taylor of Gryfe, that the word "reasonably" appears in Clause 34(2):
"The notices and information required to be given stall be such as the Secretary of State may reasonably require for the exercise of his functions under this Part".
Clause 35, which it is suggested should be deleted, repeats almost these same words:
"The Secretary of State may by notice in writing require … to give him such information as he may reasonably require for the exercise of his functions under this Part".

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It is a complete repetition of the powers that the Secretary of State can enforce. Clause 35(2) does not carry the matter any further and in my view the clause is totally unnecessary.
Lord Williams of Elvel: I agree with the noble Lord, Lord Lloyd of Kilgerran. I believe the provision is both offensive and unnecessary, but if the Government wish to put it in their Bill, for the moment I am prepared to leave it there and not to divide the Committee. But we may revert to that at a later stage.
Clause 35 agreed to.
Clauses 36 and 37 agreed to.
Clause 38 [Duty to use the title "registered auditor"]:
Lord Benson Lord Benson moved Amendment No. 214:
Page 46, line 26, leave out ("his") and insert ("the").
The noble Lord said: This is a trifling point. I hope that it will not take more than a minute or two of the Committee's time. The purpose of the clause is to ensure that if an individual or firm is appointed as auditor, the words "registered auditor" shall be added under the name. As the Bill stands the words "registered auditor" are likely to appear when an individual signs but not a firm. The matter is easily disposed of by substituting the word "the" for "his". It is a straightforward amendment; I hope that it is acceptable to the Government. I beg to move.
Lord Brabazon of Tara: Amendment No. 214 would not seem to have the effect that the noble Lord seeks in that new Section 235A of the Companies Act 1985 which is inserted by Clause 9 of the present Bill appears to require the signature on the audit report to be that of the individual auditor responsible. However, I am sympathetic to the noble Lord's point that auditors should be able to sign the name of their firm on company audit reports. We shall be making a suitable amendment to Clause 9 at a later stage of the Bill's passage and shall deal with the consequential amendment in Clause 35 at the same time.
Lord Williams of Elvel: Can the Minister clarify his attitude to Amendment No. 215, if indeed the noble Lord, Lord Benson. was speaking to that amendment'?
Lord Benson: I appear to have been drawn into something which I do not follow. I was speaking only to the word "the" in line 26 on page 46.
Lord Williams of Elvel: I apologise to the noble Lord. In the groupings list Amendments Nos. 214 and 215 appear together. I thought that the noble Lord was following the list but I now understand that he was not.
Lord Benson: The Minister has undertaken to make changes as appropriate and that is fully acceptable. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Benson Lord Benson moved Amendment No. 215:
Page 46, line 28, leave out subsection (2).
The noble Lord said: The amendment deals with the position where an auditor signs his name but fails to put underneath the words "registered auditor". If that frightful crime is committed he can be fined or sent to gaol for six months. One has the impression of a bulldozer rushing down Whitehall in order to crack a hazelnut in Parliament Square. Auditors will want to put the words "registered auditor" after their name. If they do not it will be entirely inadvertent.
The provision of sending someone to gaol for such a little peccadillo is quite out of keeping. The professional bodies have staunch disciplinary arrangements: that is the kind of little peccadillo with which they deal easily and naturally. To labour the subject with a potential six-month gaol sentence and a fine appears to be out of all proportion. I hope that the noble Lord will accept the amendment.
Lord Williams of Elvel: The noble Lord's amendment addresses the subject of my opposition to the Question that Clause 38 shall stand part of the Bill. Therefore I shall speak to the noble Lord's amendment and, at the same time. assure the Minister that if he gives a satisfactory response I shall not oppose the question that the clause shall stand part.
I fully support what the noble Lord, Lord Benson, has said. I believe that if a person forgets to put the words "registered auditor" after his name it is monstrous that he should find himself locked up in Wormwood Scrubs for a term not exceeding six months. It is ludicrous to make that a criminal offence.
I hope that the Government will reconsider the matter. I fully accept that under the directive there must be an indication that an auditor who is auditing accounts should be properly qualified and that the public should see that. Nevertheless, to impose a criminal penalty on what may be a slip appears to be going too far.
Lord Lloyd of Kilgerran: I too take the view that subsection (2) is too draconian and that it should be eliminated.
Lord Brabazon of Tara: I have a good deal of sympathy for the noble Lord's comments on Amendment No. 215. On reflection, we agree that the penalty in the clause is excessive. However, rather than leave the offence in the domain of the criminal law, as the noble Lord's amendment would still do, we propose to take it out of that sphere and instead place a requirement on recognised supervisory bodies that they have rules for securing that auditors use the description "registered auditor" when signing company audit reports. Breach of these rules would then be a matter for the body's disciplinary procedures.
We shall bring forward amendments at a later stage, and I hope that the proposed change will satisfy the noble Lord.
Lord Benson: The proposal is acceptable.I withdraw the amendment on that basis.
Amendment, by leave, withdrawn.
Clause 38 agreed to.
Clause 39 [False and misleading statements]:
Lord Brahazon of Tara Lord Brahazon of Tara moved Amendment No. 216:
Page 47, line 10, after ("(2)") insert ("or (3)").
The noble Lord said: This amendment corrects an anomaly. Subsections (2) and (3) of this clause deal with the offences of giving misleading statements by, respectively, persons who are not registered auditors and persons who are not recognised bodies. The clause as introduced makes provision for the appropriate maximum line for a public display of the offending description in the first case but not the second case. The amendment remedies that defect. I beg to move.
On Question, amendment agreed to.
Clause 39, as amended, agreed to.
Clauses 40, 41, 42 and 43 agreed to.
Lord Benson Lord Benson moved Amendment No. 217:
After Clause 43, insert the following new clause:
("Exemption from liability for damages.
. Neither a recognised supervisory body nor any of its officers or servants or members of its governing body or committees shall be liable in damages for anything done or omitted in the discharge or purported discharge of any functions arising out of or relating to this Part unless the act or omission is shown to have been in had faith.").
The noble Lord said: The amendment comes forward at an awkward time because it deals with a subject upon which I should like to speak at length. It is of immense importance to the accountancy profession. I am sorry if I delay Members of the Committee from going to dinner.
The question of immunity, as set out in the amendment, is of profound importance. I raised it at Second Reading and the Secretary of State undertook to give the matter most careful consideration. I hope that his consideration has been fruitful.
Under the Financial Services Act the self-regulatory bodies have immunity from litigation in respect of possible defects in carrying out the supervisory role imposed by the Government. That was a perfectly proper immunity to grant. It was explained with great care in another place by Mr. Michael Howard on 11th June, 1986. The professional bodies must now seek to become supervisory bodies but they are not given immunity. That unfairness, which is damaging to them in other respects, is the subject of the amendment.
The matter was debated during the passage of the Financial Services Bill. I believe that there were only two reasons for not granting immunity to the professional bodies. The first reason was that the supervision of investments was only an incidental part of an accountant's practice. For that reason it was improper to give immunity. That was a bad argument but it does not arise now because auditing
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is the mainstream of a professional accountant's office. That argument has been destroyed.
The second reason was that accountants have never before wanted the immunity so why should they be given it now? The answer is that they have never wanted it before because they did not need it. The relationship between the council of an institute and the individual members is such that in law we are advised that there is no right of action against the council in respect of negligence by a member. I shall later explain what happens in practice. Therefore, any actions against a member cannot embrace the institute. I am sure that the advice which we have received in law is accurate because we have been in existence for 109 years and according to my information no action has ever been brought against the council in respect of negligence by a member, so that argument also falls to the ground.
Perhaps I may now explain why it is very important that immunity should be granted. I do not know whether this is generally known, but claims against auditors for bad and negligent work at any one moment in time never amount to less than £100 million and are probably a great deal more at times. Members of the Committee may wonder why that is.Whenever a company goes into liquidation or folds up, the creditors, shareholders and liquidators all look for somebody to sue. They do not sue the directors because usually they are not worth suing. Therefore, they embrace the auditors in the hope of scavenging something out of the indemnity policies which all firms of auditors have to carry.
That is exactly what will now happen. Every time there is a claim against a firm of auditors one may be sure that the litigants will join the supervisory body as part of their claim and we shall be subject to enormous claims for damages and a huge waste of time and cost. The legal advice which we have taken, which is the best we can procure in London, confirms that that is what is likely to happen. Therefore, we are exposed to these enormous risks by the Government imposing upon us a supervisory role. What happens in practice at present is entirely changed by reason of the provisions of this Bill. That is the basic reason why the amendment should be accepted.
The risks which I have just explained will be exacerbated because litigants who always look for every loophole will notice that the supervisory bodies under the Financial Services Act have immunity but the professional bodies do not. That will immediately alert them to the fact that there is a fruitful source of litigation in the hope that they can pursue claims against people who they hope will he able to produce the cash which they are seeking.
I do not believe that I am exaggerating this because people will not serve on a supervisory body if they are exposed to those enormous risks. I speak from practical experience. Eight years ago the three professional bodies set up a particular disciplinary body in order to look at matters of public concern and I was appointed chairman of the executive committee. I could not persuade people to serve on that executive committee until they had been assured that they would not be subject to claims of this character. The risks were very small in that case and nothing like the risks of which I now speak. They

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were trilling in comparison. However, I had to arrange for a special policy at Lloyd's to be written to cover the executive committee before members were persuaded to sit on the committee. Members of the Committee will therefore see how real the problem is.
Members of the Committee will ask whether the risk can be covered by insurance. There is no possibility of that. Any large firm of accountants has to take out an insurance policy, the cost of which runs deep into six figures for each of the large firms. In this case, if there is a supervisory body, one would have to have a policy to cover every claim against every firm of auditors. Even if such a policy could be written, which I am sure is not possible, the cost would be absolutely out of the question.
On those grounds, it seems to me that it is wholly logical, proper and fair that we should be given the same immunity as provided under the Financial Services Act. I also raise this point for consideration. If people cannot be persuaded to serve on a supervisory body because of risks which will destroy their livelihood overnight, not because they have done anything wrong but simply because they are carrying out a supervisory role, the Government will have to set up a supervisory body to enable the profession to continue. One may be sure that under those conditions the supervisory body will be given immunity so that that which I am asking for would be met under those conditions but is not met at present.
Perhaps I may make it absolutely plain that we are not asking for immunity from negligence. Negligence by any member, either in carrying out his work, in auditing or in any other way, remains exactly as it was. We are merely asking for indemnity against the supervisory role which was forced on us reluctantly by the Government. We merely wish to be put on the same basis as the supervisory bodies in the Financial Services Act.
I draw the Committee's attention to the fact that when this was debated on Second Reading there was support for it on many sides of the House. The professional bodies feel very strongly about it and I believe that we have support from a great many other sources. I hope that the noble Lord will bear that in mind when he replies. Finally, the wording of the amendment is copied precisely from the Financial Services Act, subject to a trifling amendment about committees which is of no importance one way or the other. I beg to move.
Lord Hacking: I should like to support the noble Lord, Lord Benson. In his absence in Hong Kong it fell on my shoulders unsuccessfully to move a similar amendment during the passage of the Financial Services Bill which was lost by a very narrow margin. I believe that the argument was won in the debate during the passage of the Financial Services Bill but was lost in the Division Lobby. The noble Lord has advanced the argument and there is no special argument that I can introduce as a corollary to the argument which has been so well presented by him, but I should like to record my most enthusiastic support.
Lord Williams of Elvel: We are all grateful to the noble Lord. Lord Benson, for setting out his point of view so clearly and convincingly. From what my noble friend Lord Peston said on Second Reading, I believe that Members of the Committee will be aware that we support the case put forward by the noble Lord and we hope that the rather delicate balance which was struck on immunities when the Financial Services Act was before your Lordships' House and which was the subject of a great deal of argument will be reflected in this new Bill. In these circumstances, the supervisory bodies will be performing exactly the same role as the SROs under the Financial Services Act and should have the same rights and privileges as well as the same duties. Logic demands that the Government accede to that which the noble Lord asks.
Lord Lloyd of Kilgerran: I support what the noble Lord, Lord Benson, has said, and support the amendment. If the Bar is to work under contingency fees, the danger is that the position indicated by him may be far worse.
Lord Chorley: I should also like to support the amendment. Had I been able to be present at the Second Reading debate, I should have spoken on the subject of this amendment. I believe that is by far and away the most important point which remains to be dealt with in Part II of the Bill. It is vital for the effective regulation of my profession that this amendment is passed because it supplies the missing keystone in the whole paraphernalia of regulation. 1 do not cavil at Schedule 8 and its related schedules and clauses, but without this amendment the whole business of effective regulation will be put in jeopardy.
I believe that it is common ground that after the passage of this Bill the RSBs will be faced with having to take decisions under the shadow of threatened litigation, and that may, and indeed probably will, work against the public interest, and the public interest should surely be the sole criterion on which the regulation should be based.
The noble Lord referred to the current scale of litigation, the number of cases and the huge sums of money involved. Not only did we discuss this, as has been mentioned, during the passage of the Financial Services Act but also in a debate we had on professional negligence. In that respect 1 am glad that the Government were sufficiently concerned to set up an investigation following that debate.
The noble Lord has rehearsed all the arguments on why this amendment is essential. I need say no more except to reiterate that it is by far and away the most important amendment to Part II of the Bill.
Lord Taylor of Gryfe: I hope the Minister will be in a position to respond acceptably and briefly to the points made so persuasively. The suggested drafting is of course a short version of Section 187 of the Financial Services Act. As has been pointed out, the SIB and the SROs already have an immunity and it would appear to be inconsistent if that principle is not applied for the new supervisory bodies.

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I said earlier that I spoke on behalf of the Institute of Chartered Accountants of Scotland. On this occasion I can also add the Law Society of Scotland, which strongly supports the amendment.
Lord Brabazon of Tara: I have listened very carefully to the points raised from all sides of the Committee and a number of good points were made in support of the case for conferring immunity from liability in damages on recognised supervisory bodies. If regulation is to be effective regulators need to be able to move swiftly and decisively, sometimes on less than conclusive evidence, if it seems necessary to do so. However, their financial resources will often be smaller than those of people affected by their actions, and there may be a risk that the prospect of large claims for damages would deter a regulator from taking the actions it believes to be necessary.
Furthermore, as the noble Lord. Lord Benson, said, it may be true that individuals will he reluctant to work for or serve on the governing bodies or regulatory bodies if there was a risk of a personal liability in damages for actions undertaken in good faith. Regulatory bodies need to employ people of high calibre and anything which would deter such people from joining may reduce the effectiveness of the regulatory body. As has been pointed out, in a number of other cases it has been found necessary to grant such immunity to regulatory bodies. Certainly we intend that the supervisory system established under this Bill should be effective.
However, I ask the Committee to pause a moment before supporting the new clause. Indeed, I should like to ask the noble Lord whether he will agree to withdraw his new clause, at least for the time being. What we are concerned with here is the taking away of an important protection in law; the right of a person who has suffered because of some error or omission by another to go to law to seek damages. This right cannot be sacrosanct. As I have said, in a number of other cases the right has been curtailed, to varying degrees, in respect of some regulatory bodies; but the right is so important that one ought not to take it away without very careful thought and consideration. One would have to consider very carefully the degree to which the effectiveness of the regulatory system would be undermined and the possibility of perhaps limiting the immunity to the least degree that is necessary.
Some of the professional bodies have now come to us with a reasoned case for granting immunity to professional bodies, and they did so only as recently as 25th January. We shall give that case the careful attention that it deserves, but I am not able now to announce even preliminary conclusions. If we are convinced by the case— we shall of course take into account what has been said in the Committee today—we shall come forward with our own amendments. If not, I am sure that Members of the Committee will have other opportunities to pursue the matter. Therefore, I hope the noble Lord will agree to withdraw the amendment and if necessary come back at the next stage of the Bill.
Lord Benson: I do not want to divide the Committee at this time, particularly as we all want to
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go to dinner. I should have preferred a slightly warmer assurance from the Minister as this subject has been under consideration for a long time. I should have expected by this time that the minds of the Minister and his colleagues would be moving in the direction whereby they could give us firm assurances that the appropriate relief would be available. Having regard to the guarded nature of the Minister's reply, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 44 [Delegation of functions of Secretary of State]:
Lord Brabazon of Tara Lord Brabazon of Tara moved Amendment No.218:
Page 49, line 30, after ("qualification") insert (", or withdrawing such approval,").
On Question, amendment agreed to.
Clause 44, as amended, agreed to.
Schedule 10 agreed to.
Clause 45 agreed to.
Schedule 11 agreed to.
Clauses 46 and 47 agreed to.
Lord Brabazon of Tara Lord Brabazon of Tara moved Amendment No.219:
After Clause 47, insert the following new clause:
("Meaning of "associate".
.—(I) In this Part "associate", in relation to a person, shall be construed as follows.
(2) In relation to an individual "associate" means—

(a) that individual's spouse or minor child or step-child,

(b) any body corporate of which that individual is a director, and

(c) any employee or partner of that individual.

(3) In relation to a body corporate "associate" means—

(a) any body corporate of which that body is a director.

(b) any body corporate in the same group as that body, and

(c) any employee or partner of that body or of any body corporate in the same group.

(4) In relation to Scottish firm, or a partnership constituted under the law of any other country or territory in which a partnership is a legal person. "associate" means—

(a) any body corporate of which the firm is a director,

(b) any employee of or partner in the firm, and

(c) any person who is an associate of a partner in the firm.

(5) In relation to a partnership constituted under the law of England and Wales or Northern Ireland, or the law of any other country or territory in which a partnership is not a legal person, "associate" means any person who is an associate of any of the partners.").
The noble Lord said: I speak also to Amendments Nos. 220 and 221. These amendments improve and extend the definition of associate in the Bill so as to catch a slightly wider group of people. The most significant place in which the word is used is in Clause 24, where the Secretary of State has power to make regulations specifying connections between a company auditor and any associate of his which make the auditor ineligible for appointment. I beg to move.
On Question, amendment agreed to.
Schedule 12 agreed to.
Clause 48 [Minor definitions]:
Lord Brabazon of Tara Lord Brabazon of Tara moved Amendment No. 220:
Page 50. leave out lines 35 to 40.
The noble Lord said: I have spoken to this amendment. I beg to move.
On Question, amendment agreed to.
Clause 48, as amended, agreed to.
Clause 49 [Index of defined expressions]:
Lord Brabazon of Tara Lord Brabazon of Tara moved Amendment No. 221:
Page 51, line 14, column 2, leave out ("48") and insert ("(Meaning of "associate")").
The noble Lord said: 1 have spoken to this amendment. 1 beg to move.
On Question, amendment agreed to.
Lord Brabazon of Tara Lord Brabazon of Tara moved Amendments Nos. 222 to 227:
Page 51, line 16, column 1, leave out ("statutory") and insert ("company").
Page 51, line 17, column 1, leave out ("statutory") and insert ('"company").
Page 51, line 33, column 2, leave out ("27(5)") and insert ("29(4)").
Page 51, line 34, column 2, leave out ("8") and insert ("9").
Page 51, line 37, column 2, leave out ("29(4)") and insert ("27(5)").
Page 51, line 38, column 2, leave out ("9") and insert ("8").
The noble Lord said: These amendments merely correct errors in the index of defined expressions. 1 beg to move.
On Question, amendments agreed to.
Clause 49, as amended, agreed to.
Lord Brabazon of Tara: We have now reached the agreed stage on the Bill and therefore I beg to move that the House do now resume.
Moved accordingly, and, on Question, Motion agreed to.
House resumed.

Electricity and Pipe-line Works (Assessment of Environmental Effects) Regulations 1988
7.49 p.m.
The Parliamentary Under-Secretary of State, Department of Energy (Baroness Hooper)The Parliamentary Under-Secretary of State, Department of Energy (Baroness Hooper) rose to move. That the draft regulations laid before the House on 29th July 1988 be approved [35th Report from the Joint Committee, Session 1987–88].
The noble Baroness said: My Lords, 1 beg to move the first Motion standing in my name on the Order Paper. It may be for the convenience of the House if at the same time I speak to the other Motion standing in my name.
The House will recall that last July Parliament debated and approved the majority of the United Kingdom regulations on environmental assessments for development projects which put into effect what we had agreed to do as European Community
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members and which implement the Directive on Environmental Assessments. The regulations before your Lordships today fill in the gaps and represent the final tidying up stage. The regulations are in two parts: the first set relates to my department, the Department of Energy, and the second to the Department of Transport.
As regards my department, the regulations apply to nuclear and other power stations, overhead electric lines and oil and gas pipe-lines, where the Secretary of State for Energy is the authorising Minister under the electricity and pipe-lines Acts. This is the distinction between these and the previous regulations, which are under the Town and Country Planning Act.
The transport regulations fill a minor loophole where harbour works developments are carried out to certain existing harbours. New harbours and some existing harbours are already covered by the regulations debated last summer.
Your Lordships may wish to know the implications on the energy regulations that arise from the electricity privatisation Bill which is currently being considered in another place. The position is that the new regulations reflect the electricity industry as it is today. They refer therefore to existing electricity Acts, which subject to the parliamentary process, will be repealed by the Electricity Bill. I anticipate in consequence that it will be appropriate to make technical changes to these regulations after the passage of the privatisation Bill in order to reflect the consent procedures for power stations and overhead lines that are provided for in Clauses 33 and 34 of that Bill.
Though I realise that your Lordships will be familiar with the form of these regulations from the previous discussion, there are three main features of these energy regulations to which I shall refer. First, they set out those categories of projects for which an environmental statement is mandatory—this includes all major power stations—and those categories where an environmental statement may be required if the Secretary of State so determines. Secondly, the regulations describe in the schedule those features of the application which the applicant must include in his environmental statement. Thirdly, they set out the way in which the applicant must make the statement available to the public.
Both sets of regulations under consideration today are therefore the final part of the implementation of the European Community directive that I know has been welcomed in principle by the House in the light of the importance that we all attach to the environmental consequences of large developments. It is on this basis that I commend these regulations to your Lordships.
Moved, That the draft regulations laid before the House on 29th July 1988 be approved [35th Report from the Joint Committee, Session 1987–88]. —(Baroness Hooper.)
Lord Underhill: My Lords, I welcome the opportunity to deal with both regulations at the same time and I am pleased that we are doing so. 1 welcome any steps to consider the environmental impact of

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development projects. In these cases, as the noble Baroness has said, we are dealing with electricity and harbour works. I also give a general welcome to the comprehensive information required of the environmental effects of electricity projects that are set out in the schedule of that regulation.
As the noble Baroness has explained, both regulations arise from EC directives. In my view there appear to be certain differences. It may be that I have not properly read the regulations and not properly understood the memoranda attached to each of them. If I may paraphrase the situation as regards harbour works, Regulation 3 applies only to works not subject to planning control. Regulation 4(5) states that the appropriate Minister decides finally whether the proposed works do not fall within the EC directive.
If within the terms of the directive an environmental assessment is required, under Regulation 5 the appropriate Minister will take steps to secure the necessary information and the developer has to give appropriate publicity under Regulation 6. Under Regulation 7 the Minister may direct that the information be supplied to bodies that the Minister may specify as having environmental responsibilities. He may decide as he thinks fit whether an inquiry should be held. So far I have no objection to the points as regards the harbour regulations.
But there appear to be some differences concerning the electricity projects. Under Regulation 3 the Secretary of State shall not give consent unless he shall first have taken environmental assessment into consideration. The noble Baroness made it quite clear that this refers to major projects only. In paragraph (2) of that regulation, an environmental statement shall be required only when the Secretary of State determines in his opinion that there would be significant effects on the environment. Then presumably Regulation 5 comes into effect. But the Secretary of State will have already made an important decision, deciding in his own opinion that there would be significant effects on the environment.
In Regulation 4 a person who has the intention to seek approval of proposed developments may make a written request as to whether the Secretary of State would wish to take an environmental statement into account. Though paragraph (4) makes a statement, it is only when the Secretary of State considers that he has sufficient information that he shall consult the local planning authority. Yet as far as I can understand the regulations and the accompanying memorandum, the Secretary of State may have already made his decision under Regulations 3(2) and 4(1). With whom will the Secretary of State consult before deciding that he has sufficient information on the environmental assessment?
Regulation 6 outlines the publicity that must be given when the application is accompanied by a statement. But is there to be opportunity for representations to be made by bodies or persons who may consider that they have a concern? It may be that I have misinterpreted certain aspects of the regulations but these differences will be rather important. I look forward to hearing what the noble
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Baroness has to say in reply to the various points that I have raised.
Lord Northfield: My Lords, the noble Baroness said that we had discussed this matter in July. Though she was not here at the time, she has no doubt read the report of the proceedings on that occasion. She will know that, together with my noble friend Lord McIntosh, I was very upset at the way in which the Government have been handling parts of the implementation of this particular directive. My concerns have not decreased since that day despite a helpful letter that was received the day after the debate from the noble Earl. Lord Caithness. He was obviously very upset himself that there had been such a noisy scene in the Chamber on that date in July when we found the replies of the Government so very unsatisfactory.
I begin by saying that I still remain suspicious and I will return to wider suspicion in a moment. I wish to take up one problem as regards these two orders right away. There is an inconsistency between what is in the regulation concerning harbours and what is said about harbours in the wider regulations under town and country planning. The noble Baroness mentioned that there are two halves to this matter—one that falls under the town and country planning rules and one that does not. We are dealing with the one that does not, and there has to be this special regulation.
Under the town and country planning law the threshold is clearly mentioned; namely, that we are dealing here with harbours that can take ships of 1,350 tonnes. That is very clearly mentioned in the body of the regulation. What is so puzzling is that the threshold has now disappeared from the second regulation. I wish to know why it has been left out. It is leaving out an important point that is in the directive from Brussels. Annex 1 of the directive, which is the obligatory and mandatory part of it, says that "there shall be". There is no question about it. The annex states that there shall be an environment impact assessment when a harbour is capable of taking ships of 1,350 tonnes or more. Why has that not been stated quite clearly in this regulation before us this evening when it is stated in the regulations as regards the town and country planning system concerning harbours?
This may be part of the problem that is worrying my noble friend on the Front Bench. He said that a good deal now seems to be devolved to the Minister. However, the Minister cannot make a decision on this one. Where a harbour is capable of taking ships of that size it must be, under the directive, subject to an environmental impact assessment.
I have no complaint about the rest of the regulation. It follows carefully and properly the lines of all the others in the way that the system is to work. I have no complaint about the other one which deals with power stations. I note in passing that the threshold is carefully stated. It is taken straight from the directive and put in the regulation. It applies, and must apply, to power stations with an output of more than 300 megawatts. It is curious that the threshold is left out of the regulation on harbours.

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The noble Baroness made a puzzling and worrying point. She said that the regulations wipe up everything, that they clear up the backlog, that we are now at the end of the road and that with the two proposed regulations the directive will be put fully into force. They do not do that at all. That is the most worrying statement she made this evening. I do not want to stray too far from the regulations, but the Government have sidestepped and evaded the agricultural land points in the directive. I shall give an example. The regulations about the drainage of land cover land whether or not it is to be grant-aided. I concede that point which we raised during the July debate. However, they apply only to the drainage of land carried out by statutory authorities. The regulations will not cover drainage of land, which can have a large impact on areas of wild land, carried out by private owners and not by statutory authorities. The Government are evading that part of the directive.
The only way in which the directive will apply to afforestation is when the Government, through the Forestry Commission, make a grant for initial afforestation. The Government's excuse is that there will not be much afforestation without government grant so they do not need to worry about it. However, that is not so. A good deal of afforestation may be carried out by private owners without government grants. There is nothing in the regulations to carry out that part of the directive.
I am not alone in my concern. The Nature Conservancy Council has protested vigorously about the way in which the forestry part of the directive is being carried out. It calls it a minimum measure. I quote from the Daily Telegraph of 10th August 1988:
"The Nature Conservancy Council said yesterday that it had not succeeded in persuading the Government to require environmental assessments for forestry projects on all areas of semi-natural vegetation—meaning on all moorland and blanket bog. It maintains that conifer forestry has caused drastic changes to the ecology of the wilder moorland and peatland areas of Britain, and. where planted inappropriately, acidifies rivers and watercourses".
The article goes on to mention the kinds of areas which concern the Nature Conservancy Council. It refers to the flow country, the Western Isles, particularly Islay, the Borders, Kintyre, Galloway, and around the Cambrian and Breadalbane environmentally sensitive areas. There is nothing in the regulations to deal with private afforestation unless it attracts government grants through the Forestry Commission. A good deal of afforestation may take place over the years—I am sure we shall not return to this issue for some years—without government grants.
My other point on agriculture relates to changes in land use. When working in the Commission in Brussels 1 was surprised that the Government swallowed the parts of the directive dealing with changes in land use. I now discover why they swallowed them. They had no real intention of carrying them out. They say that they do not need to have controls and environmental impact assessments over changes in agricultural land use simply because, as the noble Earl, Lord Caithness, said in his letter to my noble friend Lord McIntosh and to me, they are not likely to occur in this country. We are told that
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most of our holdings are pretty settled in size and that with overproduction of foodstuffs today if there are changes they are likely to be in favour of increasing rather than reducing the wildlife areas of our agricultural land.
However, the position can change very rapidly. It could be the other way round in a few years' time. In addition, it does not take care of marginal cases where concern arises. Land may well be reclaimed from wildlife and from conservation use to be put into agricultural production. It cannot be assumed that no such environmentally important land will be reclaimed and put to intensive or more intensive production. It is not good enough to evade the intention and the letter of the directive by having in those three areas—drainage, afforestation and changes in land use—an excuse that does not really hold water, linking the matter only to things which are done by statutory authorities or attract government grants.
I cannot make much more of this point this evening because to do so would be wholly out of order. However, I feel bound to protest strongly because the noble Baroness said that this is the end of the road and that there will be no more regulations to carry out the directive. Some of us will have to carry on protesting. I hope that in the end the matter can be settled. The Council for the Protection of Rural England is now waiting for a decision to see whether it can challenge under European law some of the missing parts of the implementation. Unless we do something about these areas in which we have not carried out the directive, either there will be fights in the European Court or the Commission will be bound to intervene and point out to the British Government that they are not carrying out the directive as finally agreed by the Council of Ministers.
I am not wholly unhappy with the two regulations but I was extremely unhappy to hear the noble Baroness say that this is the last we shall hear of the subject and that from now on she will be calling the matter closed as regards implementation of the directive.
Baroness Hooper: My Lords, I am grateful to the noble Lords, Lord Underhill and Lord Northfield, for their comments, and, if I may put it this strongly, for their welcome on the whole for the regulations. I shall endeavour to respond to the questions that were asked. The noble Lord, Lord Underhill, questioned the area of consultation with local authorities. I can reassure him that the Secretary of State will have the views of the local planning authorities under the administrative procedures which are provided for and shown in form B. These apply to all applications under the electricity Acts. So far as concerns representations, major electricity projects are required to be advertised. The Electricity (Publication of Applications) Regulations 1957 are the relevant regulations and they set out the manner in which representations may be made to the Secretary of State.
As regards the concerns expressed about the harbour regulations, perhaps I should reiterate that the regulations which are before the House are

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supplementary regulations and Regulation 3 limits the scope to harbour works below the low water mark which are not subject to planning control and which have not been specifically authorised by legislation.
Perhaps I may say here that major port developments almost always turn out to need legislation. The Community directive excludes from its scope projects which are specifically authorised by national legislation. The harbour works draft regulations contained in 3(c) therefore exclude works under local Acts. I understand that at present about 15 Bills are before Parliament seeking powers for harbour authorities. Moreover, these may or may not be environmentally significant projects. But, in that case, it is for Parliament, and in particular the Select Committee which examines each Bill, to decide whether to call for an environmental assessment.
In the cases with which these regulations are concerned, the appropriate department will ask developers for more information where necessary and from that the department will decide and inform him whether the project needs environmental assessment and consent. From there on, as with other procedures under the directive which involve advertisement and the possibility of a public inquiry and consent with or without conditions, such applications will follow in the same form.
The noble Lord, Lord Northfield, expressed particular concern about harbour works and about the application of these regulations. I should point out to him that Annex 1 to the directive applies to new harbours only and that these regulations which are before us now are concerned essentially with modifications of harbours which are listed in Annex II to the directive.
I must say that I am sorry to have missed the previous discussion which took place last July when many points were raised on all the regulations which were then going through the House. I understand that in total they came to something like 18 separate sets of regulations. However, I am glad to hear from the noble Lord, Lord Northfield, that he was somewhat reassured by the information which he subsequently received.
In regard to his comments on agricultural land requirements, I must say that those are outside the scope of the regulations which are before the House tonight. Nevertheless, I shall draw his comments to the attention of my relevant right honourable and honourable friends who are concerned with the matter. But I wish to emphasise that drafts or copies of all the regulations, both those which were agreed last July and the present draft regulations, have been submitted to the European Commission in Brussels. Further, so far as I am aware we have not had any objections at all as regards the manner of our implementation of this important directive.
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I should add that in relation to our implementation of the directive overall we are actually well ahead in the field. I believe that only France and the Netherlands have passed the necessary legislation completely ahead of us. Our provisions will enable us to carry out the principle and the spirit of the directive most adequately.
Lord Northfield: My Lords, perhaps I may ask the noble Baroness whether she would be good enough to write to me further on the point about the 1,350 tonnes. I should have thought that if the effect of the works under these regulations made the harbour capable of taking 1,350 tonnes it would then be within the spirit of Annex 1 of the directive and therefore have a compulsory assessment. In that case, would it not be better to have some threshold, as there is in nearly all the other parts of these regulations? As I said, the thresholds which are in the directive have been reproduced in the regulations. However, if I may say so, I am still puzzled—despite the noble Baroness's attempt to explain this—as to why there is no threshold in this one and why it is left to so much ministerial discretion. If the noble Baroness will write to me on that point I shall be most grateful.
Baroness Hooper: My Lords, I shall be delighted to look again at what the noble Lord said. If there is any way in which I can attempt to reassure him further, I shall certainly do so. In the meantime, I commend both sets of regulations to the House.
On Question, Motion agreed to.

Harbour Works (Assessment of Environmental Effects) (No. 2) Regulations 1988
Baroness Hooper Baroness Hooper rose to move, That the draft regulations laid before the House on 12th December 1988 be approved [3rd Report from the Joint Committee].
The noble Baroness said: My Lords, I beg to move.
Moved, That the draft regulations laid before the House on 12th December 1988 be approved [3rd Report from the Joint Committee].—(Baroness Hooper.]
On Question, Motion agreed to.

London Regional Transport Bill
Returned from the Commons with amendments agreed to.
House adjourned at sixteen minutes past eight o'clock.