Companies Bill [H.L.]

HL Deb 31 January 1989 vol 503 cc1016-67

4.33 p.m.

House again in Committee.

Clause 19 [Parent and subsidiary undertakings]:

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 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 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 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 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 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 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 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 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 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—

1. (a) a person's appointment to it follows necessarily from his appointment as director of the undertaking, or
2. (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 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 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 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 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 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 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 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 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 moved Amendment No. 172: Page 37, leave out lines 28 and 29.

On Question, amendment agreed to.

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 moved Amendment No. 174: Page 38, line 34, column 2, leave out ("260") and insert ("261").

On Question, amendment agreed to.

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 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 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 moved Amendment No. 178: Page 163, leave out line 9.

On Question, amendment agreed to.

[Amendment No. 179 not moved.]

Lord Strathclyde moved Amendment No. 180: Page 165, line 21, leave out second ("of') and insert ("or").

On Question, amendment agreed to.

Lord Strathclyde moved Amendment No. 181: Page 165, line 42, leave out ("received") and insert ("receivable").

On Question, amendment agreed to.

Lord Strathclyde moved Amendment No. 182: Page 166, line 19, leave out ("obligations") and insert ("contributions").

On Question, amendment agreed to.

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 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 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 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 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 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, 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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.

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 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, 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 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 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 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 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 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—

1. (a) are qualified to audit accounts under the law of a specified country or territory outside the United Kingdom, or
2. (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 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 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 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"— 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 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 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 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 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 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 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 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 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 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 moved Amendment No.213: Page 44, line 35, at end insert— ("( ) For this purpose a person's "address" means—

1. (a) in the case of an individual, his usual residential or business address:
2. (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 —

1. (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;
2. (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". 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 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 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 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 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 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 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.

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 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 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 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—

1. (a) that individual's spouse or minor child or step-child,
2. (b) any body corporate of which that individual is a director, and
3. (c) any employee or partner of that individual.

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

1. (a) any body corporate of which that body is a director.
2. (b) any body corporate in the same group as that body, and
3. (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—

1. (a) any body corporate of which the firm is a director,
2. (b) any employee of or partner in the firm, and
3. (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 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 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 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.