§ 2.58 p.m.
§ Lord Young of Graffham
My Lords, before I move that the House do resolve itself into a Committee, perhaps I may offer an apology to the noble Lord, Lord Williams of Elvel. I understand that a 1261 consultative document which I issued last Wednesday and which was put in the Library of the House was not sent to him. I apologise for that lack of courtesy, as I do to the noble Lords, Lord Jenkin of Roding and Lord Lloyd of Kilgerran, and any other Members of your Lordships' House who did not see a copy of the document. I shall ensure that that procedure does not happen again.
I beg to move that the House do now again resolve itself into Committee on this Bill.
Moved, That the House do now again resolve itself into Committee.—(Lord Young of Graffham.)
On Question, Motion agreed to. House in Committee accordingly.
§ [The LORD ABERDARE in the Chair.]
§ Lord Jenkin of Roding moved Amendment No. 257:
§ Before Clause 132, insert the following new clause:
§ "Designated agencies.
("(1) In section 114 of the Financial Services Act 1986 (Power to transfer functions to designated agency), after subsection (9) insert—
( ) The designated agency shall publish a Code of Practice setting out guidance on the application of such general principles and such Code may be used as evidence of any departure from the general principles but breach of a provision in the Code shall not of itself constitute a breach of the rules and regulations of the designated agency.
Provided that the rules and regulations which a designated agency proposes to make may take the form of a statement of general principles embracing inter alia those set out in Schedule 8 to this Act.
(2) In Schedule 7 to the Financial Services Act 1986 (qualifications of Designated Agency), in paragraph 3, at end insert
(3) The system which any other body or person as mentioned in paragraph 2 has in order to perform on behalf of the agency the functions mentioned in sub-paragraph (1)(a) may be founded upon a statement of general principles embracing inter alia those set out in Schedule 8 to this Act." ").
§ The noble Lord said: I hope that the remarks made by my noble friend on the Front Bench were not totally germane to this amendment. I must confess that I have recently become a very deaf old grandfather and I did not hear what my noble friend said. However, I shall move my amendment. If I need to be corrected in some way, I have no doubt that my noble friend will do it with his usual charm and courtesy.
I wish to speak also to Amendment No. 257C, standing in the name of the noble Lords, Lord Williams of Elvel and Lord Peston. Amendment No. 257 takes us to Part VIII of the Bill. Although Part VIII is described in the Bill as containing miscellaneous provisions, it contains a very important subheading:
Amendments of the Financial Services Act 1986".
§ I think it will be within the recollection of Members of the Committee in all parts of the Chamber that on Second Reading of the Companies Bill on 16th January several noble Lords took advantage of that occasion to refer to the Financial Services Act and to draw attention to some of the untoward consequences that flowed from that Act. I say they were untoward because I feel tolerably certain, having taken part in some of the proceedings on the 1262 Bill, as it then was, in another place, that what has happened does not bear much relation to what the Government at the time thought would happen.
§ In our debate in January my noble friend Lord Carr of Hadley, the noble Lords, Lord Benson, Lord Elton, Lord Williams of Elvel, and my noble friend Lord Stevens of Ludgate all spoke to the effect that the Act had become quite unreasonably bureaucratic in its implementation. We warned of the growing expense of complying with the Financial Services Act. I have no doubt that a number of Members of the Committee will have received from their financial advisers lengthy documents which they are required to read and sign. They will not have been surprised to find that they are having to pay rather more for that advice than they did in the past.
We warned of what was happening in terms of the numbers of independent intermediaries. The Committee will remember that during the passage of the Financial Services Act a great deal was made of the importance of the independent financial intermediary in the financial services of this country. We warned of the difficulties which are now facing the providers of financial products and services. The Standard stated in its opinion column on 14th December 1988:
It's a funny way to promote investor protection.
On Second Reading I declared my interest as chairman of a major mutual life insurance company. I do so again to put that firmly on the record. My noble friend Lord Strathclyde, in his reply to that debate, dealt with great thoroughness with a large number of the points that had been made. He referred to what many see as the real problem, which is the sheer complexity of the rules. I quote what he said in relation to the rules which are laid down by the Securities and Investments Board and the self-regulating organisations. My noble friend stated:
Both the SIB and the SROs must have rules governing the behaviour of the business they authorise. The SIB must be satisfied that the SRO's rules afford protection to investors at least equivalent to that afforded by SIB's own rules."—[Official Report, 16.1.89; col. 80.]
Some discussion followed. It became apparent that my noble friend was going to refer to the source of complaint that had been voiced, particularly I believe by my noble friend Lord Elton and the noble Lord, Lord Williams of Elvel. They said the problem was that the SROs had slavishly to follow in every detail the rules which had been established by the SIB. There was some exchange, which was reported at column 80 of the, Official Report. At the foot of that column my noble friend stated:
I do not wish to rule out amendments to the Act to ease such simplification if this should prove necessary.
I took some encouragement from those words. I took advice as to how we on this side of the Chamber could best help the Government to achieve what seemed to be becoming their objective. I was informed that one important source of the complexity which both the SIB and the SROs impose on the industry is to be found in a somewhat obscure paragraph of the seventh schedule to the Financial Services Act 1986. That paragraph is paragraph 3 of Schedule 7. I shall read out part of that paragraph as
I need it to explain my argument. It states under the heading "Monitoring and enforcement":
3.—(I) The agency must have a satisfactory system—
- (a) for enabling it to determine whether persons regulated by it are complying with the obligations which it is the responsibility of the agency to enforce; and
- (b) for the discharge of the agency's responsibility for the enforcement of those obligations."
I have received advice on these matters. I believe it is the advice which the SIB's own lawyers have consistently given to the board. That advice states that each and every rule must be separately justiciable. Every rule must spell out precisely the obligation it creates and the offence committed if it is broken. The advice stated that otherwise the SIB cannot know whether:
a person is complying with the obligations".
be able to enforce those obligations".
It was with that in mind that I tabled Amendment No. 257. Amendment No. 257 seeks to do several things. First, it makes clear that the SIB's rules can take the form of a statement of general principles. Secondly, it provides for a code of practice:
setting out guidance on the application of such general principles".
§ Thirdly, it provides that the code can be used as evidence of a breach of any of the principles. But contravention of a provision of the code itself, of itself, would not constitute an offence. The proposed subsection (2) of my amendment links paragraph 3 of Schedule 7 to the new system of general principles and a code of practice. I believe that the Committee will recognise that my model, if not in drafting at any rate in concept, has some relation to the Road Traffic Acts and the Highway Code. The Acts state the offences—for example, driving dangerously. The Highway Code spells out the rules of good conduct on the road. One cannot be prosecuted for a breach of the Highway Code, but the code can stand as evidence that one has committed one of the offences contained in the Acts.
§ I concede straight away that the drafting of my amendment is no doubt flawed because those who helped me with it would not consider themselves parliamentary draftsmen. But I hope I have made the intention clear. My amendment was tabled on 13th February. But that was not, of course, the end of the story. My noble friend, no doubt bearing in mind the remarks of his noble friend Lord Strathclyde about the legislation, recognised that he would have to face this debate at some stage in the proceedings on the legislation. He therefore decided that it was time to do something. He has published a consultation paper dated 1st March which is entitled Possible Changes to the Financial Services Act 1986. It would be quite inappropriate for me to try to read even substantial portions of the consultation paper to the Committee. But, much to my astonishment, it seems to have received very little publicity in the press. That may be because it is primarily of interest to the specialist press.
The title looked hopeful, as did paragraph 4:
This consultative document … invites views on a proposal to amend those provisions of the Act relating to the recognition of SROs
so as to facilitate the incorporation of common Principles in the rule books, providing flexibility to achieve appropriate levels of investor protection in different sectors, having regard to the costs of complying with the rules".
§ That too is a hopeful portent.
That point was spelt out in slightly more detail in paragraph 12:
The intention is that SIBs should be able to approve an SRO's rules if they provide an adequate level of investor protection"—
I ask noble Lords to hold on to the word "adequate"—
taking account of the circumstances of the investors concerned in the markets where the SRO's members operate. The Government therefore proposes to amend the Act so that where an SRO has incorporated into its rules those rules designated by SIB as Principles of Conduct SIB will be able to recognise it if satisfied with the rules as a whole, including but not limited to the Principles of Conduct, on the basis of the level of protection offered to investors".
§ The present law requires that SROs' rules should have equivalent effect. The proposal is that they should be adequate. Although there may be a change of only one word, that clearly offers much greater flexibility for the individual SRO in drawing up rules to suit the particular businesses which it is intended to regulate. I believe that, if legislated, that proposal would meet the case made by my noble friend Lord Elton and by the noble Lord, Lord Williams of Elvel. I have to say with some gratitude that it goes part of the way to meeting the purpose of my amendment.
I also give a warm welcome to the proposal contained in paragraph 17 of the consultation paper:
The Government for its part proposes to add a new provision, similar to those in Schedules 7 and 8 to the Act, that SIB itself must have arrangements to enable it to take account of the costs of compliance in formulating its own rules".
That is an extremely valuable innovation. Hitherto there seems to have been the view that every conceivable loophole must be blocked, notwithstanding that that may impose considerable additional costs for only a marginal benefit. Of course the costs eventually have to be paid by that very same consumer whom it is the intention of the Act to protect.
§ It would be nice to be able to sit down at that point, say thank you and move on to the next business. However, I fear that it is not quite as simple as that. As I said a moment ago, the consultation paper goes only part of the way. The proposals stop short of my wish to see this form of regulation take what I might call the Highway Code form—a statement of justiciable principles matched by a code of practice which could be used as evidence as to whether or not one of the major principles had been breached.
Apparently it is not yet the Government's view that that is feasible. Paragraph 11 of the consultation paper says:
it is clear that the Principles of Conduct on their own cannot constitute the only rules governing the conduct of an SRO's members. In some cases it will be necessary to amplify them by means of detailed rules setting out how the principle is to be applied in practice".
§ I therefore have to ask my noble friend whether that is really the case. Is it not possible in this field to draw up principles which are of sufficient clarity to form the basis of the justiciable part of that code of regulation? Is it not possible for that detailed guidance to take the form of a code of practice? Why was it possible to proceed on that basis in the labour 1265 legislation which has gone through Parliament in recent years and yet not possible in relation to financial services? Is it really essential to regulate financial services by means of masses of detailed rules rather than by main principles and a code?
§ I do not wish to appear in the least bit churlish towards my noble friend on the Front Bench. His consultation paper is very welcome. However, has he finally rejected the solution of some relatively straightforward statements of principle with guidance in the form of a code? I believe that that is what a great many people in the industry would have liked to see and what a large number of Members of both Houses thought they were getting when they passed the Financial Services Act.
§ Am I right in saying that, if we were to have such a solution, paragraph 3 of Schedule 7 would need to be amended so as to make clear that such a structure complied with the Act?
I think it was the noble Lord, Lord Croham, who, in an earlier manifestation as Permanent Secretary to the Treasury, when giving evidence to a Select Committee of another place was asked whether, as a very senior civil servant, he could give a definition of bureaucracy. After a pause for thought the noble Lord replied:
The infinite search for perfection".
That is quite a good definition of bureaucracy. The important word is "infinite".
§ The SIB and the Financial Services Act, and in particular the SIB's rule book, are extremely good examples of the noble Lord's definition. Far from achieving perfection, however, in its infinite search, the SIB has achieved massive overregulation. Complexity is piled upon complexity, expense is added to expense to the point where the main objective— better consumer protection—is lost in a welter of words. There are over 900 pages of the SIB's rule book alone.
§ The amendment is one way out of that morass. I hope that the Government may feel able to give it the most careful consideration before the Bill comes back at the next stage. I beg to move.
§ 3.15 p.m.
§ Lord Williams of Elvel
As I said at Second Reading, we are sympathetic to what the noble Lord, Lord Jenkin, proposes. My amendment—which I do not intend to speak to in any great detail—is on the same lines. I accept that perhaps it is not so well drafted as that of the noble Lord, Lord Jenkin, but the objective is the same, particularly with regard to the SIB.
I should like to concentrate on a somewhat different point. The noble Lord, Lord Young, was kind enough to apologise for not having sent me and other interested noble Lords a copy of the consultation document when it was produced. The fact that it was produced on St. David's Day may be interpreted as being somewhat machiavellian since the noble Lord, Lord Lloyd of Kilgerran, and I were otherwise occupied on St. David's Day. Nevertheless, it is a fact that on 1st March, when the Bill was well through the Committee stage and we had almost 1266 reached Part VIII, suddenly, without it in any way being foreshadowed at Second Reading, either in the speech of the Secretary of State or in that of the noble Lord, Lord Strathclyde, the Government without notice issued a consultation document.
That places us in a rather difficult situation. Both the noble Lord, Lord Jenkin, and I tabled amendments to that part of the Bill without knowing that a consultation document was in the pipeline. Had we known, we might well have saved ourselves the intellectual effort of drafting amendments. No doubt the noble Lord, Lord Jenkin, would have saved himself the oratorical effort of spending rather a long time introducing his amendment. It seems to me that we have now to wait to see what the Government produce at the end of the day.
However, the end of the day is rather a long way away. The time given for consultation expires at the end of May this year.
§ Lord Elton
I believe that the noble Lord is referring to the SIB consultation paper for which the consultation period ends on 31st May. The Secretary of State will correct me if I am wrong, but I believe that the consultation period for his paper finishes on the 31st of this month.
§ Lord Williams of Elvel
I am most grateful. I am sorry; I accept that I got the two muddled up.
Nevertheless, having reached 31st March, we shall find ourselves at the Report stage of the Bill. I should like to ask the Secretary of State whether he believes that government amendments will be available at the Report stage in your Lordships' House., because, if not, we shall have what we had on the Financial Services Bill; namely, government amendments tabled at all stages until the final stage and then not given proper discussion either by noble Lords or in another place.
I do not intend to move my amendment formally when we come to it. As I said on Second Reading—I do not want to repeat my argument endlessly—I support the general principle behind these amendments. We believe that there should be much more flexibility in the way the markets operate. As we come to these amendments, we believe that the SIB should be given a much firmer superstructure. In the hope that the Secretary of State will be able to tell us the timetable for future government amendments as a result of this consultation, I support the noble Lord, Lord Jenkin. With that, I shall sit down.
§ Lord Lloyd of Kilgerran
In supporting the amendment of the noble Lord, Lord Jenkin, I intended to make a number of observations in the context of the well-known overregulation arising from the Financial Services Act 1986. I am grateful to the Secretary of State for his apologies for not providing me with a copy of his consultation paper. Like the noble Lord, Lord Williams of Elvel, I did not know that there was such a consultation paper in being. As somewhat of an amateur in this field, it would certainly have saved me a great deal of trouble in researching to support this amendment. In those circumstances, I do not propose to detain the Committee any longer except to say that I strongly 1267 support what the noble Lord, Lord Jenkin, has so ably presented.
§ Lord Rippon of Hexham
I should like to add something to what has already been said. I entirely support what my noble friend Lord Jenkin of Roding has said in moving this amendment. Like other noble Lords who have spoken in this debate, I must declare an interest as chairman of Britannia Arrow Holdings and chairman and director of a number of other companies involved in financial services and banking.
I was certainly one of those who welcomed the original legislation in so far as its purpose was to find a firm and flexible way of protecting the investor, particularly the small investor. The Committee will recall that there were some people who, at the time, feared overregulation. As the noble Lord, Lord Lever, said on the Second Reading of the Bill on llth July 1986:if we set up a network of regulation, it is our duty to watch that we are not causing more anxiety and expense to honest men than we are to the crooks".—[0fficial Report,11/7/86; col. 611.]With the benefit of hindsight, we may consider his speech well worth rereading, not least the conclusion, which stated:In short I utter a certain amount of what I hope will not look too eccentric a warning to the House: beware the road to a large and ineffective bureaucracy is always paved with perfectionist good intentions"—[col. 613]As the noble Lord, Lord Lever, had been in the Treasury, no doubt he had heard the definition of bureacracy of the noble Lord, Lord Croham. As for the welter of words to which my noble friend referred, I would say only that the "welter of chaotic verbiage" that was said to constitute the rent Acts reads like plain English compared with this legislation.
As my noble friend Lord Stevens of Ludgate said on Second Reading:while the original concept was correct it is growing like an octopus out of control and sucking within its tentacles the creativeness and vitality of the financial services community".—s[Official Report, 16/1/89; col. 48.]My noble friend made a number of constructive points in that speech and I know that he wished to follow them up in Committee and would have done so but for the sudden tragic death of Lady Stevens. Nevertheless, I hope that the Secretary of State has taken due note of what was said in that notable speech. In the course of my remarks, I should like to refer back to some of the points that were made.
This is not a cri de coeur from interested parties. It was the Director General of the Office of Fair Trading, Sir Gordon Borrie, who last year drew attention to the "scale and complexity" of the SIB rule book and,the impenetrability of the languagewhich was such that the,full implications of rules are likely to prove difficult to understand, both for those to whom they apply and those affected by them".You can say that again! It is important to note that Sir Gordon Borrie's report not only highlighted the costs of compliance and record-keeping; it also drew attention to the potential anti-competition effects—the very reverse of what I understand the Government intend. Thus, the report stressed that 1268 the costs were likely to make it more difficult for new firms to be set up while driving smaller firms out of business or into amalgamations which could distort competition and limit consumer choice as well as resulting in additional costs being inevitably passed on to the investor.
The Stock Exchange pointed out that the new regulatory burden was increasing transaction costs in London in a way that would affect not only private client business but also London's competitiveness as an international capital market. Sir Nicholas Goodison and other members of the Stock Exchange uttered at the same time an important warning, which I believe is still relevant, to the SIB and Whitehall; namely, that the single European market in financial services will bring no benefit to this country unless the regulatory corset of the Financial Services Act can be made more compatible with the looser girdles employed in the rest of Europe. I hope that the Secretary of State, who has done such a tremendous job in launching 1992 and making people understand what is involved, will have borne that point very much in mind.
It is fortunate for all of us that when Mr. David Walker took over the office of chairman of the SIB he recognised very quickly that the existing rule book needed a radical review. In his words, it was:over-long, over-complicated and over-specific".So we had last year—and, after all, it is in advance of the consultative document—The SIB Rulebook: A New Approach,which placed a greater reliance on principles. I am bound to say that I see a certain danger, as my noble friend Lord Jenkin of Roding has also indicated, in reliance on principles if overregulation is to be replaced by legal uncertainty. I find the distinction between principles of conduct and rules of conduct confusing to a degree in the way in which it has so far been presented by the SIB and in the consultative paper.
Nor am I helped by an article in the February issue of Butterworth's Journal of International Banking and Financial Law—in which I have an interest, being a member of the editorial board— in which Mr. David Walker had this to say:The status of the principles under the New Approach rules is important. The essential features of this status are that—the principles form part of the rules so that, in principle, they can be enforced in the same way as other more detailed rules; but where a more specific rule is derived from a principle, anything expressly legitimated by the rules is also taken to comply with the principle".When Committee Members read Hansard tomorrow, they may follow that more clearly than I have so far been able to do.
At least this amendment makes the point that the breach of a provision of the code will not in itself constitute a breach of the rules and regulations of the designated agency. I very much hope that the Secretary of State has taken on board what my noble friend Lord Jenkin has said. I feel very strongly that laws that can result in penalties should be clearly and specifically drafted. If I may say so, with respect, that is one principle that is often ignored in much modern legislation.
Against that background, like my noble friend, I warmly welcome the consultative document. It would not be appropriate now to comment on it in detail, 1269 but—bearing in mind that it takes some time for such documents to get into the hands of those who have to read them in detail and that Easter is approaching—I do not think that what are in effect 18 working days are adequate for consultation. I believe that the present situation is so bad that we should make a determined effort to get it right this time. I cannot believe that time is so much of the essence that we cannot have a little more time to consider the consultative document in detail because, with all due respect, as it stands, it offers some prospects of further confusion added upon that that already exists. Some of the concepts, such as cost benefit analysis, may have to be looked at rather carefully. All this is as well-intentioned as the Act itself but it would be a grave error of judgment not to allow more time for thought.
Another point that is now recognised is that a further impediment to the operation of the financial services industry is the fragmentation of the regulator structure which derives from the divergences between the various rule books. As I understand it, I gather that the Government are now suggesting that we should remove the legal requirement for all the present five self-regulatory organisations to have rules which ensure an equivalent standard of protection to those of the SIB. How one translates equivalence in practice is very difficult.
§ 3.30 p.m.
§ Lord Young of Graffham
If my noble friend will forgive me, we are moving away from equivalence. We are moving towards principles. It was because we have equivalence and rule books that had to give the same level of protection that we got ourselves into this difficulty.
§ Lord Rippon of Hexham
I gather that the Government are moving away from this position and have this point in mind. What has happened is that equivalence has tended to be translated as identical. Against that background Mr. Walker said that he would like an attempt made to reach a common code of principles for all the rule books. That may seem a step forward and it would help to achieve a level playing field for those who now have to consult a number of rule books.
Perhaps I may suggest — it is the last point I wish to make— that the Government might consider the simpler suggestion made by my noble friend Lord Stevens in the Second Reading debate; namely, to abolish all the SROs. At present it is quite common for a City institution to be regulated by three or four SROs and by the SIB as part of its business. Accordingly such institutions have to report to two or three bodies and the SROs concerned themselves report to the SIB. If all the SROs were abolished, as my noble friend Lord Stevens suggested, everyone could then read the same single and, it is to be hoped, simple, rule book and report only to one body.
Finally, I suggest with respect that the Director General of Fair Trading—who is after all independent and not representing a special interest but who drew attention in the first place to what was going wrong—should be brought in at a very early stage to vet the rule book. If that were done, we have 1270 a good chance under the Government's proposals to have a rule book which would be more practical, sensible and appropriate than it is now. Above all it would be less restrictive, and distortive, and less preventive of competition.
§ Lord Carr of Hadley
I too should like to support the amendment moved by my noble friend, Lord Jenkin of Roding. There can be no doubt of the strength of general feeling that the burden of regulation and its enforcement is very much greater than many of us envisaged when the Financial Services Act was being debated. It is good to find that the Government themselves have recognised and accepted this. Indeed, that was not only shown by something that was said during our Second Reading debate on the Bill, but has also been proved by the consultative paper that has just been published.
I am in a difficulty because until I arrived here barely an hour ago I had no idea that such a document had been published or that it was intended to publish it, let alone to have had a chance to look at it. Therefore my preparation for what I wish to say has been done against the background of not knowing that such a paper was about to appear or had appeared. It is also impossible to judge how far it goes. From what my noble friend Lord Jenkin of Roding has said, it appears to go part of the way. Whether it goes halfway or more I cannot tell. However, it does not go all the way that this amendment desires. Until I have had a better chance to consider the consultative document I must press for going the whole way because it seems to me that the method proposed in this amendment has a great deal to commend it.
In considering this matter it is perhaps helpful to go back briefly to base. Base in this matter is the review of investment protection prepared by Professor Gower from which this legislation stemmed. I believe that I quote accurately when he said in that review that regulations should:not be greater than is needed adequately to protect investors and this, emphatically, does not mean that it should seek to achieve the impossible task of protecting fools from their own folly. All it should do is to try to prevent people being made fools of. And, in deciding how far it is desirable to go to achieve that, of paramount importance are … (i) that it would be self-defeating to impose restrictions so severe that they cannot be complied with except at disproportionate trouble and expense and (ii) that it would be detrimental to the national interest if controls were disproportionately strict in comparison with those of other financial centres to which the business could move".I do not think that there can be much doubt that we have been breaching both those two criteria laid down by Professor Gower in his initial review. I very much doubt whether the level of regulation enforcement that we have is necessary for sensible consumer protection. Indeed, I go further than that. The sheer volume of information required to be given to the customer is such as to be counter-productive. We therefore have the appearance of a level of production and protection without the reality of that protection fully matching up to the appearance.
I apologise if I did not make this declaration at the beginning, but I have often made it. I am a director of the Prudential and was chairman of the company for five years until a few years ago. I therefore have that interest. Sometimes interests can give one 1271 knowledge and experience. However, I understand that at the point of sale a life office may well need to supply each customer with five or six pages of information on the policy that the customer is buying. Subsequently another five or six pages of cancellation notice papers have to be sent out which repeat much of the information given at the point of sale.
In the second half of 1988 alone the industry sold over 5 million policies to which those rules applied. Let us consider those sheets of paper multiplied 5 million times in the last six months of last year. Were the recipients of those pieces of paper capable of finding the time or the concentration required to read them all and fully to understand what they were or were not being given by way of protection? Speaking personally, whenever the time came to sign the necessary letters which my stockbrokers— who have dealt with my affairs for as long as I can remember— said that they had to send me, I waded through them all and was not clear at the end. I could not find time to read them all over again but I had a sneaking feeling that all that small print was just as likely to be used against me as for me if the crunch ever came.
I believe that we are not providing the reality of consumer protection that the legislation purports to provide at least to the majority of relatively sensible but nonetheless, in these matters, inevitably fairly simple consumers throughout the country.
Furthermore, I understand that the present rules to which I have just referred on life policies are too rigid properly to cover the wide variety of investment contracts in the market place and thus may actively reduce— not increase—real investor protection.
I therefore believe that reform is necessary. I believe that it would be a great tragedy—almost a scandal—if we were to lose the legislative opportunity that we have in this Bill to make the amendments that we ought to make.
I repeat that I have not had the chance to read the consultative paper. It alarms me somewhat that this has been produced, and that we have been given a very few working days in which to consider it. But even if we take that number of working days we shall be in grave danger of missing the bus on this Bill, certainly in this Chamber. It may be dealt with by a series of messy amendments produced in another place which will come back here and so forth. As we know from past, bitter experience on other Bills, that does not provide good, lasting legislation.
I beg my noble friend to give serious thought. If the Bill has to pass a bit more slowly, it could be a case where less haste would mean more speed and better achievement for the consumer, in whose interests we are doing this. I believe that the combination of moving from a level of detailed precept to a practice of statement of principles, backed by a code of practice plus effective enforcement, is the best way forward for the consumers of this country. We must put ourselves at the other end of the telescope and look through the consumers' eyes at us, at government departments and the way we legislate, instead of looking at them perhaps through the 1272 wrong end of the telescope so that the cosumers look extremely small. We ought to put the other end of the telescope to our eyes and think much more of what is practicable and useful to the consumer.
I believe this concept of a code of practice amplifying a statement of principles, as long as it is effectively enforced, is the best way to provide consumer protection. I ask the Committee (and above all my noble friends on the Government Front Bench) to think very carefully before they refuse to accept that principle or ask us to settle on what may appear, if my noble friend is right, to be a halfway house between where we are at present, and where we ought to be.
The reality is that in practice it is far more difficult for those who wish to get through the net at the expense of the consumer to circumvent broad-based principles than it is to pick a route through apparently tightly drawn, formal rules. I should have thought that all our history over many decades of tax evasion or avoidance shows that the more detailed the rules become, the more those who wish to get through the spirit of them find a loophole to worm their way through somehow. On every ground of consumer protection I ask my noble friend to think carefully before rejecting the principles of the amendment moved by my noble friend Lord Jenkin.
§ 3.45 p.m.
§ Lord Elton
I too am glad that my noble friend has put this amendment down on the Marshalled List because it has given us the opportunity for this debate. I am glad also to hear that he will not press it because it will give us the opportunity to hear what comes from the consultation on the Government's paper published last week. I also have to declare an interest. I am chairman of one of the self-regulatory organisations which was set up under the Financial Services Act and which is most closely affected by these proposals. It does not have the effect of putting the wrong end of the telescope to my eye; but it does have the effect that I and my colleagues receive over 4,000 letters direct from consumers and we are very well aware of their feelings.
As the industry has until the end of the month to give its comments, I shall mention briefly four matters arising from the consultation of which I believe the Committee should be aware at this stage. I seek not to pre-empt the position which I may wish to adopt at the end of the consultation period. The Government were for a while in doubt as to whether the Act needed any alteration to permit flexibility. I was one of those who sought to convince them that it did, and I am therefore delighted that they have taken this step. I believe that it will eventually produce further certainty and therefore greater consumer protection. I hope that they will test all the proposals that emerge from the consultation against those two criteria—simplicity and certainty—before they put them into effect.
The first area that I wish to consider is the proposal to create a hierarchy of prescription with principles at the top and rules underneath. That is interesting and will need careful consideration. The Government's proposal is that the principles themselves should have the force of law and thus of rules. I believe that this 1273 would have precisely the effect that my noble friend Lord Jenkin of Roding wishes to see: permitting beneath the level of principles with the status of rules codes of practice that have the status of guidelines. This can be inverted and 1 believe could and would be inverted to provide that degree of flexibility at the interface with the consumer and the regulated company.
There is another school of thought that would prefer the principles to be declaratory rather than mandatory. My second request is that before Her Majesty's Government finally close their minds on the subject, they will consider very carefully indeed which of the relationships between the two levels will secure the smallest amount of interpretative litigation and choose that one. I am not talking about litigation under Section 62, the terms of which have been altered. I am talking about the litigation that arises from uncertainty when two levels of authority coexist. Regulators already know from hard experience that the orderly but extensive revision of the rulebook is demanding and expensive. All of us know that litigation is also demanding and expensive.
Moreover, litigation can itself give rise to the need for further revision and amendments to the rulebook; and a protracted cycle of litigation and revision is not a cost-effective way to proceed. Avoidance of it would he entirely consistent with—indeed I think it is demanded by—the Government's admirable and very welcome commitment in paragraph 10 of their paper to imposing on the industry the minimum burdens necessary to achieve proper or adequate levels of investor protection and their commitment to cost-effectiveness generally.
The Government's proposal is, as I understand it, for the principles which stand, as they put it, at a higher level of generality as well as having the force of rules to be transported wholesale into the rulebooks of each SRO. They will then he separately exemplified by each SRO and SIB in sets of rules and perhaps guidelines or codes that may be different in some respects in each case. The normal test of their sufficiency will, it seems, be whether or not they cover the whole of the area covered by the principles. So far there is little to provide the added flexibility for which we were looking. We appear however to have the demise of "equivalence" and the welcome arrival of "adequacy". Furthermore, paragraph 11 proposes to provide not only for the amplification of the principles where necessary, but also for derogation from them where appropriate. That is an important provision and SROs will need to consider how this latitude might be used.
The Committee will have to consider how authorisation for it is to be expressed in statute so that it can be defended in court. The extent to which these matters are justiciable will depend not only on the relationship between principles and rules, to which I have referred, but also on the answers given to and the decisions taken on the questions raised in paragraph 16 of the paper. These deal with the nature of SIB's power to enforce conformity with its wishes on the SROs, and the SROs will be giving that their close attention,
Again. I must ask Her Majesty's Government to bear in mind the desirability of keeping litigation to 1274 a minimum consistent with justice. By that I do not mean that an SRO should never have the power to go to court for its defence. That is consideration. In that consideration however it would be well to remember that when the regulatory system settles down, it should be even clearer than it now is, and that it is a single system with a single aim and not a collection of rival teams with a supervising and sometimes unpopular referee and conflicting rulebooks.
I have said that revising rulebooks is expensive. That expense does not arise simply from the task of revision. It results also from its impact upon the members who have to obey the rules in the rulebook. Every time one of those rules is changed they have first to understand and then to re-learn the provision. After that they have to adjust their practices—and sometimes their computer systems—yet again to fit. This can represent a major and costly upheaval and also leads to periods of uncertainty that can be periods of risk for investment. I therefore very much welcome the proposal to allow each SRO to choose when within an interim period it will adopt the new system in place of the old.
My fourth request to Her Majesty's Government is that they take great care to make that period long enough. I am clear in my own mind that some of the numerous amendments to my own SRO's rulebook result from its having been written to too short a deadline. Very many more result from the need to follow changes made in the SIB's rule book, which I suspect were made for the same reason. Even though we made extensive and expensive use of consultants in drafting a whole section of our rulebook, experience since April of last year has revealed many necessary changes.
Therefore, I ask the Secretary of State—and it is a pleasure to have him in the same Committee because most shouts are sent down a speaking tube and one never hears anything but the faintest squawk from the other end— that in deciding the length of the period he should have in mind his own experience. I hope that his advisers will also do so. From that they will know that even a very efficient department, with considerable resources, needs a lengthy lead time to draft quite a modest Bill. They will also be aware that once it emerges from the department any Bill of substance, no matter how well it is drafted, is altered in many particulars during its passage through both Houses of Parliament. It need not be as large as this Bill in order to attract scores of amendments in your Lordships' House alone before it becomes an Act of Parliament.
An SRO regards its rulebook as being the equivalent of an Act of Parliament, and it can be of an equivalent length and complexity. Brevity and simplicity are highly desirable, but neither can be achieved in haste. I hope that Ministers will agree that such instruments should be carefully prepared and that SROs do not have nor ought to have the same drafting capacity as government departments. That must be so as regards SROs because drafting rules should not be a continuous activity—as, regrettably, it appears to be in every government department except the Foreign Office. Nor do they have the untiring labours of both Houses of Parliament to help them in their task. Therefore, 1275 SROs need a considerable time to get their rules right, and I ask Her Majesty's Government to ensure that they have it.
I should like to mention the third aspect of the discussion paper which is most welcome. It is the recognition of the need for co-operation between SROs. My noble friend Lord Rippon has spoken at length about the matter. To obtain compatibility among five or six sets of rulebooks will take a great deal of time and a great deal of exchange of information.
I have not referred to the SIB consultation paper issued in tandem with this paper but there is a link between the concepts of compatibility and of fairness referred to in Part III of the annex to that paper. Paragraph 3(3) proposes that:rules, taken together with the principles, should be fair to different firms and to different kinds of business".Although we are regulating one industry, each SRO has a different kind of member. If the separate sectors are to be equally capable of survival it is important that there should be fairness between the SROs regarding the practices permitted to their members.
On Second Reading my noble friend Lord Jenkin of Roding referred to the fact that there was doubt about how small a proportion of the independent sector would survive as a result of the tilted playing field. I am happy to say that that stage is being left astern of us. I hope that the Government and the SIB will remember that danger and act upon it.
My final comment is a heartfelt welcome to the Government's intention of making clear in legislation the fact that costs of compliance should be taken into account in the making of the rules. I do not share the hesitation of my noble friend Lord Rippon in respect of that aspect of the paper, although I say that it must never stand in the way of the paramount need for adequate consumer protection.
My final request is that in that context the Government take into consideration not only the direct costs of enforcement, but also the costs of the various tiers of authority which impose it. In one respect they will not yet be in a position to come to a view on the matter. Accountability for cost is various across the system. It is too early to say whether it will be equally effective in controlling cost at each level. I assume that the Government will consider the whole performance of the Financial Services Act in a year or possibly two years. By that time it should be possible to see whether adjustments are also necessary in this area.
I welcome the Government's initiative, and hope that my noble friend will not press his amendment.
§ Lord Lucas of Chilworth
I hope that my noble friend Lord Jenkin and the noble Lord, Lord Williams, will forgive me if I do not address my remarks specifically to the amendments. They appear to me to have been overshadowed by the Government's consultative document which I welcome.
I should like to remind my noble friend Lord Jenkin that the document was published on Wednesday, although it had been foreshadowed for 1276 several days. The Independent, the Daily Telegraph and the Financial Times carried extensive articles on Thursday, and the heavy weekend press also carried articles about it. Therefore, the document should not come as a great surprise. If there is a surprise it is that the Government have given only until the end of the month for representations to be made. Presumably they will be embodied in the Bill, although I do not know when. Perhaps the Committee will recall the interest which I must declare in the matter because we ran into much the same problems.
I suggest to my noble friend the Secretary of State that it will be disappointing if the Committee does not have ample opportunity for investigating such extremely serious matters. I am not surprised that the Government have sought to revisit the working systems of the regulatory system. When the Financial Services Act was introduced, the Government stated that it was an entirely new framework intended primarily for the protection of investors. I believe that some Members who have spoken have been a little unkind. It was new territory when we discussed and eventually passed the Financial Services Act. A number of noble Lords have been proved right in their forecasts, most notably on complexity and cost. But that bears little relationship—
§ Lord Williams of Elvel
Does the noble Lord include Members of the Opposition among his group of noble Lords who have been proved to be right?
§ Lord Lucas of Chilworth
I was referring to Members of your Lordships' House wherever they sit; and that is so. However, that does not mean to say that the principle with which we were then dealing was wrong. I do not believe that it was, nor do I believe that the intentions of the Government were wrong. However, I believe that the adjustment which must now be made was inevitable. It is purely and simply because of the unforeseen costs and complexity. More particularly, I believe that it is due to the complexity of the financial services market. The new opportunities which have been given have induced further complexities. I believe that the consultative document reflects consideration of the anxieties that have been growing. The Bill provides the opportunity to put such reflections into the law.
I do not wish to stray into discussing other matters which will arise in connection with Amendment No. 257E in the name of the noble Lord, Lord Williams of Elvel. The amendment to Section 62 of the Financial Services Act has a bearing. However, in considering the Government's paper, it will be essential to investigate how the incorporation of principles into a rulebook can be achieved. For example, will it allow greater flexibility in adapting a rule to the particular circumstances of a market? My noble friend Lord Elton outlined the different types of consumers, the different types of products and the different types of members of the various SROs.
Will it be possible to draft suitable principles or will they again turn out to be equally as complex as the existing rules? I believe that those questions will essentially have to be dealt with by the SIB—and the new director general has made clear the direction in 1277 which he wishes to go with the SIB, and more importantly, with the various SROs. I believe that that will be very much their responsibility. Those SROs together with the SIB will again be concerned with the arrangement for assessing the costs and benefits of regulation. I believe that it will be possible to assess those costs and the various benefits.
If the UK financial services sector is to succeed in an increasingly competitive environment and if the burden of compliance with the rules of our regulatory system is much higher than elsewhere, then I believe that the sector will suffer to no-one's benefit in the UK.
We have the opportunity, as has been mentioned, of the single European market and we shall have to ensure that we do not place ourselves at a disadvantage in taking those opportunities. At the same time, we must ensure that not only is the balance between effective investor protection and the international competitiveness of our financial services properly struck but that it is understood and seen to be so.
My noble friend Lord Rippon talked of the timescale and the 31st March as the end of the consultation process. He said that this time we must get it right. I would not put that charge on the Government, on the SIB or on the SROs because I do not believe that we shall get it right. I do not believe, if the Committee sat here for another six months, that it would be right at the end of that time. I suggest that we should get it more closely correct than last time and have it in such a state that it will be even more correct in one or two years' time as the market-place changes, as it inevitably will.
I believe that both amendments are out of place in the Bill as it now stands and I look forward at the earliest time to government amendments to put right that which was wrong and which has been proved to be wrong since we passed the Financial Services Act.
§ 4 p.m.
§ Lord Young of Graffham
I am very grateful to my noble friend Lord Jenkin of Roding for the way in which he introduced his amendments. Perhaps I may offer him my personal congratulations on being a grandfather, if I heard him right. That is a most desirable state of mankind, as I can certainly testify.
There are many occasions on which I am—dare I say it?—criticised in the newspapers, strange as that may seem, for being interested in publicity. This is one case in which I thought I had become a total failure. When we published this consultative document, I saw the press. I am very grateful to my noble friend Lord Lucas who obviously read what I said—and he is almost alone in that in your Lordships' Chamber. However, it was fairly extensively published in the press and a copy was put in the Library. However, I shall come on to the reasons in a moment.
I am also grateful to my noble friend Lord Rippon. Perhaps I may say to him that I came into government with a mission to deregulate. When I took up my present position I was very well aware of the complaints of many people operating regulation in the City. We cannot go back to a world in which 1278 there is no regulation, but on the other hand it should not be over-bureaucratic and over-expensive. Many of the changes over the past two years have not been forced out of the Government but they are changes which—and I say no more than this—I recognise very well indeed. It is part of a continuing process in which we adjust the way in which the regulation works to the desires and needs of the market. I believe that other Members of the Committee have said that. I regard one of the important parts of this consultative document to be something about which my noble friend Lord Rippon was worried; that is, the compliance cost. When we look at all these regulations, we have to look at and examine the cost of complying with them. That is a burden which we shall certainly take very much into account.
Perhaps I may say to my noble friend Lord Carr that I agree with him that the type of regulation which perhaps the SEC in the United States made famous—regulation which gives so much detail that one is swamped—is not one which we should try to emulate in the slightest.
Perhaps I may say to both my noble friend Lord Carr and my noble friend Lord Rippon that a regulatory system without the SROs would be simpler. However, it would also be less flexible and more bureaucratic. It would reduce the contribution which practitioners can make to producing appropriate requirements which reflect the realities of the financial markets because the legislation which my noble friend Lord Lucas helped to bring through your Lordships' Chamber some years ago relied very much on self-regulating organisations. If my noble friend Lord Carr feels that that is over-bureaucratic, then perhaps I may point out that his own chief executive was and still is one of the leading lights in the SIB and, indeed, the responsibility for many of the regulations lies with practitioners. Indeed, that was one of the particular problems.
Both I and the Governor of the Bank of England, when we jointly appointed David Walker, very much had that matter under consideration. We have seen a series of changes which have come through and which I hope will make this a more workable system. Indeed, I ask all Members of the Committee to read the consultative document very carefully because I believe that it will show the system to be quite flexible and will make an improvement.
I accept that 18 working days is not very long but in this particular instance and in dealing with this matter I believe that it is long enough for consultation. Of course, I should have preferred to have given more time, but I am concerned to ensure that we use this Bill to make the necessary amendments in order that we may press on quickly. I hope that it may be possible to come back with those amendments while the Bill is still before your Lordships' Chamber. Of course, that very much depends upon the nature of the response which we receive to the consultative document. However, it is very important indeed that we press on with these changes and do so with all possible speed.
§ Lord Williams of Elvel
We, on these Benches, are quite prepared to adopt the suggestion of the noble Lord, Lord Carr of Hadley, that we should postpone 1279 the last day of the Report stage until the Government are ready with their amendments on this issue, because it is important that your Lordships should have a proper opportunity to consider them. We cannot amend them other than on Third Reading so that if we miss that opportunity on Report then we miss it altogether and it will go to another place.
§ Lord Young of Graffham
I am grateful to the noble Lord, Lord Williams of Elvel, for his generous offer and I shall certainly consider it. However, I should first like to see the response to the consultative document.
Perhaps I may make one more general remark before I deal with the detail because I should like to show the problem we have and also to put it into perspective. I suspect that if we compare the rule books as we have them today, particularly the modified SIB books, and compare them with the Stock Exchange rule book and regulations, which have been mentioned, I believe that the SIB rules would read like Enid Blyton in comparison. I suggest that before we look at that, we should look at the comparison and look at the other rules. It is important that we have a system which is not too burdensome on the industry, which provides protection for the amateur investor and probably a slightly different standard of protection for the professional. I believe that the amendments which we should like to see, and which we hope the consultative document will support, will achieve that.
Amendment No. 257, in the names of my noble friends Lord Jenkin of Roding and Lord Rippon, and the noble Lord, Lord Lloyd of Kilgerran, proposes that the rules which the designated agency is required to submit before the transfer of powers to it may take the form of a statement of general principles including, if appropriate, the principles prescribed in Schedule 8.
I appreciate my noble friend's concern that the rules made by the designated agency should be as simple as possible but I am afraid that this first element of his proposal would not be practicable. The difficulty lies not in Section 114, which he seeks to amend, or in the principles in Schedule 8 to which it refers, but for other reasons.
The rules and regulations made by the designated agency serve two functions. They serve as a benchmark for the rules made by SROs. But they also apply directly to the conduct of business by directly authorised persons, because some are directly authorised by the SIB. The principles in Schedule 8 would not themselves be suitable for this purpose since they are essentially cast in judgmental terms, setting out particular matters which the Secretary of State has to consider in delegating or continuing to delegate his powers. They do not as such lay down any standard; but I accept that provisions which were apt to govern the conduct of business could be expressed in similar terms. Principle 2, for example, (due skill, care and diligence) is taken very largely from Section 13 of the Supply of Goods and Services Act 1982, which implies a contractual term to that effect in any contract for services. I am not aware of any difficulty which that section, or others in that Act 1280 in similarly broad terms, has given. Indeed, it must apply to a large range of the contracts governed under the Financial Services Act. There is nothing inherent in any legal proposition which means that it has to be expressed in legalistic terms.
My noble friend Lord Rippon reminded the Committee that the Director General of Fair Trading has commented on the terms of the rules of the SRO. He is empowered to do so under the procedure in the Financial Services Act. He is the one to test, first, that the rules are reasonable in the circumstances. It was not a case of his volunteering to do so but part of the procedure which the last Act laid down.
However, not all of the principles are so readily reduced to rule form. Principle 11, for instance, provides that,the conduct of business rules must require the keeping of proper records and make provision for their inspection in appropriate cases".That principle expresses the objective which rules about record-keeping are to achieve; but as a rule itself it lacks clarity and certainty. What does "proper" mean in an individual case? Who is to decide whether it is "appropriate", and so on?
There is also, I suggest, an understandable desire on the part of those affected by any provision to desire apparent certainty at the expense of broadly defined provision. I say "apparent" because it is by no means always the case that greater detail produces greater certainty in practice. This desire is likely to be particularly strong where breaching the rules can lead to the deliberately tough disciplinary and other sanctions, in addition to civil liability. It would therefore probably not be desirable to rely solely on provisions in such general terms as those used in Schedule 8 to form the rules which the designated agency must make.
The amendments also propose that the designated agency should have an obligation—perhaps even a power—to publish a code of practice, which would not itself have any legal force, giving guidance on the operation of its rules. I should remind my noble friend Lord Carr that in Gower's review of investor practice the one thing that Gower himself could not stand was codes of conduct because of their impreciseness. The SIB is already able to publish such guidance. That element of that amendment is therefore unnecessary. Moreover, for the reasons I have given above I am doubtful whether practitioners themselves would be content to be governed only by broadly based principles, without further provision which they could rely on for the purposes of establishing clearly to themselves whether or not there had been a breach.
I listened carefully to what my noble friend Lord Jenkin said about paragraph 3(2) of Schedule 7. 1 have heard a number of the provisions of the Act blamed for the structure of the rules that have emerged, but never before, I fear, this particular one. The paragraph in question simply provides that the SIB may delegate its monitoring function to another body which is able and willing to perform it. It does not require the rules to have any particular structure, and perhaps that is a matter on which my noble friend may care to reflect and include in his response to the consultative document.
1281 The Government have no desire to restrict the freedom of SROs to adapt the rules to suit the kinds of business carried on by their members. That point was made by my noble friend Lord Elton and I am grateful for his support of the document we have just issued.
There are potential problems if the diversity of rules between SROs becomes too great. Some firms—indeed, more than some—may belong to more than one SRO. It may not always be clear which set of rules should apply; and complying with both may be unnecessarily burdensome. It may be difficult for investors to sort out which rules applied to their transactions with the firm. If unhelpful diversity of this sort can be removed without reducing flexibility it would be of considerable benefit.
As all who have followed this matter will know, the SIB has published revised drafts of its rules. The proposed new version adopts a different structure in which most of the detailed rules are grouped under rules at a higher level of generality, known as principles of conduct. I should like to pay tribute to the work of David Walker in seeking to simplify the rules under the SIB. Perhaps I should make clear at this point that the distinction between these principles of conduct and those referred to in Amendment No. 257C is that these principles are themselves intended to be rules and will have legal effect as such.
The Government welcome the spirit behind this new approach, which offers the prospect of a set of rules more readily understood by practitioners and investors alike. We believe that the adoption by SROs of a similar approach is to be encouraged.
The Government propose that a new basis of assessment should be available to the SIB when considering the rules of an SRO which has incorporated in its rules the principles of conduct laid down by the SIB. For the reasons I have outlined, rules at such level of generality may not be suitable to constitute the only rules governing an SRO's members. In some cases they will have to be amplified by means of detailed rules applying them in practice. In other cases, the detailed rules might derogate from the general rule in particular circumstances.
To take account of all these complications the Government propose that where an SRO has adopted the SIB's principles of conduct the SIB should be able to approve those rules if it is satisfied that they provide an adequate level of investor protection, having regard to the circumstances of the investors concerned in the markets where the SRO's members operate. I am glad to be able to say that the cost of compliance would also be a matter to be taken into account. As my noble friend Lord Elton said, the SIB has published a paper outlining the way in which this assessment test might be applied.
I hope very much that we shall be able to look at the results of this consultative document while the Bill is before this Chamber. However, as I have said, until such time as we have had responses to it I cannot give any firm undertaking.
I am afraid that even in this all too lengthy reply it has only been possible to give a brief description of the Government's proposals. These are set out at 1282 rather more length in the consultative document and we have invited comments on these proposals by the end of this month so that this Bill can possible be used to make the necessary changes. We shall naturally, in considering responses to our proposals, also take into account the views expressed in this afternoon's debate. I hope that on that basis my noble friend Lord Jenkin of Roding and all noble Lords who have tabled amendments will feel that they can be withdrawn.
§ 4.15 p.m.
I listened with great care to my noble friend the Secretary of State in his response to the amendments and I should like to try to draw him out a little with regard to his legislative ambitions.
The noble Lord, Lord Williams of Elvel, made clear that there are considerable procedural difficulties on this Bill for the simple reason that, as I understand it, the Report stage is pencilled in for Monday 20th and Tuesday 21st March, which is before the end of the consultation period. The third day is pencilled in for Thursday 6th April, which gives only three days for my noble friend to table amendments.
The Third Reading is scheduled for Tuesday, 11th April. I suggest that it would be churlish if any amendments to the Bill were put down at such short notice. On top of that, there is only the opportunity for one say on any matter, to put it crudely, at the Report stage. There might be many Members of the Committee who wish to make amendments to any legislation that is tabled. We all know that if it is tabled in another place then it is impossible or very difficult for this Chamber to amend it. I ask my noble friend whether he will seriously consider having a word with the business managers of the House to postpone the Report stage of this Bill?
§ Lord Young of Graffham
I am not sure that the dates that my noble friend read out were the latest ones. In any event, I have to see the results of the consultative document before we know how far we are to take the matter. The last day of the Report stage is 11th April and not 6th April. I will certainly bear in mind the point made by the noble Lord.
§ Lord Lloyd of Kilgerran
Where there is some difficulty as regards amendments tabled by the Government and there has not been satisfactory notice for their full examination, I believe that there is a procedure known as recommitment. In view of the importance of this matter, I wonder whether Part VIII of this Bill—I am not an expert on procedure—can be recommitted. It will give Members of the Committee an opportunity to speak on more than one occasion.
§ Lord Young of Graffham
I have heard that there is such a procedure, though in my own experience I have not put it into effect in the Chamber. I shall certainly look at all these points. But, as I have said, the first matter is to look at the consultative document and the reponses that we get to it.
§ Lord Lloyd of Kilgerran
I am in some difficulty on this matter because I understand that the Report stage will be 20th and 21st April. Have those two dates been cancelled?
§ Lord Williams of Elvel
Perhaps I may help the noble Lord, Lord Lloyd of Kilgerran. Through the usual channels we have written out the pencilled dates produced by the noble Lord, Lord Morris. It is true that we shall have one day at Report stage before Easter and the Recess. After that, there will be space. The noble Lord, Lord Lloyd of Kilgerran, has mentioned the possibility of recommitment. It is a Motion in the Chamber to recommit and it is one that any noble Lord can move. It is a debatable Motion. When we come to it we may find that there is such a Motion and I am sure that the noble Lord, Lord Lloyd of Kilgerran, will bear that in mind.
§ Lord Elton
It might well be inadvisable for any Member of the Committee to do that. I beg any Member not to recommit the whole of Part VIII of the Bill otherwise we shall be here until the Summer Recess!
§ Lord Jenkin of Roding
I appear to have been more fortunate than some Members of the Committee in that I was able to get a copy of the consultative document from the Library on Thursday. In other respects I appear to have been less fortunate. I have been learning a good deal about the future programme of this Chamber of which I "wotted" nothing until I was given the dates by my noble friend Lord Morris and others.
Since the rule hook is as easy as Enid Blyton, I must tell my noble friend that I do not propose to give it to my new granddaughter to read, though I am extremely grateful for his kind remarks. I believe that this debate has proved the value of the amendments that we have been discussing. I say no more than this. We shall want to study my noble friend's speech with great care because he went to some considerable trouble to spell out precisely how the Government see the best way forward in this area.
I repeat that I hope that he will not rule out the possibility of inverting the process and having broad principles which are justiciable and guidance that can help the court or the authorities to decide whether a breach has taken place. I recognise that, forced by the existing structure of the Act, the SIB has not been able to go down that road. Whether it is paragraph 3 of Schedule 7 or whatever, it feels obliged now to write out a series of rules. I do not believe that is what Parliament envisaged when the Act was put on the statute book, and certainly not in the complexity that it has.
When I heard my noble friend Lord Rippon read the passage from David Walker's article in which he tried to spell out the interaction of the present structure of principles and rules—some principles being justiciable if they had no rules underneath them and others being not justiciable because they have rules beneath them—I could not help feeling that that is almost the worst of all worlds. I hope that the Government will take further time to think of this matter. This is an opportunity to get what is widely 1284 acknowledged, and by my noble friend himself, as unsatisfactory legislation. It needs amendment. Would it be impossible for the amendments to be tabled and discussed in another place? That would give the Government more time. We can then discuss them when they come back to this Chamber as amendments that have been passed in another place. It seems that to table what may be quite complex amendments in time to allow this Chamber to consider them at the Report stage on this part of the Bill at the beginning of April, is trying to rush things a great deal too fast.
§ Lord Williams of Elvel
Perhaps I may remind the noble Lord that we cannot amend Commons amendments when they come back to us. We can only approve or disapprove.
§ Lord Jenkin of Roding
That seems a lacuna in our procedures. I thought that we could suggest another amendment in its place.
§ Lord Jenkin of Roding
That is a way of doing it. I should have thought that with the ingenuity of my noble friend on the Front Bench and his parliamentary advisers that it would be possible to do that. It is so important that we get a workable structure that achieves the overall purpose of consumer protection without throttling the industry in a mass of detailed regulations which I do not believe anyone envisaged would be the result. We shall study my noble friend's speech with great care. He has gone part of the way to meet us with his consultative paper and it would be quite wrong to divide the House.
§ Amendment. by leave, withdrawn.
§ Lord Williams of Elvel moved Amendment No. 257A:
§ Before Clause 132, insert the following new clause:
§ ("Transfer of functions.
- (a) in subsection (1)(a), leave out "corporate-;
- (b) in subsection (2), line 1, leave out "first";
- (c) in subsection (2), line 3, leave out "limited".").
§ The noble Lord said: In moving this amendment, for the convenience of the Committee, I wish to speak to Amendments Nos. 257D and 262. As I said at Second Reading, it was the Opposition's objective to make sure that the superstructure of the financial services' regulatory system was as strong as possible. The Committee will remember that when the Financial Services Act was a Bill before us, it started off as a Bill that envisaged a number of possibly competing organisations that would have a chance to go for the regulatory role. When the Bill started in another place, there was no mention at all of the Securities and Investments Board. It seems to us that this board must be considered as a part of the landscape of the financial services regulations. What we are proposing in these amendments is essentially to tidy up the landscape and to make sure that the SIB is a permanent feature and that it is seen as such.1285
§ This objective is achieved by a number of relatively small amendments. In Section 114 of the Financial Services Act we should like to omit the word "corporate". We should like the SIB no longer to be considered as a corporate body. We should like to leave out the thought that this is the first delegation order; that there is a delegation to the SIB of the Secretary of State's powers, and that that is the end of the matter; and that the SIB is therefore permanently in situ. We should like to leave out the expression "limited". We believe that the SIB should not be a limited company but that it should be a properly established Crown body.
Amendment 257D is established by the schedule that governs the designated agency. In Paragraph 1(1), line 1, we propose that the SIB or designated agency shall be considered as a Crown agency. Schedule 9 1(1) of the Financial Services Act reads;
A designated agency shall not be regarded as acting on behalf of the Crown and its members, officers and servants shall not be regarded as Crown servants".
We propose that the designated agency shall be regarded as acting on behalf of the Crown and that its members and officers shall be regarded as Crown servants; in other words, it should be a Crown body with Crown immunity provisions applying, as we discussed a long time ago when the Bill was before your Lordship's House.
§ I should like to refer briefly to Amendment No. 262 which seeks to delete Section 115. That allows the Secretary of State to retract the delegation order when he decides that the Securities and Investments Board or other designated agency is not fit for its task. We believe that that should not be part of the Act.
§ These amendments are designed to recognise what I believe is now the status quo. In our view they improve the position of the SIB by giving it and its servants Crown immunity. No doubt some noble Lords will object to the fact that salaries would fall under the supervision of the Treasury. That is rather an old chestnut. The Treasury, with regard to certain agencies, is much more liberal than might be thought about the level of salaries it is prepared to approve. We must recognise that the SIB should have proper staff and that we should remunerate them in a manner which is competitive with staff elsewhere in SROs and in the businesses from which these people will no doubt come, or from which they will be seconded.
§ These relatively simple amendments tidy up the Act and do much to give security to the SIB and to the financial services financial regulatory system. I beg to move.
§ 4.30 p.m.
§ Lord Young of Graffham
The noble Lord, Lord Williams, will, I am sure, forgive me for remarking that this set of amendments bears a striking similarity to amendments that he put forward during the passage of the Financial Services Act two and a half years ago. I am sorry to have to tell the Committee that, in consequence, my remarks will have a familar ring. The reason for this is quite simple: the noble Lord, Lord Williams, was misguided on that 1286 occasion and I fear that he is misguided now, for reasons that I shall endeavour to explain.
Underlying this set of amendments is the noble Lord's desire for the Securities and Investments Board to be given some kind of statutory status, although the details have never been entirely clear. I shall return to that broader question in a few moments; but it might be helpful at the outset to outline some of the consequences that would flow from the amendments proposed by the noble Lord, Lord Williams.
Amendment No. 257A, among other things, would have the effect that the only body to which functions under the Act could ever be transferred would be the Securities and Investments Board. I should like to make clear that I have no intention in the present circumstances of transferring functions to any body other than the Securities and Investments Board, which is doing a fine job. But it would be foolish entirely to rule out this option for the future.
It may be, for instance, that in the light of developments in the market, which is evolving and very fluid, it will become desirable to amend Schedule 1 of the Act to extend markedly the definition of "investments". If that were to happen—and I stress that I am talking hypothetically—it may well be that SIB would be unwilling or unable to take on the task of regulating this new area of business or that there was another body better placed so to do. In such circumstances it would be sensible to have available the option, but no more than the option, of transferring functions to that other body while leaving the SIB doing what it is doing at present. Moreover, should it ever prove necessary to resume some or all of the functions transferred to the SIB, it would be sensible to have available the option of transferring them to another body rather than requiring the Secretary of State to exercise them.
The last point leads me to the noble Lord's proposal in Amendment No. 262 that Section 115 of the Financial Services Act should be repealed. That is the section which allows for functions which have been transferred to a designated agency to be resumed in certain circumstances.
It is worth recalling four circumstances in which functions can be resumed. First, functions can be resumed at the request of, or with the consent of, the designated agency. Secondly, they can be resumed if the then Secretary of State considers that the designated agency no longer satisfies the conditions laid down in Schedule 7 to the Act. These are the conditions which have to be satisfied before the functions are transferred in the first place, and it does not seem to me to be unreasonable that, if they are no longer satisfied, the functions should be withdrawn. Thirdly, functions can be withdrawn if the agency is no longer able or willing to perform them. Again, it does not seem to me to be unreasonable that functions should be resumed in these circumstances. Fourthly, functions may be resumed if the agency's rules do not provide an adequate level of investor protection or do not comply with the principles laid down in the Act.
The amendment of the noble Lord, Lord Williams, would have the rather startling effect that, once 1287 transferred, functions could not be resumed by the Secretary of State in any circumstances. Once again, I think I should say that the question of resuming powers is, for the moment at least, an entirely hypothetical one. However, I wonder whether the noble Lord really means what his amendment says. Is he telling us that he thinks that an agency which had shown itself unable or unwilling to do the job, or which has produced rules which failed to achieve an adequate standard of investor protection, or which did not have proper monitoring or enforcement arrangements, should be left in the position that those functions could not be withdrawn from it and transferred to another body which could do the job better? I have to tell the Committee that the ability to withdraw functions from the designated agency is an essential safeguard in ensuring that the functions bestowed under the Act continue to be carried out in the way in which Parliament intended. I must also admit to some surprise that the noble Lord should seek to delete one of the provisions designed to ensure that those operating the system are ultimately accountable to Ministers and Parliament.
As I have said, at the heart of this group of amendments is the status of the SIB. I have listened very carefully to what the noble Lord has said on this matter but I fear that he has still not answered what, for me, is the fundamental question. Let us suppose that the SIB was part of a government department. Can anyone identify a single function which it would then be possible for the SIB to carry out which it cannot, by reason only of its status, exercise now? The SIB can make rules which have all the force of law; it can impose restrictions on businesses which can be enforced through the courts; it can appoint investigators with far-reaching powers; it can disqualify individuals from employment in investment business.
I could go on listing the SIB's powers for several minutes but I hope that I have made the point. I put it to the noble Lord that the powers of the SIB are as extensive as would be the powers of a government department doing the same job. In those circumstances, I apply a simple test. That is, is the SIB doing the job efficiently, and would the job be done any better by a government department? I believe that the answer to the first question is yes, and the answer to the second is no. Therefore I do not think that there is any advantage to be had in changing the SIB's status—and, indeed, in all the circumstances, it may well be damaging to do so. I must therefore ask Members of the Committee to reject the amendment.
§ Lord Williams of Elvel
I am afraid that the noble Lord and I seem to live in slightly different worlds. His arguments seem to be wholly fictional: whether there could be another body to which these tasks could suddenly be given overnight, without there being an enormous crisis within the whole system. I simply cannot understand that happening. If there were a crisis in the whole system, I have absolutely no doubt that the Secretary of State would intervene to make sure that the SIB was up to doing the job that it had to do. As Members of the Committee have said, the board does the job perfectly well now; but if 1288 it fell down on the job this provision would cover it. There is simply no question at all of removing the functions from the SIB and transferring them to someone else.
There is one point that I should mention because the noble Lord asked me a question in this respect. Indeed, I mentioned it as long ago as the Second Reading debate on the Financial Services Bill when it came to this Chamber. It concerns the question of immunities. We understand that the SIB has immunity in the United Kingdom; but the SIB being a private body—as I mentioned in my Second Reading speech—has no immunity, and members of the board have no immunity, outside the United Kingdom in foreign jurisdictions which of course Crown servants have. I made the point, which the noble Lord, Lord Lucas, will certainly remember, that the body, the SIB, is a Crown body and has an immunity which the present SIB does not have. Therein lies one of the advantages.
The other advantage of the system that I am proposing is perfectly simple; namely, that the whole fictional world in which the noble Lord seems to live is eradicated, and it becomes a Crown responsibility. It is the job of the Secretary of State to make sure that the SIB carries out its job properly. Moreover, if it does not do its job properly, the Secretary of State can fire all the members of the board if he wishes to do so and produce new ones. In my view, that is a very fundamental point.
We have had a long debate on the previous amendment and I do not intend to detain Members of the Committee on the matter. Nevertheless, I think that on the first debate it was shown that the points which I and some of my noble friends made when the Financial Services Bill was under consideration in this Chamber about the whole system of complexity which we thought would result from the legislation have been proved to be right. The noble Lord may repeat the words of the noble Lord, Lord Lucas (who said at the time that we were misguided) when he says that we are misguided on the question of the Crown status of SIB.
However, I am sure that he will come to recognise our views. I have absolutely no doubt that in 10 years' time the SIB will be a Crown body, and that it will operate as a permanent feature of the landscape. At that time we may have switched places, but I am quite certain that it will be proved that we from this Dispatch Box were right at the time. As I said, I do not wish to detain Members of the Committee at this stage, so for the moment I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
§ 4.45 p.m.
§ Lord Williams of Elvel moved Amendment No. 257B:
§ Before Clause 132, insert the following new clause:
§ ("Takeover offers
§ "Regulatory panel.
§ 171 A.—(1) The Securities and Investments Board shall establish a panel to regulate the conduct of takeovers.s1289
§ (2) The members of the panel shall be chosen by the Securities and Investments Board in consultation with the Bank of England.
§ (3) The Securities and Investments Board shall publish a Code of Practice setting out general principles on the conduct of takeovers and from time to time the panel may issue guidance on the application of the general principles but breach of a provision in the Code shall not itself constitute a breach of regulation issued by the Securities and Investments Board. Such guidance shall lie outside the provisions of section 114 (10) of this Act.
§ (4) The Securities and Investments Board may also issue regulations governing the conduct of takeovers under the powers delegated to it by virtue of section 114 of this Act.".").
§ The noble Lord said: We now come to an extremely important amendment. Again, I hope that the Secretary of State will not reply to my introduction by simply saying that we are having a re-run of the debate that we had when the Bill was before this Chamber. However, it is of course more or less the same problem; namely, the status of the Takeover Panel.
§ I have no criticism, as I said in 1986 when we were debating the matter, of the way the Takeover Panel has operated from 1968 to 1986—other than in the context of the Guinness affair which we were discussing at the time where, in my view, the Takeover Panel had fallen down on the job. On the whole, it has worked fairly well, but of course in 1968, when it was set up by the noble Lord, Lord O'Brien, when he was Governor of the Bank of England—I am sorry not to see him here in his place today—it was operating, and designed to operate, an entirely different system. The system was completely different from the one which we introduced in the Financial Services Act.
§ We now have two parallel arrangements: we have a statutory system for the regulation of the issue of securities and the conduct of investment business; and we have a non-statutory system for the regulation of takeover offers. I argued at the time, and I still maintain, that the two systems have difficulty in running in parallel.
§ Let me take head on the argument that Members on the opposite side of the Committee will undoubtedly adduce—quite rightly—about the Takeover Panel; that is, that it has great flexibility in its operation. We do not wish to destroy that flexibility. The possibility that guidance can be sought and given without having recourse to the courts is one which we should like to maintain. That is why, in Amendment No. 257B, I seek a construct. That construct is not dissimilar to the one which the noble Lord, Lord Jenkin of Roding, put forward on the general problem of financial services regulation where the SIB can set up a code of practice—which is equivalent in my view to the takeover code—and can give guidance on the matter.
§ Moreover, such guidance will not necessarily have to be reported to the Secretary of State, as is required under the Act at present; yet there can be rules and regulations which are statutory when those are required. That provision seems to me to mirror the existing operation of the Takeover Panel. Nevertheless, it would give the Takeover Panel the assurance that it has the umbrella of statute and the umbrella of the penalties that the SIB can inflict should there be any infringement of the rules and regulations which the provision sets up.1290
§ I have not so far mentioned the 13th Company Law Directive, but I must now do so. I must say that I am most grateful to the Secretary of State for sending me a copy of the document as soon as it was available to the department. The directive introduces a suggested regime for takeovers in the European Community. It is a directive which will be considered under Article 100A. As I understand it, that is the article which allows a qualified majority for the Council to approve a directive, and it will therefore not be subject to veto by any one member country.
§ It is a directive which in my view, and I think in the view of most commentators, adopts a lot of the principles which we are used to in London. Indeed, it is not surprising that it should be so because a high proportion of the takeover activity in the Community takes place in London. But it has the effect, because it is a directive, of putting some of those matters into statute. In particular, Article 1 makes quite clear that this is a directive and that the member states must comply with it. Moreover, Article 6 also spells out in a little greater detail exactly how that will be achieved.
Article I says that,
Co-ordination measures prescribed by this Directive shall apply to the laws, regulations and administrative provisions of the Member States relating to takeover and other general bids".
Article 6 says perfectly clearly that,
The authorities and, where appropriate, the associations or private bodies referred to in paragraph I must have all the necessary powers to ensure that this Directive is put into effect".
Therefore it looks to us as though we are going into some sort of statutory system if the directive is adopted by the Council. I have read articles in newspapers which state that the Secretary of State will be encouraged to challenge the whole basis of the directive to make sure that the voluntary system—if that is what we have here—should rule throughout the Community.
§ I wish the noble Lord great success if he can manage to budge a directive which has been adopted by the full Commission and submitted to the Council. I doubt whether that would happen in real life. What we must do is to make sure that the panel which we have at present is, so far as possible, flexible within the terms of the statute but that it should, nevertheless, be brought into line with what we have in the Financial Services Act and with what the directive will impose upon us.
§ We believe that the amendment, although badly drafted—I make no apology for that—succeeds in that intent. So far as concerns the statutory provision, Section 171A(1) asks that the Securities and Investment Board should establish a panel to regulate the conduct of takeovers, and therefore the panel becomes a dependency of the SIB. We recognise that the Bank of England has a role to play in the panel and, because it is now influential in choosing the members of the panel, it should be influential in choosing the members of the future panel.
§ In subsection (3) we set out how the general principles—a code of practice—could be established. In subsection (4) we provide for rules to be set out where they are necessary. We believe that those 1291 proposals meet the requirements of present day life in the City of London. It answers the problems that have been raised, not least by the chairman of the Takeover Panel in articles published earlier this year; it complies with the directive with which we shall have to comply. It will give us an altogether more harmonious system of regulation in an important part of consumer protection. It is vital that if we are to have a full system of consumer protection in all other areas, we should have a full system of consumer protection when it comes to takeovers, because that it where many people feel that they are being less well protected than they might otherwise be. I beg to move.
§ Lord Lloyd of Kilgerran
I am delighted that the noble Lord, Lord Williams of Elvel, talked so positively about what I believe is known as the 13th Directive a copy of which I received from the Secretary of State. I thank him for sending me a copy as soon as it became available to his colleagues in the department.
It is essential that the Government somehow indicate as far as possible—I see the noble Lord, Lord Cockfield, in his place—what their position is in relation to takeovers as set out in that directive. If I had had a copy of the directive earlier I should have pressed the noble Lord, Lord Strathclyde, much more than I have, to try to have some of the parameters of the Treaty of Rome, especially the well-known factors which arise under Articles 85 and 86, put into the Bill. My valiant attempts were met by grace and charm from the Minister, but we received no further commitment. I should like to join the noble Lord, Lord Rippon, in congratulating the Secretary of State on the great effort he has put in to increasing industry's interest in what will happen after 1892.
§ Lord Lloyd of Kilgerran
I usually get my figures wrong. The Secretary of State is to be strongly congratulated on that matter.
With the leave of the Committee I should like to mention Amendment No. 257EC which is almost an epilogue to the Bill. I am trying to tempt the Minister to postpone the operation of Part VI, which deals with mergers, until such time as the 13th Directive on takeovers and general bids, which the noble Lord, Lord Williams, has drawn to our attention, has been finalised. If the Minister can deal with the 13th Directive in some detail I may be able to save a considerable amount of time by not moving the amendment that I have tabled.
§ Lord Roskill
Ten days ago when I spoke to an amendment moved by the noble Lord, Lord Lloyd of Kilgerran, I disclosed an interest. Perhaps I may disclose the same interest again because I am, and I have been, as I then told the Committee, chairman of the Takeover Panel Appeals Committee for the past 18 months. It is perhaps irrelevant to mention it again because holding that position has enabled me to observe the workings of the Takeover Panel from a 1292 distance for the past 18 months. I am not a member of the panel but it allows me to attend its meetings. From time to time it discusses its problems with me. The noble Lord, Lord Alexander of Weedon, is unfortunately still out of the country and therefore what I say will be less happily said than if he had said it.
If one wanted to summarise the difference of opinion between the noble Lords who tabled the amendment and those of us who do not believe that it is right, it might be said that it is a difference of opinion between pragmatism and dogma. The Takeover Panel is one of the best examples of working pragmatism that I have ever encountered. One of the matters that one learns in a long experience of the law is that if one can get people to do something of their own free will it is much better to leave them to do it that way than to introduce an element of compulsion which will almost invariably lead to resentment, legalism and the bureaucracy about which the Committee has heard so many complaints from the noble Lord, Lord Jenkin of Roding, who moved an earlier amendment.
One of the astonishing things about the Takeover Panel is the way that it works. The noble Lord, Lord Williams of Elvel, said that he had only one criticism, which it would not be right for me to repeat. I was delighted to hear that because the panel works extremely well. It works because people agree to do the things that the panel enjoins that they should do. Its decisions are obeyed because they command respect. They command respect because of the people who operate the panel and constitute its members. I therefore ask the noble Lord, Lord Williams, what he suggests the statutory body which he proposes should be set up should do that is achieved almost every day at present in the interests of the protection of shareholders by the panel working as it does.
There will of course be criticism from time to time of the panel. Anyone who has had even a short experience as a judge, let alone a long one, knows that a judge is fortunate if only one party is discontented at the end of his decision. If one sits on the panel one deals with conflicting interests over a wide spectrum of business, finance and the City as a whole. A decision will affect not just a predator, an offeror or an offeree; it will also affect merchant bankers, brokers, bankers and all the rest and yet they will obey the decision. One has seen that happen again and again. One asks what on earth would be achieved by substituting the statutory panel.
The noble Lord, Lord Williams, said that he accepts that the Takeover Panel is flexible. So indeed it is. The situation in the financial markets, as the Committee knows far better than I do, changes week by week and day by day. If we have a statutory provision and an unusual case arises that case will often have to be forced into some rather procrustian bed into which it does not properly fit, and then litigation follows. The worst thing that can happen—it may seem odd for a lawyer to say this—is that such matters become involved again and again in the type of litigation which has haunted takeovers in the United States, Australia and one or two other countries. We cannot have an efficient shareholder protective system if people are going to run to the 1293 courts every time. Rightly or wrongly, the Takeover Panel has been held by the Court of Appeal to be amenable to judicial review. So be it. That is probably a good thing because otherwise it would be suggested that it was beyond and above the law.
It is interesting that there have been only three attempts to tackle the panel by means of the weapon of judicial review. The first two failed and the third never got as far as the review because the application for leave was refused. The truth is that the law tends unhappily to be, and the criminal law long has been, a rather blunt instrument when it comes to matters which require to be dealt with quickly. As the Committee knows, I spent two and a half years as chairman of the Fraud Trials Committee. We tried to sharpen the criminal law. It remains to be seen how sharp it now is. I venture to think that it will soon be found to be a great deal sharper than it was in the past. However, the criminal law is necessarily a long stop and it cannot hope to be as effective as the Takeover Panel when it comes to dealing with matters swiftly and in a hitherto unknown and unexpected situation.
I wish to say one word more, if I may, about the EC position. I do not wish to discuss it at length because I know it is a delicate matter. It is somewhat ironic that one finds—at least I am so told; and this accords with my own reading—that the requirements of the takeover code are in many respects a great deal stricter than those which would be imposed if the directive became part of the law of this country.
With great respect to the noble Lord, Lord Young of Graffham, we are ahead of the forms of control which the EC seeks to impose. It would be quite disastrous in my view if there were a lessening, a lowering of the standards which have been voluntarily accepted in this country over the past 20 years and particularly in the past three or four years when so many of these controversies arose, and if we were compelled to fall into line with a law which demanded lower and less effective standards than those which have prevailed in this country in recent times. I hope that the noble Lord in whose name the amendment stands will forgive me if I invite the Committee emphatically to reject the amendment.
§ 5 p.m.
§ Lord Boardman
First I declare an interest in that I am a member of the Takeover Panel. That gives me the advantage of a not inconsiderable experience of sitting on the panel and hearing many cases. I shall not detain the Committee by going over the ground so admirably covered by the noble and learned Lord, Lord Roskill. He has painted the advantages in a way which I think is clear and in my experience entirely accurate.
I think that if the noble Lord, Lord Williams of Elvel, had ever been able to see the panel operating—but perhaps he already has.
§ Lord Williams of Elvel
If the noble Lord will permit me to intervene, I have been a practitioner in the market for a long time—ever since 1966; so I have seen the panel in operation.
§ Lord Boardman
Then I am sure that the noble Lord will be able to confirm from his own experience the results so ably outlined by the noble and learned Lord, Lord Roskill.
I think there are three courses which may be taken in dealing with takeovers. The one I highly commend is the one in force and in play today. There is the argument, with which I do not agree, for a fully statutory system. Some would argue for that but I believe it would be completely wrong. At any rate, it is one for which there has been argument. The third, which is encompassed in the amendment of the noble Lord, is a hybrid of both, with the worst of both. I suggest it would be quite disastrous.
There is one further point which I wish to add on the merits of the panel to which the noble and learned Lord did not refer. It is the advantage the panel has for prior consultation. It is open to people who are uncertain, the professional practitioners who are not quite certain of the appropriate course to take. It is open to them to consult the panel in advance. That would be quite impossible if it were a legalistic system. People could not do so. One cannot consult a judge in advance to find out how he would rule if one brought a case before him. This is very important.
I shall not go over the ground which has been so ably covered except to say that the amendment would be very unfortunate and a disservice to commerce, industry and the investors. After all, those are the people whom we are most concerned to protect and it would be a disservice to all of them if we should depart from the system which is working so well.
§ Lord Lloyd of Kilgerran
Before the noble Lord sits down, perhaps I may ask whether he confirms what the noble and learned Lord, Lord Roskill, has been saying about the position when the thirteenth directive of the EC becomes operative. That is particularly having regard to the single European market.
§ Lord Boardman
Yes. At the moment it has been conceded that this is a suggestion contained in the directive which is open for discussion, and I understand (and certainly hope) that the Government will strongly oppose it. As the noble and learned Lord, Lord Roskill, has said, these regulations would produce a less effective and less stringent control than we have at present. I think it would be very unfortunate if we were to accept a lowering of standards in order to comply with some EC-imposed regulation. I hope that we shall not reach that situation.
§ Lord Elton
I also declare an interest as a member of the panel, though of much more recent date than my noble friend. I have another interest which I have already declared, as a member of an SRO which is part of the system. I think that the noble Lord, Lord Williams of Elvel, was referring to that when he said that the two systems had difficulty when working in parallel. If that is the case, I can assure him that I am not aware of the difficulty. If the two systems were not in parallel, I should presumably be doing the splits.
1295 The other matter I wish to point out is that it is very nearly the 21st birthday of the panel. During its almost 21 years of existence, the panel has monitored well over 5,000 takeovers. If the noble Lord, Lord Williams of Elvel, only takes exception to one of its conclusions, I think that is a much higher success rate than might be expected from any statutory body.
§ Lord Cockfield
It had not been my intention to intervene in the debate, but in view of what has been said by the noble and learned Lord, Lord Roskill, I am compelled to do so. He made two comments about the thirteenth company law directive, the first of which I entirely agree with: that it is premature to be discussing the directive. The second point he made, I suspect, is wrong. The directive would not compel an individual member state to adopt lower standards than it wishes. It prevents a member state imposing on other member states standards which are higher than those prescribed by the directive. That is an important point. I am sure that once a directive is examined in detail it will be seen that it does not undermine the operations of the Takeover Panel. We went to quite extraordinary lengths to ensure that the Takeover Panel was left untouched as far as possible by the thirteenth directive.
Without wishing to debate the directive in detail, we must bear in mind that Community legislation applies to all 12 member states. It is one thing to have a voluntary system for ourselves, but there are very soon complaints about voluntary systems operated by other people. It is for that reason that we need at least a minimum framework of Community law. The thirteenth directive set out to provide no more than the absolute minimum framework that was required.
§ Lord Rippon of Hexham
I do not wish to discuss the thirteenth directive, which I understand is still being debated and on which the Government still have to express a clear view. As I understand the amendment, I believe it reflects a growing anxiety in the public mind about the nature, the conduct and the extent of takeovers and mergers in recent years.
We would all agree with the Members of the Committee who have already spoken that every case must be considered, in the last resort, on its merits. But I do not believe that we have a system yet whereby the public interest and the interests of shareholders are best protected. There is a case for new ground rules. Having been concerned myself in a hostile takeover bid against me and occasionally in takeover bids against others, two things worry me very much. First, I am concerned at the deterioration in standards in the conduct of takeover bids, largely as a result of the aggressive tactics of some merchant banks which almost encourage bids and take large fees and commissions from the companies involved. Secondly, I am concerned at the behaviour of institutional shareholders who—unlike, for example, their German counterparts—increasingly regard share certificates as casino chips to be used to secure short-term capital gains rather than long-term investments.
As the noble Lord, Lord Williams of Elvel, has acknowledged, and as the noble and learned Lord, 1296 Lord Roskill, has so clearly demonstrated, for over 20 years the Takeover Panel has made a substantial contribution in protecting shareholders. But it is not concerned with the financial and commercial merits of takeovers. Questions of public interest are dealt with by the Monopolies and Mergers Commission, the Office of Fair Trading and the Department of Trade and Industry.
We must look at this problem in a world where takeover activity is both increasing and taking new forms, such as management and leveraged buy-outs. In this situation, the panel has been looked at more closely perhaps than in the past two decades. I, like other Members of the Committee, have every confidence in the chairman of the panel, the noble Lord, Lord Alexander of Weedon, and in his colleagues who have spoken here today in their various capacities. But there are inevitably nuts and bolts issues with which they are not very closely or personally involved.
The noble and learned Lord, Lord Roskill, said that theTakeover Panel is one of the best examples of working pragmatism. That may be so. I acknowledge that the flexibility it has is necessary, to a large degree, to deal speedily with novel circumstances. However, there are so many novel circumstances and so many takeover bids that some of us who are involved one way or another feel that areas of uncertainty are now arising in respect of many matters.
I must confess that I do not much care for putting the Takeover Panel under the SIB. Therefore, I could not vote for the amendment as it now stands. It may be more sensible to argue that another alternative could be the case for putting the Takeover Panel on the same kind of statutory footing as the SIB itself. Then the Secretary of State would have the power to make takeover rules but would delegate that power to the Takeover Panel.
I come now to the point raised in the amendment about codes of practice. We need a system whereby the Government and the panel have regard to the wider dimensions—the ease or the difficulty of takeovers in other jurisdictions. Other Members of the Committee, as is sometimes customary in our proceedings, find little fault in our own system. But whatever view we take of the 13th directive as it now stands, I believe that we must create a fairer playing field in Europe for the good of British companies. There are anxieties in that field to which noble Lords have referred in various debates during the progress of the Bill.
Meanwhile, I take the view that it would be unwise to change the present tried and tested system unless we are sure we have something better to put in its place. I do not think that that case is yet made out. As to the code of practice setting out general principles, to which the amendment refers, I feel that there is a case for some new approach. When I raised this matter in another place nearly three years ago on 12th March 1986, I suggested we should study action that has been taken in other countries to regulate takeovers. In America, for example, a number of states apply criteria that many people feel we might now usefully adopt. In Colorado, an independent board of directors has to vet a bid for a financial 1297 institution and a 25 per cent. holding is deemed to be a change of control which it will investigate. In Minnesota, the single most important component of company law is the requirement that acquiring companies must disclose their operational plans for the target company.
In Germany, a company's workers have an absolute right to be consulted on decisions that will have an effect on their future, such as mergers. In Canada, action has been taken to ensure that bids over £250 million have to be referred to the equivalent of our Monopolies and Mergers Commission.
After the 1986 debate, I received written assurances from Ministers in the DTI that its review of mergers law and policy would involve examining a number of countries including Canada, Germany and the United States. Among other things the department was to consider the merits of the pre-merger notification requirements of American and German law. As a separate issue I was told that the review would consider how the department could best support the Takeover Panel further in its job of regulating takeovers.
I may have missed some paper along the way, but I do not think I have seen any significant results from that review or any clear indication of the conclusions of the study that was to be taken of action in other countries. I hope that the Secretary of State has a copy of the letter I received. I hope that he can give some indication of the results of that review and that he will agree to publish them.
§ 5.15 p.m.
§ Lord Boardman
I hope it will help if I inform my noble friend that there is a working party within the Takeover Panel which is looking at a great range of points which the noble Lord has mentioned.
§ Lord Rippon of Hexham
I am delighted to hear that. I hope that it will not take as long as the Department of Trade and Industry to publish the results of its conclusions. But the very fact that there is—
§ Lord Rippon of Hexham
I very much hoped that that would be the case. No doubt my hopes will be fully realised. I am not making any criticism of the Secretary of State. I am saying that I hope that the Takeover Panel will produce those results soon. The very fact that it has a working party shows that it has at any rate an appreciation of the public's anxieties in this regard. While I do not feel that we can make a structural change at present of the kind suggested in the amendment, there are some fundamental issues which have to be tackled. Consideration should be given to new guidelines, whether they are expressed in a code of practice or in some other way.
§ Lord Lucas of Chilworth
I have some sympathy for the view of the noble Lord, Lord Williams, with regard to the status of the SIB in five or 10 years' time. However, I cannot believe that at this moment it 1298 would be right to burden that body with another set of duties, such as appointing a panel to take over from, or to run alongside, the existing Takeover Panel.
When we debated this matter some three years ago, I was sturdily of the view that the panel was at that time the best kind of regulatory authority we had because of its flexibility and because it was practitioner-based. I must confess to having been swayed over recent years. I now believe that we need something a little sterner than that. We need something that is more easily recognised by the participants over which that body is to preside.
The noble and learned Lord, Lord Roskill, said that it was a pragmatic success. I do not dissent from that view. However, my noble friend Lord Rippon made the point very succinctly that there have been a number of takeovers, on which the panel may have given advice one way or another, which have been greatly disturbing to some shareholders. Some takeovers and mergers have contributed nothing to the wealth of the country. In relation to wealth I am not talking in terms of money. So much of what has gone on has meant that a lot of money has been chasing a lot of other money, not necessarily to the long-term benefit of the community.
I hope that I have interpreted the remarks of my noble friend Lord Boardman correctly that the Takeover Panel is currently looking at the way in which it operates and therefore the way in which it is seen by others to operate.
§ Lord Boardman
I am grateful to my noble friend. I am not a member of the working party. It is considering various issues such as the threshold for compulsory bids and other matters which have been debated widely outside this House.
§ Lord Lucas of Chilworth
I am obliged to my noble friend. No doubt the working party will take note of the comments made in your Lordships' Committee.
I am grateful to my noble friend Lord Cockfield for his explanation of the 13th directive. In the light of the 13th directive I think that it is perhaps premature to press the kind of argument which the noble Lord, Lord Williams, has presented this afternoon. It is my understanding that a directive sets the minimum standard and it is left to member states to interpret the directive into domestic law so that domestic law should not have a lower value than the directive prescribes.
I believe that it would be best to leave the Takeover Panel as it is in the hope that it can improve its presentation and have regard to the longer-term issues involved.
§ Lord Young of Graffham
In listening to the very interesting debate on the amendment put forward by the noble Lord, Lord Williams of Elvel, I very much regretted the absence of the noble Lord, Lord Stevens of Ludgate, whose wise counsels on this day would have been very welcome to your Lordships' Committee. I regret even more the sad reason for his absence today. 1299 The primary concern with regard to any system for the supervision of the conduct of takeovers is that it should work. It must ensure that the interests of shareholders are protected while maintaining an open and efficient market for takeovers. The important point about the Takeover Panel is that it does work: it achieves its objectives. Few would dispute the fact that it has performed its function well since it was set up in 1968, perhaps with the one exception to which the noble Lord, Lord Williams of Elvel, referred.
During debates on the Financial Services Bill there were some who argued that the panel could not be expected to cope with the recent increase of takeover activity, and that takeover regulation should be brought within the Bill. That was some two years ago. Since then the panel has gone from strength to strength under the chairmanship of my noble friend Lord Alexander of Weedon. It continues to exercise authority over those it regulates, and the level of compliance with the code is high. Of course there will always be isolated cases of non-compliance, as with any regulatory system. However, there is no suggestion that the occurrence of such cases is widespread, and I believe that the panel has proved itself to be an effective regulator.
The performance of the panel since the passing of the Financial Services Act confirms that Parliament was correct in its decision not to bring takeover regulation within the ambit of the Act. That was confirmed by my noble friend Lord Boardman in recounting his experiences as a member of the panel. Indeed, to some extent, the amendments tabled by the noble Lord, Lord Williams, appear to accept that. The intention seems as much to be to bring the Act's regime more into line with that of the panel as to bring the panel into line with the Act. However, the past two years have shown that the panel and the supervisory bodies under the Act work excellently side by side without the need for any formal statutory link.
My noble friend Lord Rippon has referred to a review of overseas mergers and other reviews which were occasioned by the debate in your Lordships' House some two years ago. There were two aspects. One was a review of mergers policy. It was in that context that overseas practice was considered. The results were used in the preparation of the Blue Paper on mergers policy which I published at the beginning of last year.
In May 1987, my predecessor as Secretary of State announced the outcome of a review of the operations of the Takeover Panel. That review, which I believe was the review referred to in the letter mentioned by my noble friend, was undertaken not only by my department but included the Treasury, the Bank of England, the SIB, the Stock Exchange and the Takeover Panel itself. The conclusion, announced in May 1987, was that the panel should continue in its existing form, but that certain measures should be taken to strengthen its hand. As a result of the review steps have been taken to ensure that the panel has the benefit of support from the SIB, the Stock Exchange and appropriate self-regulating organisations, as my 1300 noble friend Lord Elton has already testified this afternoon.
The SIB and the self-regulatory organisations have made it clear that their sanctions are available to be used against authorised persons who show themselves not to be 'fit and proper' by breaking the takeover code. They have adopted 'cold-shoulder' rules requiring investment businesses not to act for individuals or companies who the businesses have reason to believe will not comply with the code. They also have rules requiring authorised persons to co-operate with the panel in inquiries and investigations.
The composition of the panel now includes the Securities Association and IMRO in addition to FIMBRA and the Stock Exchange, which were already members. In order to facilitate co-operation between the panel and the bodies under the Act, the panel has been designated to receive regulatory information whose disclosure is restricted by statute. In the light of these steps, I do not believe that it can be argued that there has been any difficulty in the panel operating outside but in a close relationship with the Act's regime. The noble and learned Lord, Lord Roskill, has paid tribute to the flexibility of the workings of the panel.
It is impossible to tell with certainty whether the current self-denying approach of the courts towards the panel's rulings could continue unchanged if the panel were to have a formal status under the Financial Services Act. I suspect that the special reasons justifying that approach would no longer exist. Moreover, any increase in access to the courts would result in an increase in litigation used for purely tactical and delaying purposes during takeovers.
That is why I believe that my noble friend Lord Rippon is mistaken in this matter. I believe that putting the panel on a statutory basis would in the end undermine it. It would provide a whole new armoury of legal devices which would be used both by the aggressor and the defender in bids and we should find that the whole process of takeovers would fall into disrepute.
I say to my noble friend Lord Lucas that I am not sure how putting the matter on a statutory or non-statutory basis would repair the damage of which he complains. I should be grateful to receive more evidence of such damage because I confess that I regard the whole process of bids as being entirely healthy. In fact it serves to keep boards of management on their toes and ensures that the performance of companies does not lag behind.
I should like to comment on three elements of the operation of the panel on any non-statutory basis. First, as I have already said, the panel's own sanctions are effective. I need only turn to its rulings on the Guinness-Distillers and the AE-Turner and Newall takeovers for that evidence. The second of the elements is flexibility. The code imposes very high standards of behaviour by being expressed in strict terms. The consensual nature of the rules allows dispensation to be made where shareholders' interests are not at stake. I am not sure that that would be the case if they were statutory rules.
1301 The third element—which I must confess, living in my very statutory world, I rather envy—is speed. The panel interprets the rules, allowing definitive rulings to be made very quickly. The Court of Appeal has recognised the importance of that element in takeovers and that is why it has constrained itself from attempting to reverse decisions made by the panel. I must confess that I am not sure whether that would continue to apply if there were an underlying statutory basis for the panel itself.
That brings us to the speculation regarding the 13th company law directive on takeovers which has just been published by the European Commission. The speculation about the effectiveness or the operation of the 13th directive is no reason for supporting the amendment. As my noble friend Lord Cockfield has testified, it is premature. The central issue in relation to the directive is whether it will be compulsory and must be implemented through legally binding rules. We have by far the most active Stock Exchange in the Community. Our financial system is as advanced as any. We should like to see a voluntary system for ourselves with other countries free to adopt it on either a voluntary or a compulsory basis. We believe that it is in the interests not only of the United Kingdom but of the wider single market in Europe that the directive should allow for non-legally binding rules in all member states which wish to follow that particular route.
I believe it is important that the directive should not increase litigation in relation to takeovers in the Community. That would erect new barriers to takeovers rather than eliminating existing ones. But the Government believe that that point must be addressed in the directive and we are encouraged by the fact that the Commission is not without sympathy for our concerns. We shall continue to discuss the subject with it and the other member states in order to arrive at an acceptable solution, but at the moment it is far too early for us to legislate in an attempt to anticipate the implementation of the directive.
I therefore believe that the case for change has not been made. Furthermore, the past two years have made it more difficult than it was in 1986 to argue that the takeover regulations should be brought within the ambit of the Financial Services Act. The panel's authority has not been undermined. Far from it; it has increased. The provisions of the Financial Services Act have not cut across those operated by the panel. They have worked side by side to their mutual benefit, as my noble friend Lord Elton has testified. The advantages of a consensual code have been emphasised. The speed and flexibility of the working of the panel are not diminished. The lesson is that, rather than changing the system in the United Kingdom, we should, with all the power at our disposal, encourage our European partners to follow our example.
In commenting on an Opposition amendment on takeovers during the Third Reading of the Financial Services Bill, my noble friend Lord Lucas of Chilworth said that there was no point in mending something that was not broken. I make no apology for repeating that point because there is no reason to believe that the system of regulation under the 1302 Takeover Panel will break. We should not undermine it by making an unnecessary and undesirable change, and I therefore urge the Committee to reject the amendment.
§ Lord Williams of Elvel
I am grateful to Committee Members who have taken part in the debate. I expected to hear only one or two spokesmen from the Takeover Panel, but we have heard three—the noble and learned Lord, Lord Roskill and the noble Lords, Lord Boardman and Lord Elton, all of whom are members of the panel. Alas, none of my noble friends enjoys that privilege because we on this side of the Chamber do not seem to be appointed to the panel. That may say something about the panel or about us; I do not know. I leave the matter at that.
The noble and learned Lord, Lord Roskill, made the traditional defence, and we respect what he says. I do not believe that the Takeover Panel's present sanctions—the tap on the wrist and the wigging, as it is called—are tremendously effective. As a practitioner, I know that a number of people regard it as a mark of their ability to slide as close to the wind as they possibly can. If they get rapped over the knuckles by the panel, they say, "We nearly defeated the panel the other day". That is what happens.
On the question of agreeing with all decisions, the noble Lord, Lord Elton, got me wrong. I did not say that I agreed with all the panel's decisions; I simply disagreed rather violently with one of its decisions which I mentioned. That does not mean to say that I agreed with all the others. As a practitioner—I speak in this case in the Committee as a practitioner—I have been on the wrong side of many of the panel's decisions with which I have profoundly disagreed. If it always agreed with me, I should have thought that I would agree with the panel, but unfortunately one has to take the rough with the smooth.
I agree with one point made by the Secretary of State; namely, that in one sense in this amendment and the previous ones that we moved we are trying to bring together the two systems—the Act and the panel. That point is very important. We are trying to do that and it is sensible to have a coherent system. I still do not believe that the two systems can run for ever in parallel. All the curious arrangements that the Secretary of State described—such as people getting together and arranging for cold-shouldering—are pretty artificial ways of trying to make sure that the gap that exists between one system and the other is narrowed rather than eliminated altogether.
As a matter of interest, among the practitioners whom I know in the City of London—I know quite a few after all these years—I know no one who believes that cold-shouldering means very much at all.
The noble Lord, Lord Boardman, said he was worried that prior discussion could not take place if there were a statutory body. Over the years, I have had many prior discussions with the Office of Fair Trading on mergers and deals in which I have been involved, but I have never had any problems. Perhaps that is because of my personal friendship with Sir Gordon Borrie, although it may be that he is more flexible than others. As regards prior discussion with a statutory body, there is no problem whatsoever.
1303 The noble Lord, Lord Rippon, made some interesting general points, many of which I agree with. I believe that he has a good argument, on which we would do well to reflect, when he says that the Takeover Panel as presently constituted, including its philosophy, has not addressed the genuine worries of people in this country about the way in which takeovers are conducted. In my view, that worry is quite widespread.
The noble Lord, Lord Lucas of Chilworth, again returned to some of the arguments that we heard when the Bill was before the House on a previous occasion. I was glad to hear him say that he thought there might be some substance in what we said at the time. I reiterate what I said on the Third Reading of the Financial Services Bill in the same way as the Secretary of State reiterated what the Minister said; namely, that it is not a question of something being broken, but of making a system work rather better than it does at the moment.
I believe that the bringing together of the Act and the panel will lead us into the 13th directive quite properly and sensibly. Ultimately, the consumer will never be satisfied until takeovers are conducted on a statutory basis. That is the fundamental principle on which I shall ask the Committee to decide.
§ 5.39 p.m.
§ On Question, Whether the said amendment (No. 257B) shall be agreed to?
§ Their Lordships divided: Contents, 66; Not-Contents, 124.1304
|DIVISION NO. I|
|Airedale, L.||Hughes, L.|
|Ampthill, L.||Irving of Dartford, L.|
|Ardwick, L.||Jeger, B.|
|Blease, L.||Jenkins of Putney, L.|
|Bonham-Carter, L.||John-Mackie, L.|
|Bottomley, L.||Kilbracken, L.|
|Briginshaw, L.||Kirkhill, L.|
|Brooks of Tremorfa, L.||Lloyd of Kilgerran, L.|
|Bruce of Donington, L.||Longford, E.|
|Buckmaster, V.||McCarthy, L.|
|Carmichael of Kelvingrove, L.||Mclntosh of Haringey, L.|
|Carter, L.||McNair, L.|
|Cledwyn of Penrhos, L.||Mais, L.|
|Cocks of Hartcliffe, L.||Mason of Barnsley, L.|
|Davies of Penrhys, L.||Mayhew, L.|
|Dean of Beswick, L.||Mishcon, L.|
|Dormand of Easington, L.||Molloy, L.|
|Ennals, L.||Mountevans, L.|
|Evans of Claughton, L.||Northfield, L.|
|Ezra, L.||Peston, L.|
|Falkland, V.||Phillips, B.|
|Fisher of Rednal, B.||Pitt of Hampstead, L.|
|Fitt, L.||Ponsonby of Shulbrede, L[Teller.]|
|Galpern, L.||Prys-Davies, L.|
|Gladwyn, L.||Stewart of Fulham, L.|
|Graham of Edmonton, L.[Teller.]||Stoddart of Swindon, L.|
|Hampton, L.||Taylor of Blackburn, L.|
|Hanworth, V.||Taylor of Mansfield, L.|
|Harris of Greenwich, L.||Turner of Camden, B.|
|Hatch of Lusby, L.||White, B.|
|Hirsfield, L.||Wigoder, L.|
|Hooson, L.||Williams of Elvel, L.|
|Airey of Abingdon, B.||Long, V.|
|Aldington, L.||Lyell, L.|
|Allerton, L.||McAlpine of Moffat, L.|
|Arran, E.||McAlpine of West Green,|
|Auckland, L.||Mackay of Clashfern, L.|
|Belhaven and Stenton, L.||Macleod of Borve, B.|
|Beloff, L.||Malmesbury, E.|
|Belstead, L.||Mancroft, L.|
|Bessborough, E.||Manton, L.|
|Bethell, L.||Margadale, L.|
|Blatch, B.||Marley, L.|
|Boardman, L.||Marshall of Leeds, L.|
|Boyd-Carpenter, L.||Merrivale, L.|
|Brabazon of Tara, L.||Mersey, V.|
|Brookeborough, V.||Monson, L.|
|Brougham and Vaux, L.||Mottistone, L.|
|Butterworth, L.||Mowbray and Stourton, L|
|Campbell of Alloway, L.||Murton of Lindisfarne, L.|
|Campbell of Croy, L.||Nelson, E.|
|Carlisle of Bucklow, L.||Newall, L.|
|Carnock, L.||Norfolk, D.|
|Carr of Hadley, L.||Nugent of Guildford, L.|
|Cockfield, L.||Oppenheim-Barnes, B.|
|Coleraine, L.||Orkney, E.|
|Colwyn, L.||Oxfuird, V.|
|Constantine of Stanmore, L.||Pender, L.|
|Cottesloe, L.||Penrhyn, L.|
|Craigavon, V.||Platt of Writtle, B.|
|Craigmyle, L.||Pym, L.|
|Cullen of Ashbourne, L.||Quinton, L.|
|Davidson, V. [Teller.]||Rankeillour, L.|
|Denham, L. [Teller]||Reay, L.|
|Dundee, E.||Rees, L.|
|Elibank, L.||Renton, L.|
|Ellenborough, L.||Renwick, L.|
|Elles, B.||Rippon of Hexham, L.|
|Elliot of Harwood, B.||Rodney, L.|
|Elliott of Morpeth, L.||Romney, E.|
|Elton, L.||Roskill, L.|
|Fanshawe of Richmond, L.||St. Davids, V.|
|Ferrers, E.||Saltoun of Abernethy, Ly.|
|Fraser of Carmyllie, L.||Sanderson of Bowden, L.|
|Greenway, L.||Selkirk, E.|
|Gridley, L.||Shannon, E.|
|Hailsham of Saint Marylebone, L.||Skelmersdale. L.|
|Halsbury, E.||Strathclyde, L.|
|Harmar-Nicolls, L.||Strathspey, L.|
|Harvington, L.||Sudeley, L.|
|Hemphill, L.||Suffield, L.|
|Henley, L.||Swinfen, L.|
|Hesketh, L.||Swinton, E.|
|Hives, L.||Terrington, L.|
|Holderness, L.||Thomas of Gwydir, L.|
|Home of the Hirsel, L.||Thomas of Swynnerton, L.|
|Hood, V.||Thorneycroft, L.|
|Hylton-Foster, B.||Trafford, L.|
|Jenkin of Roding, L.||Trefgarne, L.|
|Joseph, L.||Trumpington, B.|
|Kaberry of Adel, L.||Vaux of Harrowden, L.|
|Kimball, L.||Wynford, L.|
|Kimberley, E.||Young of Graffham, L.|
§ Resolved in the negative, and amendment disagreed to accordingly.
§ [Amendments Nos. 257C and 257D not moved.]
§ Clause 132 [Restriction of right to bring action for contravention of rules, regulations &c.]:
Lord Williams of Elvel moved Amendment No. 257E:
Page 125, line 22, leave out subsection (1).
§ The noble Lord said: In a way this is a probing amendment to elicit a government explanation 1305 about what Clause 132(1) means because the innocent reader of the Bill would have great difficulty in understanding exactly what is meant.
The new section in the Financial Services Act which it is proposed to insert, distinguishes between a private investor and presumably someone who is not a private investor. It is up to the Secretary of State to make regulations to define what a private investor is. It is no secret that when the Financial Services Bill was in another place, Mr. Michael Howard rejected a possibility that was put forward by Mr. Tim Smith of a distinction between professional investors and small scale investors. Perhaps I may quote from what he said. He was the Minister in charge of the Bill at the time.
I came to the conclusion that it would be extraordinarily difficult to arrive at such a distinction, because of the difficulties of defining a professional investor in that context".—[Official Report Commons, 11/6/86; col. 425.]
Presumably something has now changed to make it easy for the Government to arrive at a distinction between a private investor and an institution investor. I shall be interested to know what has changed since those days. No doubt the Secretary of State will be able to enlighten me.
The second difficulty that I have with this new clause is that it is up to the Secretary of State to define what is meant by the private investor. In other words, we have a new clause in the Financial Services Act that is left in an incomprehensible state until the Secretary of State produces regulations to make it comprehensible. This is an unsatisfactory state of affairs, particularly in view of Section 62A(3) which concerns the regulations that the Secretary of State may make. He,
may make different provision with respect to different cases".
In other words we do not know what different classes of investor or even different investors will be defined in one category or another.
§ I hope that the Secretary of State will be able to convince us that this provision is, first, necessary and, secondly, operable. I could understand it, if he adopted the view that all investors are able to sue or that an investor is able to sue. Both those are comprehensible. We may argue the merits of each position, but to have some being able to sue and others not being able to do so seems an odd system and possibly rather odd in law. I beg to move.
§ Lord Lucas of Chilworth
When we were discussing an earlier amendment I indicated that I thought that this amendment on principles was somehow linked. I am glad that the noble Lord, Lord Williams, described the amendment as a probing amendment. I wonder whether against that background I might make a few comments for the Committee, primarily to enable the Government to give further consideration not only to the discussion document, but to the questions that inevitably arise when a new section is inserted into a Bill.
The Government are right to bring forward the provision to amend Section 62. Those who are responsible for implementing and maintaining the system will be glad to see the provision. I understand 1306 that among many others the Securities Association has formally and publicly welcomed the proposal.
Whether it was right or wrong, Section 62 has been seen as a prime cause of much of the complexity surrounding the introduction of the new regulatory system. But the threat that any breach of a rule made by a regulator could lead to legal action under Section 62 has had adverse consequences. Regulators have had to devise rules to cope with any contingency. They have drawn rule books which will satisfy lawyers, first and foremost, faced with possible court actions. As a result this has led to what I understand the Americans call "safe harbours".
The comprehensibility of the regulatory system as a result has suffered. I do not believe we can blame the regulators. We talked about them a little earlier this afternoon. But any alleged breach of an SRO rule can lead to expensive court action at the suit, not only of the professional but also of what I might call the Aunt Agatha. A professional could use the threat of action to his advantage. One might almost say, in the privilege of this Committee, that this is a weapon more usually associated with commercial blackmail.
One can hardly blame the regulator for his attempts to achieve maximum provision, nor the authorised business for its attempt to build in as much protection to its position as possible. My noble friend Lord Elton described this protection in terms of customer documentation which I believe lessens the confidence that the buyer of the product has, not only in the product but in the purveyor of the product—what I might call the small print syndrome.
In welcoming the new clause I would make so bold as to extend a word of caution, because the extent to which rule books can be simplified will depend on the content of the regulations to be made under the provisions of this clause. My advice to my noble friend the Secretary of State is to draw quite clear distinctions. If the definition of "private investor" leaves any grey area, any area where investors and investment businesses are uncertain of the applicable category, there will have to be qualifications in the rule books. Surely the objective of the simplification will then be much diluted and investors will again not be certain where they stand.
In discussing these matters with the Securities Association, whose advice I have drawn on heavily for this part of the Bill, I have discovered that it is looking for regulations which will tend to be quite simple. Perhaps I may suggest therefore that a good starting point might be the concept that a private investor is a natural person. That concept would have to be developed, but I do not believe that this Committee is the right place to develop it.
§ Lord Lucas of Chilworth
A natural person is the investor, however he goes about it. Whether he allows his investment to be discharged by others is a different argument and one which I do not propose to be drawn into by the noble Lord.
I was suggesting that the clause as written leaves it open for there to be exceptions to the rule for non- 1307 private investors—I suppose that these are the professional institutes. We find these rather ridiculous descriptions of people, so I will stay with what I would call the non-private investor. He cannot bring an action. I hope therefore that we can recognise quite quickly that if we are not careful we shall build into the regulatory system a two-tier system. As soon as one has a two-tier system, that of the private investor "except for" and the professional investor "in addition to", the pitfalls are perhaps wider and larger than those we have already. Quite clearly there have to be categories of actionable and non-actionable rules that are easily distinguished in all cases. That is no easy task and the scope for confusion will be great. That surely is the job of the Minister's department together with the SIB and the SROs. We are engaged, by virtue of the consultative document, in something of a tidying-up and cleaning-up exercise.
If we can get this part of it right, it will do much to achieve the objectives of fair and flexible protection for investors which is also, if I may use a popular but not nice phrase, user friendly, to those whose business is regulated by them. I do not believe that in assenting to the clause as it is written the Committee will in any way be diluting investor protection. We have to consider the regulations that will be made under the provisions of the clause. I, like the noble Lord, Lord Williams, would be glad to hear exactly the areas in which the Government expect to make regulations and also upon whom those regulations will bear. Then we might have the opportunity of revising the new clause, if revision is then deemed to be necessary.
§ 6 p.m.
§ Lord Lloyd of Kilgerran
I should like to explain why I put my name to the amendment dealing with the restriction of right of action. It is a probing amendment. I could not understand the full significance of the first paragraph to which the proposed amendment refers. I am unclear about the effect of the proposed Section 62A on rights of action which may accrue otherwise than because a breach of the rules alone. For example, there may be a breach of an SRO's rules which may also give rise to a liability under the general law. It may be a matter of negligence.
It is assumed that under the section there is no intention to remove a plaintiff's rights under the general law. However, the paragraph provides that no action shall lie in respect of a contravention to which Section 62 applies and which is, arguably, wide enough to have that effect. Many SROs do no more than restate the law. Perhaps the Secretary of State will clarify the position.
§ Lord Young of Graffham
The amendment tabled by the noble Lords, Lord Williams, Lord Peston and Lord Lloyd, would, by its operation, destroy the modification to Section 62 of the Financial Services Act 1986 which I announced last November. It may be convenient therefore if I say a little about our reasons for proposing this modification. Section 62 is 1308 the provision which makes it explicit that investors can sue for damages if they suffer loss as the result of an authorised person breaching either requirements imposed under the Act, most notably the rules and regulations concerning conduct of business and other matters, or the corresponding rules of a recognised self-regulating organisation or a recognised professional body. This is a provision to which the Government have always attached considerable importance. It is little comfort to an investor who has lost money because a firm has failed to meet the standards of conduct expected, even if the firm concerned suffers the harshest form of disciplinary action possible and has its authorisation revoked. The investor has still lost money as a result of that misconduct. Section 62 provides a mechanism for recovering that money, subject to proper judicial safeguards.
I shall look at the point raised by the noble Lord, Lord Lloyd. However, it is not intended that we should remove any other rights: the right is only that by virtue of suing under Section 62.
When the Financial Services Bill was before your Lordships' House, the debate on the provision understandably concentrated on the nature of those safeguards. It was made explicit that the defences available in a Section 62 action would be the same as those in actions for breach of statutory duty. Nevertheless, experience gained since the Bill received its Royal Assent has highlighted a rather different and unforeseen problem. It concerns the consequences of making Section 62 available as between practitioners; market competitors, for instance. I have to say that it is by no means clear that it does so apply.
One of the principles of action for breach of statutory duty is that it enures for the benefit only of those for whose protection the duty is intended and against losses of the kind at which it is directed. Market competitors almost certainly do not come into that category. But there is a category where the issue is less clear cut. For example, large institutions or in some cases counterparties in the market. I think it is clear that it will be worthwhile for a private investor to pursue a Section 62 claim only where he has a genuine case.
Where dealings between professional investors are concerned, however, there is a much greater danger of persons looking for technical breaches and then using Section 62 actions as a means of securing commercial advantage. It has been represented to me that this produces two undesirable effects. The first is that it encourages a generally litigious attitude on the part of the professional investors. I do not believe that that is a healthy development for the reputation of our financial markets. Secondly, concern about the operation of Section 62 seems to have led practitioners and their legal advisers to press for the new rule books to be much more detailed and legalistic than we originally envisaged.
Today the Committee has spent a long time debating the consequences of that. I believe that the concern arose before people saw Section 62 as having to be defined precisely in legalistic terms. Members of the Committee will be aware of the Government's 1309 support for the current efforts being made to simplify these rule books.
In the light of those representations, we have considered it right to modify Section 62 by making it possible for the right to sue to be removed from practitioners and professional investors. The announcement of that conclusion last November was widely welcomed throughout the financial services community, not least by those who would lose the right to sue. I remain convinced that that is a desirable modification.
The professional investor will not be able to rely on the fact that a course of conduct was a breach of a rule. However, if the conduct was actionable on other grounds—in other words, breach of contract, agency law, or negligence—even without reference to the rules he would be able to sue on those grounds. We are now dealing specifically with the rights to sue under Section 62.
The proposition referred to when the Financial Services Bill was in another place related to defining professional investors in the Act and of excluding such businesses from the Financial Services Act. It may give comfort to the noble Lord, Lord Williams—on the other hand, it may not—to know that we propose to make the definition precise in secondary legislation. I know that the noble Lord is not fond of secondary legislation. He has that peculiar quirk in his nature and at this hour I shall not attempt to remedy that—
§ Lord Young of Graffham
I hope not to have that experience; but we shall see. We incorporated the definition in secondary legislation, first, because it is more amendable to change; and, secondly, our proposed definition would be for limited purposes only. I believe that it will deal with the legitimate anxieties expressed by my noble friend Lord Lucas of Chilworth.
We still believe that it would be wrong to exclude professional investors from all of the Act's provisions. However, I believe that by adopting the course which we are undertaking, and by the general welcome received from those who, apparently, would lose their right to sue, it will be a key amendment enabling the simplification of the rule book. That is widely welcomed by all sides of the Committee.
§ Lord Williams of Elvel
Can the Secretary of State indicate what he means by a "professional" investor and a "private" investor? I do not want the regulations on the Table today but I should like to know roughly what he means.
§ Lord Young of Graffham
It is self-evident: "professional" investors are professional investors and "private" investors are private investors. However, I hope that the rules which we bring forward at the time of secondary legislation will define the terms. They tend to vary from individual market to individual market.
1310 We are looking at those who could be described as "innocent" investors. They are those to whom it was envisaged the full protection of the Financial Services Act should apply. Those who invest as "amateurs"—for want of a better definition—would have the full rigour of the Act. We should look at those who would lose the right to sue. The policy refers to practitioners or professional investors; the two terms being interchangeable.
The new Section 62A operates by defining a "private" investor in secondary legislation. Secondary legislation will also be able to specify circumstances in which the right to sue is retained even for professional investors. In some cases that follows from the need to comply with Community obligations. However, the precise definition is something at which we must look very carefully and define from market to market and according to the circumstances of the case. In essence it is simply this: an amateur investor will continue to have the full protection of Section 62 and the person whose business it is to invest money will not.
§ Lord Williams of Elvel
Perhaps I may probe further. I do not like the expression "amateur investor". It implies that private investors are amateur although they may be very professional in the way they go about investing. However, let us suppose that an individual investor invests through a unit trust. Presumably he is no longer a private investor. The unit trust is the vehicle and is therefore the professional investor. Am I right in that assumption?
§ Lord Young of Graffham
I assume that a private investor is covered by Section 62 in his investment in that unit trust. The unit trust itself in its operations in the market will surely be a professional investor.
§ Lord Peston
I believe that the noble Lord has now arrived at the point we wanted to reach. Many of those he calls professionals and practitioners are ultimately operating for, to use his expression, the "innocent" investor. Therefore, that distinction does not seem to be as clear-cut as the noble Lord suggests. I am an "innocent" investor. I certainly never act on my own behalf. However, others, whether engaged in unit trusts or pension funds, are acting on my behalf as an "innocent". Therefore I do not see —and this is what my noble friend asks—why this right of innocence is not transmitted forward to the professionals acting for us.
Perhaps I may pursue this further. Is there any possibility that before he frames the regulations the Secretary of State will have consultations on this matter? It seems to me that it is rather complex, and it may be useful to consult various bodies which typically concern themselves with the interests of private investors as to their views.
§ 6.15 p.m.
§ Lord Lucas of Chilworth
Let us suppose that the professional, whether he is a unit trust manager or a practitioner, in the completion of a document, makes a technical error. The recipient sues for breach of 1311 contract, incorrect contract or something of that nature. The "innocent" may very well make an error of the same kind but could not be sued in such a case. Perhaps I may go back to an analogy which comes quickly to mind. When I practised business in the retail motor car industry which concern used motor cars, if the seller described a motor car as a 1960 model XYZ and sold it into the trade and it was subsequently found that it was not of such a description and the trader took that person to court, the court would probably throw out the claim on the basis of caveat emptor. However, if one sold the same motor car with the same description to a private individual who subsequently found the description to be incorrect, then the private individual would probably have the court's decision in his favour. Surely, that is what we are trying to decide in this clause. We take away the technical errors which an expert or somebody with expertise should be expected to see and to accommodate whereas the "innocent" would not.
§ Lord Young of Graffham
I can give a categorical assurance to the Committee that should the occasion arise, I would certainly buy a used car from my noble friend. I am grateful to him for his description because it encapsulates what we are talking about.
Perhaps I can persuade the noble Lord, Lord Peston, to lose a little of his innocence in putting this point to him. We are not talking about taking away any investors' rights in the normal corpus of law, be it tort, contract or whatever. We are talking about a specific right under Section 62 which protects the amateur or occasional investor but not the investor whose full time occupation it is to invest in the market. That is what we are talking about.
To take the example the noble Lord gave, if I wished to invest my money in the unit trust and I was not given all the facts I should have been given because it did not comply with whatever the regulations were, then I should have a right to sue that unit trust for any resultant loss. However, the unit trust fund managers when dealing with other professional people in the market, should not be able to rely on Section 62. That is the universal point. We should not have professionals using it against each other.
I give an assurance to the noble Lord, Lord Peston, and to all Members of the Committee that my department will consult widely before we frame these regulations. We know how important they are, and I very much hope that as a result of the consultation there will be an adequate and satisfactory definition.
§ Lord Williams of Elvel
We believe that it is important that there should be wide consultation. I still tend to agree with Mr. Michael Howard's remarks that this matter will be extremely difficult. However, we accept that the Department of Trade and Industry will do its best and we look forward to the draft regulations coming before us. In the meantime, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 132 agreed to.
1312 Clause 133 [Requirements for recognition of investment exchange]:
Lord Lloyd of Kilgerran moved Amendment No. 257EA:
Page 126, line 21. after ("procedures") insert ("in relation to transactions on the exchange").
§ The noble Lord said: This is a probing amendment and relates to the Government amendment of Schedule 4 to the Financial Services Act 1986. That deals with requirements for recognition of investment exchange and to paragraph 2 of that schedule entitled, "Safeguards for Investments". That is consequently a matter of some importance and significance.
I have been advised by the Law Society that it is experiencing difficulties with the words, "to deal with" in sub-paragraph 2A(2)(b) of the Government amendment. That sub-paragraph states:
The references in paragraph 2(4) above, and elsewhere in this Act, to ensuring the performance of transactions on an exchange are to—(b) having procedures to deal with the consequences of the default of a person party to such transactions".
The Law Society advises me that it is concerned lest the words "to deal with" go too far. Its reasons for suggesting that this is a more suitable amendment to deal with this matter is that the consequence of the default in question in this section may extend beyond areas within the competent or control of the exchange and its procedures. Therefore, it was suggested that the wording of my amendment in relation to transactions on the exchange should be helpfully introduced after the word "procedures". That would help to confine the obligation within satisfactory limits. I beg to move.
§ Lord Strathclyde
The purpose of the new subparagraph 2A(2) which this clause inserts into Schedule 4 of the Financial Services Act is to clarify the meaning of the expression:ensuring the performance of transactionsused there. The intention is to make it clear that the exchange is not itself required to guarantee the completion of a transaction in the event of a default.
In order to provide a proper level of investor protection, it is important that an exchange's default procedures deal effectively with a member's contracts with his investor clients, as well as his contracts with other members of the exchange. While a member's contracts with other exchange members will clearly be transactions on the exchange, his contracts with investors may not be. The wording used in the new sub-paragraph 2A(2)(b) is wide enough to cover such off-exchange contracts with investors. The noble Lord's amendment would narrow it. It has not been put to us that the clause would cause any difficulty in the context of the clarification it makes. However, I am prepared to look at the matter further.
§ Lord Lloyd of Kilgerran
I am obliged to the Minister. In the circumstances, I ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 133 agreed to.
1313 Clause 134 [Set off in bankruptcy]:
§ Lord Lloyd of Kilgerran moved Amendment No. 257EB:
§ Page 126, line 41, at end insert—
("(3) Without prejudice to subsections (I) and (2) above, parties concerned may waive the benefit of statutory set off.").
§ The noble Lord said: This amendment deals with a technical matter in regard to set-offs in bankruptcy. Clause 134, which the Government propose to amend, deals with set-offs but seems to leave unclear the position in regard to statutory set-offs. Again, it has been brought to my attention by the Law Society that the Government may have overlooked a recommendation made by Sir Kenneth Cork, an ex-Lord Mayor. He has a great reputation for dealing with insolvent companies and was very good at avoiding insolvency. His attitude was always to seek to assist companies to avoid such difficulties.
§ The Cork Committee Report, at paragraph 1342, pointed out that difficulties have arisen because of a Court of Appeal decision in 1972 in National Westminster Bank Limited v. Halesowen Presswork and Assemblies Limited. In his report he suggested that that Court of Appeal decision should be reversed. I will not bother the Committee with the main reasons, but I point out that as long ago as 1972 that recommendation was made.
It may be that it has been overlooked because the difficulties have not arisen too often. My amendment suggests, therefore, that the Court of Appeal decision to which I have referred should be reversed so that it is possible for parties to waive the benefit of statutory set-off in insolvency cases. Of course, my wording may be improved upon but the wording that I suggest should be considered is:
Without prejudice to subsections (1) and (2) above, parties concerned may waive the benefit of statutory set off".
I beg to move.
§ Lord Strathclyde
The aim of this clause is to clarify the position regarding set-off, which it has been suggested is unclear as a result, in part, of an attempt to update the language of the 1914 Bankruptcy Act in the 1986 Insolvency Act.
This clause is for a limited purpose. It is designed to overcome uncertainty which has been expressed as to the meaning of the word "due" in the present section. The opportunity has been taken to reword the provision to clearly link the debts and liabilities capable of being set off to those capable of proof as a bankruptcy debt. These debts may be present or future, certain or contingent. This amendment would go further.
The amendment suggested by the noble Lord would alter the existing law by enabling parties to contract out of set-off. This would effectively reverse the decision of the leading case on the subject mentioned by the noble Lord; namely, National Westminster Bank Limited v. Halesowen Presswork and Assemblies Limited, which decided in 1972 that set-off was mandatory.
A similar proposal was rejected during the passage of the Insolvency Bill in 1985–86 and we are not 1314 satisfied that the existing law is in this respect unsatisfactory. Any change could lead to debtors pressing their creditors unreasonably to accept compromises of their debts. Also, when applied across to the winding up of companies., it might lead to manipulations between members of a group of companies to the detriment of creditors outside the group. We feel it would be undesirable to effect such an amendment to the provisions relating to set-off, and in the circumstances I hope the noble Lord will be able to withdraw the amendment.
§ Lord Lloyd of Kilgerran
I am grateful to the noble Lord for that explanation. I will read what he had to say to see whether the matter should he raised at the next stage. In the circumstances, I ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 134 agreed to.
Clause 135 [Restriction of duty to supply statements of premium income]:
On Question, Whether Clause 135 shall stand part of the Bill?
§ Lord Lloyd of Kilgerran
I gave notice of my intention to oppose the Question that Clause 135 stand part of the Bill because I am not clear what this clause is dealing with and the reason for its introduction. At this hour I am only anxious to discover what is the policy behind the insertion of this clause.
Clause 135 states:Schedule 3 to the Policyholders Protection Act 1975 (provisions with respect to levies on authorised insurance companies) is amended as follows".I do not follow why it is necessary to amend the 1975 Act, an Act of 14 years ago, in the manner proposed. For example, at the top of page 127 of the Bill there is a proposed new paragraph to Schedule 3 of that Act which reads:The Secretary of State may by notice in writing require an authorised insurance company to send him a statement of—(a) any income of the company for the year preceding".I need not read the rest. Arising from that, why is the Secretary of State intervening at this stage in a matter which is clearly for the Inland Revenue?
There are other aspects of this rather long and complicated proposed amendment by the Government. However, at this late hour of the evening—I know we are delaying other work—if the noble Lord deals with that question I shall be in a better position to know what to do.
§ Lord Peston
I do not wish to keep matters going unduly, but the noble Lord, Lord Lloyd of Kilgerran, is right to raise this matter and I hope that we do not rush through too rapidly and not clarify it.
The noble Lord put his finger on the central issue: that it is difficult to understand the point of the Government's proposed amendment in the Bill, in particular the circumstances in which the Secretary of State will demand in writing this information on income. What is the Secretary of State up to? What problem does he feel that it would solve?
1315 Further, when this clause was drafted in the first instance, or after it was published, did representatives of the insurance industry make representations to the department? If so, and without specific revelation of what any individual said, one would be interested to know what is the view of the industry. My understanding is that this is a complicated subject and that there is more than one valid view to be held on the Government's amendment. Again, in the interests of speed, one does not necessarily insist on a full answer now, but if the noble Lord writes to us that will be acceptable. This not a trivial matter.
§ 6.30 p.m
§ Lord Strathclyde
There is a very short answer to the question raised. This is a straightforward measure of deregulation. However, I am sure that Members of the Committee will not be satisfied with that. Without going into too much detail perhaps I can explain what it is that the Government are doing.
The background is this. When the Policyholders' Protection Act was passed in 1975 the administration of the time appears to have taken a rather more pessimistic view than turned out to be justified of the number of times the levy arrangements provided for in that Act would need to be activated. This levy is based on the premium income of authorised insurance companies, and it is therefore clearly necessary before a levy can be made that the Policyholders' Protection Board should know what that premium income is. Erring perhaps on the side of caution, it was felt that the best way of dealing with this problem was to require annual statements from each individual company.
However, as it turned out insolvencies among insurance companies have been infrequent, and only once—in 1976, after the collapse of Capital Annuities Ltd.—has it been necessary to place a levy on the industry. Since then such insolvencies as have occurred have been dealt with by the Policyholders' Protection Board from the funds left over after settlement of the capital annuities claims, and no further levies have been required. The requirement for an annual statement of premium income has accordingly become an unnecessary burden upon companies and we are taking this opportunity to abolish it. Instead there will be a power to require companies to make returns of their premium income on a one-off basis as and when required.
The noble Lord, Lord Peston, asked me if the insurance industry had been consulted on this issue. I am sure that as many people as possible were consulted at the time.
§ Lord Lloyd of Kilgerran
I am grateful to the noble Lord for that careful explanation of the position. It always amazes me how useful are so many of his speeches to matters that I raise. I do not quite know how to get out of this position. I am not going to move that this clause do not stand part.
§ Clause 135 agreed to.
§ Clauses 136 to 138 agreed to.1316
§ Clause 139[Commencement and transitional provisions]:
§ Lord Lloyd of Kilgerran had given notice of his intention to move Amendment No. 257EC:
§ Page 129, line 11. after ("Part") insert ("VI (mergers and related matters) shall come into force on such days the Secretary of State may appoint by order made by statutory instrument but not before the proposal of the Commission of the European Communities entitled 13th Council Directive Concerning Takeover and General Bids has been finalised.
§ (1A) Part.").
§ The noble Lord said: This afternoon many Members of the Committee have indicated quite clearly how necessary it is to introduce new guidelines into the Companies Bill arising out of the operation of the Treaty of Rome. I shall be considering what they had to say very carefully before the Report stage. In those circumstances I do not propose to move this amendment.
§ [Amendment No. 257EC not moved.]
§ Lord Peston moved Amendment No. 257F:
§ Page 129, line 16, at end insert ("hut before making such an order in respect of Part I of this Act he shall consult representative bodies of the auditing profession.").
§ The noble Lord said: In moving this amendment I hope that I am pushing at an open door. When the Bill becomes an Act it will have far-reaching consequences as we debated earlier at Second Reading and in Committee. It will make considerable changes to the lives of the auditing profession and it will have great consequences for accountants.
§ I speak very much as a layman, but as I understand it Part I of the Act will come into effect as the result of an order. I assume that the accountancy profession is already engaged in a great deal of activity, but there will be a great deal more to be done. For all I know it is always the case before placing an order of this kind that the noble Lord's department consults with a view to seeing that it is not acting prematurely. I am not suggesting that we wish to delay this Bill in any way particularly as regards its many constructive parts. I am sure that the relevant bodies will come forward if the department is rushing ahead too rapidly and they will say "Look, hold your horses". We wish for a little reassurance that the noble Lord's department is aware of the possible dangers and that it will take due account of them. 1 beg to move.
§ Lord Strathclyde
We are as keen as the accounting profession to discuss together the commencement arrangements for Part I, which concerns company accounts. This is simply a continuation of the close consultation with the profession which has gone on throughout the preparation of this part. I am happy therefore to give the noble Lord an assurance that we shall consult on the arrangement for bringing it into force. On Part I we shall consult both the accountancy profession, as the noble Lord's amendment suggests, and the representatives of other interested parties with whom we have been in discussion.
I hope that Members of the Committee will agree that this assurance meets the noble Lord's point, and that no purpose would be served by including a 1317 purely transitory provision in primary legislation. 1 hope that the noble Lord will feel able to withdraw his amendment.
§ Lord Peston
I thank the noble Lord for his answer which is exactly as I expected. I entirely agree that, given his assurance, there is no need for what he rightly calls a transitional amendment to be included in the Bill. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 139 agreed to.
Clause 140 agreed to.
§ Schedule 17 [Repeals]:
§ Lord Strathclyde moved Amendments Nos. 258, 259, 260 and 261:
Page 206, line 13, column 3, at end insert—
("In section 88(6), the words from "the relevant parties" ' to the "and" immediately following paragraph (c).").
Page 206, line 28, column 3, at beginning insert—
("In section 169(5), the words from ", during business hours" to "for inspection)".
In section 175(6)(b), the words from "during business hours" to "period".
In section 191— (a) in subsection (1), the words from "(but" to "for inspection)"; (b) in subsection (3), paragraphs (a) and N.").
Page 206, line 32, column 3, at end insert—
("In section 219(1), the words from "during" to "for inspection)",
In section 288(3), the words from "during" to "for inspection)".
In section 318(7), the words from "during" to "for inspection)".
In section 356— (a) in subsection (I), the words "during business hours", (b) subsections (2) and (4).
In section 383— (a) in subsection (1), the words "during business hours", (b) subsection (2); (c) in subsection (3), the words from "at a charge" to the end.").
Page 207, line 15, column 3, at end insert—
("In Schedule 13, in paragraph 25, the words from "during" to "for inspection)".").
§ The noble Lord said: These amendments are additions to the schedule of repeals. Amendment No. 258 simply repairs an omission from the list of consequential repeals. Amendment No. 258 simply repairs our omission from the list of consequential repeals. The substantive repeal is in paragraph 10(4) of Schedule 15. Amendments Nos. 259 to 261 are purely consequential on Amendment No. 234E, to which the Committee agreed at an earlier stage. I beg to move Amendments Nos. 258 to 261 en bloc.
§ On Question, amendments agreed to. [Amendments Nos. 262 and 263 not moved.]
§ Schedule 17, as amended, agreed to.
§ House resumed: Bill reported with amendments.