Lords Sitting of 18 April 2000

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

Lord Grenfell of Kilvey
Julian Pascoe Francis St. Leger Lord Grenfell, having been created Baron Grenfell of Kilvey, in the County of Swansea, for life, took the oath.
Lord Mitford
Rupert Bertram Lord Redesdale, having been created Baron Mitford, of Redesdale in the County of Northumberland, for life, took the oath.

Prisoners: Rehabilitation
2.40 p.m.
Lord Juddasked Her Majesty's Government:
Whether, in view of recent reports by the Chief Inspector of Prisons on the effects of solitary confinement and on the treatment of young offenders, and following two suicides in Leicester prison on 21st March, they will now instigate a policy review of the role of prisons in the rehabilitation and well-being of prisoners in the United Kingdom.
Lord Bach: My Lords, the Government work with the Prison Service to review and update policy continually in respect of the role of prisons in the rehabilitation and well-being of prisoners. The Chief Inspector of Prisons' inspection reports and thematic reviews provide a valuable input to that process. As part of the comprehensive spending review the Government provided £226 million over three years for constructive regimes aimed at reducing re-offending. There is still some way to go, but significant improvements in regimes and rehabilitation are being delivered across the prison estate.
Lord Judd: My Lords, I thank my noble friend for that reply. Does he agree that whatever good work is being carried out by many dedicated people within the service, there is a disturbing situation? Whenever the chief inspector makes a devastating report, we hear accounts of what has been done to address the situation and, all too soon, sometimes literally within days, the next disturbing situation arises. Does my noble friend agree that there appear to be cultural problems within the Prison Service?
Many people who are in prison should not be there at all but should probably be in psychiatric care. Many young prisoners have had absolutely nightmarish social and family experiences which have led to their
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imprisonment. While punishment, where appropriate, is important, does the Minister agree that there is urgent need for leadership in establishing the biggest challenge of all, which is rehabilitation into positive citizenship? Does he also agree that there can be no complacency whatever about any suicides or any psychological damage to young people or any prisoners in custodial care?
Lord Bach: My Lords, we believe that the Prison Service carries out, under great pressure, an excellent job, but failures gain the most publicity. In recent years, the performance on security has improved markedly. Many excellent things happen in our prisons. However, the Government agree with my noble friend's statement that rehabilitation is absolutely critical. Increasingly, rehabilitation is emphasised within prisons. The Government are determined to improve regimes. Of course, those who have committed serious offences must be locked up for the protection of others, but it is equally important that they should not offend when released. The role of rehabilitation in that respect cannot be over emphasised.
Lord Dholakia: My Lords, in relation to two inmates who committed suicide, does the Minister accept that both had the same tendency and were put in the same cell? What aftercare and advice are available to prison officers, particularly when prisoners are taken off "at risk" registers? Having made a statement about the need to divert young people away from custody, can the Minister explain why, under the Crime and Disorder Act 1998, the matter relating to reparation and training orders for young people comes into force in June as against new custodial powers that are being introduced in April, giving the message that custody comes before any reparation matters?
Lord Bach: My Lords, on the deaths in custody raised by the noble Lord, the whole House will want to convey personal condolences to the families of the two young men who died so tragically. It was a particularly tragic event. Perhaps I may speak personally for a moment. I know Leicester prison extremely well. In my professional career I have visited it much more than any other prison. In my experience, the staff and the governor are of the highest quality. That is my personal recollection.
Every suicide in prison is a tragedy and every one is taken extremely seriously by Ministers. As the noble Lord knows, the prison department investigates each one and there is an independent coroner's inquest. It is too early to be able to give more details on the points the noble Lord raises about these particular tragedies. Perhaps I can make one further point about deaths in prisons—
Noble Lords: Oh!
Lord Bach: I shall leave the matter as the House is against me.
The Lord Bishop of Rochester: My Lords, is the Minister aware of the concern expressed in this House, not least by the right reverend Prelates the Bishops of Lincoln and Southwark, and also in the press, regarding the reluctance of prison staff and prison chaplains to report abuse by colleagues for fear of victimisation? How is that grave problem to be addressed? Is the Minister aware also of the need to involve leaders of faith communities in the care of prisoners belonging to those communities? Are any initiatives being taken in that respect?
Lord Bach: My Lords, the right reverend Prelate is right to make his point in relation to examples of victimisation. If there are such cases, I hope that in one way or another the authorities hear of them so that they can be dealt with seriously and speedily. Of course the faiths have a huge part to play in looking after those in custody and the Government are behind the increased involvement of the faiths in our penal institutions.
Viscount Bridgeman: My Lords, does the Minister realise that the number of purposeful hours per prisoner fell from 26.4 hours per week in 1994–95 to 22.8 in 1998–99? Does he agree that a programme producing 1¼ million pairs of socks over the past three years, not for sale but for the use of a prison population of around 60,000, is neither productive nor, for the prisoners, a fulfilling use of their time?
Lord Bach: My Lords, this is not an issue that should be between parties; it is much too serious a matter. The tone of the noble Viscount's question suggested that somehow his government did better than ours. That is not true. The figures indicate that prisoners are being given more active time and more purposeful activities outside their cells. But the noble Viscount will know as well as I do that this is a difficult issue which must be coped with in the best way possible.
Baroness Stern: My Lords, is the Minister aware that the number of children in prison—children, as defined in the Convention on the Rights of the Child, being under 18—has doubled since 1993? Those children come from the most damaged backgrounds. In the light of that, does he expect government policy to lead to a reduction in the number of children in prison? If so, when can we expect it to happen?
Lord Bach: My Lords, we hope that those of tender ages and from underprivileged backgrounds do not end up in prison. If they do, it is important that such children are educated in basic skills, which may lead to work when they are released. There is then more chance that they will not re-offend. It is critical that education regimes in prison are increased, as is currently happening.

Housing Benefit Fraud
2.46 p.m.
Lord Campbell of Croyasked Her Majesty's Government:
Whether, in order to reduce fraud, they will in future require all local authorities to arrange with the Post Office for housing benefit correspondence not to be redirected to other addresses, as already arranged in the present voluntary scheme.
The Parliamentary Under-Secretary of State, Department of Social Security (Baroness Hollis of Heigham): My Lords, the powers we inherited in the March 1997 Fraud Act do not allow us to compel local authorities, even if that were desirable. However, 272 local authorities have now adopted the scheme; most of the rest should do so shortly.
Lord Campbell of Croy: My Lords, I am grateful to the noble Baroness for her reply, which is encouraging. As the Chancellor of the Exchequer announced a severe crackdown on welfare fraud, why do not the Government get tough on housing benefit deception, which is known to be widespread, instead of concentrating on changes to disablement benefits? The noble Baroness has confirmed more than once in this House that there is very little fraud in relation to the claiming of disability benefit.
Baroness Hollis of Heigham: My Lords, I am happy to confirm again that there is little or no evidence of fraud in relation to disability benefit. A great deal of error occurs in payment primarily because, fortunately, people get better and, as a result, they should be in receipt of less disability benefit. However, they do not always report the change in circumstance and therefore continue to misdraw that benefit.
The noble Lord is right that serious fraud takes place in relation to housing benefit. Fraud, or a strong suspicion of fraud, is responsible for the loss of around £840 million in that regard. One in six housing benefit claims is probably paid in error. We are tackling this situation in three ways. We are building a verification framework with local authorities to ensure that fraud is, as far as possible, built out of the system at the point of the original claim. Secondly, given that most errors occur after the initial claim when people's circumstances change, we are aiming for a weekly benefit savings scheme with local authorities so that they have an incentive to eradicate and prosecute fraud. Thirdly, we are going for the "Do not redirect" procedures with the Royal Mail. So we have a strategy in place. We hope that, as a result, we will see a significant reduction in housing benefit fraud.
Baroness Maddock: My Lords, I believe that there is general agreement that the complexity of the housing benefit system is what makes tackling fraud so difficult. Indeed, the Minister's Answer this afternoon demonstrated that fact. In view of that difficulty, can the noble Baroness tell the House how the

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Government calculate the level of housing benefit fraud and other fraud; in other words, can she give us a figure in that respect?
Baroness Hollis of Heigham: My Lords, the noble Baroness is absolutely right. It is very difficult to put a figure on fraud that has not yet been uncovered. One has to multiply it by the number of weeks that it would have continued had one not intervened and stopped it. More generally, we believe that benefit fraud runs between £2 billion and £4 billion a year and if, we include cases where there is mild suspicion of fraud, we believe the figure to be £7 billion.
Housing benefit fraud runs at about £840 million, but there is a 30 per cent possibility of error either way. As the noble Baroness said, our difficulty is that we do not know the level of fraud that we have failed to uncover. However, from talking to experienced investigators, that is the best estimate available. It is certainly supported by the research report of 1997–98 on housing benefit accuracy. I agree that the statistics are flaky and that they should carry a health warning.
Baroness Gardner of Parkes: My Lords, can the Minister comment on the logistics involved? I understood that correspondence regarding housing benefit is not meant to identify that fact on the envelope, so as not to embarrass the recipient. Therefore, if local authorities are to instruct the Post Office not to re-direct such correspondence, how can they mark such correspondence so as to ensure that it is not re-directed?
Baroness Hollis of Heigham: My Lords, the noble Baroness has put her finger on one of the reasons that so many local authorities have been slow to take up the "Do not re-direct" scheme. It means that they have to separate their housing benefit mail from the rest of their correspondence. But, basically, with the aid of government grant—indeed, this is entirely funded by the DSS, with £350,000 a year being spent on new envelopes—local authorities must have a "return to sender" address printed which allows the envelopes to be returned. However, even where local authorities are using their best efforts to ensure that housing benefit giros are returned to them, all the evidence suggests that it is likely that the Post Office fails to intercept perhaps 50 per cent of such correspondence.
Lord Higgins: My Lords, can the Minister say whether or not the original envelopes are identifiable as such?
Baroness Hollis of Heigham: My Lords, they come from the local authority's housing section and will have a "return to sender" address printed on the front. However, local authorities print their own envelopes and, therefore, every set of envelopes from each local authority can be different. There is no standard envelope in use across the system. Local authorities take responsibility for this because they have different forms and they may wish to include different information in the correspondence; for example, they
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may wish to include council tax benefit, and so on. I am afraid that that is one of the problems which arise when working with a pluralist regime.
Lord Rotherwick: My Lords, can the Minister say whether or not it would be possible to have a common envelope that could be printed by the Government so as to solve this problem?
Baroness Hollis of Heigham: My Lords, I suppose so. At present, every local authority has its own envelope which may contain different types of information. But, given the fact that this is a matter of concern to your Lordships, I shall ask my colleagues to mention this suggestion at the next meeting with local authority associations to ascertain whether this is an avenue that should be pursued. However, once all local authorities are in the scheme, we have no reason to believe that this should not effectively help us to reduce fraud by some £5 million a year.

Missile Defence System: US Decision
2.52 p.m.
Lord Chalfontasked Her Majesty's Government:
Whether they have entered into any arrangement to provide support for an American national missile defence system if the United States Government should decide to establish such a system.
The Parliamentary Under-Secretary of State, Foreign and Commonwealth Office (Baroness Scotland of Asthal): No, my Lords. The United States has not put any such request to us, nor would we expect it to do so until, and unless, it has decided to proceed with the deployment of a national missile defence system. No such decision is expected before later this summer at the earliest.
Lord Chalfont: My Lords, I thank the noble Baroness for that only moderately enlightening Answer. Does she agree that this is part of a much wider issue and a very serious one? Given that strategic policy nowadays involves the frequent use of expeditionary forces and the fact that many countries around the world which might be involved have weapons of mass destruction and the missiles to deliver them—they are sometimes capable of being delivered from surface vessels—does the noble Baroness also agree that such forces are becoming more and more vulnerable to counter-attack as time goes on? Further, can she give the House an assurance that that assessment of the threat is included in the long-term defence and strategic planning of the Government?
Baroness Scotland of Asthal: My Lords, I can give the House such an assurance. As we made clear in the Strategic Defence Review, that is indeed the focus of the research work we are undertaking in the United

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Kingdom. It is also the focus of the feasibility study that we and our allies commissioned in NATO earlier this year. At this stage, we still judge that it would be premature to decide on acquiring a ballistic missile defence capability either for our deployed forces or for homeland defence. However, our involvement in the NATO study and our own national programme will enable us to make an informed judgment on whether to invest in ballistic missile defences in the future. This is obviously a matter that we must take into account and consider seriously. We are not disregarding it; indeed, we understand the concerns highlighted by the noble Lord.
Baroness Williams of Crosby: My Lords, I am sure that the Minister will agree that the prospect of a new arms race as a result of the NMD proposals does exist. However, can the noble Baroness comment on the very interesting link made by President Putin on his recent visit to London about the possibility of linking a Start II treaty ratification and, possibly, the ratification of other unratified nuclear treaties by Russia with an agreement about an NMD that Russia could accept? Will the Government explore the possibilities that arise from President Plain's remarks?
Baroness Scotland of Asthal: My Lords, I can reassure the noble Baroness that Her Majesty's Government are doing everything to encourage both our Russian partners and the United States seriously to consider the anti-ballistic missile treaty. Those two parties are the ones negotiating it. I can also assure the noble Baroness that we very much wish to encourage them to reach a decision about which both can feel comfortable so that our security is enhanced thereby.
Lord Jenkins of Putney: My Lords, will the Minister urge the Government to discourage the American Government from proceeding along the lines of a national defence system? Further, does she agree that it would be a step towards nuclear armament and away from nuclear disarmament? Consequently, should not such a step be viewed with less enthusiasm and, indeed, as a step that could lead us in a direction in which we ought not to be going?
Baroness Scotland of Asthal: My Lords, we understand the concerns expressed by my noble friend. I should point out that the signing of Start II on Friday was a very helpful indicator that the Russians are participating in a way that we must all feel is very productive. We hope that this is not a step forward that will be taken without the full implications of the international consequences being taken fully into account. In our conversations with our partners, these are of course issues that are explored quite extensively.
Lord Marsh: My Lords, the noble Baroness has accepted the fact that there are very real dangers in the spread of anti-missile systems of this type, particularly in the Far East. Is she aware that, for the first time in my life, I find myself agreeing with a great deal of what the noble Lord, Lord Jenkins, said?
Baroness Scotland of Asthal: My Lords, I hope that that is a comfortable position for the noble Lord.
Viscount Cranborne: My Lords, perhaps the noble Baroness can enlighten the House in one respect. As the object of the American scheme, as I understand it, is primarily to guard against the increasing missile capability of rogue states, can she tell the House to what extent that danger was explored in recent conversations between her right honourable friend the Prime Minister and the President-elect of Russia? Further, can the noble Baroness say whether the President-elect saw the force of those arguments and whether there might therefore be some means of bringing such conversations forward to enable him to become more sympathetic to the idea of a breach of the ABM treaty?
Baroness Scotland of Asthal: My Lords, I can certainly tell the House that Mr Putin did discuss the issue with my right honourable friend the Prime Minister. Mr Putin made clear the Russian concerns about the US national missile defence plan. The Prime Minister made clear our view that this is a matter best pursued through patient negotiation between the US and the Russians. The concerns of both sides need to be fully addressed. That issue was discussed and it will continue to attract much attention in Russia and America which are aware of each other's respective positions and concerns.
Baroness Rawlings: My Lords, one of the main actors on the US stage in this area, former Secretary of State for Defence, Donald Rumsfeld, says that one of the biggest threats comes—several noble Lords have mentioned this—from the proliferation of weapons of mass destruction. Has Mr Hoon pledged our support, not just held regular dialogues as he said in the other place yesterday, for the US ABM treaty, even if President Clinton said he was committed to development and not deployment, so that we too can benefit from it?
Baroness Scotland of Asthal: My Lords, we have not had a formal request. As I believe I have said on a number of occasions from this Dispatch Box, the situation is not fixed. If the matter goes forward and the Americans are determined upon it, further discussions about merits, demerits, and where we would fit in, would, of course, take place.

Refugees: Status
3.2 p.m.
Lord Rentonasked Her Majesty's Government:
Whether they will negotiate with those governments which signed the 1951 Geneva Convention Relating to the Status of Refugees with a view to its revision.
Baroness Scotland of Asthal: My Lords, we have no plans to advocate revision of the convention which, with its 1967 protocol, continues to provide a vital framework for the international protection of refugees. However, we are concerned at abuse of the asylum system by unfounded applicants and traffickers. We aim to act against the traffickers and return quickly those who have no right to stay in the United Kingdom. We shall continue to work with EU partners and the Office of the United Nations High Commissioner for Refugees to develop an approach to international protection in line with today's requirements.
Lord Renton: My Lords, while thanking the noble Baroness for that largely helpful reply, perhaps I may remind her that, when the 1951 convention was negotiated by the United Nations 50 years ago, it was contemplated that if there was a change of circumstances it would be necessary to revise the convention; and that is why Clause 45 of the convention enables revision to take place. In view of the tremendous change of circumstances and the vast numbers of people involved causing expense and trouble of various kinds to the countries concerned, would it not be wise now to have it properly revised?
Baroness Scotland of Asthal: My Lords, we have considered whether it would be appropriate to revise the convention. The clear view expressed was that it was not. The convention is an important instrument. We still feel that it has great value in its current unamended form.
The Lord Bishop of Portsmouth: My Lords, I thank the Minister for her reply. Does not she agree that the complexity and scale of the refugee situation have so escalated since 1951 that there is a case for revising the Geneva convention along more inclusive and humanitarian lines? I refer to some of the habits into which we have slipped in the past years in this country by detaining refugees in moderately adapted prisons.
Baroness Scotland of Asthal: My Lords, we certainly accept that there is a need for a greater degree of international discussion in relation to this matter. We are working with our other partners to reach an agreed position. We shall continue to pursue that. We have in no way sought to water down our commitment to genuine refugees, who have for many years obtained proper succour from this country. We are deeply proud of that history and will do nothing to besmirch our position in that regard.
Earl Russell: My Lords, will the Minister confirm that, as a result of the Treaty of Amsterdam, the UN
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convention of 1951 is now enshrined in Article 63(1) of the consolidated Treaty of the European Union? Will she further confirm that that means it can be changed only by unanimity among all the members of the European Union? Under those circumstances does she agree that the objective of the noble Lord, Lord Renton, is somewhat improbable of success?
Baroness Scotland of Asthal: My Lords, I certainly agree with the sentiment that has been expressed. As a point of fact—I always tremble when I correct the noble Earl—Article 63(1) of the treaty establishing the European Community requires the Council to adopt within five years of the entry into force of the Treaty of Amsterdam measures on asylum which are in accordance with the Geneva convention. Therefore Article 63 does not incorporate the 1951 Geneva convention on refugees into Community law; it merely requires the new EU measures on asylum to accord with the convention. The 1951 convention could therefore be amended without requiring EC treaty change. The noble Lord is right in terms of the import of his question; namely, that our EU partners have made a commitment to us on this matter. Whether the 1951 convention is revised or not, the sentiment which underlies it will remain in being.
Lord Cope of Berkeley: My Lords, when talking about discussions with partners, does the Minister include the possibility of a revision of the Dublin convention? Given that France and some other countries are now officially regarded as unsafe in terms of returning asylum seekers to them from this country, although France operates under the same 1951 convention, does that not seem an extremely unsatisfactory situation?
Baroness Scotland of Asthal: My Lords, it is somewhat ironic that the party opposite signed the Dublin convention in the first place. We are already involved in negotiations within the EU on a replacement for the Dublin convention. We shall press for a quicker and more robust mechanism for returning asylum seekers to the member state which is responsible for them. In the meantime the 1990 Act strengthens the operation of the Dublin convention by providing that all EU member states will be considered as a safe destination.
Lord Dubs: My Lords, does my noble friend agree that three principles should underlie our approach to asylum and refugee policy: that we should have calmness rather than hysteria; that we should have a fair way of determining each individual application; and that these decisions should be made quickly? I hope that my noble friend will confirm that the Government are applying those principles.
Baroness Scotland of Asthal: My Lords, I have great pleasure in confirming that that is precisely the Government's approach. Speaking for myself, I am becoming increasingly concerned at the tone of some of the rhetoric which is being voiced in relation to

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refugees where refugee status seems to be considered as synonymous with being somehow unsuitable or unsound.

Deputy Chairmen of Committees
The Chairman of Committees (Lord Boston of Faversham): My Lords, I beg to move the Motion standing in my name on the Order Paper.
Moved, That the Viscount Falkland and the Lord Geddes be added to the Panel of Lords appointed to act as Deputy Chairmen of Committees for this Session.—(The Chairman of Committees.)
On Question, Motion agreed to.

Powers of Criminal Courts (Sentencing) Bill [H.L.]
Read a third time, and passed, and sent to the Commons.

Financial Services and Markets Bill
3.9 p.m.
Lord McIntosh of Haringey: My Lords, I beg to move that the Bill be now further considered on Report.
Moved, That the Bill be further considered on Report.—(Lord McIntosh of Haringey.)
On Question, Motion agreed to.
Clause 17 [The general prohibition]:
Lord Kingslandmoved Amendment No. 47A:
Page 8, line 6, leave out from ("person") to end of line 7.
The noble Lord said: My Lords, Clause 17(2) defines the prohibition contained in Clause 17(1) as the "general prohibition". As your Lordships are aware, the Bill provides in Clause 36(1) that exempt persons are,
"to be exempt from the general prohibition".
This applies to "exempt persons", whether specified in exemption orders or exempted under various provisions in the Bill—for example, under Clause 37. However, if we look back at Clause 17(1), we see that the general prohibition only prohibits the person carrying on the activity unless he is authorised or exempt. Accordingly, the general prohibition in terms does not apply to an authorised person or an exempt person, and therefore an exempt person cannot be
"exempt from the general prohibition".
It may be that the general prohibition is supposed to stop after
"or purport to do so",
but, as a matter of construction, it does not.
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It is quite clear what is meant; but, given how long the Bill has been in Parliament and how complicated it is, we ought at least to get this part of it right. This is what the amendment seeks to achieve. I beg to move.
Lord Newby: My Lords, in this group we have three amendments which relate to Clause 322. They seek to deal with a problem which arises for lawyers who give financial advice as a part of their business. There are two categories of such advice: the first category relates to major blocks of investment advice in terms of the management of funds; the second category relates to ancillary financial advice given by solicitors in the course of their day-to-day business.
The fear expressed by a number of legal firms dealing in this area is that the Bill as presently drafted is over-onerous for those firms which give advice purely as an ancillary function, rather than providing, as it were, mainstream investment advice in respect of major funds which they manage on behalf of their clients. These three amendments seek to avoid a double burden of regulation and to make it easier for solicitors to continue to give such ancillary advice without feeling the pressure of over-regulation, with which the Bill as it stands threatens them.
Lord McIntosh of Haringey: My Lords, as we indicated at Committee stage, the Bill was amended at Report stage in another place to incorporate Government proposals under which professional firms which are, among other things, subject to regulation by a designated professional body and which provide financial services as an incidental and complementary part of their professional practice, will not require authorisation by the FSA. These amendments were broadly welcomed by the Law Society and by the Institute of Chartered Accountants.
A member of a designated professional body needs to consider the regime established under Part XX, to which Amendments Nos. 173 to 175 relate, only if he is carrying on activities which fall outside the exclusions which will be contained in the regulated activities order, a draft of which was published for consultation last year. That order will be finalised after the Bill has received its Royal Assent and the Government have taken into account comments made during the consultation process. Of course, the proceedings of your Lordships' House are assumed to be part of that consultation process.
I turn now to Amendments Nos. 173 to 175, which were spoken to by the noble Lord, Lord Newby. Amendment No. 175 proposes the deletion of subsection (7) of Clause 322, with a consequential adjustment to Clause 322(1)(a). This subsection makes it clear that, in order for the Part XX exemption to apply, the financial services activities carried on incidentally by a professional firm must be the only regulated activities carried on by that firm.
In Committee, the noble Lord, Lord Taverne, referred to:
"the problems faced by solicitor investment managers who may now find themselves at a disadvantage because they are subject to regulation by both the FSA and one of the Law Societies".—[Official Report, 30/3/00; col. 1003.]

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It is not clear to me that the amendments of the noble Lord, Lord Newby, would make any difference to that situation. Allowing a professional firm to carry on regulated activities other than exempt regulated activities would not remove the FSA's ability to regulate all the regulated activities—both mainstream and non-mainstream—carried on by the firm if the firm was authorised. I am afraid that we cannot accept these amendments.
It is only right and proper that firms carrying on mainstream investment business should require permission from the FSA to carry on those activities. It is a recipe for ineffective regulation to tie the FSA's hands so that it is unable to look at the whole of a firm's financial service business where that is appropriate. It is in the interests of consumers that an authorised firm's overall fitness to conduct financial services be assessed in the light of its activities as a whole. Such oversight by the FSA is what any firm, whether or not a professional firm, has to undergo.
However, as we indicated in Committee, it does not follow that the FSA will or must necessarily apply additional burdens in respect of the non-mainstream business of authorised professional firms. The FSA will, on the contrary, be expected to act in accordance with its statutory duties, including the need to have regard to considerations of proportionality and competition. For example, any restrictions relating to the introduction by authorised firms of clients to independent financial advisers would be a matter for FSA rules—and I understand that there is no intention to make rules to that effect.
We also referred in Committee to the FSA's October 1999 consultation paper on the regulation of professional firms, in which it was made clear that with regard to the provision of non-mainstream activities, in line with the degree of risk attaching to such business, a
"differentiated and, where appropriate, less burdensome regime"
is proposed.
Amendment No. 174 relates to Clause 322(5). This subsection makes it clear that a professional firm seeking to benefit from the Part XX exemption will need to ensure that it does not carry on, or hold itself out as carrying on, a regulated activity other than one which rules made as a result of Clause 327(3) allow it to carry on. The amendment seeks to delete this provision, amending subsection (5) so that it provides that,
"The regulated activity is one which rules made as a result of section 327(3) allow him to carry on".
I am afraid that we cannot accept that amendment either.
Where a breach of the Clause 322(5) prohibition occurs, it is important that the offending firm be subject to the authorisation offences set out in Clause 21. We cannot risk professional firms giving the impression that they are free to operate outside the regime for which Part XX of the Bill makes provision. I appreciate that this means that firms who do hold themselves out as carrying on regulated activities which they are not permitted to carry on by the rules
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of the professional body of which they are members will be subject to criminal penalties. But in this regard they are no different from other firms which conduct regulated activities but are not authorised by the SPA.
I understand that the general policy behind Clause 322(5)—namely, that professional firms should keep within their designated professional body's rules subject to criminal sanctions—is broadly supported by the professional bodies currently recognised under the Financial Services Act 1986. The main objection, as I understand it, is that a breach under this subsection would render inoperable a firm's entire exemption from the general prohibition, and therefore mean that all exempt regulated activities undertaken would he illegal, and not just the particular transaction which had breached Clause 322(5).
I understand that the Treasury has recently talked this issue over with various professional bodies and has made it clear that the Government are prepared to look at the issue again. But whatever the outcome of that consideration, it will remain the case that a firm which carries on or holds itself out as carrying on activities which it is not permitted to carry on will commit an offence.
Turning to Amendment No. 218A, to which the noble Lord, Lord Kingsland, has spoken, the only effect of this amendment is to include professional firms benefiting from the Part XX exemption within the "exempt persons" definition in Clause 407 so putting them on the same footing as, for example, recognised investment exchanges and their recognised nominees. However, professional firms benefiting from the Part XX regime are more closely analogous to those members of Lloyd's who currently do not require authorisation by virtue of the provisions of Part XIX of the Bill than they are to the persons which the Bill describes as "exempt persons". In both cases, the FSA has the power to direct that the authorisation requirement should apply. In both cases, it would be misleading to describe the persons who benefit from the regime as "exempt" from the authorisation requirement in any true sense of that word since the Bill expressly contemplates the possibility that the authorisation requirement may be applied to them. Amendment No. 218A is therefore inappropriate and would have a confusing impact.
Amendments Nos. 47A and 47B are drafting amendments. They restructure Clause 17 in it way that makes the clause less clear than it currently is. We do not see the reason for those amendments and we are therefore unable to support them. In any case, Clause 17 is drafted in almost exactly the same terms as Section 3 of the Financial Services Act 1986. The meaning has remained clear for 14 years and there does not appear to be any reason for changing it.
Lord Kingsland: My Lords, I thank the Minister for his reply but I am surprised that he has not been prepared to accept my amendments. Es it not clear—perhaps this will prove to be a rhetorical question; your Lordships will wait and see—that something

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cannot be exempt from something which never applied to it in the first place? That is the effect of Clauses 17 and 36 if they are read together.
Lord McIntosh of Haringey: My Lords, with the leave of the House, if that were the effect, it would still apply even if Amendments Nos. 47A and 47B were added to the Bill. Clause 17 deals with regulated activities and specifically refers in the same terms to "an authorised person" and "an exempt person". If the noble Lord's argument were the case, Amendment No. 47B would restore exempt persons to Clause 17 and would not make anything other than a drafting difference.
Lord Kingsland: My Lords, that is an argument for improving my amendments, not for rejecting them. I shall leave the noble Lord to reflect on what he said. Meanwhile, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 47B not moved.]
Clause 19 [Restrictions on financial promotion]:
Lord Kingslandmoved Amendment No. 48:
Page 8, line 22, leave out ("or inducement to engage in investment activity") and insert ("to engage in investment activity or information which is intended or might reasonably be presumed to be intended to induce any person to do so").
The noble Lord said: My Lords, Clause 19 of the Bill sets out the fundamental financial promotion prohibition. As your Lordships are well aware, it applies to invitations or inducements to engage in investment activity. That expression is defined in subsection (8) in two different ways. Subsection (8)(a) provides that entering or offering to enter into agreements will be,
"Engaging in investment activity",
if the making or performance of the agreement,
"constitutes a controlled activity".
Subsection (8)(b) provides that exercising rights conferred by an investment is,
"Engaging in investment activity",
if the rights are to,
"acquire, dispose of, underwrite or convert an investment".
Subsection (9) provides that an activity is a "controlled activity" for the purposes of subsection (8)(a), and so is subject to the financial promotion regime, if it is an activity specified by the Treasury and relates to an investment specified by the Treasury. However, subsection (8)(b), which is supposed to cover the same ground, does not limit investments to those specified by the Treasury. Accordingly, the fundamental financial promotion prohibition in subsection (1) is currently much wider than intended.
Although subsection (8)(a), which spells out the main meaning of engaging in investment activity, is limited to investments specified by the Treasury—because subsection (9) applies to it—there is no such limitation on the second meaning of engaging in investment activity; namely,
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"exercising any rights conferred by an investment to acquire, dispose of, underwrite or convert an investment".
These amendments are intended to limit the regime in relation to the exercise of investment rights. The new subsection (9A) requires the Treasury to specify again the same investments or classes of investment it has specified under subsection (9). Surely it is much simpler just to say that an investment is a controlled investment if it falls within subsection (9)(b). It will be far too complicated for the Treasury to specify different investments for the purposes of subsection (9) and for the purposes of new subsection (9A).
The amendment to "investment" in line 10 is probably misdirected. I refer to Amendment No. 51. Surely the financial promotion regime ought to extend to cover rights to acquire, dispose of, and so on, any investment and not just an investment which is itself subject to the financial promotion regime. Restricting the regime to where the investment which can be acquired, disposed of, and so on, is a controlled investment is therefore too limiting.
The other amendments seem to me to be wholly admirable. As the effect of specifying controlled investments is to limit the financial promotion regime, I think—dare I say it?—like the Government, that there is no need for the special parliamentary control provisions in paragraph 26 to apply. I beg to move.
Lord Elton: My Lords, I do not want in any way to cut across discussion of my noble friend's amendment but to leave a thought with the Minister to consider and perhaps discuss before the final stage. I do so because this is the last opportunity to suggest improvements for the final stage of the Bill. We have here a series of definitions and we have a series of definitions scattered throughout the Bill. In view of the great facilitation it would be to users of the Bill when it becomes an Act and is published, would it be possible to have an index in the Bill—there is precedent for this—of terms which are defined in the Bill? That would mean that where there is a different definition of the same term in different parts of the Bill, people using the Bill will not be led into confusion by thinking that the interpretation is the same in both parts.
I do not wish to promote a discussion of the merits of that idea, which I think are self-evident, but merely to leave it with the Minister so that perhaps we can return to it at Third Reading.
3.30 p.m.
Lord McIntosh of Haringey: My Lords, perhaps I may respond first to the helpful point made by the noble Lord, Lord Elton. There is indeed such an index in the Explanatory Notes which takes up several pages and indicates where in the Bill these definitions are to be found. However, that is not much help to the noble Lord as the clause numbers have changed considerably. It may be helpful, and it would not be difficult for us, if between now and Third Reading we

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were to circulate an updated list of definitions with reference to their location in the Bill, as amended on Report.
Lord Elton: My Lords, lapsing into the style of a Committee stage, publication in a separate explanatory document would not be the remedy for which I had hoped. What is needed is an index which will travel with the Act itself and should therefore be incorporated in it. Otherwise, the noble Lord got my middle stump!
Lord McIntosh of Haringey: My Lords, the definitions are in the Act. Where it is possible for a definition to apply to the whole Act, that definition is to be found in whichever clause it is that has changed. I do not have the number offhand, but it is there. The only reason why there are sometimes definitions in other places is that they only apply to parts of the Bill. That is the situation in regard to Clause 19. So it cannot be done by means of the index that the noble Lord wants on the face of the Bill. However, I undertake to see to it that when we return to these matters at Third Reading the noble Lord and other noble Lords who have taken part in the debates can have in front of them not merely the definitions as they appear in the Bill but also an index of where to find them. I appreciate the difficulty.
I am grateful to the noble Lord, Lord Kingsland, for his exposition of the government amendments. I was slightly taken aback that the noble Lord did not speak to his Amendment No. 48, as I had intended to be rather sympathetic to it—and probably still shall be. The difference between us on this amendment is narrowing.
Amendment No. 48 to Clause 19 seeks to delete "inducement" from the financial promotion restrictions and replace it with,
"invitations to engage in investment activity or information which is intended or might reasonably be presumed to be intended to induce any person to do so".
I understand the concern that the Opposition have. It has been expressed at various stages throughout the Bill. I undertook in Committee to look at whether Clause 19( 1) needs further clarification. As we have always said, it is implicit in the phrase "invitation or inducement" that only promotional communications will be targeted by Clause 19, and I believe that that is the intention of Amendment No. 48.
As things stand, in my view Clause 19 as drafted is the best way of tackling these issues. The word "inducement" should catch only communications of a promotional nature. However, we should appreciate the opportunity to confirm that that LS so, and that that is the Opposition's intention. I issued half an invitation to talk to the noble Lord, Lord Kingsland, before Report stage. I should now like to issue a firmer invitation to meet the noble Lord to discuss the matter before Third Reading. My office will make arrangements for such a meeting if the noble Lord wishes. On that basis, I urge him to withdraw the amendment.
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Amendment No. 49 seeks to amend subsection (3) of Clause 19 so that subsection (1), which sets out the basic prohibition,
"does not apply unless the communication is intended or might reasonably be presumed to be intended to be aced on by a person".
in the United Kingdom. That was also proposed in Committee. The Opposition were concerned that the clause is not sufficiently clear and that communication will be caught only if it is targeted or "directed at" a person ill the United Kingdom. We believe that this issue is best dealt with in subordinate legislation and we have proposed something designed to achieve that in the draft order set out in the second consultation document on the subject of financial promotion; namely, cutting back on the "capable of having an effect" test in subsection (3). The reason why we believe it should be in secondary legislation is that we are presently in an intermediate stage between the home state regime and the host state regime and it is difficult to estimate the speed or in which direction it will go. It is not clear what "acted on" means. For example, if a communication is sent From abroad for onward transmission by an agent in the UK, is that a communication which is intended to be "acted on" by a person in the UK? If so, is onward transmission acted on in a sense that should be covered by the Bill?
Another intention behind the amendment may be the need to address the UK's Community obligations. In any event, I should like to say a few words about this for the record. Let me say quite categorically that the United Kingdom takes its obligations seriously. That is in respect both of our treaty obligations in general and any specific legislation such as the proposed e-commerce directive, in particular with regard to territorial jurisdiction and other requirements it might place on the UK's financial promotion regime. The UK is committed to ensuring that the financial promotion regime complies with all Community requirements.
Clause 19 was amended in Committee in order to clarify that the Treasury can adjust the scope of the Bill's financial promotion regime in order to take full account of international and technological developments. Under subsection (6) of Clause 19 as it now stands, an order made under subsection (5) may in particular provide that subsection (1) does not apply in relation to communications originating in specific countries or groups of countries such as EU member states. These provisions will enable us to comply with our obligations to give effect to requirements such as a home state regime for e-commerce transactions. In the meantime, the provisions will enable us to give effect to obligations which arise by virtue of general EU law under the treaty. In applying controls of the kind which will be imposed once the necessary subordinate legislation is in place, which will be before Clause 19 and the Bill as a whole are brought into force, we must ensure that any requirements we impose are not discriminatory, are objectively justifiable, are not disproportionate to the ends to be achieved and do not duplicate controls to which a person is subject in his

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home state. Given our intention to modify the scope of the prohibition using secondary legislation, I hope that the noble Lord will not press the amendment.
The amendment to Clause 23, also proposed in Committee, still puzzles us. We are still unclear as to why oral communications not amounting to an invitation to engage in investment activity should be given a special exemption from criminal liability when presumably oral communications which amount to both an invitation and an inducement would remain subject to Clause 23(1).
The Government remain concerned that the impact of this amendment would be to create a two-tier regime with regard to penalties for breach of Clause 19 whereby some communications which breach the prohibition are subject to criminal sanctions while others are exempt. The Government do not favour that. We see no reason to apply a softer touch to all oral communications, which can after all be just as misleading as other forms of communication.
The Government have already proposed that solicited real-time communications (including oral communications) which are not part of a co-ordinated promotional strategy should benefit from an exemption. However, we remain convinced that unsolicited real-time communications should be subject to restrictions.
In any event, it is in the interests of consumers that a uniform approach be taken on the face of the Bill. Debate on the draft Financial Promotions Exemptions Order is the appropriate place to discuss which real-time communications should be classified as exempt from the prohibition.
Perhaps I may say a word about the government amendments in this group. Amendments Nos. 50 to 53 and 54 to 56 are technical, tidying-up amendments to Clause 19. Under Clause 19(8), one meaning that is ascribed to "engaging in investment activity" is,
"exercising any rights conferred by an investment to acquire, dispose of, underwrite or convert an investment".
Under Clause 19(13) "investment" is defined to include any "asset, right or interest". That represents the only limitation placed on what constitutes an investment. The amendments will serve to narrow the definition. The thrust of many of our amendments which we shall debate today are to limit the scope of the Bill and define it more closely; they are certainly not to extend its scope.
Amendments Nos. 50 and 51 seek to amend subsection (8)(b) so that engaging in investment activity is defined to mean,
"exercising any rights conferred by a controlled investment to acquire, dispose of, underwrite or convert a controlled investment".
Amendment No. 52 seeks to introduce a new subsection (9A) to define a "controlled investment" as one that is specified in an order made by the Treasury or,
"one which falls within a specified class of investment".
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One appreciates that that is not much of a definition unless one knows what the specification is to be, but this is another aspect of the flexibility which is required as financial markets change. Amendments Nos. 54 to 56 are consequential on those amendments.
Amendments Nos. 224 and 225 make consequential changes to Clause 41 which is concerned with the parliamentary control of statutory instruments. The amendments add to the list of statutory instruments which require an affirmative resolution procedure for the first orders to be made, or contain provisions made under Clause 19(9A), as well orders that add one or more investments to those which are controlled investments for the purposes of Clause 19. Amendment No. 223 also adds to this list orders which vary a previous order made under Clause 19(5) so as to make Clause 19(1) apply in circumstances where it did not apply as a result of a previous order. All these changes to Clause 418 have been approved by the Delegated Powers and Deregulation Committee.
Clause 19(9) provides that an activity is controlled for the purposes of financial promotion if it relates to an activity or investment that is specified in an order by the Treasury. Schedule 2 sets out the boundaries of what may be specified. Clause 19(10) provides that Schedule 2 applies for the purposes of subsection (9) and that references in Schedule 2 to Clause 20 should be read as references to Clause 19(9).
Parliamentary control of the secondary legislation is set out in Clause 418. Paragraph 26 of Schedule 2 also sets out parliamentary control of orders made under Clause 20. Therefore, by virtue of the provisions of Clause 19(10), paragraph 26 of Schedule 2 applies to Clause 19(9). The form of parliamentary control differs. Schedule 2 specifies that an order must be laid before Parliament after being made and that it comes into effect immediately but ceases to have effect if it is not approved by both Houses within 28 days. Clause 418 provides that a draft order is to be laid before Parliament which requires the approval of both Houses before it can come into effect. The reason for the difference is that orders under Clause 20 may need to be made urgently. Amendment No. 53 has the effect of bringing parliamentary control of Clause 19(9) unambiguously into Clause 418 by making it clear that paragraph 26 of Schedule 2 does not apply to Clause 19(9).
I hope that I have set out the reasons for the government amendments in this group. Although we are sympathetic to Amendment No. 48 and should like to discuss it further, we cannot accept the other amendments in the group.
Lord Kingsland: My Lords, I thank the Minister for his reply. The noble Lord will be relieved to hear that I do not intend to speak again to amendments that have been retabled following Committee stage. I would rather leave them where they are to ferment, perhaps steadily improving with age, so that at Report stage the Minister may find them more palatable. I am most grateful to the noble Lord for his response to

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Amendment No. 48 and look forward to receiving his kind invitation, in appropriate copperplate. Meanwhile, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 49 not moved.]
Lord McIntosh of Haringeymoved Amendments Nos. 50 to 56:
Page 9, line 9, leave out ("an") and insert ("a controlled").
Page 9, line 10, leave out ("an") and insert ("a controlled").
Page 9, line 15, at end insert—
("(9A) An investment is a controlled investment if it is an investment of a specified kind or one which falls within a specified class of investment.").
Page 9, line 16, after ("2") insert ("(except paragraph 26)").
Page 9, line 16, leave out ("subsection (9)") and insert ("subsections (9) and (9A)").
Page 9, line 17, leave out ("that subsection") and insert ("each of those subsections").
Page 9, line 19, at end insert ("or (9A)").
On Question, amendments agreed to.
3.45 p.m.
Clause 20 [The classes of activity and categories of investment]:
Lord Kingslandmoved Amendment No. 57:
Page 9, line 31, at end insert—
("( ) The activity carried on by way of business of giving or offering or agreeing to give advice (other than legal advice) to persons in their capacity as borrowers or potential borrowers on the terms of a loan or a proposed loan secured or to be secured on land or any other property shall be a regulated activity.").
The noble Lord said: My Lords, as noble Lords are well aware, this amendment is intended to ensure that the giving of advice in relation to mortgages is a regulated activity. Such an activity could be a regulated one if the Treasury included advice on mortgages in the regulated activities order. However, it seems that, at least at present, the Government do not intend that the provision of advice on mortgages should be regulated. This is not satisfactory given that the provision of mortgages is to be a regulated activity. It is not sufficient to rely on mortgage providers, who are to be regulated, to ensure that independent mortgage advisers adopt appropriate standards.
The argument for regulation can be illustrated by asking why someone who advises on an ISA, which may involve a modest investment of only a few hundred pounds, is required to be regulated, while someone who advises on a mortgage, which may well involve a loan of many thousands of pounds, is not. Why should the former be required to carry out a detailed fact-finding of his customer while the latter is not? It is not enough to say that in the case of an ISA it is the customer's money which is being invested whereas in the case of a mortgage the customer is a recipient of someone else's money. The fact is that in the case of a mortgage the customer enters into a very substantial long-term commitment which may have a major impact on his financial position. Nowadays, the marketplace is full of different types of mortgage
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product and the average borrower is in greater, not less, need of help in determining the advantages and disadvantages of particular products.
The impression gained is that the standards of advice are very variable, with many borrowers still entering into quite unsuitable mortgages. The introduction of new standards for mortgages will help but will not provide the complete answer. In our view, it would be a major anomaly if the provision of mortgage advice was not part of the new regulatory regime from the outset. The amendment is intended to remove that anomaly. I beg to move.
Lord Newby: My Lords, in Committee we moved three amendments relating to mortgages which covered two issues: first, what was meant by "a mortgage"; and, secondly, what a mortgage could cover. My noble friend Lord Sharman described in graphic detail mortgages on boats, caravans and various other categories of property which are as important to the person who holds the mortgage as the person's home. We believe that the question of the inclusion of those mortgages in the remit of the Bill may be dealt with in regulation and that the Government accept that they are just as important as mortgages on houses. On that understanding, we have not retabled the amendment.
As to advice, we tabled an amendment which in many ways mirrored the amendment which has been moved by the noble Lord, Lord Kingsland. In Committee, the noble Lord, Lord Burns, explained why the Joint Committee believed that mortgage advice should be included in the scope of the Bill. We still believe that at some stage the FSA may wish to look at the regulation of mortgage advice, but it has been borne in upon us that the other category of advisers not covered by the Bill is insurance brokers. We believe that there is an illogicality in formally including one and not the other. Therefore, in relation to advice, at this stage we do not table an amendment similar to that tabled in Committee.
Lord Elton: My Lords, I am sorry that the noble Baroness, Lady Turner, is not present. She is at least with us in the spirit of the terms of Amendment No. 59.
It seems extraordinary that regulation of advice for the most important financial decision that many people will take in their lives should be left to subordinate regulation or made the responsibility of a body other than the FSA. The commitment to a mortgage often outlasts the commitment even to a life insurance policy. It determines the manner of life of many people. We have seen recently how people who have been wrongly advised have overcommitted themselves to a mortgage and have been caught in the negative equity trap. If there is any purpose in having the Bill so far as concerns the private citizen, this is an area of the most important sensitivity. Therefore, I support my noble friend. I hope that he does not let the matter drop.
Lord Jenkin of Roding: My Lords, I add my voice in support of the amendment. For a long time there was

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a great sense of injustice that life insurance companies were subject to the full rigours of the then regulatory system whereas building societies—in many cases they were involved in far larger financial transactions than those for life or pension policies—were not. That situation has changed; and I welcome it. It was an unfair form of competition. The full rigours of the regulatory system applied to selling life insurance but not to selling mortgages.
However, the Bill has only gone half way. Many of the products are promoted by advisers even though the mortgage product is provided by the building society, bank—or whoever it may be. It is upon the person with whom the public has the face-to-face contact that the regulation should bite. The broker may be able to offer a range of products from different providers. But in the end it is probably on his or her advice that the punter finally decides to move forward; and it may be bad advice. There are many reasons why that may be so. I do not need to go into them now.
As my noble friend from the Front Bench said, it is extraordinary that the Bill moves only part of the way. Many people believed that if we were to have a system of regulation, it should surely cover, as my noble friend Lord Elton said, the largest single transaction that most people are likely ever to take on in their lives. With respect, it is unfair that the providers of mortgages should have to second-guess the advice of the brokers because the brokers are not regulated or subject to the regime established by the FSA; and that in order to protect themselves the building societies will need to go much further into the circumstances of the individual borrower than they might if the process were properly regulated from beginning to end.
If my noble friend receives what I suspect will be a somewhat unsatisfactory answer from the Minister, I, too, hope that he will take the matter further. It is a curious lacuna in the Bill. I am at a loss to understand why the Government are so reluctant to move this last stage.
Baroness Oppenheim-Barnes: My Lords, I support my noble friend's amendment and all who have spoken in favour of it. No doubt the noble Lord, Lord Borrie, waits to intervene in support. He knows as well as I do that this area is something of a jungle for consumers.
There is a good deal of wise advice available, but it varies, as my noble friend said. Brokers are, after all, brokers; they have a job to do which they see in one light. I do not blame the providers of the mortgages, but the variations are great. Consumers are entering a jungle; they are not confident; they are confused. The amendment seeks to ensure that the advice they receive is bona fide: that there is no unacceptable variation.
I hope, therefore, that my noble friend will not let the matter drop. The issue is important for consumers.
Lord Boardman: My Lords, I strongly support the amendment for the reasons outlined by noble Lords on this side of the House.
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There is no numerically larger group in the community than mortgagors. No group needs wise advice more than they do. Often a mortgage may be the only investment they have made and they want the best advice they can get in order to invest wisely. I urge the Minister to accept the amendment moved by my noble friend and to allow mortgages to be covered by the safeguards provided in the Bill.
Lord Borrie: My Lords, the noble Baroness, Lady Oppenheim-Barnes, will be glad to know that I wish to repeat something I said at Second Reading; namely, that the provisions for regulation should apply to those who give advice. At that time I disclosed that I was a non-executive director of the Woolwich plc, which is a provider of financial services. At the annual general meeting I ceased to be a non-executive director. However, I have the same view today as at Second Reading. The remarks of the noble Lord, Lord Jenkin, chimed with my point of view. Providers of mortgages are keen, as is the Woolwich plc, that brokers should be subject to regulation in the way that providers of financial services are.
Brokers may be or can be—it varies from case to case—exceedingly important in the choice of and decisions on investment made by the customer. As others have said, a mortgage is often the most important investment that a consumer may make in the course of his or her lifetime. I should like the Government to convince me that somehow or other such advisers should not be subject to regulation.
Lord Lipsey: My Lords, I should not like it to be thought that the controversy is between those in favour of and those against the regulation of mortgages. In answer to the point raised by the noble Lord, Lord Boardman, the Bill allows full regulation of mortgage products to be brought in by order.
The question is a practical one. Can the FSA so early in its life, with such a huge workload to digest, take on the task of regulating the vast number of mortgage brokers? I think that I have seen the figure of 20,000. Is that a sensible priority at stage one? Whatever position noble Lords take, they should not think that it is the end of the matter. It would be better to make provision at the right time—it may be later—and to get it right.
Lord McIntosh of Haringey: My Lords, we debated these matters in Committee. As I said in Committee, the Treasury consulted last year on whether mortgage advice should be regulated. The Treasury consultation document on mortgages, Regulation of Mortgages—a discussion document by HM Treasury, was published on 20th July, 1999; and the feedback document, Evidence of consumer damage reported during Treasury Mortgage Consultation, was published in January of this year. Both documents are published on the Treasury website.
The Treasury received little evidence of consumers receiving bad or biased advice and when that was mentioned it was in the context of selling commission-based products such as endowment policies, which are already regulated under the Bill. Indeed, they have

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been regulated as "investment activity" since the Financial Services Act 1986. The Bill provides that that will continue. Therefore, the problem that has arisen is already covered by the regulatory system and as matters stand it will continue to be so. Making advice on mortgages which does not also involve advice on products such as endowment policies a regulated activity will not add to the protections which are already available.
The Government have recently taken steps to remedy one other area in which problems arise. The area was highlighted in consultation as causing particular consumer detriment; namely, the provision of poor quality or misleading information which has resulted in consumers buying an inappropriate mortgage product or being subject to hidden charges.
One interesting feature of the consultation exercise was that about half the replies the Treasury received came from borrowers who had simply not appreciated what their mortgage loans really entailed. There was clear evidence that people were willing to look after their own interests in taking out and servicing their loans if they could be empowered to do so by the available information about the loan itself.
As a result of the consultation, the Economic Secretary to the Treasury announced on 10th April important new standards which relate to standard variable and fixed rate or capped mortgages, including some discounted and cashback loans. As noble Lords who have been following the legislation in ISAs will remember, the CAT standards refer to charges, access and terms. They will help to make mortgages more straightforward, clear, fair and easy to understand. CAT standards set minimum standards, most importantly in relation to the advertising of mortgage products. That is a crucial improvement in terms of product transparency, ensuring that the consumer has access to all the information required to make an informed decision as to which mortgage product to apply for.
These measures add to those already announced to benefit borrowers, such as the proposal in the Bill that the Financial Services Authority should have a regulatory objective aimed at improving public awareness and understanding of financial products. I understand that in line with this proposed objective the FSA is currently developing information tables to assist consumers in their comparison of the different products on the market. Once again, where the issues have emerged action has been taken.
The objective of the Bill is to provide a sensible regulatory framework which focuses on areas where regulation is required. Blanket regulation of mortgage advice may look attractive, but is it sensible or proportionate? As I said, action has already been taken in those areas where problems are thought to arise. In addition—and I note that my noble friend Lady Turner is not here—if the amendment is successful, the implementation of the new regime could be substantially delayed, which I do not believe is the intention.
Lord Jenkin of Roding: My Lords, I am afraid that I missed the Economic Secretary's announcement, which is probably my fault. The Minister said that endowment mortgages were covered by regulation because they involved life insurance. Often, the biggest single issue facing a mortgagor is whether there should be an interest-only mortgage or an endowment mortgage. Perhaps the Minister could clarify whether the announcement made on 10th April ensures that those who are advising on that critical question will be subject to the regulation of the authority.
4 p.m.
Lord McIntosh of Haringey: My Lords, the announcement which the Economic Secretary made related to the introduction of the charges, access and terms regime (CAT) to mortgage products where they had not previously existed. Noble Lords who have been familiar with individual savings accounts since they were announced some two years ago will recall that the CAT standards have ensured that there is available a range of ISAs which have a kite mark in terms of the charges made on the amount paid in, ensuring adequate access and comprehensible and fair terms. That will be introduced in relation to mortgages.
If that is put alongside the now acknowledged fact that any endowment policy is investment and is regulated as such, it is clear that the two difficulties which have been identified in consultation are dealt with by the Government's proposals.
I turn to the effect of the amendment. Our previous amendments and those that we are to introduce limit the scope of the Financial Services and Markets Bill. This amendment would extend the scope of the Bill and enormously extend the responsibilities of the Financial Services Authority. It would mean—and my noble friend Lord Lipsey gave an underestimate—that the FSA would have to authorise 20,000 broker firms and 40,000 individual brokers. The FSA estimates that if the amendment were passed and the proposal carried through, it would require an additional 200 staff.
We have seen much in the press about the huge power that is being given to the FSA and the huge risks which go with that power. I do not accept what has been said in the press, but in the amendment the Conservative Party proposes an enormous extension to the power and responsibilities of the FSA.
Lord Elton: My Lords, I had brief experience as a regulator when the Financial Services Act 1986 was brought into force and I was called upon to deal with the regulation of independent financial advisers. The numbers the Minister gives do not surprise me, but they strengthen my view that on the penumbra of the large number of reputable advisers there is an enormous penumbra of highly unreputable ones. That is what we found in independent financial advisers, whose employment is similar to that which we are now discussing. The bigger the numbers become, the more the matter should be brought into regulation.
Lord McIntosh of Haringey: My Lords, the noble Lord is forgetting two things. First, we have already

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agreed that mortgage products will be regulated by the Financial Services Authority. Mortgage products must be introduced by large-scale institutions.
Lord Elton: My Lords—
Lord McIntosh or Haringey: My Lords, we are at the Report stage.
Lord Elton: My Lords, the Minister is under a misapprehension. The financial advisers to whom I am referring did not produce a product. They took a commission on advising other people to get it. That is exactly where we are here.
Lord McIntosh of Haringey: My Lords, that is exactly my point. The mortgage brokers and the individual brokers to whom I am referring have no option but to sell products which are themselves regulated under the Bill. That is the difference and the extent of their powers.
Lord Boardman: My Lords, the noble Lord gave the number of additional staff who would be required if the amendment were accepted. Could he estimate the annual number of mortgagors who would be unprotected if the amendment were rejected?
Lord McIntosh of Haringey: My Lords, no mortgagors would go unprotected because the Bill proposes, and we propose in regulation, that mortgage products will be covered. But the situation is worse than that. The amendment would bring far more than mortgage advice within the scope of the Bill. Anyone who advises on any loan would require authorisation provided that the loan was secured on some form of property. That is an extension of the power of what is being described as an "overweening authority" beyond anything I would have thought possible for noble Lords opposite to propose.
The noble Lord, Lord Newby, in a balanced speech, said that he could understand that in future it might be— he believed that it probably would be—necessary to bring such advice into the scope of the Bill. Of course, as has already been made clear, it is always possible, by regulation, to bring mortgage advice within the scope of the Bill. However, I can give him an assurance that the Treasury will examine how the new measures play out in the market place. If, in a few years' time after implementation, borrowers experience significant and widespread problems that lie at the door of bad advice, rather than relying on opaque product terms, Ministers will have no hesitation in using their powers to extend the scope of statutory mortgage regulation.
Everything that we have seen and heard so far has persuaded the Government that the measures that they have put, and will be putting, in place with regard to mortgages are a proportionate and measured response to the need to protect borrowers from unfair or restrictive practices. At the same time, they do not
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saddle the industry with costs and delays which, in the long term, simply rebound on the consumer. I ask the noble Lord to withdraw the amendment.
Lord Kingsland: My Lords, I hope that the Minister will agree that any attempt by me to disguise the strength of feeling on this side of the House about this matter will be futile. I was surprised to hear the noble Lord the Minister say that it would lead to a large extension of the power and the responsibilities of the authority. I agree that it would lead to an extension of the responsibilities of the authority, but I do not see how that would lead also to an extension of power. It means simply that the authority would apply the same powers in a wider field.
As I understand it, the main reason for establishing the authority is to protect the consumer. The consumer needs protection in this, more than any other, area of financial activity. If the noble Lord the Minister had given me some encouragement to believe that, in a reasonable time under delegated legislation, those activities would be covered, I would be inclined to withdraw my amendment. He gave me no such encouragement. Therefore, in the circumstances, I feel obliged to press the amendment.
I am disappointed that the noble Lord, Lord Newby, is not with me. However, at least I am comforted by the thought that the fewer the men, the greater the share of honour. I wish to test the opinion of the House.
4.12 p.m.
On Question, Whether the said amendment (No. 57) shall be agreed to?
*Their Lordships divided: Contents, 93; Not-Contents, 145.

Division No. 1

CONTENTS

Anelay of St. Johns, B.

Eccles of Moulton, B.

Astor of Hever, L.

Eden of Winton, L.

Attlee, E.

Elliott of Morpeth, L.

Bagri, L.

Elton, L.

Barber, L.

Ferrers, E.

Beaumont of Whitley, L.

Flather, B.

Blaker, L.

Fraser of Carmyllie, L.

Boardman, L.

Gardner of Parkes, B.

Bowness, L.

Garel-Jones, L.

Brabazon of Tara, L.

Geddes, L.

Bridgeman, V.

Goschen, V.

Brougham and Vaux, L.

Gray of Contin, L.

Burnham, L. [Teller]

Hayhoe, L.

Buscombe, B.

Henley, L. [Teller]

Byford, B.

Higgins, L.

Campbell of Alloway, L.

Hogg, B.

Campbell of Croy, L.

Holderness, L.

Carlisle of Bucklow, L.

Howe, E.

Carnegy of Lour, B.

Howell of Guildford, L.

Chilver, L.

Hunt of Wirral, L.

Clark of Kempston, L.

Hylton-Foster, B.

Cope of Berkeley, L.

Jenkin of Roding, L.

Courtown, E.

Kingsland, L.

Cranborne, V.

Kirkham, L.

Dean of Harptree, L.

Knight of Collingtree, B

Dundee, E.

Liverpool, E.

579

Luke, L.

Platt of Writtle, B.

Lyell, L.

Prior, L.

McCarthy, L.

Rawlings, B.

McConnell, L.

Reay, L.

MacFarlane of Bearsden, L.

Renton, L.

Mackay of Ardbrecknish, L.

Roberts of Conwy, L.

Marlesford, L.

Rotherwick, L.

Masham of Ilton, B.

Ryder of Wensum, L.

Mayhew of Twysden, L.

Seccombe, B.

Miller of Hendon, B.

Sharpies, B.

Monro of Langholm, L.

Shaw of Northstead, L.

Mowbray and Stourton, L.

Shrewsbury, E.

Moynihan, L.

Skelmersdale, L.

Strathclyde, L.

Northbrook, L.

Thomas of Gwydir, L.

Norton of Louth, L.

Trumpington, B.

Onslow, E.

Vivian, L.

Oppenheim-Barnes, B.

Waddington, L.

Park of Monmouth, B.

Wedderburn of Charlton, L

Pearson of Rannoch, L.

Willoughby de Broke, L.

Pilkington of Oxenford, L.

Windlesham, L.

[The votes of L. Mc Carthy and L. Wedderburn of Charlton in the Content Lobby were given in error.]
[*The Tellers for the Not-Contents reported 145 votes; the Clerks recorded 144 names.]
4.22 p.m.
Lord Lipseymoved Amendment No. 58:
Page 9, line 33, at end insert—
("( ) The Treasury shall within 28 days of the passing of this Act make provision under subsection (1) in respect of buying, selling, subscribing for, carrying out or underwriting contracts of insurance against the provision of long-term care or offering to do so, either as a principal or as an agent.").
The noble Lord said: My Lords, it has been said previously on this subject, at Second Reading and in Committee, that a boom in sales of the products covered by my amendment is to be expected when the Government respond to the Royal Commission on long-term care when it reports in July and it becomes clear that the Government cannot pay and w ill not pay for everything people require in their extreme old age.
These products are strong candidates for regulation: they are expensive; they are complicated, and once you are in you cannot get out; once you have bought it, you are stuck. They are sold in particular to vulnerable people or to people who may be at a particularly vulnerable stage in their lives, when they are going into care. There is therefore a wide consensus that they should be subject to regulation, which includes in its bounds the Personal Investment Authority, the FSA, the ABI, Age Concern, the Continuing Care Conference, the Burns committee which scrutinised this Bill before its introduction, Uncle Tom Cooley and all.
When this matter was raised by a number of noble Lords in Committee the Minister made encouraging noises in response. It might therefore be for the

581
convenience of the House if we asked him to give us the result of his further deliberations right at the start of the debate. I beg to move.
Lord McIntosh of Haringey: My Lords, I believe that there is precedent for the Government to respond to a request of that kind at Report stage, and I am happy to do so.
As I said in Committee, the market for long-term care financial products is new and relatively small, though it is developing. The products are sometimes complex. There is as yet not enough claims history to provide a track record to discover whether the cover that is ultimately provided matches people's expectations of what they thought they were buying.
I referred in Committee to the work of the Treasury committee, which was established to explore with the financial services industry how long-term care insurance products and other financial products could best be designed, to see whether they could be made more attractive to a wider audience. The committee comprises representatives from the industry and consumers, as well as some academics who specialise in this area. The committee has been reviewing how the best features of existing products, coupled with good practice and an appropriate degree of regulation, can be combined to make long-term care insurance products a safe and attractive proposition for as many people as possible.
We expect the committee to report by early stages of the summer. I am assured that the committee has made a great deal of progress in a complex area. Among other things, it has discussed existing products; how they are sold; the desirable characteristics of each product; as well as topics such as the claims criteria, claims procedure, people's understanding of what they were buying, and what good practice might entail.
In developing product design criteria, the committee is considering cost and reliability as well as ease of understanding and competition. The committee is also considering how providers can be encouraged to market acceptably designed products, for example, through disclosure, benchmarks, minimum standards, codes of conduct and invitations to tender.
Once the committee has delivered its report we will be in a better position to judge what measures should be taken to ensure that consumers in this area are fully protected.
As will be clear from what I have said, the Government need to go through various processes before finally resolving this matter. These include completion of the process of regulatory impact analysis and the necessary consultations with interested parties.
However, provided that that work confirms, as my noble friend Lord Lipsey clearly expects it will confirm, that regulation will be proportionate and effective, we shall aim to include long-term care products in the regulated activities order, often referred to as the scope order, which will follow the
582
passage of this Bill. I should add that the order is subject to the affirmative resolution procedure; it will therefore be debated in both Houses.
I undertake that we will give the House a full report of our conclusions, with a clear timetable for future action, at the time when the order is debated. The Government intend to lay that order before Parliament as soon as is reasonably practicable. We are determined—to pick up a phrase used by my noble friend Lord Lipsey at an earlier stage—that the stable door will not be left open so long that there is a serious risk that the horse will bolt.
The Government are grateful to those who have expressed concern over this matter. They have given us a welcome opportunity to set out our views more fully and, I hope, to alleviate the real concerns which have been expressed.
Lord Lipsey: My Lords, I am extremely grateful to the Minister for what he has said. His words are so moving as to reduce the House to silence. I could not have put his concluding words better had I drafted them myself.
I would like to thank noble Lords on all sides of the House who have supported me in our discussions of the regulation of long-term care. I would also thank the Minister, the Economic Secretary and the Treasury team for the time that they have devoted to the matter, for their consideration and for their sympathy. In truth, I do not think that there was ever much between us, and now there is nothing.
At one point a newspaper reported that the Treasury had caved in on this matter. The Treasury never caves in, and it certainly did not on this occasion. Matters have been crystallised and clarified, and I believe that the Minister's statement will delight those outside Whitehall who have supported regulation. I hope that it will also delight the House, from which I will, with your Lordships' permission, withdraw my amendment.
Amendment, by leave, withdrawn.
Schedule 2 [Regulated Activities]:
[Amendment No. 59 not moved.]
Clause 23 [Contravention of section 19]:
[Amendment No. 60 not moved.]
4.30 p.m.
Lord Kingslandmoved Amendment No. 61:
Page 10, line 43, leave out ("purchaser")") and insert ("other party")").
The noble Lord said: My Lords, Amendments Nos. 61 to 64 and 70 are variations on similar amendments tabled in Committee and are intended to avoid the word "purchaser".
As pointed out in Committee, in some circumstances, the purchaser may be a seller. That may be confusing and our original proposal was to substitute the word "purchaser" with the word "counterparty". In Committee, the Minister acknowledged the point and said that he was unsure

583
whether "counterparty" was quite the right word. However, no alternative has been forthcoming from the Government and, therefore, we suggest the rather straightforward alternative of "other party" to "purchaser". I shall be interested to hear the Minister's response to that suggestion.
Meanwhile, the other government amendments are welcome. As we have said on previous occasions, both in another place and in Committee in your Lordships' House, with respect to Clause 26, the only test for enforcement of an agreement should be whether it is just and equitable. I am delighted to say that the Government have now made it clear that what are now the issues, formerly conditions, are not fatal, even if they are answered in the negative, although the court may have regard to them.
The amendment to Clause 27 is to the same effect as that to Clause 26. It makes enforcement depend only on whether it is just and equitable, albeit that it requires the court to have regard to the question as to whether the deposit-taker really did believe that he was not contravening the authorisation requirement.
The series of amendments to Clause 28 makes the same changes in relation to the enforcement of agreements entered into pursuant to unlawful financial promotion communications, as do the amendments on the question of enforceability in Clauses 26 and 27 in relation to carrying on business without authorisation. Those amendments are also welcome.
However, I make one small point. I have noticed that in the new subsection (5A), line 3, after the words "under the agreement", there should be inserted the words "or obligation". That was missing in earlier versions and it appears to me that the omission has been carried forward. I beg to move.
Lord McIntosh of Haringey: My Lords, I have a complicated but friendly message on Amendments Nos. 61 to 64 and 70. I ask the noble Lord, Lord Kingsland, to withdraw Amendment No. 61, which changes the tag or label in Clause 24 from "purchaser" to "other party" so that we can consider in what form to bring it back on Third Reading.
The simplest thing may be to leave "other party" as it is in Clause 24 and not to have any tag or label at all rather than to put a new tag "other party" so that the phrase is not repeated, as the Bill would read were the amendment to be accepted. If the noble Lord, Lord Kingsland, will withdraw Amendment No. 61, the Government can then agree to opposition Amendments Nos. 62, 63, 64 and 70 which all take out the word "purchaser" and replace it by the words "other party". If that is done, we shall make speedy progress.
Government Amendment No. 72 deals with deposit-taking and third party breaches. That would introduce a new clause dealing with deposit agreements entered into as a result of illegal regulated activity by a third party. The need for the third party provisions in Clauses 25 and 26 arises from the fact that advising on and arranging deals in investments
584
are currently regulated activities and will remain so under the regulated activities order that we are proposing.
But in the case of deposits, a similar situation does not arise. It is only the activity of accepting deposits that is intended to be a regulated activity. As now, there will be no third party activities—for example, advising or arranging—which could be carried on by a third party in contravention of the general prohibition in relation to deposits and which could lead to deposit-taking by an authorised person. So making equivalent third party provision for deposit-taking would be an unnecessary complication.
I turn now to government amendments to Clauses 26 and 28. I wrote to those noble Lords who took part in the debate in Committee or, indeed, at any stage, with what I believe is called a "Keeling schedule"; in other words, a text of how those complicated amendments will read when inserted into Clauses 26 and 28. I am already grateful to the noble Lord, Lord Kingsland, for his support for them because they establish the just and equitable test as the sole test on which a court must be satisfied in order to enforce an agreement where that agreement is the result of some breach of either the general prohibition—that is, the prohibition under Clause 17 on carrying on regulated business without the necessary authorisation or exemption—or the financial promotion prohibition under Clause 19.
The other tests do not disappear. They are there as particular issues to which the court is directed to have regard in deciding what is just and equitable in any particular case.
Where the provider—that is, the person carrying on the regulated activity—is doing so in contravention of the general prohibition or where the agreement results from an illegal promotion that the provider himself has communicated, the court is directed to consider whether the provider reasonably considered that he was not acting in breach.
Where the provider has not committed any breach but the agreement results from a breach, of either prohibition, by another person, the court is directed to consider whether the provider knew that the agreement resulted from a breach. As has been acknowledged, the amendments respond to the point made by the Opposition in another place that the court should have flexibility to judge what is just and equitable in difficult cases, and not be hound absolutely by the "reasonably believed" and knowledge tests.
The amendments enhance the discretion of the court in those matters but we believe that that compromise establishes sufficient certainty.
I am advised that I should retract in a very modest way from the offer I made to the noble Lord, Lord Kingsland. I ask him to withdraw Amendments

585
Nos. 61 and 63 and we can agree the other amendments. I am sure that we can find a solution in relation to Amendments Nos. 61 and 63 in due course.
Lord Jenkin of Roding: My Lords—
Lord McIntosh of Haringey: My Lords, no.
Lord Jenkin of Roding: My Lords, but I was just going to comment on what the Minister said.
Lord McIntosh of Haringey: My Lords, this is Report stage. The order of business is that the mover speaks; any other noble Lord who wishes to speak speaks; the Minister replies; and no other speeches are taken other than that of the mover of the amendment. That is the rule and has been for many years.
Lord Kingsland: My Lords, I am extremely grateful to hear that the Minister is prepared to entertain my amendment. I look forward to seeing the fruits of that undertaking on Third Reading. Meanwhile, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Kingslandmoved Amendment No. 62:
Page 11, line 1, leave out ("purchaser") and insert ("other party").
On Question, amendment agreed to.
Clause 25 [Agreements made through unauthorised persons]:
[Amendment No. 63 not moved.]
Lord Kingslandmoved Amendment No. 64:
Page 11, line 18, leave out ("purchaser") and insert ("other party").
On Question, amendment agreed to.
Clause 26 [Agreements made unenforceable by section 24 or 25]:
Lord McIntosh of Haringeymoved Amendments Nos. 65 to 69:
Page 11, line 35, leave out ("the enforcement conditions are met.") and insert ("it is just and equitable in the circumstances of the case,").
Page 11, line 40, leave out from beginning to second ("the") and insert ("In considering whether to allow").
Page 11, line 41, leave out ("for").
Page 11, line 42, leave out from ("retained") to first ("the") in line 43 and insert ("the court must—

(a) if the case arises as a result of section 24, have regard to the issue mentioned in subsection (4A); or

(b) if the case arises as a result of section 25, have regard to the issue mentioned in subsection (4B).

(4A) The issue is whether").
Page 11, line 45, leave out from ("agreement") to second ("that") in line 1 on page 12, and insert—
("(4B) The issue is whether the provider knew").
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The noble Lord said: My Lords, I beg to move.
Lord Jenkin of Roding: My Lords, perhaps I may make my point at this stage. It is only brief but it is rather important. I am sure that the House will have in mind the extremely unfortunate circumstances which took place some years ago when a local authority, engaging in interest-swap transactions involving very large sums of money with a number of banks, both foreign and British, was held to have acted ultra vires.
The effect of that was to void all the transactions. I must say that it did not redound to the advantage of this country as a centre for financial services. The solution that has been found, incorporating the government amendments, seems to go a long way to avoid any repetition of what was, in terms of the financial reputation of this country, an extremely unhappy chapter.
On Question, amendments agreed to.
Lord Kingslandmoved Amendment No. 70:
Page 12, line 4, leave out ("purchaser") and insert ("other party").
On Question, amendment agreed to.
Clause 27 [Deposit-taking in breach of general prohibition]:
Lord McIntosh of Haringeymoved Amendment No. 71:
Page 12, line 25, leave out ("and
(b)") and insert (", having regard to the issue mentioned in subsection (3A).
(3A) The issue is whether").
On Question, amendment agreed to.
[Amendment No. 72 not moved.]
Clause 28 [Enforceability of agreements resulting from unlawful communications]:
Lord McIntosh of Haringeymoved Amendments Nos. 73 to 79:
Page 13, line 15, leave out from ("that") to ("it") in line 16.
Page 13, line 16, leave out ("for") and insert ("in the circumstances of the case.
(5A) In considering whether to allow").
Page 13, line 17, leave out ("for").
Page 13, line 18, leave out ("and—
(a)") and insert ("the court must have regard to the issues mentioned in subsections (5B) and (5C).
(5B)").
Page 13, line 19, leave out ("that") and insert ("the issue is whether").
Page 13, line 21, leave out ("or
(b)") and insert ("(5C)").
Page 13, line 22, leave out ("that he did not know") and insert ("the issue is whether he knew").
On Question, amendments agreed to.
Schedule 3 [EEA Passport Rights]:
Lord McIntosh of Haringeymoved Amendment No. 80:
Page 241, leave out lines 19 to 23 and insert—
("12.—(1) Once an EEA firm which is seeking to establish a branch in the United Kingdom in exercise of an EEA right satisfies the establishment conditions, it qualifies for authorisation.
(2) Once an EEA firm which is seeking to provide services in the United Kingdom in exercise of an EEA right satisfies the service conditions, it").
The noble Lord said: My Lords, I shall speak first to Amendments Nos. 80 and 86, which make it clear that the key question as to whether an European Economic Area firm qualifies for authorisation is whether it has met the establishment or service conditions. As the Bill stands, it appears that an EEA firm qualifies for authorisation only when it is seeking to establish a branch or to provide services and not when it is already doing so by virtue of the schedule.
Amendments Nos. 81 to 85 are the first of a number of groups which include amendments to complete the Government's rationalisation of the decision-making procedures in the Bill announced at Second Reading. The House will recall that we introduced a number of amendments in Committee and circulated further draft amendments to the early parts of the Bill to ensure that your Lordships would not only have the opportunity to discuss those changes in Committee and on Report, but also to ensure that the whole picture could be seen and understood. Amendments Nos. 81 to 85 are part of that group. They were all circulated to interested noble Lords when we tabled our amendments for Committee stage. They deal with the procedures under Part III of Schedule 3 for the FSA giving or withholding consent for UK firms to establish new places of business in, or to provide cross-border services into other EEA member states.
As with the Government's other amendments, they provide for a simple written notice procedure for granting requests and applications. That ensures a minimum of bureaucracy and hold-up where a firm is being granted consent for what it wishes to do. Even where the consent is not as broad as that sought, there is no reason for there to be any delay in the firm's ability to benefit from it. To the extent that the application is granted in part, that will have immediate effect. Thus, Amendments Nos. 81 to 84 are drafting amendments which require formal written notice to be given to a UK firm by the FSA, rather than the FSA simply informing the firm, when granting consent for that firm to establish a branch in another EEA state, or to provide cross-border services into another EEA state. On the other hand, the warning and decision notice procedure will apply for refusals and part-refusals.
Amendment No. 85 makes it clear that the decision by the FSA to refuse consent for a UK firm to change the details of its activities or establishments in other member states and, therefore, to issue a decision notice, is not the final determination of the matter. Heading 20(3)(b), which Amendment No. 85 amends, gives the firm a right to refer the matter to the tribunal. The refusal does not become effective until the period
588
for referring the matter to the tribunal has expired without a reference, or if a reference is made, until the tribunal and, where appropriate, the higher courts have determined the matter. At that point a final notice under Clause 385 will be issued.
Paragraph 5(1) of Schedule 4 makes it an offence for a treaty firm to carry on a regulated activity in the United Kingdom before the expiry of the period of seven days beginning with the day on which it gave the FSA notice of its intention to do so. Amendments Nos. 87, 88 and 90 to 92 correct an unintended effect of that by making it clear that a treaty' firm that is already authorised by virtue of holding a Part IV permission, or having notified under Schedule 3 or 4, is not required to cease the regulated activity it may be carrying on already in the UK by virtue of its existing permission.
Thus, Amendments Nos. 87 and 88 ensure that a treaty firm which is already authorised by virtue of Schedule 4 should not have to cease for seven days its existing regulated activity when it wishes to expand the range of regulated activities it carries on in the UK. Equally, Amendment No. 87 makes it clear that, although paragraph 4(3) of the schedule deals with the case in which a treaty firm already has a Part IV permission, the firm will not commit an offence if it carries on the activity for which it has the Part IV permission during the seven-day period. Amendments Nos. 90 to 92 are consequential amendments.
Amendment No. 89 is also a technical change The existing sub-paragraph (2) of paragraph 5 applies various parts of Clause 49, which applies to applications under Part IV of the Bill, to a notice given to the FSA under that paragraph. Sub-paragraph (2) requires the notice to state the regulated activities to be carried on and to give an official UK address for the service of notices, and allows the FSA otherwise to direct the manner and content of the application, and to require verification of information contained in it. Amendment No. 89 removes the incorrect reference to subsection (4) of Clause 49, which would enable the FSA to require additional information. Given that the person's right is exercisable at the end of the seven-day period without FSA approval, that reference is redundant. Such further information as is required by the FSA to fulfil its ongoing supervisory functions as host state regulator can be obtained through rules and the exercise of powers under Part XI. I beg to move.
4.45 p.m.
Lord Stewartby: My Lords, perhaps I may ask the Minister to explain a point relating to the consequences of Amendment No. 80, which replaces paragraph 12 of Part II of the schedule. Subparagraph (1) refers to establishment conditions. In that case, the overseas regulator will have given the firm consent to establish a branch in the UK and so it will then satisfy the establishment conditions. That is perfectly straightforward. The service conditions are listed under subparagraphs (a), (b) and (c) of paragraph 14, but it is not clear to me that, if the firm

589
concerned wishes to provide different services in the UK from the ones that it provides in its home state, it would really be properly authorised.
Amendment No. 80 sets out that once a firm satisfies the service conditions, it automatically qualifies for authorisation, but the service conditions as set out appear to relate to any services in the firm's home state for which it may have authorisation, whereas it may want to do something else in the United Kingdom. It may be that I have misunderstood that point, but I read it through once or twice and I still do not find it easy to see what protection there is against a firm which might want to do something different. Technically, it might qualify automatically, even if the home state regulator said that it did not authorise it in respect of those particular services and that it would not indeed do so.
Lord McIntosh of Haringey: My Lords, that is an interesting point. I believe that the answer is that Amendment No. 80 provides equality for establishment and the provision of services, whereas paragraph 12, which Amendment No. 80 replaces, does not make that distinction. My understanding is that the directives only provide the right to cross-border services which are carried on in its own home state. Paragraph 14 reflects the narrower scope of the European Union directives. If I have got that wrong or not made it clear, I shall certainly be pleased to write to the noble Lord.
On Question, amendment agreed to.
Lord Kingsland: My Lords, I wish to speak to this group of amendments.
The Deputy Speaker (Lord Brougham and Vaux): My Lords, if the Minister moves Amendment No. 81, the noble Lord, Lord Kingsland, can speak.
Lord McIntosh of Haringeymoved Amendment No. 81:
Page 244, line 19, leave out ("inform the firm concerned") and insert ("give written notice").
The noble Lord said: My Lords, I had already spoken to this amendment with Amendment No. 80. I beg to move.
Lord Kingsland: My Lords, as I understand the procedure, the Minister opens; and if no other noble Lord wishes to speak, the Opposition reply. I am simply exercising that right. Perhaps I may put it another way: I am performing that duty.
Lord McIntosh of Haringey: My Lords, I am sure it is my fault. The noble Lord, Lord Stewartby, spoke to Amendment No. 80 and I replied immediately without giving the noble Lord, Lord Kingsland, the opportunity to contribute. I apologise to him. It is entirely legitimate for him to make his points on Amendment No. 81 instead.
Lord Kingsland: My Lords, I thank the noble Lord very much indeed for his apology. I was not suggesting
590
that he had done anything wrong. I am simply saying that the procedure had unfolded in such a way that I had not had the opportunity to speak. It now transpires that I can.
As regards the amendments to Schedule 3, they are mostly drafting amendments and do not change the substance of the existing provisions. The one point of note is that, as the Government have indicated, the amendment to line 39, on page 245 of the Bill, makes it clear that, in the normal way, the authority merely decides to refuse consent rather than actually refusing it. At the decision stage, although it does not issue a decision notice, the authority notifies the firm that it has decided to refuse consent and the firm may then appeal to the tribunal.
In the Government's Explanatory Notes they say that they are making it clear that the decision to issue a decision notice is not the final determination of the matter because the firm has the right to refer the matter to the tribunal and the normal provisions suspending the effect of the decision notice come into play.
However, in our view, that is not expressly stated in the amendment. Amendment No. 85 relates to paragraph 20. It provides that the authority's consent is required for specified changes to the firm or to an activity that it carries on. Neither Amendment No. 85 nor paragraph 20, as amended, provide that the authority must issue a decision notice when the firm applies for consent. All that is said is that, if the authority decides to refuse consent, the firm concerned can refer the matter to the tribunal. Presumably, the authority must notify the firm of its decision to refuse consent, but as it is not by way of a decision notice, the protective provisions in Clause 130, as amended, which refer to the procedures originating with the decision notice, never come into play.
Accordingly, in our view, Amendment No. 85 should be amended so that it requires the authority, when it decides to refuse consent, to issue a decision notice and then go on to say that the firm concerned may refer the matter.
I believe that this is just a problem of clarification. I do not believe that there is a difference of substance between us. However, it is an important matter and I hope that the Government can suggest another solution to this if our suggestion is not palatable.
As regards Schedule 4, in principle, the amendments are only drafting amendments. The Minister has explained that the reason for the reorganisation is that the present provisions of paragraph 5 require a treaty firm to issue a new notice to the authority each time it wants to begin a new regulated activity. As I understand these amendments, therefore, they provide that only one notice is needed.
I say this with great respect. Perhaps the Government will make it clear that the permission to which Amendment No. 87 refers is a permission granted under paragraph 4 of Schedule 4—in other words, a passported permission. I believe that that is what is intended; but because the amendment refers

591
merely to a permission, and does not limit it to a Schedule 4 permission, it also covers Part IV permissions.
The fact that it could be read that way is made clear by the terms of paragraph 4(3). The notice that the authority requires is a notice that the treaty firm intends to use its Treaty of Rome passport under Schedule 4. The present wording of Amendment No. 87 does not achieve that.
Perhaps a solution would be to refer in Amendment No. 87, heading (11), to "permitted" instead of "regulated" in both places. Another potential solution would be that after the word "permission" in heading (b) we could insert "under paragraph 4(1)".
Lord McIntosh of Haringey: My Lords, I am grateful to the noble Lord for explaining his concerns. I deal first with Amendment No. 85. The noble Lord is quite correct. The point is that it is a decision to issue a decision notice—in this case, a decision notice refusing an application—which is the trigger for the right to refer the matter to a tribunal. Therefore, instead of saying that a person refused consent may refer the matter to the tribunal, if the authority decides to refuse consent without necessarily implementing that decision, there is reference to the tribunal and there is no interruption of the business involved. That should be an improvement.
However, in case we have misunderstood each other we shall look at the points the noble Lord has raised and write to him about it and, if necessary, make an amendment. It seemed clear enough to me that we were doing what the noble Lord wanted. As regards the amendments to Schedule 4, I am less clear about the very abstruse point which the noble Lord has made. Again, I shall have to write to him on that subject.
On Question, amendment agreed to.
Lord McIntosh of Haringeymoved Amendments Nos. 82 to 85:
Page 244, line 20, at end insert ("to the firm concerned").
Page 245, line 14, leave out ("inform the firm concerned") and insert ("give written notice").
Page 245, line 15, at end insert ("to the firm concerned").
Page 245, line 39, leave out ("a person refused consent") and insert ("if the Authority decides to refuse consent, the firm concerned").
On Question, amendments agreed to.
Schedule 4 [Treaty Rights]:
Lord McIntosh of Haringeymoved Amendments Nos. 86 to 92:
Page 246. line 30, leave out paragraph 2 and insert—
("2. Once a Treaty firm which is seeking to carry on a regulated activity satisfies the conditions set out in paragraph 3(1), it qualifies for authorisation.").
Page 247, line 20, leave out from beginning to second ("the") in line 22 and insert ("Sub-paragraph (1A) applies to a Treaty firm which—
592

(a) qualifies for authorisation under this Schedule, but

(b) is not carrying on in the United Kingdom the regulated activity, or any of the regulated activities, which it has permission to carry on there.

(1A) At least seven days before it begins to carry on such a regulated activity, the firm must give").
Page 247, line 23, at end insert—
("( ) If a Treaty firm to which sub-paragraph (1A) applies has given notice under that sub-paragraph, it need not give such a notice if it again becomes a firm to which that sub-paragraph applies.").
Page 247, line 24, leave out(",(4)").
Page 247, line 25, leave out ("(1)") and insert ("(1A)").
Page 247, line 27, leave out ("the prohibition imposed by paragraph 5(1)") and insert ("paragraph 5(1A)").
Page 247, line 33, leave out ("5(1)") and insert ("5(1A)").
On Question, amendments agreed to.
Clause 31 [Withdrawal of authorisation by the Authority]:
Lord Kingslandmoved Amendment No. 93:
Page 14, line 33, leave out ("This section applies") and insert ("A person ceases to be an authorised person").
The noble Lord said: My Lords, in moving this amendment I shall speak also to the other amendments in this group. Amendments Nos. 93 to 95 relate to Clause 31. The Minister will recall that these amendments were tabled in Committee. They remove what we believe is the unnecessary requirement for the authority to give a direction formally withdrawing a person's status as an authorised person. The Minister declined to accept the amendments on the basis that, in certain circumstances, they would make a person's status unclear. If my memory serves me correctly, he gave examples of EEA or treaty firms qualifying under Schedule 3 or Schedule 4.
Having reflected on the matter, we continue to believe that the amendments are justified. The formal withdrawal of a person's status as an authorised person is both unnecessary and confusing. In the case of an EEA or treaty firm, such a firm either qualifies for authorisation under Schedule 3 or Schedule 4 or it does not. If a firm qualifies, it is authorised for the purpose of the Bill under Clause 29(1). If it does not qualify, or ceases to qualify, it should not be, or should cease to be, an authorised person automatically. Therefore, the authority is not required to give a direction to that effect.
Take the case of an EEA firm that qualifies for authorisation under Schedule 3 and also has a Part IV permission. Assume that the Part IV permission is withdrawn and in the mean time the firm has ceased to qualify under Schedule 3. Under Clause 31 the authority has to give a direction withdrawing the person's status as an authorised person. Suppose the authority fails to do so for some reason. It seems that the firm continues to be authorised, when clearly it has ceased to qualify for authorisation.
That does not seem to be right. It would be both preferable and clearer to avoid the bureaucratic requirements of the direction and rely on the provisions of the Bill to determine whether or not the firm is authorised.

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I do not have sight of the correct paper. Perhaps I may ask the Minister whether Clause 42 is dealt with in this group.
Lord McIntosh of Haringey: My Lords, yes.
Lord Kingsland: My Lords, I am much obliged. The purpose of the amendments to Clause 42 is to allow the authority to refuse an application to vary or cancel a permission in "the interests of consumers" or "potential consumers" rather than,
"consumers, or of a group of consumers".
Presumably, that provision was originally required because it was thought that the interests of consumers can be affected even in relation to some consumers only. Meanwhile, potential consumers have been omitted altogether. I beg to move.
5 p.m.
Lord McIntosh of Haringey: My Lords, when proposing similar amendments in Committee the noble Lord, Lord Kingsland, explained that he was concerned about the possibility that the FSA may try to continue to authorise someone inappropriately. I hope I can offer him some assurance on that point so that he may feel able to withdraw the amendments.
The purpose of Clause 31 is to provide certainty as to whether or not a person continues to have the status of an authorised person following the cancellation of a Part IV permission. That is necessary because, as Clause 29 indicates, a person may have permission to carry on regulated activities other than under Part IV. When the FSA cancels a Part IV permission it will have to decide whether other permissions carry on. If it concludes that they do not, it will be obliged to give a direction under Clause 31(2). That will put the status of the person concerned beyond doubt.
I want to emphasise that the clause does not offer the FSA an alternative means of prolonging authorisation. Subsection (2) clearly states that where the cancellation of a Part IV permission means that an authorised person no longer has a permission for any regulated activity, the FSA,
"must give a direction withdrawing that person's status as an authorised person".
Clause 31 simply provides certainty as to the effect of the cancellation of a Part IV permission on the status of the person involved. Although subsection (1)(b) makes it clear that the clause applies only when the cancellation of a Part IV permission means that the person has no permission by virtue of any other provisions of the Bill, we believe that it is helpful to have a distinct administrative act that confirms that the result of the cancellation is that the person's authorisation has been withdrawn.
I now turn to Amendments Nos. 98 and 100 which concern Clause 42. These amendments are concerned with cases where the FSA has varied a person's Part IV permission with the result that there are no longer any regulated activities which that person is permitted to carry on. Once the FSA is satisfied that it is no longer
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necessary to keep the permission in force, it must cancel it. We believe that is an appropriate test which ensures that the FSA cannot keep a permission in force unnecessarily.
We also believe, and the FSA believes, that it places a more stringent test on the FSA than the one proposed in these amendments. There are, of course, various reasons why it may be necessary for the FSA to keep a permission in force. A firm may, for example, have contravened a requirement and so be subject to some form of investigation or to enforcement or to disciplinary proceedings. Alternatively, the FSA may be concerned that a firm may have contravened a requirement and, therefore, needs to satisfy itself that the firm is not trying to hide something. Clearly, the FSA's ability to protect consumers would be seriously undermined if it were unable to deal with issues such as these merely because a person had ceased to be authorised.
It is important that we should bear in mind that almost throughout the Bill we have succeeded in including provisions to deal with former authorised persons. If we had to deal with former authorised persons in every regulatory provision of the Bill, we could easily extend the length of it by 50 per cent. There are all sorts of additional complications that arise when seeking to regulate somebody who is no longer a regulated person. In this part of the Bill we keep them in membership so that they can be regulated and disciplined, rather than let them out and have to bring them back again for disciplinary purposes.
The effect of Amendments Nos. 98 and 100 would be to undermine the rigour of the test that is applied. If the amendments were accepted, the FSA would be able to keep a permission in force by relying on the fact that it was unable to satisfy itself that there was "no good reason" why the person should not continue to be subject to its control. That is a difficult test for any regulator. How can it ever be sure that there is no good reason for continuing to be able to exercise control over a person? The test in the Bill as it stands, on the other hand, would require the FSA to cancel permission if it is satisfied that it is no longer necessary for permission to be continued.
In turn, that requires the FSA to address the situation that had led it to conclude that permission should be continued and ask itself the question whether the situation is still such that it is necessary that permission should be continued. If it has no reasonable grounds for concluding that it is necessary, the effect of the Bill is that permission should be cancelled. I believe that is where we started and that that is the intention of the noble Lord. We do not believe that the test is sufficiently stringent. It would not give firms certainty that they will not be the subject of unnecessary regulation. I hope that these amendments will not be pressed.
Lord Kingsland: My Lords, I thank the Minister for the tone, if not the content, of his response. From the fact that these amendments have been retabled after much debate in Committee, he will have concluded that we regard them as, although superficially

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technical, of considerable importance. I should like to reflect on what the Minister said. We can come back to the amendments at Third Reading. Meanwhile, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 94 and 95 not moved.]
Clause 40 [Giving permission]:
Lord Fraser of Carmylliemoved Amendment No. 95A:
Page 17, line 44, leave out from beginning to ("as") in line 45.
The noble and learned Lord said: My Lords, at an earlier stage I tabled a number of amendments which were prompted by the Law Society of Scotland. In this group are two of my amendments, to which I can speak briefly.
Amendment No. 95A relates to Clause 40. The proposal is that the wording given as an example of the limitation that the authority might incorporate into the description of a regulated activity should be deleted. The point is a short one. If those words remain in, the concern is that, applying one of the principal canons of construction, there may be a limit on the limitations that the authority could impose. It may be dangerous to do that and, accordingly, the words ought to be deleted. It does not seem to me that that can do any damage to the statute and it will certainly have the effect of simplifying it in an appropriate fashion.
Amendment No. 95B relates to Clause 41. As your Lordships will have observed, this is a short but possibly rather startling provision that the authority can include a requirement which extends to,
"activities which are not regulated activities".
We have already spent some considerable time this afternoon discussing what might be included in "regulated activities". It is clear from some of the earlier clauses that we debated that the Treasury has wide powers to specify what may and may not be regulated. It is surprising therefore that this requirement can go beyond regulated activities.
It may be that the Minister has already explained why the provision is necessary. But it seems to the Law Society and to me that it goes further than necessary. Accordingly, we should simply delete subsection (3). But I shall listen with interest to discover whether or not there is a sound basis for its inclusion. I beg to move.
Lord Brightman: My Lords, Amendments Nos. 96 and 97, which relate to Clause 42, are grouped with Amendments Nos. 95A and 95B. It is therefore my duty to speak now rather than later.
As we are looking at Clause 42 for a second time, perhaps I may mention a point of drafting of some importance which occurred to me rather late in the day. I do not expect the Minister to deal with this point in any substance because I did not give him notice in advance that I was going to raise it.
So far as I can discover, there is no definition of "consumer" in Part IV of the Bill. I may be wrong; I may have overlooked it somewhere, in which case
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I hope I shall be stopped. If there is no definition, then there seem to be four choices. Choice number one: there is a definition of "consumer" in Clause 135. That definition is adopted in Schedule 4. Choice number two: Clauses 5 and 12 use the Clause 135 definition, but add a few more persons as consumers. Choice number three: in Clause 9 we have the same definition as in Clauses 5 and 12, but excluding "authorised person" who is defined in Clause 407. Choice number four: we could have no special definition so that the dictionary definition applies. That, I believe, was the course advocated by the noble Lord, Lord Peston, on the second day of Committee when he said,
"I have lectured on consumer theory for about 40 years and believed that I understood what a consumer was".—[Official Report, 20/3/00; col. 45.]
As I said, I do not expect the Minister to deal with this point in substance now, but perhaps it could be considered before Third Reading.
Perhaps I may mention an allied point. There are some 280 pages to this Bill. Is it necessary to read every single line in order to see whether or not the word "consumer" is used again and to check that it has been defined; or is there some electronic equipment available in the House to those who wish to study the Bill, which will indicate where the word "consumer" is used? There are more than 7,000 lines in the Bill. I have reason to believe, which I shall not go into now, that the word "consumer" is used in other places in the Bill without definition. It would be too big a job for me to go through the Bill line by line. But perhaps I can be informed whether or not there is some equipment which will do it for me.
5.15 p.m.
Lord Kingsland: My Lords, as I understand it, Amendments Nos. 96 to 101 are intended to tidy up Clause 43 and refer to the power the authority uses, on "its own initiative", to vary the Part IV permission to carry on specific regulated activities. Part IV is the normal permission for which firms apply.
We had thought, in another place, to make it clear that Clauses 43 and 44 were indeed the exercise of the authority's own initiative power. The revised subsection (1) covers exactly the same ground as cases (a) to (c) except that, as mentioned in the Explanatory Notes, it is not linked to specific activities.
Lord Jenkin of Roding: My Lords, I wish to say a few words in support of Amendment No. 95B in the name of my noble and learned friend. Perhaps one should have paid more attention to this. But, on reflection, it is a surprising provision to find in a Bill that requirements that may be imposed, may extend to activities which are not subject to regulation under the Bill. It would be helpful if the Minister could give some indication of what the provision is aiming at.
Reverting to the earlier amendment on which the House divided, let us suppose that we have a regulated firm of insurance brokers or financial advisers and the authority decides, as a condition of the authorisation, that it is going to impose requirements in relation to that firm's giving of advice on mortgage products. Is

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there anything in the clause which would prevent that being done? It seems to me it is entirely open to the authority to do it. Yet the Government say that they do not intend the Bill to extend to that activity in the early stages. My noble and learned friend raises a good point and we need an explanation.
Lord McIntosh of Haringey: My Lords, I cannot resist the temptation to respond to the noble and learned Lord, Lord Brightman, first. I love that kind of point and he raised it in his characteristically lucid way. The answer to his question is case four; in other words, it is the dictionary definition. My noble friend Lord Peston was right in saying that, in general terms, if one has lectured on something for 40 years without anybody ever questioning what was meant by "consumer", it is probably better to leave it that way unless we intend the word to be used in a different way in legislation.
However, as I explained when responding to the noble Lord, Lord Elton, earlier this afternoon, there are many instances where words are used in a special case in this Bill. Indeed, as I said, we set out a glossary in the Explanatory Notes, which is now out of date as regards its references as to where to find the definitions. There are plenty of definitions; in fact, the Bill is overflowing with definitions of words that are used other than in their normal dictionary sense. But this is not one of them.
The noble and learned Lord, Lord Brightman, also asked me whether there was any electronic equipment that would enable him to detect other cases where the word is used. I assume that this legislation, like all legislation, is in electronic form on the Treasury's website, or on an equivalent website. If that is the case, it can be subject to key word searching in the same way as any other electronic file. However, if I am wrong about that, I shall write to the noble and learned Lord. It would certainly be absurd for us to engage in 19th-century pursuits, such as concordances carried out manually by scholars or rather by the unfortunate research assistants of scholars. I believe that we are entitled to better than that in the 20th century. My noble friend reminds me that I should refer to the 21st century; that is indeed correct. Well, I have been too busy to catch up.
I turn now the amendments tabled in the name of the noble and learned Lord, Lord Fraser. Amendment No. 95A would simply remove the example of the sort of limitation that could be imposed on the carrying on of a "regulated activity". I can assure the noble and learned Lord that the inclusion of a single example, which is intended to be a helpful illustration, is not something that will give rise to the restraints of the normal canons of construction to which he referred. That is certainly not the intention; nor is it the effect of the phrase. It has been included to make it clear that the power can be exercised in this important way. There are other examples of exemplifications that do not invoke the Latin clause from which he spared us; namely, inclusio unus exclusio alterius—I hope that I said that correctly.
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In granting permission to carry on an activity, it is vital that we should be clear that the FSA can specify circumstances in which it may or may not be carried on. Without the ability to make such restrictions, the FSA would be required to err on the side of caution in borderline cases and to withhold permission to carry on the regulated activity. I cannot believe that that is what the noble and learned Lord intended.
In deciding whether to impose such limitations, perhaps I may reassure the noble and learned Lord that the FSA must have regard to what is necessary to satisfy it that the threshold conditions are met and that consumers are adequately protected. If the applicant feels that the FSA has not been reasonable in imposing the limitation, he has recourse to the tribunal.
Amendment No. 95B seeks to prevent the FSA imposing requirements on the way in which how an authorised person conducts his unregulated activities. This, too, is essential if we are to have an effective and proportionate regulation. Let us take a simple example: how would banking supervision work if requirements could not be imposed on the way or the extent to which they lend? Given that the "own initiative power" is such an important tool in dealing with systemic issues—I shall deal with the genesis of that power when I describe our amendments—it is vital that it should be capable of addressing the problems that arise in the conduct of authorised persons' unregulated activities.
The noble Lord, Lord Jenkin of Roding, also referred to Amendment No. 95B. Of course, any requirements imposed by the FSA in relation to unregulated activities must be proportionate and relevant to the FSA's objectives under the Bill. That is the overall constraint with which we are working. The FSA can impose a requirement on conduct of unregulated activities only if the grounds set out in Clause 43(1) are satisfied. However, this is not a backdoor approach, as feared by the noble Lord, to the regulation of unregulated activities. It is essential that the FSA should be able to impose requirements on unregulated activities; for example, any financial resources requirements would need to extend to the whole of a firm's business. They could not be restricted to those parts of the business that are regulated because that would be like the judgment of Solomon; if we tried to make that distinction, the baby might die as a result of being cut in half. It is only possible to impose a requirement having regard to the need to meet the threshold conditions and the need to protect consumers. That, of course, takes us back to Clause 37.
I shall now deal with the Government's amendments in this group. Amendments Nos. 96, 97 and 99 clarify the grounds on which the FSA may refuse permission or exercise its own initiative power under Clause 43. The aim is to ensure that these powers can properly be exercised in order to minimise wider systemic risks. Amendments Nos. 96 and 97 clarify the ability of the FSA to take account of the interests of potential as well as actual consumers in deciding whether to refuse an application for a Part IV permission.

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The amendments also remove the possible and unintended implication of the reference to "a group of consumers" that the FSA is bound only to consider the interests of specific consumers or groups of consumers, and not those of consumers generally. The purpose of that reference was to give the FSA the necessary discretion to refuse an application on the grounds that granting it would have an adverse impact on the interests of a broad group of consumers; for example, depositors. But given the nature of systemic risk, we believe it is desirable to make it clear that this discretion would apply where the adverse impact was to the interest of consumers and potential consumers generally.
Amendment No. 99 is similar in intent. The power under Clause 43 to vary or cancel a person's Part IV permission, which is referred to as the FSA's "own initiative power", is a critical part of the authority's range of powers to deal with a wide range of regulatory concerns, including systemic threats. Therefore, it is vital that this power should be exercisable when necessary in the interests of consumers generally, and not just those who are consumers of the regulated activities for which the authorised person has permission.
Before I forget, perhaps I may interrupt myself at this point and tell the noble Lord, Lord Jenkin, that, when I referred to the reference back to Clause 37, I should have said Clause 39. I am sure that the noble Lord noticed that error and that he would have picked me up on it later.
Amendment No. 99 also removes the words,
"in relation to one or more, or all, of the regulated activities for which he has a Part IV permission",
from the end of case A. The amendment also takes the opportunity to reorganise the drafting of Clause 43(1) so that the three grounds appear as separate subsections (a), (b) and (c) rather than cases A, B and C.
Amendment No. 101 is also a drafting device. It defines the term "own initiative power" to which I referred earlier and which is already used elsewhere in this part of the Bill; for example, in Clause 45(6) and Clause 48(2). Amendments Nos. 102 and 103 incorporate the new defined term in Clause 44(1) and Clause 45(1).
Before I conclude, I should also give your Lordships notice that, following some discussion in another place of the head office requirements imposed by paragraph 2 of Schedule 6, we have been considering whether these requirements may bite a little too hard on some overseas firms, including some from elsewhere in the European economic area. We are checking to ensure that Schedule 6 is completely consistent with our Community obligations and with the need to maintain the openness of the UK financial markets. If necessary, we may table amendments at Third Reading. If we are in a position to lighten the regulatory burden in some way at that stage, I hope that noble Lords will feel able to indulge us.
Lord Fraser of Carmyllie: My Lords, the first amendment that I moved was simply a drafting one.
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There might he some argument as to whether the subsection contains just one example or perhaps two, but it was a small risk about which I thought the Government ought to be aware. It seems to me that the removal of such words would have done nothing to restrict what the authority might he able to do. However, I shall obviously not be pressing it.
As far as concerns Clause 41(3), I believe I understood what the Minister said in his response. I shall read most carefully in Hansard the examples that he gave. Nevertheless, this still seems to me to be a point to which we may wish to return. Under subsection (2), the authority can impose a requirement on a person which will require him "to take specified action" or,
"to refrain from taking specified action".
If the FSA does that and the person concerned says that it is outside the regulated activities, and the FSA then says that it has the right to require that of the person, whether or not it is regulated, that is precisely the area of controversy that I should have thought this House would wish to avoid the authority becoming involved in. The greatest criticism of the USA at the present time is that it will clumsily or unnecessarily trespass into matters that are not within those areas which we all acknowledge and recognise ought to be regulated. If the measure we are discussing is to have a narrow remit, I can understand how it might emerge as an ancillary power, as it were, but it seems to me, and, I believe, to my noble friends, to be expressed in the widest possible terms. Some restriction may be desirable. But, having said that, I have no intention of pressing Amendment No. 95B either. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 41 [Imposition of requirements]:
[Amendment No. 95B not moved.]
5.30 p.m.
Clause 42 [Variation etc. at request of authorised person]:
Lord McIntosh of Haringeymoved Amendments Nos. 96 and 97:
Page 18, line 34, leave out ("of a group of") and insert ("potential").
Page 18, line 36, leave out ("of that group of') and insert ("potential").
On Question, amendments agreed to.
[Amendment No. 98 not moved.]
Clause 43 [Variation etc. on the .Authority's own initiative]:
Lord McIntosh of Haringeymoved Amendment No. 99:
Page 19, line 3, leave out subsection (1) and insert—
("(1) The Authority may exercise its power under this section in relation to an authorised person if it appears to it that—

(a) he is failing, or is likely to fail, to satisfy the threshold conditions;

(b) he has failed, during a period of at least 12 months, to carry on a regulated activity for which he has a Part IV permission; or

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(c) it is desirable to exercise that power in order to protect the interests of consumers or potential consumers.

(1A) The Authority's power under this section is the power to vary a Part IV permission in any of the ways mentioned in section 42(1) or to cancel it.").
On Question, amendment agreed to.
[Amendment No. 100 not moved.]
Lord McIntosh of Haringeymoved Amendment No. 101:
Page 19, line 24, at end insert—
("( ) The Authority's power under this section is referred to in this Part as its own-initiative power.").
On Question, amendment agreed to.
Clause 44 [Variation of permission on acquisition of control]:
Lord McIntosh of Haringeymoved Amendment No. 102:
Page 19, line 28, leave out ("acting under section 43") and insert ("exercising its own-initiative power").
On Question, amendment agreed to.
Clause 45 [Exercise of powers in support of overseas regulator]:
Lord McIntosh of Haringeymoved Amendment No. 103:
Page 19, line 38, leave out from ("Authority's") to ("may") in line 40 and insert ("own-initiative power").
On Question, amendment agreed to.
Clause 46 [Prohibitions and restrictions]:
Lord Kingslandmoved Amendment No. 104:
Page 21, line 15, after ("A") insert ("or contravene any other obligation or duty the institution may owe A").
The noble Lord said: My Lords, as I said at Committee stage of the Bill, Clause 46 gives the authority power to impose requirements on authorised persons and to give notice of these requirements to any institution with whom the authorised person keeps accounts. The institution does not act in breach of any contract with the authorised person if, having been instructed by the authorised person to transfer any sum or otherwise make any payment out of the authorised person's account, the institution refuses to do so in the reasonably held belief that complying with the instruction would be incompatible with a requirement imposed by the authority.
However, if the institution complies with the instruction from the authorised person, it is liable to pay to the authority an amount equal to the amount transferred. It does not seem reasonable that the institution must be automatically liable when complying with such an instruction when it appears that the requirement imposed by the authority is not an absolute requirement. Therefore, to balance the approach adopted in Clause 46, it would be reasonable to include the words, "without reasonable excuse". I beg to move.
Lord Stewartby: My Lords, I may be making the same point as my noble friend, but on reading Clause 46(5)(b) I wondered whether,
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"if the institution complies with such an instruction"
that institution has had to go through the process of assessing whether complying with the instruction would or would not be incompatible with the requirement. It is not clear whether there is an assumption in Clause 46(5)(b) that it will have made such an assessment because the instruction of itself may not put the institution on notice that it ought to consider whether complying with the instruction would infringe the requirement. Perhaps that matter should be spelt out in paragraph (b).
Lord McIntosh of Haringey: My Lords, subsection (5)(a) of Clause 46 provides for notification of other institutions, such as a bank, where the person subject to an assets restriction has an account. It protects those institutions from action for breach of contract if they comply with the terms of the restriction.
Amendment No. 104 seeks to extend this protection to other obligations or duties to which the institution may be subject, such as a fiduciary duty or a duty of care. As I said in Committee, we understand fully the intention of the amendment. Subsection (5)(a) already recognises the need for a bank to be able to rely on the restriction as a defence to an allegation that it has acted in breach of such a duty. The provision is drafted in the way it is in response to comments made in our public consultation on the draft Bill. A number of people thought that the form of the provision in the draft Bill was confusing. We came forward with this wording to make clear that, after an assets requirement had been imposed, the institution would continue to hold A's property on the terms that had previously applied, except that it could legitimately forbear to make transfers in accordance with A's instructions.
In response to the comments made by the noble Lords opposite in Committee, we have considered whether the drafting should be further amended. We have consulted parliamentary counsel on that issue. It is our clear view that the amendment is unnecessary. It seems implausible that a court would hold that the institution was in breach of a fiduciary duty it may owe the authorised person, A, given the existence not only of an express prohibition or restriction on,
"the disposal of, or other dealing with, any of A's assets".
but also an express provision that there is no breach of contract if a person refuses to do what his contract with A would otherwise have obliged him to do. We are satisfied that it is clear that a person who complies with a requirement imposed on him under statute cannot at the same time be liable to actions in the civil courts. This would fundamentally undermine the effect of the requirements for which Parliament itself has made provision.
In this particular case we have included express provision about breach of contract in order to make it clear that the terms on which the institution holds A's property are the same as those that applied before the assets requirement was imposed—with the very important exception that, so long as the assets requirement is in place, the institution is no longer obliged under its contract with A to comply with A's directions.

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We are doubtful of the value of trying to go further in this particular instance because we do not think that it is necessary to go beyond the specific case we have dealt with here—which is necessary for the simple mechanics of this particular requirement. We do not want to run the risk of creating doubt about the position in other areas where there may be an explicit statutory requirement but there is no express provision about civil duties and liabilities. In those cases no provision is required because those duties and liabilities are displaced by the requirements imposed under the statute. Nevertheless, as I say, we have consulted parliamentary counsel on this matter and we think that we are on safe ground here.
Amendment No. 105 concerns the liability which is imposed under subsection (5)(b) on a financial institution which acts in breach of a requirement notified to it by the authority. It would give the financial institution a defence to that liability if it could show that it had a "reasonable excuse" for having paid out or transferred any part of the account. As I said in Committee, we must remember that we are not dealing here with punishment of the institution for an offence or other misconduct, but with safeguarding assets which may be owed to consumers or to other creditors. The effect of a breach of the requirement may well be to allow the authorised person subject to the restriction to dissipate its assets in a way that puts them out of reach of the firm's customers or creditors. It is only right that an institution which has notice of the requirement should comply with it.
Clearly, there may be circumstances in which the notification has been garbled or not received, but in those circumstances no liability would attach to the institution in any event. It is difficult to imagine any other circumstances in which the institution would have a reasonable excuse for having failed to comply with a requirement. However, even if it did, we do not think that it would be right to deprive the firm's creditors and other persons to whom the assets may properly belong. And to allow, indeed encourage, institutions to look for excuses for failing to comply with requirements could seriously undermine their effectiveness. It might also expose smaller institutions to undue pressure from unscrupulous and perhaps desperate firms.
Amendment No. 106 is a drafting amendment. I do not think that the noble Lord referred to that amendment and therefore the House can be spared the pain of hearing me speak to it.
Amendment No. 106A concerns the position of a trustee appointed to hold assets pursuant to an assets requirement. Subsection (8) provides that assets will be treated as being held in accordance with such a requirement only if the authorised person has instructed the trustees to do so by written notice. The amendment, which we considered in Committee, would require that notice to come from the FSA rather than from the authorised person. Again, as we said in Committee, we can appreciate the thinking behind it, but it would cause more problems than it would solve.
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The obligation to transfer the assets to the trustee is imposed on the authorised person, although it must be approved by the FSA. The authorised person will have failed to comply with the requirement—and will therefore be exposing himself to possible disciplinary' proceedings—if he fails to notify the trustee that those assets are held in accordance with the requirements. I think these two go together.
The noble Lord, Lord Stewartby, raised a point similar to that of the noble Lord, Lord Kingsland. The institution should be on notice that there are restrictions in dealing with A's property This will mean that the authority will have given the institution a notice of the restriction in dealing with A's assets by virtue of Clause 46(4)(b). So it is not necessary to spell this out in subsection (5)(b).
On that basis, I hope that the noble Lord will not press the amendment.
Lord Kingsland: My Lords, I thank the Minister for what he has said. If I understood him correctly, he has gone some way towards giving me some comfort on these matters. I shall of course read the text of Hansard carefully before deciding whether to return to this matter at Third Reading. In the meantime, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 105 to 106A not moved.]
5.45 p.m.
Clause 50 [Determination of applications]:
Lord McIntosh of Haringeymoved Amendment No. 107:
Page 23, line 19, leave out subsection (4) and inset:—
("(4) If the Authority grants an application for, or For variation of, a Part IV permission, it must give the applicant written notice.
(5) The notice must state the date from which the permission, or the variation, has effect.
(6) If the Authority proposes—

(a) to give a Part IV permission but to exercise its power under section 40(7)(a) or (b) or 41(1), or

(b) to vary a Part IV permission on the application of an authorised person but to exercise its power under any of those provisions (as a result of section 42(5)),

it must give the applicant a warning notice.
(7) If the Authority proposes to refuse an application made under this Part, it must (unless subsection (8) applies) give the applicant a warning notice.
(8) This subsection applies if it appears to the Authority that—

(a) the applicant is an EEA firm; and

(b) the application is made with a view to carrying on a regulated activity in a manner in which the applicant is, or would be, entitled to carry on that activity in the exercise of an EEA right whether through a United Kingdom branch or by providing, services in the United Kingdom.

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(9) If the Authority decides—

(a) to give a Part IV permission but to exercise its power under section 40(7)(a) or (b) or 41(1),

(b) to vary a Part 1V permission on the application of an authorised person but to exercise its power under any of those provisions (as a result of section 42(5)), or

(c) to refuse an application under this Part,

it must give the applicant a decision notice.").
The noble Lord said: My Lords, in moving Amendment No. 107, I shall speak also to Amendments Nos. 108 to 110; to the amendment of the noble and learned Lord, Lord Fraser, Amendment No. 110A; to government Amendments Nos. 111 and 112; to Amendments Nos. 163 to 166; and to Amendments Nos. 168 to 170. These amendments are all part of the package of procedural amendments, of which we gave notice some time ago.
Amendment No. 107 establishes the procedures for granting or refusing applications for a new permission or variation of an existing permission under Part IV. If an application is granted, the applicant receives written notice which states the date on which the new permission takes effect. If the FSA proposes to grant or vary a permission in accordance with an application, but to impose limitations or requirements under Clauses 40, 41 or 42, it must follow the warning and decision notice procedure.
The warning and decision notice procedure also applies if the FSA proposes to refuse an application—unless the reason for refusal is that the applicant should properly notify under Schedule 3 in accordance with the directives, in which case we would expect the question of which route was correct to be sorted out in discussion with the home state regulator.
The first new clause after Clause 51 (Amendment No. 109) applies the flexible, supervisory-type decision procedure to the exercise of the FSA's own initiative power to vary an authorised person's permission under Part IV. The own initiative power is, as I have explained, one of the key tools in the FSA's regulatory toolbox; a power that needs to be exercised in different ways according to the circumstances of each case.
Where action needs to take effect immediately or at some date prior to the full process having been completed, it is important that the action can and does take effect then. That is provided for by subsection (2), as qualified by subsection (3) which requires the FSA reasonably to consider it necessary for the action to take effect immediately or while the decision is open to review, having regard to the grounds on which the action is being taken.
On the other hand, where the power is being exercised to apply relatively routine requirements—for example, adjusting the premium income limit for an insurance company or setting a new capital ratio for a bank—to reflect new aspects of that authorised person's business, there may be no need for the requirement to take effect before the person concerned has had the opportunity to refer the matter to the tribunal, in which case the requirement will not take effect while the matter is open to review.
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The second new clause after Clause 51 (Amendment No. 110) deals with the procedure for cancellation of permission. As I made clear when introducing the changes in Committee, we are applying the full warning and decision notice procedures to those decisions, in effect treating them in the same way as disciplinary-type cases. This reflects the seriousness of this kind of regulatory action. It is possible to adopt this process only on the basis that if protective action is required in the meantime, the own initiative power is there for that purpose.
These new clauses replace Clauses 51, 52 and 53, which we are omitting under Amendments Nos. 108, 111 and 112.
Amendments Nos. 163, 164 and 165 remove the requirement under Clause 253 for the direction to specify the date on which a requirement takes effect, and replaces this with a requirement for the notice under Clause 255 to specify when the requirement takes effect. This removes an element of duplication—as it stands, both the direction and the notice would appear to specify these dates—and aligns the provisions more closely with others in the Bill.
As with subsection (12) of the second new clause after Clause 51 (Amendment No. 110), Amendments Nos. 166, 168 and 170 introduce new subsections into clauses setting out the supervisory procedures for giving directions under Clause 253 to authorised collective investment schemes; for giving directions under Clause 263 to recognised overseas collective investment schemes; and for giving directions under Clause 277 to overseas collective investment schemes authorised by virtue of Clauses 266 or 268.
These new subsections define what is meant by a decision being "open to review" by reference to the new subsection (6A) to Clause 386, to which we will come in due course. This therefore determines the basic presumption about when a decision takes effect in the absence of any need for the supervisory action to take effect any earlier.
Amendment No. 169 is a consequential change which makes clear that a decision to refuse an application for variation or revocation of a direction made under Clause 263 can be referred to the tribunal.
Some of the amendments to Part XVII reflect the fact that we can now introduce a common definition of what is "open to review" for the purposes of supervisory decisions. This is the effect of Amendment No. 193, to which we shall come in due course. The others are directed at slight technical points—duplicative requirements to set dates in one case and the omission of an explicit provision about references to the tribunal in another.
The amendment of the noble and learned Lord, Lord Fraser, Amendment No. 110A, seeks to amend Clause 52, which we propose to omit. I shall respond in terms of the replacement clause rather than the clause as printed. The noble and learned Lord seeks to introduce a minimum period of 14 days before the issue of a written notice under Clause 52 before a decision can take effect. Clause 52 currently deals with

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the authority's exercise of its own initiative power in cases other than those where it is necessary for the authority's action to take immediate effect.
As we have proposed an amendment to omit Clause 52, it might be helpful if I respond in terms of its replacement. By virtue of subsection (2) of the new clause, a supervisory decision could take effect immediately it is given or on a specified date. But this can happen only if the FSA considers it necessary that it should happen. Even in such cases, we would expect that an authorised person would be given the maximum possible notice before any action were to take effect. It would be in only relatively rare cases—for example, where it is necessary to protect consumers—that anything less than 14 days' notice should be given. I hope that that will satisfy the noble and learned Lord, Lord Fraser. I beg to move.
Lord Fraser of Carmyllie: My Lords, I had observed that my amendment sought to amend a clause which the noble Lord intended to delete. If he had not been so obviously enjoying giving the answer he gave, I might have interrupted him to tell him that it was an unnecessary response.
Lord McIntosh of Haringey: My Lords, I cut it down very substantially.
Lord Fraser of Carmyllie: My Lords, I am delighted to hear that. Perhaps I may say to the Minister that I understood the point that he was making. My point about notice is not only covered in subsection (2) but, presumably, if the notice has to give notice of his right to refer a matter to the tribunal and must give an indication of the procedure, doubtless within that there would be some indication of the time limits to which that reference would be subjected. When it comes to my moment of glory, I intend not to move the amendment.
Lord Jenkin of Roding: My Lords, I am sure that the whole House is indebted to the noble Lord, Lord McIntosh, for the care with which he has explained this very large group of amendments which covers some pages of the Marshalled List. I should also like to say that those of us who have been seeking to follow the proceedings on the Bill and have had advance notice with explanations of the amendments very much appreciate that. The noble Lord is doing his best to make an extremely unpalatable mess of pottage possibly a little more palatable than it otherwise would be.
I shall not detain the House long on this point, but, here we are, nearing the end of a long legislative process. It has spread over two Sessions of Parliament. The Bill was carried over and the noble Lord, Lord Burns, who is no longer in his place, chaired the Joint Committee of both Houses on the Bill. It has proceeded through all its stages in another place and then it came to this House. It has been through several days of Committee and we are now on the second day of Report. But we still find ourselves facing page after page after page of amendments. I really must once again make a protest that this is no way to legislate.
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Those outside who have tried to follow the proceedings have been dismayed at the way in which things have been done. One of the things of which one has also become aware is that many of them are keeping their heads well below the parapet because they do not wish to get into the bad books of the Financial Services Authority. There have been several examples of that. It may be appropriate at a later stage to draw attention to the article in today's Daily Telegraph saying that there must not be an unofficial blacklist of people. The powers being given to the authority, which no doubt under this sheaf of amendments may be exercised a little more logically and with a little more regulation, as it were, than had originally been provided, are immense. That we are at this very late stage making this whole sheaf of amendments to the Bill demonstrates how unsatisfactorily this whole process has been carried on.
I have made my protest about this before and I feel that it is appropriate to do so again. When we have this group of amendments, with new clauses coming in and with existing clauses being taken out and whole parts of the Bill being effectively rewritten at this late stage, I must once again protest and say that this is a disgraceful way of proceeding.
Lord Peyton of Yeovil: My Lords, I should like briefly to apologise for the fact that it was not possible for me to get here earlier. I had no intention of rising to my feet until I heard the contribution made by my noble friend Lord Jenkin. My noble friend lost nothing by his restraint as it was a very effective protest. I should like particularly to echo what he said in tribute to the noble Lord the Minister, who has the embarrassing task of defending the really messy conduct of the Bill. I just wish I knew who really is responsible; if anyone has been the pilot—p-i-l-o-t, not spelt the other way—behind the scenes.
I shall not detain the House any longer except to say that if I were given a single wish now it would be that the noble Lord who is conducting proceedings on the Bill would so far forget himself as to forget where he is and think that he was sitting, as he was a couple of years ago, on the Opposition Front Bench. I do not believe for one moment that he would be quite so restrained in his condemnation of the Government's conduct as, on the whole, we on this side of the House have been. I want to ask one question. Is it possible to identify anyone who has been more responsible than most for the ghastly mess in which we find ourselves?
Lord McIntosh of Haringey: My Lords, I have to say to the noble Lords, Lord Jenkin and Lord Peyton, that flattery will get them nowhere. I have listened to these complaints. I thought that the thrust of the complaints at the Committee stage had some justification and I apologised; indeed, I think I used the word "grovel". But I do not think that I am in that position now. What we doing with the Bill is consistently, deliberately and carefully improving it. I do not believe that we are being helped particularly by the Opposition.
Perhaps I may just say this to noble Lords. Have they looked at the Marshalled List? Have they looked at the fact that 40 of the amendments on the

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Marshalled List being debated today are starred? In other words, they were put down only at midday on Friday, so that I had no opportunity to consider briefing on them over the weekend, which is what I would otherwise have expected. Have they looked at the fact that, in addition to those 40 starred amendments, there are 14 on a supplementary Marshalled List, tabled by the noble and learned Lord, Lord Fraser, which I saw for the first time at ten o' clock this morning? How am I expected to respond to amendments of that kind at such an interval?
If it comes to accusations of—
Lord Fraser of Carmyllie: My Lords, I thank the noble Lord for giving way. Am I correct in understanding that not so long ago the noble Lord made a proud boast in the Dining Room of your Lordships' House that the first time he read the notes for the amendments was when he got up to read them?
Lord McIntosh of Haringey: My Lords, I would be very surprised if the noble and learned Lord was right in saying that; and, if he were, it would be entirely improper for him to quote in the House anything that I said in the Dining Room. I do not know what kind of a club this is, but it certainly is not the club in which one quotes what other people say in a dining room and attribute that quote.
I was not going to say anything about these matters until I was attacked—until the Government were attacked—but now I have been attacked I shall respond to that. I shall respond to the noble Lord, Lord Jenkin, who made a most outrageous statement. He said that there were people in the City who had objections to the Bill but were not prepared to raise those objections for fear of being victimised by the Financial Services Authority. If there are such people, let the noble Lord name them. If there are not such people, let him not make such an accusation, which is damaging to the reputation both of the City and of the Financial Services Authority.
I turn to the issue of powers under the Bill. I have already made the point several times today—it applies to previous stages of the Bill—that in the Bill the Government are limiting the powers of the Financial Services Authority, to create greater certainty about those powers and to make the Bill easier to operate. The only amendment on which the Opposition have chosen to divide the House is an amendment which would increase the scope of the Financial Services Authority's activities to the extent of encompassing another 60,000 people and employing another 200 staff. I ask the world outside to judge who is complicating the Bill and who is attempting to improve it.
Finally, I was asked by the noble Lord, Lord Peyton, how I should feel if I were on the Opposition Benches, faced with government amendments, and whether I should have been as restrained as he has been. The Financial Services Act was introduced by the noble Lord's government in 1986. It was a smaller Act; it was not concerned with banking or insurance, or with the European economic area, Lloyd's or the
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treaty obligations. It was necessarily a smaller Act because it was dealing with a simpler financial community. At the Bill's Report stage in the Lords, after the Bill had completed its passage in the Commons, there were 400 government amendments and there were 70 government amendments at Third Reading.
6 p.m.
Lord Peyton of Yeovil: My Lords, I am obliged to the noble Lord for giving way. He refers to my government. It was not exactly my government. Indeed, if the noble Lord would care to do me the favour of exercising his considerable memory, he will remember that my relations with what he calls "my government" were not all that warm at the time.
Lord McIntosh of Haringey: My Lords, I do not deny that the noble Lord was in opposition to the government of the party of which he is a member and whose Whip he takes. I do not deny that he was, in many cases, an outstanding opponent when they were doing things that were particularly wrong. But there is an element of collective responsibility. We are talking about the Conservative Party, which put through defective legislation to a much greater degree than we have done, to which we responded with considerable restraint—much more restraint than was shown by the noble Lords, Lord Jenkin and Lord Peyton.
The only response that I have received to these government amendments has been a very friendly one from the noble and learned Lord, Lord Fraser. I therefore commend the amendment to the House.
The Deputy Speaker (Lord Strabolgi): My Lords, the Question is that Amendment No. 107 be agreed to. As many as are of that opinion shall say "Content"—
Lord Kingsland: My Lords, we have not spoken to the amendments.
The Deputy Speaker:—to the contrary, "Not-Content". The "Contents" have it.
On Question, amendment agreed to.
Clause 51 [Refusal of application for permission]:
Lord McIntosh of Haringeymoved Amendments Nos. 108 to 110 en bloc:
Leave out Clause 51.
After Clause 51, insert the following new clause—
EXERCISE OF OWN-INITIATIVE POWER TO VARY PART IV PERMISSION:PROCEDURE
(" .—(1) This section applies to an exercise of the Authority's own-initiative power to vary an authorised person's Part IV permission.
(2) A variation takes effect—

(a) immediately, if the notice given under subsection (4) states that that is the case;

(b) on such date as may be specified in the notice; or

(c) if no date is specified in the notice, when the matter to which the notice relates is no longer open to review.

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(3) A variation may be expressed to take effect immediately (or on a specified date) only if the Authority, having regard to the ground on which it is exercising its own-initiative power, reasonably considers that it is necessary for the variation to take effect immediately (or on that date).
(4) If the Authority proposes to vary the Part IV permission, or varies it with immediate effect, it must give the authorised person written notice.
(5) The notice must—

(a) give details of the variation;

(b) state the Authority's reasons for the variation and for its determination as to when the variation takes effect;

(c) inform the authorised person that he may make representations to the Authority within such period as may be specified in the notice (whether or not he has referred the matter to the Tribunal);

(d) inform him of when the variation takes effect: and

(e) inform him of his right to refer the matter to the Tribunal.

(6) The Authority may extend the period allowed under the notice for making representations.
(7) If, having considered any representations made by the authorised person, the Authority decides—

(a) to vary the permission in the way proposed, or

(b) if the permission has been varied, not to rescind the variation,

it must give him written notice.
(8) If, having considered any representations made by the authorised person, the Authority decides—

(a) not to vary the permission in the way proposed,

(b) to vary the permission in a different way, or

(c) to rescind a variation which has effect,

it must give him written notice.
(9) A notice given under subsection (7) must inform the authorised person of his right to refer the matter to the Tribunal.
(10) A notice under subsection (8)(b) must comply with subsection (5).
(11) If a notice informs a person of his right to refer a matter to the Tribunal, it must give an indication of the procedure on such a reference.
(12) For the purposes of subsection (2)(c), whether a matter is open to review is to be determined in accordance with section 386(6A).").
After Clause 51, insert the following new clause—

CANCELLATION OF PART IV PERMISSION: PROCEDURE
(".— (1) If the Authority proposes to cancel an authorised person's Part IV permission otherwise than at his request, it must give him a warning notice.
(2) If the Authority decides to cancel art authorised person's Part IV permission otherwise than at his request, it must give him a decision notice.").
The noble Lord said: My Lords, I beg to move Amendment No. 108, and Amendments Nos. 109 to 110 en bloc.
Lord Kingsland: My Lords, once again I find myself shut out from responding to a large number of government amendments. I shall not protest, formally, but the House ought to allow the Opposition to respond to a large number of detailed amendments to
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which my noble friend Lord Jenkin has referred. I am obliged to the Minister for indicating that he will allow me to do so. The Minister smirks and sniggers.
Lord McIntosh of Haringey: My Lords, after the noble Lords, Lord Jenkin and Lord Peyton, had spoken, I paused, I looked around, and I waited to see whether anyone else wanted to intervene before I responded to the debate. Fortunately, the noble Lord is entirely within his rights to speak to the Question that is now before the House. I shall endeavour to respond as best I can, both in relation to the amendments that are before the House and to other amendments in the group.
Lord Kingsland: My Lords, I am much obliged. First, I want to deal with the amendments to Clause 50. Amendment No. 107 deletes subsection (4) which relates to the determination of an application for permission, and limits the simple written notice to where the application is granted. In other words, it is a fast-track procedure. However, new subsections (6) to (9) bring in the warning and decision notice procedures in those cases where the authority gives a Part IV permission but imposes limitations or requirements on it.
We asked for this provision in another place and we are extremely pleased to see it on the face of the Bill. There is, however, one small point that we wish to raise with respect to it. The new subsection (6)(a) applies the warning notice procedures to the exercise by the authority of its powers under Clause 40(7)(a) and (b). Clause 40(7)(b) allows the authority to specify either a narrower or a wider description of regulated activity than was asked for. Where it is a narrower description, obviously the application has not been granted in full; therefore, the warning and decision notice procedures should be gone through. However, a wider description means that the applicant will be able to do more regulated activities than he applied for, and this can only be to his benefit.
We think that the specifying of a wider description should be treated in the same way as the giving of permission for a regulated activity which was not included among those asked for in the application. Accordingly, we think that in the new subsection (6)(a), after "or (b)" there should be inserted the expression, "in relation to specifying a narrow description". If that is done, the same amendment needs to be made in subsection (9)(a).
Perhaps I may make one small point on the new subsection (4). The noble Lord and his team may have picked it up already. I think it is clear that in the first line the word "the" should be inserted after the expression "or for".
So far as concerns Clause 51 and the two new clauses after it, Clause 51 is deleted, as I understand it, because it is covered by the amended Clause 50. There is then a new clause which sets out the procedures for the exercise by the authority of its own initiative power to vary Part IV permissions.

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That is fine as far as it goes, but I humbly suggest two improvements. First, the authorised person whose Part IV permission is being varied should be allowed to see the evidence causing the authority to vary it. Otherwise, the whole situation is somewhat Kafkaesque in that, although the authorised person will know why the authority wants the variation, he will not know the evidence that has caused the authority to want it—so that he can, if he wishes, rebut it. Given that the authority is trying hard to be transparent, that evidence should be given to him. Therefore, although there is no warning or decision notice, it should be covered by Clause 389 concerning access to authority material. Clause 387, which lists the sections to which Clause 389 applies, should be amended appropriately.
Secondly, the period given to the authorised person to make representation should be reasonable. Therefore, I suggest that in the second line of the new subsection (5)(c), after "within such", the word "reasonable" should be inserted.
The second new clause, inserted after Clause 51, which applies to cancellation of permissions, is welcome, as it brings in all the normal disciplinary-type protections including access to authority evidence. The deletion of Clauses 52 and 53 is welcome. They have been replaced by the two new clauses after Clause 51.
Lord McIntosh of Haringey: My Lords, I am grateful to the noble Lord for his observations and, indeed, for his general welcome, which I believe I can infer from his specific objections. If those are the only objections he has, we are doing quite well.
On the issue of giving a Part IV permission to exercise power under Clause 40(7)(a) or (b), the noble Lord, Lord Kingsland, is right. Clause 40(7)(b) does provide for a narrower or wider description of regulated activity. I shall look into the question he raises as to whether "wider" would be inappropriate and I shall write to him on the point. If it seems necessary, I shall make such amendments as may be required.
As to Amendment No. 109, the noble Lord asks that under subsection (5) the notice should give evidence of the reasons for the variation. Subsection (5)(a) already provides that the notice should give details of the variation. Subsection (5)(b) provides that the notice should,
"state the Authority's reasons for the variation and for its determination as to when the variation takes effect".
"Reasons for the variation" does not apply only to when the variation takes effect but the variation as a whole. I would have thought that it was rather difficult to provide detailed reasons without giving evidence. But if there is anything more in "evidence" than I believe is already provided for I shall look into the matter. My immediate judgment is that there is not.
The noble Lord also referred to subsection (5)(c) in Amendment No. 109. He suggested that the representation should be made to the authority within
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such reasonable period as might be specified. We had a debate in Committee on "reasonable". If anything, there are perhaps far too many "reasonables" in the Bill. I believe that here "reasonable" can be inferred. The noble Lord suggested that the variation of permission should be subject to Clause 389, which is concerned with access to FSA material. We have made generous provision as to access to material which goes beyond anything that exists currently. It would be inappropriate to extend this to supervisory decisions and, therefore, make supervision far too bureaucratic and litigious. With those responses to the specific points, to which I shall add if there is anything further that I can usefully say, I beg to move that Amendments Nos. 108 to 110 be agreed to.
On Question, amendments agreed to.
Clause 52 [Procedure on exercise of the Authority's own-initiative power]:
[Amendment No. 110A not moved.]
Lord McIntosh of Haringeymoved Amendments Nos. 111 and 112:
Leave out Clause 52.
Leave out Clause 53.
On Question, amendments agreed to.
Clause 55 [Prohibition orders]:
Lord Kingslandmoved Amendment No. 112A:
Page 25, line 11, at end insert—
("(4A) In proceedings for an offence under subsection (4) it is a defence for the accused to show that he took all reasonable precautions and exercised all due diligence to avoid committing the offence. ").
The noble Lord said: My Lords, in moving Amendment No. 112A I should like to speak also to Amendments Nos. 112B, 114A and 115D. Clause 55 permits the authority to prohibit an individual from acting in a designated capacity in an authorised firm. Subsection (4) provides that an individual who acts in breach of a prohibition order is guilty of an offence. The purpose of the first amendment in the group is simply to provide the individual with a defence similar to that available in an action for breach of the general prohibition or the restrictions on financial promotion.
Subsection (5) provides that an authorised person must take reasonable care to ensure that none of his functions is performed by a prohibited person. The requirement to take reasonable care was inserted at Committee stage; prior to that, it was an absolute obligation. The amendment provides that where an authorised person contracts with another authorised person, who himself engages a prohibited person, the first authorised person will not be liable in stated circumstances.
I am assured that, in the securities and unit trust industries, it is quite common for an authorised firm to delegate fund management or settlement to another authorised firm. I understand that there is no practicable way in which the first firm can ensure that its authorised contractor observes the requirement.

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Therefore, it is reasonable for the first person to be able to rely on the second, who is also an authorised person, promising to perform the task.
Clause 58(1) requires an authorised person to take reasonable care to ensure that, when necessary, all of his staff are individually approved. Subsection (2) goes further and requires authorised firms to take reasonable care to ensure that all of their contractors' staff are duly authorised when required. Again, "take reasonable care" was inserted in Committee.
This is still a particularly onerous requirement. Firms would find it most helpful to receive some guidance on what is meant by "reasonable care"—hence the amendment. The amendment provides that, where the contracting firm is itself authorised, the duty is discharged where it undertakes in the out-sourcing contract to ensure that those of its staff who require individual approval are indeed approved.
Clause 65 empowers the authority to take disciplinary action against an individual who fails to comply with a statement of principle, or is knowingly concerned in a breach of rules by his employer or similar person. As mentioned already in relation to Clause 60, it would be easy for an individual to breach a principle and thus be guilty of misconduct. The purpose of this amendment is to provide the approved person with a defence that he took all reasonable precautions and exercised due diligence. This is the same defence as is available in relation to a breach of the general prohibition or a breach of the restrictions on financial promotion. I beg to move.
6.15 p.m.
Lord McIntosh of Haringey: My Lords, I am grateful to the noble Lord, Lord Kingsland, for speaking to this group of amendments. I say immediately that some of the amendments cause us problems for one reason or another. However, this debate gives me an opportunity to explain what is required by the relevant provisions of Clauses 55, 58 and 65 which I hope noble Lords will find helpful. I said that some of the amendments 'were problematic. The noble Lord will be pleased to know that the first one is not one of them. That amendment would give an individual a statutory defence if he performed functions for an authorised or exempt person in contravention of a prohibition order. The wording of the amendment mirrors that in use in certain other statutory defences under the Bill, for example in Clause 21(3). It is important that a person should not be convicted of an offence where he has done what he can to avoid committing it. This amendment has that effect, and its drafting is without fault. I am pleased to accept it.
I turn to Amendments Nos. 112B and 114A which set out certain circumstances in which an authorised person is to be deemed to have taken reasonable care to ensure that persons subject to a prohibition order under Clause 55 do not perform functions on his behalf. I am not attracted to including such express provisions on the face of the Bill. What amounts to "reasonable care" will depend on all the circumstances
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of the case. The test, which is well established and understood, is simple enough and there is no need to define "reasonable care". I believe that it is fair enough to ask authorised persons to exercise such care to ensure that persons who are subject to a prohibition order are not employed by them. In any event, it is not clear to me that the cases set out in the amendments would always amount to the required standard; they might or might not. It would depend on the facts of the case. The extended definitions which would be imported by Amendments Nos. 112B and 114A might well fall short of what constituted reasonable care in any particular case. I do not think that it is right to provide that authorised persons should be able always to delegate their responsibilities in those particular cases in the way that the amendments allow.
Turning to Amendment No. 115D in Clause 65, this deals with breaches of the legislative provisions made by the authority under this part of the Bill. For convenience, I shall refer generally just to rules, but what I say here applies to other legislative instruments made by the FSA, including statements of principle under Clause 63(1). The same logic does not apply to the breach of a rule as it does to the commission of an offence. To be guilty of an offence carries a certain stigma. I do not for one moment condone breaches of the rules, but the reality is that they will occur more frequently and will not necessarily give grounds for criticism or discipline.
One of the underlying purposes of this Bill is to secure that consumers are protected, and that is what the disciplinary provisions under the Bill are designed to achieve. Any disciplining of authorised or approved persons is simply a means of securing that that end is achieved. For example, an authorised person may breach regulatory requirements that apply to him through no fault of his own. An approved person under this part may have been involved in the breach. In certain circumstances, the FSA's response may well be not to take disciplinary action against anyone, but instead it may decide to use its powers to help to rectify the problem. In our view, in a rule breach of that kind, it is immaterial whether the person took steps to avoid committing the rule breach; it happened and remedial action is required.
On the other hand, there will be times when the nature of the breach would suggest some kind of misconduct. I do not believe that it is particularly helpful or meaningful to say that in certain circumstances the breach did not happen, even in cases where the actions of the transgressor were perfectly well-meaning. The important issue in such cases is what would be the consequences of the breach.
The other possible consequence of a rule breach would be disciplinary action. In response to the recommendation of the Joint Committee, the Government have made changes to the Bill to offer protection to persons who have breached FSA requirements, and those amendments are relevant here. The relevant provisions are in Clause 69(2) referring to approved persons; Clause 91(2), referring to the official listing; Clause 120(2), referring to market abuse; and Clause 206(2), on discipline of

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authorised firms. Those provisions require the authority, when issuing a statement about its policy for imposing financial penalties, to take into account a number of relevant factors. In the case of Clause 69(2), the relevant factors are the seriousness of the breach, the extent to which the misconduct was deliberate or—dare I say it?—reckless, and whether the person was an individual.
In our view, there is a presumption that where a person had taken reasonable steps to avoid breaching a requirement, it would often be difficult for the FSA to justify taking disciplinary action. Clearly that would depend on the circumstances of the case. Moreover, even if the FSA proposed to take action, it would find it very difficult to impose a substantial penalty if the rule breach were quite clearly not deliberate and the person's behaviour had not been reckless. That would be all the more true if the person concerned had followed the guidance given by the authority, or indeed if he could show that he had taken legal or other professional advice to ensure that he would stay on the right side of the line.
On that basis, while I see what Amendments Nos. 112B, 114A and 115D are trying to achieve, I think that they could confuse a situation which at the moment is reasonably clear, and which certainly has the kind of effect I believe that the noble Lord seeks to achieve by his amendments.
There is another important point here. If we were to accept Amendments Nos. 112B, 114A and 115D, without doing so in every other relevant instance in the Bill, we would cast doubt over whether the effect of the other equivalent provisions would continue to be as I have just described—and which in our view deliver precisely the policy outcome that the noble Lord, Lord Kingsland, seeks to achieve. In the light of what I have said, I hope that he will appreciate the subtle distinction I have explained between the different cases. I hope that my acceptance of Amendment No. 112A will reassure the noble Lord that we have thought carefully about the effect of the relevant provisions of the Bill.
Lord Kingsland: My Lords, my initial elation at the news that the Government accept Amendment No. 112A has somewhat subsided. However, I shall read carefully in Hansard what the Minister said and reflect on whether it will be appropriate to return to Amendments Nos. 112B, 114A and 115D at Third Reading.
I am particularly sad that the Minister felt unable to move in my direction on Amendment No. 112B which reflects an everyday situation. I believe that the terms of the Bill will impinge harshly on innocent parties. Perhaps some comfort may be gleaned from some of the Minister's remarks. I am grateful for the noble Lord's full response. I commend the amendment.
On Question, amendment agreed to.
[Amendment No. 112B not moved.]
Clause 57 [Applications relating to prohibitions: procedure and right to refer to Tribunal]:
Lord McIntosh of Haringeymoved Amendment No. 113:
Page 26, line 1, leave out ("refuses") and insert ("decides to refuse").
The noble Lord said: My Lords, in moving the amendment, I speak also to Amendment Nos. 114, 115, 118, 171 and 172. They are all drafting amendments. In each case they replace a reference to the FSA "refusing" with a reference to the FSA "deciding to refuse". It is a matter we discussed earlier today.
The point is to make it clear that the decision to refuse various types of application—an application for variation or revocation of a prohibition order; an application for approval under Part V; or an application for variation or revocation of a requirement imposed under Clause 316—is not the final determination of the matter. That does not occur until the period for referring the matter to the tribunal has expired without a reference, or if a reference is made, until the tribunal (and, where appropriate, the higher courts) have determined the matter. At that point, a final notice under Clause 385 will be issued. I beg to move.
Lord Kingsland: My Lords, as the Government have explained, the three amendments to Clauses 57 and 61 make it clear that the decision notice is only a decision to refuse an application to vary or revoke an order prohibiting someone from working in the financial services industry or to approve an individual to work in it. The actual refusal is dealt with by the final notice.
On Question, amendment agreed to.
Lord McIntosh of Haringeymoved Amendment No. 114:
Page 26, line 3, leave out ("application is refused, the applicant") and insert ("Authority gives the applicant a decision notice, he").
On Question, amendment agreed to.
Clause 58 [Approval for particular arrangements]:
[Amendment No. 114A not moved.]
Clause 60 [Determination of applications]:
Lord Kingslandmoved Amendment No. 114B:
Page 27, line 34, leave out ("three months") and insert ("one month").
The noble Lord said: My Lords, under Clause 60(3), the authority is allowed three months to determine applications for individual authorisation. As the Minister will be well aware, the financial services industry believes that that period is unreasonably long; and we share that view. Firms need to fill vacancies much more quickly. They are frequently criticised by the authority for being under-resourced. It is not practicable for a firm to make a job offer, in particular to an overseas applicant, and then to have to wait up

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to three months for the authority's agreement. A period of one month should be long enough for the authority's purposes. I beg to move.
Lord Stewartby: My Lords, I support my noble friend's amendment. Clause 59(2) makes clear that discussion can take place before the application is made because the application has to,
"be made in such manner as the Authority may direct".
The authority will have had the opportunity to ask for the application to be accompanied by the information that it needs. Before the clock starts ticking, under Clause 59 there will have been an opportunity for such discussion.
However, even if there had not been such discussion, under Clause 60(4), the clock stops running on the day that the authority asks for more information and starts again only when the information is received by the authority. If one limits to one month the period during which the application shall be determined, if there is any doubt on the part of the authority and it needs more information to check that out, in practice the period can be a good deal longer.
Given the pace at which matters move in these Financial markets, and the need for firms to have the right people in place as soon as possible, a period of three months seems very relaxed. I hope that the Minister can look favourably on the amendment.
6.30 p.m.
Lord McIntosh of Haringey: My Lords, the amendment would reduce the amount of time the FSA has to consider applications for approval under Part V. I certainly do not disagree with what the noble Lords, Lord Kingsland and Lord Stewartby, said about the importance of avoiding unnecessary delay. It is important that applications are turned around quickly and this is something that the FSA recognises. It has said that it intends to publish service standards, setting out how long it expects the application process to take, and has undertaken to publish its performance against those standards. It has already indicated that routine cases should be processed well within the one month deadline suggested by these amendments—somewhere between a few days and a couple of weeks. Therefore, in practice, the reduction in the time proposed in the amendments would not make any difference to most candidates.
However, there are bound to be a minority of more difficult cases. We believe that Clause 60 gives the FSA an appropriate amount of time to consider the detail of those difficult or complex applications and to weigh the relevant information, without allowing for unnecessary or damaging delays.
It is worth bearing in mind that the FSA is required to satisfy itself that a candidate is a "fit and proper" person to carry out the functions to which the application relates before it can grant the application. If it is unable to do so, it must reject the application. Against this background, a one-month deadline could
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be unworkable, particularly where a candidate is the subject of an investigation or where the FSA needs to obtain information from an overseas regulator.
These processes take time. It is unlikely that they could be completed within a month. This would mean that the FSA would be unable to satisfy itself that such candidates were "fit and proper" and would therefore have to reject their applications. That would be in no one's interests, least of all those of the individual or firm in question.
The important point is that at least part of the time period available to the FSA is not within its power. It is only within the power of those of whom it makes inquiries. I do not believe that the amendment would help. The three month period of consideration has to apply to all applications. If it is reduced, that will do nothing for most candidates who can expect a decision within that time. However, it could hamper the delivery of an effective and thorough approvals process, the purpose of which is to ensure that only those people who meet high standards are able to perform these functions.
Lord Kingsland: My Lords, the Minister said that most applications would be processed quickly, in a matter of a couple of weeks. Would he consider a variation on the amendment which in principle stated that one month was the right period, but subject to circumstances in which the authority had reasonable cause to believe that a longer time was required?
Lord McIntosh of Haringey: My Lords, with the leave of the House, we are always open to suggestions and we always consider them.
Lord Kingsland: My Lords, I asked whether the noble Lord would be prepared to give particular consideration to such a request with a view to coming back at Third Reading with his own amendment.
Lord McIntosh of Haringey: My Lords, I would rather first see the whites of the amendment's eyes. I would be prepared to consider such an amendment.
Lord Kingsland: My Lords, in those circumstances, I beg leave to withdraw my amendment.
Amendment, by leave, withdrawn.
Clause 61 [Applications for approval: procedure and right to refer to Tribunal]:
Lord McIntosh of Haringeymoved Amendment No. 115:
Page 28, line 14, leave out ("refuses") and insert ("decides to refuse").
On Question, amendment agreed to.
Clause 63 [conduct: statements and codes]:
Lord Fraser of Carmylliemoved Amendment No. 115YA:
Page 28, line 41, leave out ("may") and insert ("shall").
The noble and learned Lord said: My Lords, as wit h previous and future amendments, I had intended to he as succinct as possible. However, after that

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intemperate attack by the noble Lord, Lord McIntosh, on my noble friends Lord Peyton and Lord Jenkin, I see no reason why I should be succinct.
If the noble Lord would care to reflect on matters more carefully than he did in the course of his attack, he would realise that this is not a club. This is a Parliament and there is a duty to ensure that whatever legislation comes before this revising Chamber is dealt with as carefully as possible. I make no apology for tabling my amendments yesterday. If the noble Lord were not so London-centric in all his attitudes, he would have appreciated that we last considered the Bill on a Thursday evening. If it has not yet dawned on him, let me indicate to him now that those of us who come from other parts of the United Kingdom tend to regard it as not a bad idea to return to those parts, particularly at the weekend.
Furthermore, if the noble Lord had looked in any way at a number of my amendments, it would have been obvious to him that their intention was to take up problems which seemed to me to emerge from the answers he gave on Thursday. He was all over the place on whether the offence of market abuse was civil, criminal, partly civil, partly criminal, none of those or some new hybrid creature. If he looks at those amendments, he will see that a number of my amendments deal with what might be an appropriate burden of proof.
If the noble Lord wants to indicate that at no time did he ever say to anyone that the first time he considered amendments was when he was reading them at the Dispatch Box, I shall unreservedly withdraw that comment. However, what troubled me was that the noble Lord launched out on an approach which indicated that such was his approach to the Bill that he would have been considering all the amendments over the weekend and would not have been considering them any later.
I hope that the noble Lord understands that what he has said has caused a real sense of outrage on this side of the House. If the noble Lord's Chief Whip has any arrangement through the usual channels, he had better be disabused about that. And, after what the noble Lord said, if he and his luckless officials are under any apprehension that they might be ready for an early bath tonight, they should be disabused of that idea. It seems to me that he has done no one any favours by adopting such an attitude. He has shown so swiftly such an unacceptable display of temper.
The amendment seeks to remove "may" and insert "shall". The provision relates to the clause which imposes or allows for the authority to issue statements of principle with respect to the conduct expected of approved persons. I should have thought that that was a highly desirable activity for the authority to carry out.
The amendment suggests that rather than leaving the matter to the discretion of the authority, it is something that it should do. If the Minister indicates that the authority will issue such a statement of principle, I suppose that in large measure I should be
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satisfied. I just want to make it clear beyond any doubt that that is something in which we believe the FSA should engage. I beg to move.
Lord Boardman: My Lords, I support my noble and learned friend's amendment. The clause is important because it relates to the conduct of the authority. Surely, a Bill which provides so many regulations about what everyone does should require that, as regards the conduct of the authority, the principles which it intends to follow in the process of its monitoring should be under "shall". It is not a question that the authority "may" want to do so, but that it "shall" do so. I strongly support my noble and learned friend and hope that the Minister will accept his amendment.
Lord Peyton of Yeovil: My Lords, I support my noble and learned friend. In doing so, perhaps I may express my gratitude to him for his support and friendly sympathy. Although, naturally, I am bruised by the savage attack which he thought the Minister directed at me, I have reasonable confidence that I shall in due course recover.
I entirely agree with my noble friend Lord Boardman. I always dislike giving authorities discretions. I believe that their duty should be clear. I do not like the idea that they should be free to decide whether or not something suits them, depending on which officials are handling the matter, and so on. I would much rather see something definite in the Bill. I hope that the noble Lord will go along with that and see fit to accept the amendment.
Lord Kingsland: My Lords, I wish to speak to Amendment No. 115A to Clause 63 and to Amendment No. 115B to Clause 64. As your Lordships are well aware, Clause 63 enables the authority to issue statements of principle on the conduct of approved persons. Subsection (2) requires the authority to issue a code of practice to help to determine whether a person's conduct complies with a statement of principle.
That is a particularly important power because subsection (7) provides that a code of practice can be relied upon as tending to establish whether the individual's conduct complies with a statement of principle. As presently drafted, subsection (3) enables the authority's code of practice to specify compliant conduct or non-compliant conduct or factors to be taken into account in determining compliance.
As I understand it, there is no requirement on the authority to issue all three categories of guidance. In consequence, the current draft, which is contained in consultation paper No. 26, contains only examples of non-compliant conduct. Moreover, the examples refer mainly to situations which people would automatically recognise as being non-compliant. As the Minister is well aware, the principles themselves are very broadly drafted. An authorised individual who breaches a rule will necessarily breach principle 2, while a manager who fails to run his section properly will probably be in breach of principles 5 to 7.

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Therefore, because of their breadth, it is important that the code sets out what the authority considers would be compliant behaviour in a number of real situations likely to be encountered in practice. At present, it does not do so. The current draft of the code is of limited or no assistance.
Clause 64 requires the authority to consult before it issues a statement or code with regard to the conduct of approved persons. Subsection (7) disapplies the consultation procedure if the authority considers that the delay would be prejudicial to the interests of consumers. However, that is no reason why the authority should not consult at the same time as the urgent statement or code is issued, and then proceed to make amendments if the representations are persuasive. Indeed, one could well argue that where material is issued urgently, and perhaps without full consideration of the consequences, there is a greater rather than a lesser need to consult and review the action that must be taken.
6.45 p.m.
Lord McIntosh of Haringey: My Lords, in response to the accusations of an intemperate attack, I would say only, "Cet animal est méchant; quand on attaque, il se défend", and I do not make any distinction between myself and the Government in this matter.
So far as concerns the specific amendments of the noble and learned Lord, Lord Fraser, I am grateful to him for setting out with some clarity what he intended because it was not entirely clear to us when we read them this morning. In our view, Amendment No. 1 15YA would not have any effect. He asks whether under Clause 63(1) the FSA can issue no statement of principle. At the minimum, the Bill provides that an approved person is guilty of misconduct if knowingly concerned in a breach of rules by the firm. Whether or not further statements of principle are required is properly a matter for the authority. We know that it intends to make such statements.
I believe that in this matter we are returning to the old issue of "may" and "shall". No doubt the noble and learned Lord and I have debated that on many occasions. Since the noble Lord, Lord Peyton, reminded me of my time in opposition, he will recall that on many occasions I used to use "shall" instead of "may". I was always told by the government that lawyers say that "may" means "shall". That always sounded quite implausible to me. However, that is what the Conservative government used to say to the Labour opposition, and I shall rest my case with that. If I can add to it, I shall of course write to the noble and learned Lord, Lord Fraser.
Amendment No. 115ZA addresses the question of the fee that may be charged when the authority issues statements and codes under this section. The provision, as drafted, is permissive. Within limits, it enables the authority to charge for a copy of the statement and code. That is provided because the authority will issue copies of the code to persons other than those to whom its fee-raising powers under
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Schedule 1 will apply. However, where the authority is able to distribute copies and absorb the costs, we see no reason to oblige it to charge people.
I turn now to the amendments moved by the noble Lord, Lord Kingsland. Amendment No. 115A raises a technical drafting point—again, in relation to "may" and "shall". However, in our view, the Bill is correct as it stands. Clause 63(1) confers power on the FSA to issue statements of principle with respect to the conduct expected of approved persons. Clause 63(2) then provides that if the authority issues a statement of principle, it must also issue a code of practice for the purpose of helping to determine whether or not a person's conduct complies with the statement of principle. Therefore, the authority cannot issue a statement of principle unless it also issues a code of practice which supplements that statement of principle.
Clause 63(3) sets out certain matters which the authority may include in a code. Its purpose is to make it clear that a code may make provision in those matters. The amendment would oblige the authority to include the matters mentioned in Clause 63(3) in every code of practice that it issues. However, that cannot be right. The contents must depend on the nature of the statement of principle which it supplements. The sole purpose of a code is to help a person to determine what he must do in order to comply with a particular principle. Although in many cases factors such as those set out in Clause 63(3) will be relevant, it is not possible to say with certainty that they will be relevant in all cases. Therefore, in a case in which those factors are not relevant, the effect of the amendment would be to require the authority to engage in some kind of work of fiction. I do not believe that that can be right.
Amendment No. 115B questions the Bill's arrangements for consultation on the FSA's proposals to exercise its delegated legislative powers under the Bill. I must remind the House that the Government brought forward a significant number of amendments to the Bill's consultation procedures at Report stage in another place. Those amendments sought to reinforce the procedures in the light of concerns expressed by the Opposition in Committee. The amendments also sought as far as possible to introduce consistency between the procedures for exercising the different delegated legislative powers under the Bill.
As currently drafted, when the authority proposes to make rules or issue statements and codes, including statements and codes under Clause 64, the Bill requires it to publish a consultation draft of the proposed rule, statement or code; to accompany the draft with a cost-benefit analysis; to provide a period for representations to be made; and to produce a feedback statement on the consultation. However, in each case, we have made provision which removes the need for the authority to follow those procedures where the need to make the rules, statements or codes is urgent. I am not sure that Amendment No. 115B, as drafted, would work because, if an issue had to be addressed so urgently, I would not expect the authority to be able to

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produce a meaningful cost-benefit analysis in the time available without there being an undue risk to consumers or the markets.
However, perhaps I can offer some reassurance to the noble Lord, Lord Kingsland, that will enable him to agree that the amendment is not necessary. The Bill allows the authority not to follow the usual procedures where the circumstances require the authority to act urgently. We do not believe that the authority would be able to avoid the procedures frequently. The noble Lord, Lord Kingsland, may have noticed that the period for consultation in Clause 64(2)(b) is expressed in a way that would give the authority flexibility to carry out a short consultation if that were practicable. I am sure that if it were, the FSA would do so. The point the amendment seeks to address will be something that arises only very rarely in relation to any kind of delegated legislative provision, and quite exceptionally in the case of a statement or code under Clause 63.
On these rare occasions where a change has to be made urgently it may be somewhat academic as to whether or not a provision to the effect of the amendment is introduced. The amended rule, statement or code will be in the public domain and those affected by it will be free to express their concerns and make representations, whether or not it is in the Bill. The practitioner and consumer panels will, of course, be able to make representations at any time.
Last Thursday I said that the Government would consider further the amendments tabled by the Opposition on the role of the panels and bring forward amendments to improve the feedback arrangements. I am sure that they would help in this case.
When the Authority makes rules of any kind, whether under the routine or the urgent procedure, it will be bound by the objectives and principles under Clause 2 and the Director-General of Fair Trading will have responsibility for ensuring that the requirements do not have an unduly adverse effect on competition.
There are plenty of safeguards in the Bill as it stands. I believe that imposing another requirement for consultation, cost-benefit analysis and feedback statements after the event, in cases where the FSA has had to act urgently in response to some unexpected circumstance, would be excessive.
Lord Fraser of Carmyllie: My Lords, I express some disappointment that the noble Lord did not take the opportunity to offer any sort of apology, but I will leave that for the time being.
I am also very much aware of the circumstances in which the courts have construed "may" as "shall" and other circumstances where they have construed "shall" as "may". My conclusion, however, is that this is a circumstance where the courts would construe "may" as "may".
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The noble Lord has indicated that it is the intention of the Financial Services Authority to issue just such a code. I would regard that as very desirable and, for the present purposes, sufficient. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 115ZA and 115A not moved.]
Clause 64 [Statements and codes: procedure]:
[Amendment No. 115B not moved.]
Clause 65 [Disciplinary Powers]:
Lord Fraser of Carmylliemoved Amendment No. 115BA:
Page 30, line 45, leave out ("it appears to the Authority") and insert ("the Authority is satisfied beyond reasonable doubt").
The noble Lord said: My Lords, I understand that this amendment is coupled with Amendments Nos. 115CA and 133CA. Two of them relate to the issue of standard of proof and one relates to the issue of publication of findings in a national newspaper. They also tie in with other amendments that I shall wish to speak to later this evening.
They are all related to the issue which has been of some concern to me: that of market abuse and what exactly the Financial Services Authority is doing if it decides to pursue the matter of market abuse, impose penalties or make findings of misconduct.
When I was on the Joint Committee chaired by the noble Lord, Lord Burns—barring the clear expression of view given to us by the noble and learned Lord, Lord Hobhouse, that everything we were looking at was effectively criminal—I thought that I had a fairly clear understanding of what was contained within market abuse. In summary, it was this: that at one end of a continuum it was clearly civil in nature and, at the other end, it was almost undoubtedly criminal.
It would not be difficult to envisage circumstances when the criminal end of it would apply, where there had been conduct which might otherwise have been prosecuted as insider training but for the reluctance of prosecuting authorities to take that course because of the history of failure experienced in recent years.
What has always struck me as a difficulty, however—and no one has yet answered it for me—is whether at the point when one looks at behaviour that might be regarded as market abuse, before setting out to prosecute it, one can determine that it is civil or indeed criminal in character. In some circumstances it might appear to some to be a quarrel of an academic nature but, given the presence in our law—certainly north of the Border and shortly to be incorporated into English law—of the human rights legislation, it seems to me that we should be absolutely clear on what is the character of market abuse. We should certainly not attach to it any procedure or other characteristics that would allow any finding of market abuse or any conviction to be subjected to challenge in the courts thereafter.
One way of ensuring that that happened to the least possible degree would be to indicate that the appropriate test to be applied in those cases—whether civil or criminal—is that the burden of proof to be applied is that of beyond reasonable doubt.

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If, looking at it in retrospect, the conclusion were that it was essentially criminal in character, that finding would be less likely to be challenged if the test applied throughout had been that of beyond reasonable doubt, In any event, it seems to me that in disciplinary proceedings of this sort such a test is appropriate.
My purpose in putting down these amendments is to explore further whether there is an appreciation of the concerns that I and others have, and whether the Government regard the approach that I have suggested as being at least part of a technique which could be applied to ensure that the risk of challenge was reduced as much as possible.
My second amendment, Amendment No. 115BA, relates to the publication of statements of misconduct in a national newspaper. In a way, it is of secondary importance. I would envisage in such circumstances, if there were findings of misconduct, provision would be made for publication in one form or another. Whether a national newspaper remains the most appropriate way in which to do that nowadays, I do not know.
I would wish for some reassurance, however, that, where there were such proceedings and where penalties were imposed, this was not done behind closed doors but in accord with principles of openness and transparency, which I understand the FSA, and those who support the broad new regulatory regime to be introduced, would regard as being important. I beg to move.
Lord Boardman: My Lords, I support this amendment. It is right that the authority, in reaching a decision, should do so beyond reasonable doubt. Beyond reasonable doubt is a judgment which is applied to so many cases, from murder downwards. It should be clearly on the statute in this case and those words should be inserted. It does nothing to detract from the Government's approach to this Bill.
With regard to the second amendment, I think that it would he helpful to say "publish in a national newspaper". The present wording leaves the matter open. One can publish in all sorts of forms, even by putting leaflets through everyone's letterbox. This amendment removes any doubt.
Lord Kingsland: My Lords, I wish to speak briefly to Amendments Nos. 115C and 122A. Amendment No. 1150 is intended to seek clarification that to be knowingly concerned in a contravention under Clause 65(2)(b) means that the person knows that the relevant authorised person is contravening a requirement imposed on the authorised person by or under the Act.
The same point applies to Amendment No. 122A, which relates to similar wording in Clause 89.
7 p.m.
Lord McIntosh of Haringey: My Lords, I speak first to Amendments Nos. 1 15BA and 115CA, if that order is convenient to the House.
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Amendments Nos. 115BA and 133CA would both have the effect of requiring the FSA to prove disciplinary matters under Clause 65, or market abuse under Clause 119, to the criminal standard of proof of "beyond all reasonable doubt". I shall not enter into the wider issues (to which the noble and learned Lord, Lord Fraser, referred) of the extent to which these matters are criminal or civil. The noble Lord, Lord Boardman, referred to a body reaching a decision. But that is not the case here. In this case, the FSA is exercising a statutory discretion rather than reaching a decision. It is not so appropriate to be talking of standards of proof when a body is exercising a statutory discretion. The real point is that it should exercise its powers rationally.
I agree entirely that the FSA should be required to be satisfied of the facts before taking the action, but the present clauses achieve that. As the Bill stands, the FSA must reach a view as to whether it believes that a person has committed a disciplinary infraction or engaged in market abuse. It will therefore impose a penalty. It must issue a warning notice allowing that person to make representations and then, if it decides to proceed, it must issue a decision notice which will trigger the relevant person's right to take the matter to the independent tribunal.
The tribunal provides not only a safeguard but a strong incentive for the FSA to take the right decision at the start. If the case is referred to the tribunal, it will be subject to the appropriate civil standard of proof. As the former Economic Secretary to the Treasury, Patricia Hewitt, made clear to the Joint Committee—she was supported by learned witnesses; for example, Sir Sydney Kentridge—that is a sliding scale which takes account of the seriousness of the behaviour or failing alleged by the FSA. The more serious the behaviour, the higher the standard which will be applied. I believe that the noble and learned Lord, Lord Fraser, as a member of the Joint Committee, will well recall that debate and will recognise that that was the nature of the evidence given to the committee and which the committee acknowledged.
We are dealing with important provisions and it is right that they should be properly analysed and debated. But as it stands, the Bill delivers a balanced and appropriate package of measures with sufficient checks and balances. I hope that that will persuade the noble and learned Lord, Lord Fraser, not to press his amendments.
I deal now with the amendments which are concerned with Clauses 65 and 89, which give the FSA certain disciplinary powers in the event that rules or requirements are breached, and those concerned with Clause 119, which gives the FSA the power to impose penalties in cases of market abuse.
I deal with Amendments Nos. 115C and 122A in the name of the noble Lord, Lord Kingsland. Clauses 65 and 89 both refer to people—approved persons or directors respectively—being knowingly concerned in breaches by the firm of the relevant rules or requirements. Those amendments seek to define the concept of someone being "knowingly concerned" but

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we do not believe that any definition is necessary. The definition in these amendments might tighten the test in a way which is inappropriate.
It would, of course, be wrong to seek to impose penalties or to use other disciplinary powers against individuals where the person concerned had no knowledge of the action leading to the breach of rule or requirement. That would be draconian. It would also be a pointless sanction since such a case could not act as a deterrent because the person upon whom it was imposed would not have known anything about the action leading to the breach and so would hardly have been in a position to avoid it. That is why the Bill requires the individual to be "knowingly concerned" in the contravention before any action can be taken.
There is existing jurisprudence on the "knowingly concerned" test. The test requires the individual to be aware of the facts which give rise to the breach of the rule in question by the firm and aware too of his own involvement in that factual situation. But it does not have to be shown that the individual was aware of the legal rules which were contravened because ignorance of the law is rightly no defence.
The effect of the amendments would appear to be to require that the person involved not only knew about the action in question but must also have known that it involved a breach of a requirement or rule. If we adopted that approach, it could mean that we ended up in a position where people could avoid sanctions for breaches of rules or requirements simply by making sure that they kept themselves in the dark about what those rules or requirements are.
It is important to remember that we are talking about approved persons or directors—people holding responsible and important positions within the financial services industry who should make it their business to know the rules relevant to their sphere of activity and to ensure that systems are in place to avoid breaches. To give such people an incentive to remain ignorant of the rules does not seem to be either sensible or desirable.
I do not believe that it is the intention, but it seems to us also that the amendments would make it less clear than it currently is that the individual must also be shown to have been aware of his own involvement in the particular factual situation. The amendments might risk making individuals liable whenever they knew that something was being done wrongly by the firm, even when they were not aware that they were themselves involved in that wrongdoing. That might place too high a burden on individuals.
I assure the House that the concept of someone being "knowingly concerned" is not new. It is contained in the Financial Services Act 1986. It has been used by the FSA in proceedings that have been brought in the past. There is existing jurisprudence on
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what it means and it would be most undesirable to cast doubt on that. I believe that I have dealt with all the amendments.
Lord Boardman: My Lords, the Minister has not dealt with Amendment No. 115CA.
Lord McIntosh of Haringey: My Lords, the noble Lord must be right. Clause 65 is designed to provide for a proportionate approach towards the exercise of disciplinary powers under the approved persons regime. That approach would be somewhat undermined by Amendment No. 115CA, tabled by the noble and learned Lord, Lord Fraser of Carmyllie.
Where the FSA decides to take action in response to the misconduct of an approved person, it may either impose an appropriate penalty or, alternatively, publish a statement of his misconduct. Those disciplinary powers supplement the power to withdraw an approval.
They allow the FSA to make a measured response to instances where a person's behaviour did not meet expected standards but was not such as to justify withdrawing altogether the person's approval. I think that that is the response which the noble Lord, Lord Boardman, was seeking.
Lord Boardman: My Lords, as I understood the amendment, it was about publication in a national newspaper. It sought to clarify whether the information should be simply stuck up on a notice board or published in a national newspaper.
Lord McIntosh of Haringey: My Lords, the key to that is that the disciplinary powers must be used in an appropriate and measured way. Clearly, it may be right, on occasion, to publish in a national newspaper; but on other occasions, it would be disproportionate. Nothing would be gained by restricting the discretion of the FSA along the lines proposed in Amendment No. 115CA as to the nature of the action that it may take under Clause 65(3)(b). It may be wrong to arm it with a sledgehammer when perhaps a nutcracker would be more appropriate.
Lord Fraser of Carmyllie: My Lords, the noble Lord cited what the Minister said in evidence before the Joint Committee. He accurately recorded what her evidence was. But if he goes through the whole of the evidence, I should be surprised if he can discern from all that evidence one clear, unequivocal line of opinion given to the Joint Committee. Indeed, some were really quite troubled that it should have anything of a civil character and thought that it really was, from the word go, entirely criminal in nature.
However, that is not the point which really concerns me; it is the issue on which I have still not had an answer. I do not really blame the Minister. I am not trying to flatter or to criticise him; I am just making the point that I have not had an answer to that point. If it is a sliding scale—a continuum—at some point it changes from being civil in character to being criminal. No one has been able to identify for me—nor, I

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believe, before the Joint Committee—the point at which that change occurs. Once it occurs, particularly in the context of human rights legislation, one must ensure that, if they are criminal, there are attendant upon the proceedings a number of important safeguards set out in the convention and, more generally, in our criminal law. It seems that the best opinion that can be expressed is simply that after the event, it may be possible to look at the charge within the proceedings and then to say, "As we now look at it, it is clear that it was civil or criminal".
What troubles me about that approach, although I do not disagree with it, is that if we have a case on the borderline, there may be some risk of subsequent challenge to those proceedings. My sole purpose is to do what can be done to avoid the risk of such a challenge. I have no doubt that the harder and more rigorously we consider that matter, the better it will be. I have heard what the Minister has said and I shall certainly not be pressing the amendment at this stage.
In relation to my second amendment, he raised the provision of subsection (3) of Clause 65:
"If the Authority is entitled to take action … against a person, it may—
(a) impose a penalty on him of such amount as it considers appropriate;
or
(b) publish a statement of his misconduct"
I can well envisage circumstances where the authority comes to the view that there has been a degree of misconduct and that that misconduct should be brought to wider attention. What is not entirely clear to me is how disjunctive that "or" is in the middle of the subsection. It seems that it is not difficult to envisage circumstances where a person has been reprehensibly guilty of misconduct and the authority, with good cause, might wish to impose a significant penalty on him, in which circumstances it would seem appropriate that that should also be published.
Lord McIntosh of Haringey: My Lords, with the leave of the House, I wonder whether the noble and learned Lord would allow me to intervene. I was not as full as I might have been in response to him. The current practice of the FSA is to make those statements in press notices which are widely reported in the trade press and can feature also in the national press in serious and high profile cases. Of course, we cannot force the national press to support such statements. The protection is that all FSA press notices are posted on its website. They are therefore available to members of the public.
Lord Fraser of Carmyllie: My Lords, I am grateful to the Minister for that intervention. It is not quite the answer to my point. He is absolutely right about that: if anyone has an adverse press notice about him posted or given any degree of publicity, I am aware that such individuals are often far more concerned about that than about any level of penalty that might be imposed upon them because of the reputational damage it might do to them. I am not saying that that is a bad
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thing, but I am indicating that I understand. What I am not clear about is whether those are alternatives or whether one may impose a major penalty and publish.
Lord McIntosh of Haringey: My Lords, the answer to that is "yes". If the FSA imposes a penalty, it may also make a statement of the fact that it has done so.
Lord Fraser of Carmyllie: My Lords, it has taken us a little time to get there, but I am grateful that we have done so. That is what I wanted to ascertain. As I indicated, publication in a national newspaper does not seem to be at the core of matters. As time Minister has indicated, publication on a website, where perhaps the whole world may pick it up, may be far more damaging than anything else. As I indicated, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 115C to 115D not moved.]
7.15 p.m.
Clause 67 [Notice for payment]:
Lord McIntosh of Haringeymoved Amendment No. 116:
Leave out Clause 67.
The noble Lord said: My Lords, in moving the amendment, I shall speak also to Amendments Nos. 127, 138, 184, 189, 190 and 191. That group of amendments completes the changes begun in Committee to replace the separate provisions dealing with notices for payment with a single over-arching clause dealing with final notices. Clause 385 deals with final notices, and subsection (5) requires a final notice imposing a financial penalty to state the amount of the penalty and the manner and period in which the penalty is to be paid and to give details of the way in which the penalty will otherwise be recovered.
That removes the need for a number of existing clauses which provide for separate notices for payments setting out those details. Of course, I understand that the Opposition had some worries about that. They felt that there was some ambiguity as to whether payment notices could be issued before the relevant decision was intended to take effect; that is, not until after any relevant tribunal and other judicial procedures, or the period for making references or appeals had passed. To address that concern we introduced Clause 385 in Committee. During discussion, noble Lords opposite sought my assurance that the remaining provisions dealing with notices for payment and, in particular, Clause 124, would be omitted on Report.
We offered that assurance and the amendments fulfil it. Thus the government amendments would omit all the remaining clauses which separately provide for notices for payment—Clauses 67, 93 and 124 under Parts V, VI and VIII and Clause 381, which provides for payment notices for restitution orders under Clause 378. Amendment No. 189 is a consequential amendment resulting from the omission of Clause 381.

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It requires final notices issued in connection with the restitution power to set out the persons to whom, the manner in which and the period within which payments or distributions should be made.
Amendment No. 190 specifies that, as for other final notices requiring payments to be made, that period may not be fewer than 14 days. Amendment No. 191 makes provision for those payments or distributions to be enforceable through the courts. Removing the separate provision for notices for payment and dealing with the issue in Clause 385 makes it clear that payment cannot be required until the decision has come into effect, either because the period for reference to the tribunal has passed without a reference being made, or because a reference has been made and is being determined by the tribunal or by the higher courts. I hope that that meets in full the points made by the Opposition in Committee. I beg to move.
Lord Kingsland: My Lords, Clause 67 relates to notices for payment and is deleted in line with the new procedures, which leave payment notices to the final notice. That seems sensible. Clause 93 deals with notices for payment and therefore, again in accordance with the new procedures, needs to be deleted because payment notices are again now dealt with by the final notice. We are also pleased about that. Am I right in thinking that there is a new clause after Clause 93 relating to competition?
Lord McIntosh of Haringey: Yes, my Lords. It is not in this grouping.
Lord Kingsland: My Lords, I am extremely pleased to hear that, because I was about to speak to it. I am much obliged.
On Question, amendment agreed to.
Clause 68 [Publication]:
Lord McIntosh of Haringeymoved Amendment No. 117:
Page 32, line 13, leave out subsection (2).
The noble Lord said: My Lords, in moving this amendment, I should like also to speak to Amendments Nos. 192 to 194. They are concerned with the publication of information concerning supervisory actions. It further underlines the basic presumption in favour of openness where that is consistent with fairness and the protection of consumers. On reflection, it occurs to me that perhaps we should have grouped these amendments with earlier amendments from the noble and learned Lord, Lord Fraser of Carmyllie, because they are on a similar subject. Perhaps that is one of the victims of oversight because of the speed with which we were doing things this morning.
However, one of the amendments also links into amendments we have already discussed and which address the question of when non-urgent supervisory decisions take effect. That is a point which has caused some concern to the Opposition.
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Amendment No. 193 defines what is meant by "open to review" for these purposes. A matter is still open to review if the period for referring the matter to a tribunal is still running; there is a reference before the tribunal currently; the period for making an appeal against a tribunal ruling is still running; or an appeal is pending.
That feeds back into the relevant procedural clauses, such as the first new clause after Clause 51, which was introduced by Amendment No. 109 which we have already debated, and Clauses 255, 264 and 278, with the effect that a non-urgent supervisory decision does not take effect while the matter is open to review.
Turning to the issue of publicity, Clause 386(2) requires that when the FSA decides not to proceed with a proposed action and issues a notice of discontinuance, that notice must state that the FSA may publish appropriate information about the matter if the person consents. Similarly, subsection (3) of that clause requires that any copy of a notice of discontinuance given to a third party in accordance with Clause 388(14) must be accompanied by a statement that the FSA may publish appropriate information about the matter if that person consents. The FSA may not publish any information about the matter without the appropriate consents. That supersedes Clause 68(2) which Amendment No. 117 deletes.
Amendment No. 192 makes it clear that, like a final notice, information about a supervisory notice may be published if appropriate, once the notice takes effect. However, the Bill provides that it may not be published if this would be unfair to the person concerned or prejudicial to the interests of consumers. So, if publicising a supervisory action might give rise to a general loss of confidence and therefore may result in damage to consumers, the FSA should not publicise it. Amendment No. 194 imports the definition of "supervisory notice" from Clause 390 for that purpose.
Before I move from this amendment perhaps I may return to the point raised by the noble and learned Lord, Lord Fraser of Carmyllie, when we considered the words "knowingly concerned" in Clause 65. I believe it was the noble and learned Lord, but it may have been someone else. I thought that he was asking about the effect of the word "or" in Clause 65. I said that the authority was entitled, when imposing a financial penalty, also to make a public statement. To be more accurate, what will happen is that the final notice imposing the penalty will itself be published under Clause 386(4), subject to the exceptions in subsection (5) of that clause. So the publication will not be under Clause 65(3)(b). The word "or" does indeed mean "or". If it is of any consolation to the noble and learned Lord, he was right in that respect. I beg to move.
On Question, amendment agreed to.
Clause 71 [Actions for damages]:
Lord Fraser of Carmylliemoved Amendment No. 117A:
Page 33, line 24, at end insert ("but shall in any event include natural persons and Scottish partnerships under section 4 of the Partnership Act 1890").
The noble and learned Lord said: My Lords, this is a very "tartanising" short point. As I understand Clause 71(2), the opportunity is provided that a "private person" will be defined and shall have,
"such meaning as may he prescribed".
I seek to ensure that there is due acknowledgement of the fact that in Scotland a partnership enjoys the status of a separate legal persona. I should like to see some provision made to ensure that where a meaning is given to the words "private person" in such prescription, the separate legal persona of a Scottish partnership will be recognized. I beg to move.
Lord McIntosh of Haringey: My Lords, this amendment would limit the Treasury's discretion when defining a "private person" for the purposes of Clause 71 which is concerned with rights of action. Our intention is to reproduce the regulations under the Financial Services Act 1986. The regulations do not include in the definition people acting in a professional capacity.
Lord Fraser of Carmyllie: My Lords, I am grateful to the noble Lord for that answer. I shall reflect on it. I am sure that there are also professionals who will reflect on it with even greater care than I. Although the amendment concerned partnerships rather than the status of professional persons, that of itself is revealing. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 76 [Decision on application]:
Lord McIntosh of Haringeymoved Amendment No. 118:
Page 35, line 19, leave out ("refused") and insert ("decided to refuse").
On Question, amendment agreed to.
Lord Bachmoved Amendment No. 119:
Page 35, line 19, at end insert—
("( ) If the competent authority decides to grant an application for listing, it must give the applicant written notice.
( ) If the competent authority proposes to refuse an application for listing, it must give the applicant a warning notice.
( ) If the competent authority decides to refuse an application for listing, it must give the applicant a decision notice.
( ) If the competent authority decides to refuse an application for listing, the applicant may refer the matter to the Tribunal.").
The noble Lord said: My Lords, on behalf of my noble friend, in moving this amendment I speak also to Amendments Nos. 120, 123 and 124. We introduced a number of changes to Part VI of the Bill in Committee as a result of the transfer of the competent authority function from the London Stock Exchange to the FSA. My noble friend said then that the missing elements of the package concerned the procedures that the competent authority has to follow when coming to
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a decision, and the right to refer competent authority decisions to the tribunal to be established under the Bill. This set of amendments deals with these matters.
Amendment No. 119 to Clause 76 provides that the competent authority must give an applicant for listing a written notice if the application is accepted. If the competent authority proposes, however, to refuse an application, the amendment sets out the warning notice and decision notice procedures that it must go through. Additional provision on warning notices and decision notices is contained in Part XXVI of the Bill. The amendment also provides that if the competent authority decides to refuse an application for listing, the applicant may refer the matter to the tribunal.
Amendment No. 120 introduces a new clause after Clause 77 which sets out the procedures to be followed if the competent authority proposes to suspend or discontinue the listing of listed securities. These decisions are supervisory in nature rather than disciplinary, and the procedures are broadly in line with those which the FSA must follow when exercising its own-initiative powers under Part IV of the Bill.
The new clause provides that if the competent authority proposes to discontinue or suspend listing, or does so with immediate effect, it must give the issuer of the securities written notice, setting out its reasons, and informing him of the right to make representations and to refer the matter to the tribunal.
Having considered any representations, the competent authority then has to decide whether to continue with its proposal, or if it has suspended or discontinued listing with immediate effect, whether to continue with the suspension or discontinuance. Whatever it decides, it must give the issuer written notice, again informing him of his right to refer the matter to the tribunal.
The clause also deals with applications by issuers for the cancellation of suspensions which are in place. The procedures are the same as for refusal of an application for listing. The clause also provides for a right to refer a competent authority decision to refuse to lift a suspension to the tribunal.
The amendments to Clause 90 set out the steps that the competent authority must go through when it proposes to impose a penalty on someone or publish a statement censuring him under Clause 89. These are, of course, disciplinary sanctions. The first amendment, Amendment No. 123, simply replaces the reference to "imposing a penalty" with one to "taking action against". That is consequential on the introduction in Committee of the intermediate power of issuing a public censure against directors and ex-directors as well as against issuers.
The second amendment to Clause 90—Amendrnent No. 124—aligns the procedures for warning notices and decision notices with those that we are applying to the Financial Services Authority more generally when it proposes to impose a penalty or make a statement.

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We have debated those already. Subsection (7) of the amendment provides the right to refer a decision of the competent authority to the tribunal. I beg to move.
Lord Kingsland: My Lords, Clause 76 deals with applications for listing and makes it clear that the warning and decision notice procedures apply to proposed refusals and that the applicant can refer the matter to the tribunal. That is why the proposed amendment to page 35, line 19, changes "refused" to "decided to refuse". All this is most helpful.
As the Minister has already explained, the new clause after Clause 77 illuminates in great detail the procedures that will apply in the case of a discontinuance or suspension of listing and assists issuers, especially as it gives a right to refer the matter to the tribunal. However, three points trouble us.
First, in subsection (3)(c) the period for representations, in our view, should be a reasonable period. Secondly, subsection (9) provides that when a discontinuance is cancelled securities,
"are to be readmitted, without more, to the official list".
Perhaps the Government can explain what that means. Presumably there does not need to be a new application for listing, but what sort of statement does the competent authority make to the public, saying that securities are readmitted?
Thirdly, there are some quite detailed provisions in subsections (10) to (12) allowing the issuer to apply for a suspension of listing to be cancelled. However, there does not seem to be any similar provision allowing the issuer to apply for a discontinuance of listing to be cancelled.
With regard to the amendments to Clause 90, I suppose that the first amendment to line four is required because the competent authority can either impose a penalty or publish a statement of censure. Therefore, it is inappropriate to refer to imposing a penalty only. The new provisions replacing subsections (2) and (3) simply spell out in a little more detail what happens with warning and decision notices and give a right to appeal to the tribunal, rather than, as the Government until now have wanted, a separate tribunal. That makes perfectly good sense.
Lord Bach: My Lords, I am grateful to the noble Lord for his general support for these government amendments. I shall attempt to deal with the questions that he asked about Amendment No. 120, the new clause after Clause 77. He takes issue with subsection (3)(c), saying that there should be a reasonable period for representations. The fact that the subsection makes no comment as to the period, in my view, means that the time given would have to be reasonable. If it were not reasonable, a court would intervene. The precise period would depend on how soon the discontinuance or the suspension took place.
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On another question posed by the noble Lord, the effect of cancelling a discontinuance under subsection (9),
"is that the securities concerned are to be readmitted, without more",
and the words "without more" imply that there would not have to be a fresh application. As to whether there was any further procedure that was necessary, I shall have to write to the noble Lord, as I fear I shall have to on his detailed question about subsections (10) and (11).
On Question, amendment agreed to.
Lord McIntosh of Haringeymoved Amendment No. 120:
After Clause 77, insert the following new clause—
DISCONTINUANCE OR SUSPENSION: PROCEDURE
(" .—(1) A discontinuance or suspension takes effect—

(a) immediately, if the notice under subsection (2) states that that is the case;

(b) in any other case, on such date as may be specified in that notice.

(2) If the competent authority—

(a) proposes to discontinue or suspend the listing of securities, or

(b) discontinues or suspends the listing of securities with immediate effect,

it must give the issuer of the securities written notice.
(3) The notice must—

(a) give details of the discontinuance or suspension

(b) state the competent authority's reasons for the discontinuance or suspension and for choosing the date on which it took effect or takes effect;

(c) inform the issuer of the securities that he may make representations to the competent authority within such period as may be specified in the notice (whether or not he has referred the matter to the Tribunal);

(d) inform him of the date on which the discontinuance or suspension took effect or will take effect: and

(e) inform him of his right to refer the matter to the Tribunal.

(4) The competent authority may extend the period within which representations may be made to it.
(5) If, having considered any representations made by the issuer of the securities, the competent authority decides—

(a) to discontinue or suspend the listing of the securities, or

(b) if the discontinuance or suspension has taken effect, not to cancel it,

the competent authority must give the issuer of the securities written notice.
(6) A notice given under subsection (5) must inform the issuer of the securities of his right to refer the matter to the Tribunal.
(7) If a notice informs a person of his right to refer a matter to the Tribunal, it must give an indication of the procedure on such a reference.
(8) If the competent authority decides—

(a) not to discontinue or suspend the listing of the securities, or

(b) if the discontinuance or suspension has taken effect, to cancel it,

the competent authority must give the issuer of the securities written notice.
(9) The effect of cancelling a discontinuance is that the securities concerned are to be readmitted, without more, to the official list.

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(10) If the competent authority has suspended the listing of securities and proposes to refuse an application by the issuer of the securities for the cancellation of the suspension, it must give him a warning notice.
(11) The competent authority must, having considered any representations made in response to the warning notice—

(a) if it decides to refuse the application, give the issuer of the securities a decision notice;

(b) if it grants the application, give him written notice of its decision.

(12) If the competent authority decides to refuse an application for the cancellation of the suspension of listed securities, the applicant may refer the matter to the Tribunal.
(13) "Discontinuance" means a discontinuance of listing under section 77(1).
(14) "Suspension" means a suspension of listing under section 77(2).").
On Question, amendment agreed to.
Lord McIntosh of Haringey: My Lords, I beg to move that further consideration on Report be adjourned. In moving the Motion I suggest that the Report stage begin again not before 8.35 p.m.
Moved accordingly, and, on Question, Motion agreed to.

Special Constabulary
7.35 p.m.
Lord Bradshawrose to ask Her Majesty's Government whether they will consider paying members of the Special Constabulary.
The noble Lord said: My Lords, before beginning this debate about the Special Constabulary I want to declare two interests. I am a member of Oxfordshire County Council and of the Thames Valley Police Authority. However, I do not speak on behalf of the police authority or the Thames Valley Police, but I shall draw on my six years' association with police authorities and some of the issues that have come to my attention during that time.
I do not want to enter into any arguments about the numbers of police officers, or where the political responsibility may lie for that, although it is interesting to note that since 1992 police numbers in England and Wales have remained reasonably constant at between 126,000 and 128,000. However, there is now great difficulty in recruitment and retention of officers, particularly in those parts of the country where housing costs are high. That problem appears to have been made a great deal worse by the loss of the housing allowance following the implementation of the Sheehy report, which was implemented at a time of industrial recession and lower housing costs. The plain fact is that there are not enough police officers and I believe that present and planned recruitment, taking into account wastage, will not bridge that gap.
Wastage of full-time police officers and the reasons for it are not part of this short debate, but they need to be dealt with. I argue that when the Government agree new pay and allowances for the police, as I am sure
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they will have to do in the not too distant future, they should also seek to revitalise the Special Constabulary in any deal that is made.
The number of special constables is falling. Between March 1997 and March 1999 there was a net loss of 3,380 which is 17 per cent of the total strength. Interestingly, the number of retained fire fighters is not falling, although the police and the fire service have been the subject of much more stringent training requirements and health and safety requirements in the past few years. Retained fire fighters receive some payment in return for their commitment to weekly training sessions and to answering fire calls. That amounts to around £3,000 a year, and includes a compulsory two-hour training session each week, a call-out fee of £11.42p and £5.80p an hour after they have been on duty for an hour and a quarter.
The police service is subject to great "peakiness" in demand. There is a big demand on Friday evenings and Saturdays, but there are also special events such as football matches, race meetings and pop concerts. It is my experience of many other industries that large peaks in demand are best met by part-time labour, rather than the present practice which takes place in many police services of denuding whole areas of policemen in order to provide men to cover special events, such as Royal Ascot. It would seem to me to be desirable in many cases to have more specials to draft in to cover some of those events.
A paper presented by Ian Blair, then Chief Constable of Surrey, to the ACPO conference in 1998, addressed the future of police patrol. He suggested that the staff of other agencies, suitably accredited and trained, might be used more in a policing role, particularly in extending the scope of patrolling. My colleague, Susan Kramer, at present campaigning to be elected as mayor of London, has proposals in her manifesto for a community safety constabulary to work in partnership with the police. I believe the Government have ideas about neighbourhood wardens.
A community safety constabulary, or whatever we call it, would go beyond what I am advocating in terms of a revived Special Constabulary. But we should be aiming, as part of the community safety strategies which local authorities are developing, to bring together the efforts of many people like traffic wardens, park rangers, estate wardens and street inspectors. They could have a much greater impact on vandalism, graffiti, broken street lights, blocked bus lanes, anti-social behaviour and abandoned cars. A common uniform and radio contact with the police, which is in prospect with the new radio systems becoming available, would enhance the effectiveness of such people. I believe that the police should remain in the lead in law enforcement and my proposals seek to reinforce their efforts.
There is a traditional argument that Specials value their volunteer status. Many existing Specials do and we should be grateful for their voluntary, public-spirited service, and I do not in any way wish to devalue that. However, we need to go out to a much

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wider catchment of potential recruits and some payment may be an effective incentive. The sums offered to retain fire fighters are not large, but they are sufficient in the town where I live to have 10 people ready to staff the local fire engine when called and in many of the towns in Oxfordshire there are 20 people who are willing to turn out when required. I believe that sort of payment might encourage people to volunteer to be special constables. I know that in the past a small bounty was offered, I believe in Dorset, without any great effect. But I am calling for a much more widely-publicised and radical initiative.
The retained fire service is also a valuable way of recruiting to the full-time service. A revived and relaunched Special Constabulary might help full-time police recruitment. It may also help in the vital area of attracting ethnic minority recruits who would be able to sample police life before entering into a career commitment.
In some businesses, such as the railways, London Underground, and so forth, employers might encourage and even be prepared to pay staff to join up as Specials. In fact the British Transport Police, with its heavy commitment on football days, would seem to be the ideal place to step up recruitment of Specials familiar with the technicalities of the railway system. Accredited football stewards and other properly trained security staff may also be potential recruits.
I realise that such proposals are not likely to be welcomed by the Police Federation. It will argue for an overhaul of wages and conditions. I accept that that is necessary and I am not, in raising the subject of the Special Constabulary, seeking to distract attention from the legitimate views of the federation in relation to pay and conditions. But we cannot wait for that.
It seems unlikely, with wastage running at current rates, particularly in London and surrounding areas, that the much-heralded increase in police numbers will be achieved. I will go so far as to say that the increases will not be achieved and that in 18 months time we will have fewer officers in many areas than we have at present. In Thames Valley, transfers out—officers going away to forces in other areas—have grown from 10 officers a year two years ago to an anticipated 30 officers this year and the figure is rising sharply. However, a radical approach to revitalising the Special Constabulary, including payment, could see 10,000 more people in uniform within 18 months at times and in places where an additional police presence is vitally necessary. I hope that the Minister tonight will be able to tell us that the Government will give this matter serious consideration.
7.45 p.m.
Lord Luke: My Lords, your Lordships may wonder why I decided to put my name down to speak in this debate, for which we are all indebted to the noble Lord, Lord Bradshaw. I congratulate him on his most interesting speech, though I do not necessarily agree with some of his conclusions.
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The reason for my speaking in this debate is that for some 12 years I was a member of the City of London Special Constabulary. I served mainly as a mobile special, using my own car with another special and, most importantly, with a regular constable on board. Among other things, I remember acting as a guinea pig for the new hand-held radio, which did not work very well at the start. I helped to line the streets when President De Gaulle came to lunch at the Guildhall. I helped to get Princess Margaret's car through the crowds to Tower Pier on the occasion of her marriage to Lord Snowdon. I even participated in the arrest of some men in a stolen car (it was broken down at the time).
So my knowledge is a bit rusty; in fact, some 40 years old. But at that time, as is the case now, special constables were never used as substitutes for full-time and, most importantly, fully-trained members of the police. The Special Constabulary is, was, and should remain, a means for public-spirited people to offer their services to help police forces to carry out their duties in whatever way may be appropriate to each force while at the same time contributing to the welfare of their own communities.
The number of special constables appears, as the noble Lord, Lord Bradshaw, said, from the statistics that I have been given, to be falling at an alarming rate. That is particularly marked in the metropolitan area. What is the reason for that? Several probable reasons have been advanced. One is difficulty in getting time off work. I find that odd. Surely most duties for specials are likely to commence after six o'clock at night.
Another reason is the length of time spent training. That is interesting because 22 weekends, either Saturday or Sunday, are spent by the new special in training. In my day, I spent about five evenings of two hours each. No doubt I was poorly trained by current standards, but at least some of that time was spent in learning first aid and becoming qualified. Incidentally, that no longer seems to be a requirement. If my briefing on this matter is wrong, which I hope it is, I apologise. But if not, then can the Minister say why that is? I am sure that a basic knowledge of first aid is essential for a special constable.
Another reason advanced for the alarming drop is the inadequate level of expenses. However true that may be—I believe it is the case—that is not a reason for poor recruiting or retention. However, a poor level of morale in all police forces, due to poor funding, a lack of respect for the police generally, due, not least, to the Macpherson report and the way it was received by the Government, colours the general public's view of the police. There is also the almost universal portrayal of police on television as often brutal, often bent and sometimes both. In my view, that is not the main reason for such a fall in the recruitment and numbers of special constables.
There is also the seemingly inexorable rise in the national crime rate, which has been particularly noticeable this past year. However, I believe that the

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report of the working group on the Special Constabulary of April 1996 had it about right when it said that,
"the voluntary nature of the Specials' contribution is important, not because it saves taxpayers' money, but because the Special is a prime example of the partnership between the public and the police which underlies policing by consent"—
and that is so important. This is the only way forward. Whereas I believe that more could be done to improve the level of expenses paid to Specials, to my mind their voluntary nature is priceless and should be preserved at all costs; that means, I am afraid, no pay.
7.50 p.m.
Baroness Harris of Richmond: My Lords, before I begin, I should make your Lordships aware of my interest in policing matters. I chair a police authority and am a member of the Association of Police Authorities, as well as being a member of the National Crime Squad Service Authority, the Police Advisory Board and the Police Negotiating Board.
When we look at the question of whether special constables should be paid, we need to look at some of the conclusions and recommendations found in two reports to which I should now like to refer. The first is the Home Office Working Group on the Special Constabulary in England and Wales, which reported in 1995–96. This document defined the role of the special constable, and I should like to quote briefly from it:
"The Special Constabulary is a voluntary body designed to assist the regular Police, drawn mainly from the communities served by each local Force. Special Constables perform constabulary duties and exercise constabulary powers under the supervision of, and supported by, regular Police Officers. They are expected to achieve and maintain a level of proficiency which will enable them to assist regular officers in solving local policing problems, and thereby to enhance the overall contribution and effectiveness of their local Police Force. They are a manifest sign of the partnership between the Police and the public".
However, the thorny question of payment for the Special Constabulary has from time to time been addressed. The Home Office working group concluded that, having had a number of representations from the special constables on the topic of payment—the overwhelming majority valued their voluntary status highly—and did not want it to be changed. As my noble friend Lord Bradshaw said, Dorset piloted a scheme in 1993—a sort of bounty payment—with no conclusive results. The recommendation of the working group was simply that the regulation that prohibits payment should be repealed in order to allow forces the discretion to make payment, if they so wished. It was thought that a payment might aid retention of the Specials, but this did not seem to be the case. The current national "loss" is approximately 20 per cent, which is interesting if you compare that with the Territorial Army, which does receive an annual bounty, whose "loss" is approximately 80 per cent. I am not at all sure whether or not that is a fair comparison; it is simply an interesting one.
The second report to which I should like to refer is from Her Majesty's Inspector of Constabulary's thematic document, A Special Relationship, which was
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published in 1997 and complemented the Home Office report to which I previously referred. This report, looking into the payment of special constables, concluded that,
"there was no need to introduce such schemes at present",
but that,
"it would be remiss not to report that the issue still remains active in the minds of many younger special constables in particular".
When I used to swear in special constables—not too long ago—not one of them ever said to me, "I joined because I hope you'll pay me". Indeed, payment was never the motivator. It may be interesting to your Lordships to learn of the sort of person who joins as a special constable. Their ages range between 181/2 and 55 years. In North Yorkshire, we have bankers; civil servants; local government officers; teachers; nurses; shopkeepers and shopworkers; students; young—and older—mothers (and sometimes grandmothers!); all sorts of tradesmen and women; and former members of her Majesty's forces (quite a lot of those). I could go on. I simply wanted to demonstrate the great wealth of talent among members of the special constabulary. I know that North Yorkshire is not alone in having many who hold managerial positions in commerce, industry and the public sector. Nevertheless, we have a duty to ensure that we address the problem of shortage of numbers of police officers generally, as my noble friend Lord Bradshaw rightly reminded us. The plain truth is that most police forces now rely heavily on their special constables to help to deliver policing services in the fight against crime.
It is immaterial to the officer (and the public) on the street who might be faced with an incident, whether he works 40 or 4 hours per week; whether he has a pension, sickness or disability benefits, and so on. Members of the public expect that officer dealing with that incident to do so to the best of his ability. However, in reality, the special constable might think twice before doing so because he might be faced with injury, loss of earnings or litigation; and would find himself in a very different situation from that of his regular colleagues. That is totally unacceptable. The Home Office is currently addressing this complex issue. I trust that those who have the rank and "clout" within the service will actively lobby for some form of insurance scheme for our special constables sooner rather than later.
In conclusion, I should like to share with noble Lords what happened to one special constable in North Yorkshire in 1992. Glenn Goodman had hoped to join the regular police and had served with the Specials for only a few months. On the evening of 6th June, he went out on one of his first patrols with a regular officer. Glenn was a lorry driver—a husband to Fiona; a father to young Thomas. Glenn was a happy, likeable, enthusiastic 37 year-old. He put in extra hours that night and it was almost 4 o'clock in the morning of 7th June when the two officers made a routine check on a car on the A64 near Tadcaster. Shots were fired and both men were badly wounded. The regular officer spent many weeks in hospital and has since retired from the force. Glenn died later on that Sunday evening.

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I tell noble Lords this story because it helps to illustrate the selflessness and dedication that our special constables bring to their duties. No payment, no bounty, no insurance policy would have saved Glenn Goodman that night. But a recognition that we must care for and treat our special constables properly and guard their welfare thoroughly is an absolute necessity, and one that I trust your Lordships will support wholeheartedly.
7.57 p.m.
The Earl of Rosslyn: My Lords, perhaps I may begin by thanking the noble Lord, Lord Bradshaw, for tabling this Question tonight. I should also like to declare an interest as a serving police officer with Thames Valley Police.
The Police Act states that,
"a Special Constable enjoys all the powers, privileges and protections of a Constable in the police area for which he or she has been appointed".
They also face the same dangers and challenges and their families the same anxieties and pressures. We have every reason to be grateful to them.
Demands for police services are rising and, if our strategic aims and performance targets are to be met, we need to develop a culture that engages with the members of the volunteer force and the community at large. Volunteers not only reinforce the links between the service and the public but also allow communities to develop their capabilities within the framework of policy authority.
In 1962 the Royal Commission on the Police remarked that,
"the recruitment of special constables is of great value in promoting relations between the police and the public".
That is no less true today, though the context of policing is somewhat different. In recent years, the duties of special constables have become more varied and more demanding. Traditionally viewed as a reserve to augment police strength, today they undertake general patrol, police special events, work alongside neighbourhood watch schemes and act as neighbourhood special constables working in defined geographic areas.
However, as the noble Lord, Lord Bradshaw, said, in recent years their numbers have fallen from over 20,000 in 1995 to a little under 16,500 in 1999. During that period, only six out of the 43 police forces in England and Wales recorded a net increase in numbers. One force recorded a reduction of 45 per cent, while at the other end of the scale increases of 38 per cent were achieved in Dorset and North Wales.
In 1994 the Home Office research and planning unit found that the turnover of special constables was in the order of one in five per year. For those not joining the regular force or moving out of the area completely, the average length of service was about four years. The majority gave "personal commitments" as the reason for leaving, but in interview it emerged that resignations were in fact linked to some aspect of the work itself. Based on calculations made in 1995 the
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estimated costs of training, recruiting and equipping a special constable are about £1,500. Such levels of wastage are therefore damaging in more than one sense.
It seems to me that the first step in achieving a committed, motivated Special Constabulary with low wastage rates is to ensure that the right recruitment decisions are made both by the applicant and by the force. Thereafter, integrating new recruits, managing and deploying them effectively and ensuring that they feel appreciated are critical. These are, after all, volunteers who on average contribute more hours per week for a longer period of service than those undertaking other forms of voluntary activity.
However, it is also clear that the number volunteering purely as a community service is falling, with a proportionate increase in those expecting at least a mutual benefit to themselves and the force. Research on volunteering for the 1995 Make a Difference report suggested that this is a common trend in the voluntary sector. Volunteers, especially the young, who are, after all, the most significant source of new recruits, increasingly expect to benefit from their voluntary service in terms of their own personal development. The police have much to offer here both to the special constables and to their employers, although I wonder whether we have done enough to market those latter benefits and to seek reciprocal support from employers themselves.
Adequate training and resources are also necessary to an effective Special Constabulary but they are not in themselves sufficient to make it flourish. The attitudes of regular officers are fundamental. Specials value feeling part of the police team and this can best be achieved by integrating them fully into the operational effort of the service. This can often be realised by attaching them to a specific team of regular officers. There is evidence from the Metropolitan Police that where volunteers feel valued and see themselves as part of the local policing effort wastage is reduced.
Many volunteers will have times when the demands of paid employment or domestic circumstances prevent them reporting for duty. Increased flexibility over working patterns may help to retain valuable Specials who feel under pressure from the demands of their other lives.
A report by Her Majesty's Inspector of Constabulary in 1997, to which the noble Baroness referred, found that successful performance was directly and consistently related to the involvement of regular officers in leading these volunteers and to the participation of Special Constabulary staff in decisions about deployment and tasking. The 1996 Home Office working group on the Special Constabulary, which has also been referred to, remarked on the need for new regular constables to be taught adequately about the Special Constabulary and to begin working alongside it with an understanding of its voluntary nature and role.
In all of this it has been found that volunteers respond to effective leadership and good management which, with sensitivity, exploits what they have to

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offer. But would payment also help? The overwhelming majority of Specials who responded to the 1996 working group valued their voluntary status highly and did not want that to be changed. This has already been mentioned. The voluntary nature of the Specials' contribution is important because it exemplifies the partnership between police and public that underlines the principle of policing by consent. That point was mentioned by the noble Lord, Lord Luke. I believe that volunteering should be acknowledged as having its own intrinsic value. It seems to me important that a special constable joins with that as his or her primary motivation, not personal financial gain.
In conclusion, the oft repeated accusation that the Special Constabulary provides policing on the cheap is" I believe, ill conceived. It fails to take account of the positive links created between police service and public as a result. We should be open-minded about all recruitment strategies but perhaps as much can be achieved by valuing and supporting our special constable colleagues as by paying them.
8.4 p.m.
Lord Mackenzie of Framwellgate: My Lords, I declare an interest as a former president of the Police Superintendents' Association. I thank the noble Lord, Lord Bradshaw, for tabling this timely Unstarred Question this evening. The police service is going through a difficult period. That is a cyclical process. In my 35 years in the police force I have experienced difficult and good times.
It may surprise noble Lords to hear that I acquired my first knowledge of the Special Constabulary after I joined the police service when I was working in Jarrow on Tyneside. I had completed about six months' service at that time. I had not really concerned myself with the Specials as I was too busy getting to know the regulars. One night I was assaulted in the bus station at Jarrow. I lay in the gutter and I was in some difficulty until a bus driver jumped out of his cab and came to my assistance. He was like the cavalry as far as I was concerned in that he rescued me. I always remember that incident as it was the first major assault to which I was subjected. I suffered one or two subsequent assaults, but that first assault stuck in my mind. I discovered that the bus driver was a special constable.
The numbers in the Special Constabulary appear to fluctuate between about 16,000 and 20,000 officers at any one time. They constitute a tremendous fund of allies in the field. Specials have families and they are good ambassadors for the police service. I am sure that police officers are aware of the value of the Special Constabulary.
This evening we are discussing whether we should pay Specials for their service. I used to be an instructor at a police training school where Specials were trained. The quality of those Specials was extremely high, certainly in Durham where I began my service. I have a high regard for the people who provide that service. The noble Baroness, Lady Harris, has stolen my
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thunder as I had intended to speak at some length about special constable Glenn Goodman. However, she has already done so and has paid tribute to that officer. I, too, pay tribute to him. That is the serious side of the service. On Friday and Saturday nights many Specials suffer the kind of assault that I suffered and give selfless service. We should pay tribute to that.
The important point to note is that Specials give their time to the police service. I have spoken to many Specials over the years and my impression is that they do not do the job for money. The last thing they want is payment. They simply want to provide a service and to help out where they can. As has been said, many people join the Specials simply to get a flavour of policing before they join the regular force. There is nothing wrong with that, but it results in a certain amount of wastage in that the regular service benefits from the Specials' loss. However, I must emphasise the important point that Specials are allies in the community. They should quite rightly be distinguished from the regulars. Understandably, regular officers feel in some respects slightly threatened in the sense that they are fully trained while Specials are not trained to the same extent. However, I believe that the vast majority of policemen value the service that the Specials provide.
How can we retain the Specials? The big problem is not so much recruiting as trying to ensure that they do not leave once they have been recruited. I agree with the noble Earl, Lord Rosslyn, that the way to prevent that wastage and to ensure that they do not leave is to make them feel valued and part of the team. That requires the establishment of a good relationship with them, both on and off duty.
The cost of a Special is fairly minimal; it costs about £1,800 to recruit and train a Special, and thereafter the cost is about £600 or £700 per annum. They provide an extremely useful service, particularly in policing special events. As a divisional commander I would have been lost without the help and partnership of the Special Constabulary which turns out in force and does an excellent job. Unlike the duties of the fire service and the Army, policing constitutes a constant battle, a constant war. The members of the fire service and the Army can stand down while waiting for the next fire or the next war. Policing is not like that; it is different. We need people to come into the service for the right reasons.
I remember talking to someone in the street and trying to recruit him, for whatever reason. I said, "Why don't you join the Specials?" He said, "Half the police force are bare-faced liars"—I was quite taken aback—and then he said, "And the rest of them have moustaches or beards". I gave up the task of trying to recruit him.
What has been said is important: we need to value special constables and we need to encourage them to join for the right reasons. I do not thank that payment plays a part in that.
8.10 p.m.
Lord Dholakia: My Lords, I thank my noble friend Lord Bradshaw for introducing the debate. What he said made a lot of sense. How else would we have discovered the hidden qualities of the noble Lord, Lord Luke, in his role as a special constable? I envy some of the very exciting tasks he has performed. The only area where I disagree concerns the matter of payment. If I were a chief constable, I would certainly have handed him a brown envelope if he had refused any kind of payment.
I served as a member of the Sussex Police Authority for a number of years. It became clear to me that many chief constables concentrate their operations in urban areas where problems are acute. Much of the policing strategies were demand based, almost always reactive and had considerable resource implications.
Over the years, the policing of our towns and cities has changed immensely. Fewer police officers are now to be seen in our rural areas. According to Home Office figures, the shire counties have some of the lowest numbers of officers per 100,000 people. The Government have a high profile strategy in fighting crime. Unfortunately this is not reflected in the number of police officers required for the purpose. But that is not the subject of the debate.
We have a great tradition that in many areas of our public life we rely on those who are prepared to offer their services for the cause they believe in. Many of our voluntary organisations, including charities, depend on volunteers, who provide specialist knowledge and help. The police constabularies are no exception. The Special Constabulary is a voluntary body designed to assist the regular force. It reflects a cross-section of the community because its members are drawn from local areas.
My noble friend Lady Harris of Richmond has rightly pointed out the nature of our Specials, who perform police duties and exercise police powers under the guidance and supervision of regular officers.
Over the years, recruitment to our police service has seen dramatic changes. Many of the cadet schemes, which were the backbone of recruitment and training, have disappeared. However, it has remained a feature of our policing that special constables have retained their status and identity. They are a partnership between the police and the public. More importantly, they are a feature that reinforces our belief that independence and public consent is more evident when we see volunteers as special constables providing valuable service to the community.
But recent trends in recruitment and retention of police officers is a cause for concern. This is more so in relation to special constables. In a Commons Written Answer in Hansard on 28th February 2000, it was stated that the number of special constables who were recruited between September 1998 and September 1999 was 2,341. However, the number who left the constabulary totalled 3,386. The public has a legitimate concern about the falling numbers. In September 1999, there was 1,694 fewer police officers than at the last general election.
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Even more worrying is the trend in relation to the fall in the number of front-line police constables. The Audit Commission report stated that for the first time in five years there was a decrease in the overall average number of police constables available for ordinary duties. The low level of police recruitment is making it harder for the police to meet the Government's 10-year target for increasing recruitment and retention of officers from ethnic minority communities. The British Crime Survey 1998 revealed that knowledge about special constables was particularly low among these communities.
Of course I welcome the initiatives taken to increase the number of Specials. In an increasingly competitive world, where contract culture is an important element, volunteers find it difficult to take time off work. Employers need to be convinced about the value of the work done by Specials and to recognise that such staff should be released.
I was able to study the HMIC report of 1997 about police forces, the Special Constabulary and the Neighbourhood Watch. The importance of the Special Constabulary is highlighted. It states:
"Demand for police services is rising faster than the available resources. If strategic aims and performance targets are to be achieved, the service needs to develop a performance culture which will take advantage of the potential not only of regular officers and civilian support staff employees but also members of the volunteer force and the community at large. It is the view of HMI that force performance is enhanced by harnessing the support of and working with the community in partnership".
I wholly commend this statement; it goes to the core of our policing matters. I scanned the report to see whether there was any mention that payment of a kind would assist recruitment and, above all, assist retention. Unfortunately, there was no such mention.
I then turned to the report of the working group on the Special Constabulary published by the Home Office, which has been quoted in the debate by many noble Lords. It gave some attention to the basic question of remunerative payment to Specials in recognition of their services. I think that we all subscribe to the view of the working party—endorsed by the noble Lord, Lord Luke—that the voluntary nature of the Specials' contribution is profoundly important, not because it saves expenditure by the taxpayer but because the Special is a prime example of the partnership between the public and the police.
In a response to this report, the Police Federation also concluded that it is strongly opposed to the payment of a bounty. The point at issue is that police and policing issues are very much in the public eye. My noble friend Lord Bradshaw is right; the issue of paying members of the Special Constabulary will not go away. Is it not time that we revisited the whole matter relating to payments to special constables? It is also important that the matter is not left simply to the constabulary and the federation, but that the public has a say. The independence of and public consent for our police is the envy of the world. Let us ensure that by adequate rewards, the special constables continue this noble tradition. Receiving a payment is a small part of this equation.
8.17 p.m.
Viscount Bridgeman: My Lords, I am sure that we are all very grateful to the noble Lord, Lord Bradshaw, for initiating the debate. It is a tribute to the composition of this House that it can attract to this kind of debate a former special constable, a serving police officer and a former president of the Police Superintendents' Association.
There is agreement from all sides of the House on the invaluable role which special constables play, not least in the interface which they form between public and police. A superficial comment might be, "Why can't a job well done be recognised in its remuneration?" But of course the answer is not as simple as that, as has been shown today. The case put forward by the noble Lord, Lord Bradshaw, deserves a great deal of respect.
But there are some considerations as to why this should not come about. There has, for instance, historically been a rivalry between Regulars and Specials, greater in some forces than in others, as referred to by the noble Lord, Lord Mackenzie. I understand that there is a feeling among some Regulars that if Specials are paid, they will divert work which would otherwise be done by Regulars who would earn overtime.
But the overwhelming consideration—it is a gratifying one—that has come through in so many speeches is that there still exists in the community the concept of service to the community. Specials are proud of the job they do and they appreciate the dignity, if one can put it like that, of being truly volunteers and of doing the job for no reward, other than a very limited reimbursement of expenses.
It is noteworthy that the Police Federation and the Police Superintendents' Association, together with the special constables' own body, are all opposed not only to pay but to the bounty system. Special constables seek training and equipment on a par with regular forces, and recognition of this in the uniform, which is now identical to that of regular police officers. I gather that the only differentiation is in the numbering.
We are having this debate against a background of seriously falling numbers among special constables. The figure of 17.3 per cent between 1995 and 1999 has been mentioned. I am proud that my own county of Hampshire is one of the half a dozen or so referred to by the noble Earl, Lord Rosslyn. It has spectacularly bucked the trend and shows an increase in special constables from 698 to 760 over the same period—an increase of 8.5 per cent—and that, it should be noted, is after a series of forced redundancies, common to a good many forces, due to existing members failing fitness tests.
This success is attributed by the force to an intensive recruitment drive, to the provision of good information packs, to obtaining favourable coverage in local newspapers and on radio and television, and to—the most recent innovation—an imaginatively produced website. Added to that is close liaison with the employers of recruits. A full-time inspector is assigned to the special constable force. But at the end
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of the day, the special constables have the assurance that they have the same training, including training in the use of CS gas and the long baton, the same equipment, the same fitness requirements and the same uniform. They are integrated into the Regulars' duties and they have identical powers of arrest. Most significantly, they are also aware that they can perform some duties—for instance, in the case of Hampshire, in under-cover drugs enforcement—which at the end of the day simply would not be covered owing to lack of resources. So this is a force which shows what can be done with recruitment if the problem is addressed with vigour and imagination.
This is not a party political matter—the noble Lord, Lord Bach, will be particularly pleased to hear that—and we congratulate the Government on the recent recruiting initiatives which have been launched and which are being taken up by local forces. I took the opportunity to look at websites relating to special constables. There are several very good ones; Suffolk and West Yorkshire being two examples. The West Yorkshire website showed a day in the life of a special constable. If that does not turn on an adventurous recruit, I do not know what will.
If there is a point which we would make from these Benches it is about the conclusions arising from the Home Office review conducted during 1995 and 1996 under the initiative of my right honourable friend Mr David Maclean. That made a number of recommendations, including a uniform system of allowances, improved personnel administration, and attention to special constables' welfare, such as arrangements for sick pay and a system of uprating of allowances in line with that for regular officers. A number of consultation papers have been issued and we from these Benches urge that those should be given high priority.
Perhaps I may sound a note of caution. The Government have recently announced a 12 million grant for rural neighbourhood watch. We suggest that serious consideration should be given if special constables are to be incorporated into that scheme. There are hazards and dangers. The matter should be considered very carefully.
The institution of special constables, with its ethos of voluntary service to the community, is a particularly British concept. We are on these Benches are not in favour of payment to special constables. We look forward to hearing the Minister's reply.
8.23 p.m.
Lord Bach: My Lords, the whole House will be grateful to the noble Lord, Lord Bradshaw, for initiating this important debate. As the noble Viscount, Lord Bridgeman, said, seldom can there have been such a distinguished group of speakers—perhaps apart from the noble Viscount and myself—who have had such involvement with special constables. There were three members—a past member in one case—of police authorities. If I mention in particular the noble Baroness, Lady Harris of Richmond, I know that the other two will

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understand. The noble Baroness's reputation goes before her as far as concerns this matter. We heard from two senior police officers—one still serving, one not serving, but both equally distinguished. First and foremost is the former special constable himself, the noble Lord, Lord Luke, whose story about stopping the stolen car that had broken down has, I am sure, had many an outing on many an occasion. I look forward to hearing the full story at some time in the future.
The Special Constabulary is made up of more than 15,000 men and women in England and Wales who give up their spare time to help police their local communities for the benefit of the residents. They provide an excellent example of the police and the public working together to tackle crime. Special constables are fully trained to assist the work of regular officers and are able to carry out many of the police officer's duties, providing a high level of support. This requires a significant commitment from volunteers, yet they offer their services free, despite the inherent dangers associated with police work. The tragic case of special constable Glenn Goodman, referred to by two of the speakers in the debate, proves that beyond doubt.
In return I can say that the Government value that commitment and are themselves totally committed to maintaining the Special Constabulary as an important part of the police service. An example of that is the Government's Ferrers Trophy, which is awarded annually to the special constable of the year from nominations submitted by the police forces in England and Wales. I am sure that nearly all Members of the House will know why it is called the Ferrers Trophy. For those who do not, it is named after the very distinguished Member of this House, the noble Earl, Lord Ferrers, who was a Home Office Minister in 1993 when the trophy was inaugurated. Noble Lords will be pleased to know that the competition for that prestigious award is as strong as ever.
No one is prepared to put up with unlawful and anti-social behaviour. People should be able to walk down the street with their children without having to fear for their safety. Special constables play a vital role in making the whole country a safer place in which to live and work. The Government have huge admiration for the work of special constables. They demonstrate in a practical way the part citizens can play in maintaining law and order. This debate gives me the opportunity to express the Government's gratitude to those volunteers whose service is so selfless, a word that has already been used in this debate. Every special constable should be proud of his or her contribution.
The question of whether special constables should be paid has been an issue for a number of years. We have heard about the Dorset experiment. A bounty was paid from existing police funds to see whether it would improve recruitment, retention and morale. The results were inconclusive. I shall not say more about that. A working group was set up by the previous Government in 1995–96. It reviewed the Special Constabulary and, as part of its remit,
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considered the arguments for and against a bounty. The then Minister wrote an open letter to all special constables whose names were on the data base inviting comments for the group's consideration.
As we have already heard, of the special constables who made representations about payment, the overwhelming majority valued their voluntary status highly and did not want it to be changed. The working group's conclusion was that the voluntary nature of the special constable's contribution is profoundly important, not because it saves expenditure by the taxpayer, but because the special constable is a prime example of the partnership between the public and the police which underlies policing by consent. The group thought it essential that a special constable joins with that as his or her primary motivation, and not for personal financial gain. After considering the group's report, Ministers decided not to reintroduce the bounty.
That view has been supported by recent research conducted on behalf of the Home Office. Special constables who were interviewed did not consider that payment was an important issue. I am glad to be able to tell the House that the development of the Special Constabulary is kept under constant review by a standing committee. It has developed from the working group and is made up of representatives from the appropriate associations. It meets every six months to monitor developments. The payment of special constables is an issue that is reviewed from time to time. However, the Government are of the view that there is insufficient evidence to show that paying special constables for their service would have any effect on recruitment or retention, and we have no plans to do so at the present time.
I have listened carefully to the arguments put forward this evening. They have been moderate and sensible, whatever their point of view. I thank the noble Lord, Lord Bradshaw, for having had the courtesy to send me six or seven days ago a full summary of what he intended to say in opening the debate.
We remain convinced that paying special constables would not have any real effect on recruitment or retention. Comparisons have been made with the role of a retained fire-fighter who receives payment. I make two distinctions. The first is that a special constable is part of a day-to-day resource in which the volunteer generally agrees his or her times for duty, often on a Friday or Saturday night when a more visible police presence is required, while retained fire-fighters make up a reserve force with its members waiting on-call. Another distinction, perhaps, is that the Special Constabulary is an additional resource over and above the establishment of a police force, while retained fire-fighters are part of a fire brigade's establishment.
The Special Constabulary is already being used by many applicants as a taster for the regular force, and we are not convinced that payment would see increased numbers come forward. We can see the attraction of encouraging ethnic minority recruits to

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join the regulars via the Special Constabulary but there is no evidence to suggest that paying special constables would achieve this.
It is true that the number of special constables has fallen in recent years. All noble Lords have spoken about that. One of the reasons is that police forces have raised their standards of recruitment generally. To reflect that, special constables are now used on a wider range of duties, many similar to those performed by regular officers. It was true sometimes in the past that special constables would be equipped with a regular officer's cast-offs and would receive not as much training as they do now. While their contribution was significant then, the Special Constabulary was nevertheless considered by too many to be something of a second-class force. Today's Specials are much more professional, with the latest personal protective equipment and much better training.
To reflect the higher standards, the entry criteria have been strengthened, so a somewhat higher proportion of applicants fail to meet the standards than was the case a few years ago. In recent years there have also been open evenings at which the full details of being a special constable have been explained. That may have to some extent put off' some would-be applicants. As the noble Earl, Lord Rosslyn, said, it may just not have suited them or the constabulary that they sought to join.
The police forces in England and Wales have improved their management of special constables in recent years. I am glad to be able to tell the House that later this year the Government will bring in regulations for special constables which, among other things, will improve entitlement to out-of-pocket expenses and provide better sick leave pay to reimburse loss of remuneration following an injury on duty. We shall also provide a free legal advice and representation scheme for specials who are the subject of complaints, disciplinary action or civil or criminal proceedings. We believe that those measures will help to address any dissatisfaction that some special constables may have with their conditions of service rather than the payment of a bounty.
The noble Lord, Lord Luke, raised a question about first aid. I do not want to be absolutely firm about this, but my understanding is that special constables still receive a basic first aid training. I promise to find out the details and write to the noble Lord. I do not want to be too dogmatic.
The Special Constabulary has seen radical change in recent years. It provides its regular colleagues with a high level of vital support. The vast majority of special constables want to put something back into society without reward, and in return they expect the time that they give to the police to be valued and used to good effect. I hope that some of them at least will hear about this debate and will not be able to go away with any impression other than that they are highly valued by Members on all sides of this House who have spoken. The Government, in their turn, and the police service
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have the utmost respect for the volunteers and fully value their contribution. We are continually looking to improve their conditions of service.
Lord Burlison: My Lords, I beg to move that the House do now adjourn during pleasure for five minutes.
Moved accordingly, and, on Question, Motion agreed to.
[The Sitting was suspended from 8.35 to 8.40 p.m.]

Financial Services and Markets Bill
Further consideration of amendments on Report resumed.
Clause 83 [Prospectuses]:
Lord Bachmoved Amendment No. 121
Page 38, line 30, after ("the") insert ("competent").
The noble Lord said: My Lords, in moving Amendment No. 121 on behalf of my noble friend should like to speak also to Amendments Nos. 122, 125, 126, 129 and 130. All of these are government amendments which make minor but essential drafting changes. Amendments Nos. 121, 125, 126 and 129 insert the word "competent" before ''authority". This amendment is necessary to ensure that it is absolutely clear that it is the competent authority, rather than the FSA, to which reference is being made. The Bill names the FSA as the competent authority and that will be correct so long as the authority continues to exercise these functions. However, if the functions were ever transferred the FSA would no longer be the competent authority and there is a danger that the Bill would not make sense.
The other amendments in this group, Amendments Nos. 122 and 130, concern the power to define the term "approved exchange". This power is currently contained in Clause 101. However, the definition is relevant only to Part VI as it is modified by Schedule 9 to the Bill where the term "approved exchange" appears in paragraph 5. Amendment No. 130, therefore, deletes the power in Clause 101 and Amendment No. 122 inserts it in its proper place in Schedule 9. I beg to move.
On Question, amendment agreed to.
Schedule 9 [Non-listing Prospectuses]:
Lord McIntosh of Haringeymoved Amendment No. 122:
Page 253, line 7, at end insert—
("( ) After paragraph 8 of that Schedule, insert—
"Meaning of "approved exchange".
9. "Approved exchange" has such meaning as may be prescribed." ").
On Question, amendment agreed to.
Clause 89 [Penalties for breach of listing rules]:
[Amendment No. 122A not moved.]
Clause 90 [Warning notices]:
Lord McIntosh of Haringeymoved Amendments Nos. 123 and 124:
Page 42, line 4, leave out ("impose a penalty on") and insert ("take action against").
Page 42, line 6, leave out subsections (2) and (3) and insert—
("(2) A warning notice about a proposal to impose a penalty must state the amount of the proposed penalty.
(3) A warning notice about a proposal to publish a statement must set out the terms of the proposed statement.
(4) If the competent authority decides to take action against a person under section 89, it must give him a decision notice.
(5) A decision notice about the imposition of a penalty must state the amount of the penalty.
(6) A decision notice about the publication of a statement must set out the terms of the statement.
(7) If the competent authority decides to take action against a person under section 89, he may refer the matter to the Tribunal.").
On Question, amendments agreed to.
Clause 91 [Statement of policy]:
Lord McIntosh of Haringeymoved Amendments Nos. 125 and 126:
Page 42, line 19, after first ("The") insert ("competent").
Page 42, line 37, after ("The") insert ("competent").
On Question, amendments agreed to.
Clause 93 [Notice for payment]:
Lord McIntosh of Haringeymoved Amendment No. 127:
Leave out Clause 93.
On Question, amendment agreed to.
Lord Bach Lord Bach moved Amendment No. 128:
After Clause 93, insert the following new clause—
("Competition

COMPETITION SCRUTINY
.—(1) The Treasury may by order provide for—

(a) regulating provisions, and

(b) the practices of the competent authority in exercising its functions under this Part ("practices"),

to be kept under review.
(2) Provision made as a result of subsection (1) must require the person responsible for keeping regulating provisions and practices under review to consider—

(a) whether any regulating provision or practice has a significant adverse effect on competition; or

(b) whether two or more regulating provisions or practices taken together have, or a particular combination of regulating provisions and practices has, such an effect.

(3) An order under this section may include provision corresponding to that made by any provision of Chapter III of Part X.
(4) Subsection (3) is not to be read as in any way restricting the power conferred by subsection (1).
(5) Subsections (6) to (8) apply for the purposes of provision made by or under this section.
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(6) Regulating provisions or practices have a significant adverse effect on competition if—

(a) they have, or are intended or likely to have, that effect: or

(b) the effect that they have, or are intended or likely to have, is to require or encourage behaviour which has, or is intended or likely to have, a significantly adverse effect on competition.

(7) If regulating provisions or practices have, or are intended or likely to have, the effect of requiring or encouraging exploitation of the strength of a market position they are to be taken to have, or be intended or be likely to have, an adverse effect on competition.
(8) In determining whether any of the regulating provisions or practices have, or are intended or likely to have, a particular effect. it may be assumed that the persons to whom the provisions concerned are addressed will act in accordance with them.
(9) "Regulating provisions" means—

(a) listing rules,

(b) general guidance given by the competent authority in connection with its functions under this Part.").

The noble Lord said: My Lords, in moving government Amendment No. 128 I should like to speak also to Amendments Nos. 128A and 157A. We made clear in Committee in another place our intention to subject the competent authority to competition scrutiny in respect of its regulating provisions and practices. Currently, there is no such scrutiny under the Financial Services Act. Like the FSA more generally, the competent authority in going about its functions under the Bill can do things which have an impact on competition. Almost all regulation by definition involves restrictions which can affect competition in one way or another. We believe it right, therefore, that the special competition scrutiny regime should apply to the competent authority as well as the FSA and recognised bodies. The new clause, therefore, gives us the power to apply such a regime to the competent authority by order.
The reason for doing this by order is to allow flexibility to adapt the competition scrutiny regime should the power in Schedule 8 to the Bill ever be exercised to transfer the function to another body. For example, if we ever split the function between two bodies we might need to make changes to these provisions. We cannot foresee now whether we shall ever transfer the function and, if so, to what kind of body. However, given that we have such a power in the Bill, which was debated and agreed in Committee, we believe that it makes sense to introduce a provision for competition scrutiny arrangements. The Delegated Powers and Deregulation Committee has not raised any questions about our taking this power.
The new clause allows the Treasury to provide for the competition scrutiny of the competent authority's regulating provisions and practices. Subsection (3) provides that the order may include provision corresponding to that made by any provision of Chapter III of Part X. We intend to exercise this power to bring in the same arrangements for the competition scrutiny of the competent authority as the Bill has put in place for the Financial Services Authority.
The Director-General of Fair Trading will be placed under a duty to report on regulating provisions or practices of the competent authority which have a significantly adverse effect on competition. The

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Competition Commission will then, as in Part X, reach a conclusion on whether there is a significant adverse effect and, if so, whether it is justified. If the commission reports that any such effect is justified, in ordinary circumstances that will be the end of the matter. If, however, the commission reports that an adverse effect is not justified the Treasury will, in ordinary circumstances, have to direct the competent authority to make any necessary changes.
The only exceptions to what I have just said arise where the competent authority makes any necessary changes itself which obviate the need for Treasury action, or where the Treasury considers that the exceptional circumstances of the case lead it to a different conclusion from the commission. An example of this, which was outlined by my noble friend when we debated Chapter III of Part X, is where it is necessary to meet our international obligations. If the Treasury considers that there are exceptional circumstances which lead it to a different conclusion we intend to provide, as in Part X, that it must publish a statement of its reasons and lay a copy before Parliament. As has been indicated in previous debates, Treasury Ministers expect that this House or another place may wish to question them on their reasons for coming to a different conclusion.
I turn next to Amendments Nos. 128A and 157A tabled by noble Lords opposite. These amendments have the same effect, although the former in relation to the competition scrutiny regime for the competent authority and the latter in relation to the regime which covers the FSA more generally. The amendments would include within the scope of those items covered by the competition scrutiny regime matters which have a significantly adverse effect on competition between authorised persons and particular classes of authorised persons and the competitive position of the United Kingdom.
I am happy to reassure noble Lords that the first two elements of this definition—competition between authorised persons and between classes of authorised persons—are already included in the wide class of matters which have a significantly adverse effect on competition, but only in the case of the competition regime under Chapter III of Part X. Why? As noble Lords will appreciate, in the case of the new clause we are concerned with issuers, not authorised persons. The competitive position of the United Kingdom is also covered in so far as we are talking about things which the FSA does that damage competition. I fear that there may be some confusion as to how the Bill works, so perhaps I may take a brief step back. All regulation has an impact on competition. Regulation involves placing restrictions on those who can perform a regulated activity and the way that they perform it.
No one doubts that it is necessary, nor that too much can be counter-productive.
The Bill sets the FSA objectives and principles of good regulation, and subjects it to transparency and accountability arrangements which should lead it to strike the right balance between regulation and competition. However, if it does not, and it over-regulates so as to produce a significantly adverse effect
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on competition, then the competition authorities can step in and investigate and, ultimately, the FSA can be directed to change what it is doing.
However, if the FSA is regulating in accordance with its objectives and principles in a way that does not have a significantly adverse effect on competition, then what is there for the competition authorities to examine? There is, we certainly acknowledge, a separate issue concerning the competitive position of the UK, which noble Lords are attempting to introduce into the competition scrutiny regime. This separate issue is whether the regulatory framework set up by the Bill, including the objectives and principles, remains the right one in the light of developments in the UK and world financial markets. That is a legitimate question. But it is not one that is appropriate for the competition scrutiny regime.
As was made clear in our debate last week on Report, Ministers will keep the legislation under continual review. As part of that, of course, they will consider its impact on the UK's competitive position. Ministers will be responsible for their policies to Parliament in the usual way. If appropriate, Ministers could decide at some point to commission a review of the impact of the regulatory regime on competition and the competitive position of the UK. Whether the competition authorities would be the right bodies to carry out that particular task would of course be considered carefully if the issue arose.
In conclusion, let me try to reassure noble Lords that there is nothing missing in the competition scrutiny regime. It covers the right things, which are the effects of the FSA's regulatory provisions and practices on competition. Its job is not to review whether the FSA's objectives and principles are the right ones; and indeed the Bill does not give the Treasury powers to change those objectives and principles. These are things for Parliament to decide in the first instance, and for Ministers to keep under review thereafter.
In the light of this somewhat lengthy explanation, I hope that noble Lords will not move those amendments. I beg to move.
Lord Fraser of Carmyllie: My Lords, perhaps I may resort to the rather tired device of addressing the Minister before he sits down. We would want to reflect on his extremely helpful statement. Having pursued at earlier stages of the Bill interest in ensuring that the international competitiveness of the United Kingdom should be maintained, what the noble Lord said was encouraging.
The noble Lord may be encouraged to know that, having heard what he said, I may not return to some of the earlier issues in the Bill.
Lord Bach: My Lords, by phrasing it in that way, the noble and learned Lord allows me to rise to my feet to thank him very much.
Lord Kingslandmoved, as an amendment to Amendment No. 128, Amendment No. 128A:
Line 39, at end insert—
("(10) "Competition" includes competition between authorised persons, or particular classes of authorised persons, and the competitive position of the United Kingdom").
The noble Lord said: My Lords, in moving the amendment, I thank the Minister for his remarks. I too have had the benefit of my noble and learned friend's views. Perhaps the wise course would be for me to wait until I have read Hansard, reflect on what the Minister has said, and consider whether or not it is right to reintroduce the amendment at Third Reading.
In those circumstances, I confine my comments to the new clause, after Clause 93, introduced by the Government. I have only a technical point to make. The amendment introduces the same competition scrutiny for the rules of the authority as a competent authority—in other words, in its role as a listing authority—as is imposed by Chapter III of Part X on the authority as regulator, although it does not go into the detail of who will be the person responsible for keeping the rules and practices under review.
In two places the amendment refers to "a significant adverse effect" rather than "significantly adverse effect". I am sure this is a mistake. The difference is that with the phrase "significantly adverse effect" the adversity must be significant. However, in the (if I may so say) incorrect phrase, "significant adverse effect", the effect must be significant.
It is plainly a drafting point, but one of significance. It is for that reason that I draw it to the attention of the Minister. I beg to move.
Lord Bach: My Lords, significantly, the noble Lord may have a significant point! I should like carefully to consider it as he will consider carefully what to do with his amendments.
Lord Kingsland: My Lords, I am obliged to the Minister. In those circumstances, I beg leave to withdraw the amendment.
Amendment No. 128A, as an amendment to Amendment No. 128, by leave withdrawn.
On Question, Amendment No. 128 agreed to.
Clause 94 [Obligations of issuers of listed securities]:
Lord McIntosh of Haringeymoved Amendment 129:
Page 43, line 37, after first ("the") insert ("competent").
On Question, amendment agreed to.
Clause 101 [Interpretation of this Part]:
Lord McIntosh of Haringeymoved Amendment No. 130:
Page 47, leave out lines 17 and 18.
On Question, amendment agreed to.
Clause 103 [Insurance business transfer schemes]:
Lord Kingslandmoved Amendment No. 130A:
Page 49, line 29, at end insert—
("CASE 5
Where the scheme provides expressly that the provisions of this Part shall not apply to the scheme.").
The noble Lord said: My Lords, Amendments Nos. 130A and 131A are probing amendments. Part VII deals with the control of business transfers involving transfers of insurance and deposit taking.
We welcome those provisions, which were included at the later stages of the Bill's progress in another place. However the provisions of Clause 102 state that,
"No insurance business transfer scheme or banking business transfer scheme is to have effect unless an order has been made in relation to it under section 109(1)".
Such an order is an order for the court.
However, in Clauses 103(2) and 104(2), it is clear that an insurance business transfer scheme and a banking business transfer scheme can involve the transfer of only a part of the business. Is it intended that every business transfer involving the transfer of part of a business, no matter how small, must require the approval of the court before it becomes effective? In the case of the transfer of a very small business it may be possible to get consent to a scheme from all the policyholders and deposit holders involved. Is it still necessary to obtain court approval in such cases?
The clauses are beneficial, in that in the case of transfers of substantial businesses, it will not be necessary to obtain the consent of all policyholders and deposit holders. But should the provisions be compulsory in all cases? I beg to move.
9 p.m.
Lord McIntosh of Haringey: My Lords, perhaps I may respond by speaking briefly to government Amendment No. 131 in this group. It addresses a minor technical point. In its current form, Clause 103 refers to a body incorporated "in any part of the United Kingdom". It is more usual to refer to a body incorporated "in the United Kingdom". The amendment tidies the drafting.
As regards Amendments Nos. 130A and 131A, Part VII of the Bill would enable a person carrying on deposit-taking or insurance business to transfer that business to another entity with the sanction of the court. This is broadly equivalent to the arrangements for long-term insurance companies under the Insurance Companies Act 1982. In the past, different arrangements applied in other cases. General insurance business transfers could be approved by the Secretary of State; now the Treasury. Banking transfers required a Private Bill procedure. We have therefore taken this opportunity to rationalise the arrangements so that similar procedures apply in all these cases.
To a degree, the transfers of business arrangements are facilitative. Without these provisions, it would nearly always be impossible for a bank or insurance company to transfer its business to another firm. But

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that is not the only purpose that these provision serve. Part of the reason for introducing them is to provide that a proper regulatory scrutiny may be applied to transfers of business. Perhaps I may illustrate the potential difficulty.
If a company wanted to transfer its business, it could do so in a way whereby insufficient assets were transferred to meet the liabilities of the business being transferred. That could happen, for example, where a company was taking over a failing firm and seeking to combine the businesses. That could have the effect of jeopardising the solvency of the firm to which the business is transferred and could thereby threaten the interests of the policyholders from both companies.
A transfer of business could also be used as a device for a company to restructure its group so as to place all the liabilities in one subsidiary while retaining the assets in another, from which they could be siphoned off, leaving the remainder of the group and the policyholders insolvent. The noble Lord, Lord Kingsland, seemed to believe that that was a shocking allegation. However, I can assure him that it happened on occasions at Lloyds. Those might be extreme cases, but they illustrate the kinds of risk that we need to guard against. Therefore, the provisions of this part are intended to ensure that any transfer proposals affecting insurance or deposit-taking business are subject to proper scrutiny.
They will be subject to certain conditions being met. The conditions will include proper independent analysis of the financial standing of the firms concerned to ensure that the customers of the firms are not exposed to undue risks. The provisions give the authority a proper role in scrutinising the scheme and advising the court of its likely effect, and give any person likely to be affected by the scheme the opportunity to make his views known to the court. It will then be for the court to decide whether the transfer may take place, and whether any conditions should be imposed.
The Treasury has heard arguments that certain types of transfer should be excluded. The noble Lord, Lord Kingsland, referred to minor transfers. Clearly, there will be a question where minor transfers are involved whether the transfer is of a business as opposed to a contract, asset or liability. That would need to be considered on a case-by-case basis. The position is no different from that under the Insurance Companies Act 1982. It has never caused any problems in practice during the past 18 years, although I realise that out of context my reply might seem vague.
There are difficulties even in excluding certain kinds of transfer. For example, if a life insurer were to offer a small cash incentive to its policyholders to agree to the transfer, most would probably accept without having any understanding of the significance of what they had signed up to. Another case might be where only a small part of the business was to be transferred. But that itself raises question as to the extent of the assets that need to be transferred to ensure that both parts of the business remain viable.
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If there were a case for making exemptions, in our view it would need to be made by or under the Bill and certainly not, as Amendments Nos. 130A and 131A would have it, be a matter of discretion for the transferee and transferor firms.
However, we have concluded that it would be wrong to provide for exemptions of that kind over and above those set out in Clauses 103 and 104. The risks are too great. While it has been argued that in some cases court scrutiny is not necessary and would be burdensome, the Government believe that that can easily be tested under the procedure set out in Part VII. If a transfer is simple, raises no prudential concerns and has the support of the customers and creditors or the firms involved, there is no reason why the court process should be protracted.
However, I would like to draw attention to one point which has come to light in the past few days. That involves a possible exemption for transfers which are subject to approval procedures in overseas jurisdictions; for example, where two firms are incorporated in Australia and the merger or transfer of business would be approved in accordance with Australian law. That is something we are looking at and will come back to at Third Reading if necessary.
On the basis of what I have said, I urge the noble Lord, Lord Kingsland, not to press the amendments.
Lord Kingsland: My Lords, of course I recognise that from time to time fraudulent practices take place. It is extremely important to do everything in our power to prevent that happening. On the other hand, the Bill, in the circumstances I described, could prove extremely onerous for those who want to enter into what seems to me to be a straightforward and simple transaction. It is a question of finding the right balance.
When I have the benefit of seeing the Minister's speech in print I shall look carefully at what he has said and shall reflect on whether to return to the issue on Third Reading. In the meantime, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord McIntosh of Haringeymoved Amendment No. 131:
Page 50, line 2, leave out (", or") and insert ("the United Kingdom; or
(b) is").
On Question, amendment agreed to.
Clause 104 [Banking business transfer scheme]:
[Amendment No. 131A not moved.]
Clause 115 [Market abuse]:
Lord Kingslandmoved Amendment No. 132:
Page 56, line 1, leave out from ("which") to ("the") in line 3 and insert ("falls below").
The noble Lord said: My Lords, the Minister will recall that in Committee this and a number of related amendments formed the basis of a long debate. As I said to the Minister earlier today, it is not my intention to repeat speeches I made in Committee to identical

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amendments I have tabled on Report. I simply wish to remind the Minister of the importance that we ascribe to the definition of "market abuse". I wonder whether he has had an opportunity since our last debate to reflect further on what was said and whether, in the light of that reflection, he has decided to make any changes to this part of the Bill. I beg to move.
Lord Eatwell: My Lords, Amendment No. 113A in my name and that of my noble friend Lord Lipsey is contained within this particular group. However, I intend to speak to it in its position in the Marshalled List and not at this point.
Lord Fraser of Carmyllie: My Lords, the noble Lord takes me slightly by surprise in that approach. I want to make a relatively brief intervention on this matter. I believe that the Minister will understand that my greater interest lies not so much in what is contained within Clause 115 as in a wish to explore at a later stage exactly what is the relationship between market abuse in terms of that clause and what the Financial Services Authority may determine is market abuse in terms of its code.
I believe that there are still some very real difficulties to be resolved before the Bill reaches the statute book. I must indicate to the Minister that, until they are resolved, I am, if one likes, neutral on the question as to whether or not it is desirable to introduce into the Bill the concept of the "regular user" of the market. The noble Lord, Lord Grabiner, made an extremely telling and worthwhile point in Committee. He said that if one examines the Bill properly and looks at what is contained within Clause 115(10), it is clear that one must have regard not only to a "regular user" but to a "reasonable" regular user of the market. That seems to me to be a concept trundled up on an omnibus from Clapham.
In some senses, it may be quite helpful to grasp what we are trying to establish as the test against which one examines conduct in the market. However, I am not quite sure about that because, before I come to a personal view on whether or not that is desirable, I need to know whether we properly understand what the FSA can do within its code in relation to inclusion of examples or indications of what is unacceptable market conduct.
I believe that the importance of the role of the Financial Services Authority can be described as follows. One reason that London has become preeminent in the world as a centre for financial services is because over the past 10 or 20 years it has been extraordinarily innovative. It may be that some of the innovation which those who practise financial services in the City would like to introduce is simply unacceptable and should not be allowed to continue. I have difficulty in grasping the idea of the "reasonable regular user" of the market when confronted with a novel, innovative approach to marketing or a financial product. I am concerned about trying to determine whether or not that is market abuse. That "reasonable
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regular user" of the market will simply have to shrug his shoulders and say, "I don't know whether that is the sort of conduct that I expect".
It seems to me that, in the circumstances of that type of innovation, one desirable feature of the FSA would be to place people in a position where they could stand back and examine exactly what is going on. In its code, the FSA could indicate, "We understand that that is innovative; that it is clever and new", and say, "Either that is completely unacceptable and you cannot do that any more without suffering the risk of being prosecuted or convicted for market abuse" or "Yes, that is acceptable, innovative and helpful to the international competitiveness of the City of London". The Minister will understand that that is something of a hobby-horse of mine.
However, I do not understand how one tests the desirability of such a change in the way that the market works if one holds only to the idea of a "regular user" of the market who in the past has never encountered such a product or marketing approach. I shall return to this issue when I come to Amendment No. 133BA.
Earlier today, the Minister indicated, in a slightly tart fashion, that something of our approach has been dilettante and irrational. I would indicate to the Minister at this stage that there seems to be a coherence in the approach that I take to what my noble friend advances, and in the queries I raise with my three amendments.
9.15 p.m.
Lord Newby: My Lords, I suspect that all of us can agree that Clause 115(1)(c) contains some of the most tortuous wording in the Bill. I think that is for a very good reason.
This subsection is seeking to strike a balance between, on the one hand, allowing action to be taken where there is market abuse but, on the other, not providing too tight a framework—a framework which might in people's minds stifle innovation and arrest an activity that would be perfectly legitimate. This is a balancing act. Like many balancing acts, it is slightly inelegant.
This amendment is the result of a process which any of your Lordships who have done much drafting will have been through when grappling with a complex problem. You start with a short statement which seeks to encapsulate it; you then realise that it might not quite work, so you add in a subordinate clause and another phrase. The Government have done a fair bit of that. The Opposition have said that it is now far too complicated and that we should have a much shorter, clearer definition. In the process, the use of the phrase "falls below" introduces a rather vaguer concept than that in the Bill. Everyone has been seeking clarity, but not always feeling that we have found it.
Of the two choices on offer, however, the Bill is certainly clearer to me, as a layman, than what is suggested by the Opposition. We would therefore prefer to leave the Bill as it stands.
Lord McIntosh of Haringey: My Lords, I am sorry that my noble friend Lord Eatwell has chosen to

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separate out his group, because I much prefer to be the pig in the middle. I can always argue that if people are attacking me from both sides, there must be something right about what I am doing—a feeble argument, I know, but good enough for your Lordships after dinner! "Don't annoy them", the Chief Whip is saying!
I am grateful to the noble Lord, Lord Kingsland, for the way in which he has spoken to this amendment and I am grateful to him for what may be seen to be terseness, although I think he has another word for it—"telegraphic", rather.
I say to the noble and learned Lord, Lord Fraser, that I may be tart on occasion, but I have never accused him of being dilettante. I have always taken his arguments extremely seriously.
The effect of Amendment Nos. 132 and 133 would be to delete the reasonable regular user from the test in Clause 115(1)(c) and make the relevant standard for determining whether the abuse had occurred that of the person doing the abuse. This is absolutely critical.
The amendments would change Clause 115(1)(c) so that behaviour which meets the other conditions in Clause 115 would amount to abuse only if it is behaviour—if I may do a Keeling schedule on the noble Lord's amendment—"which falls below the standard of behaviour reasonably expected of the person or persons concerned in his or their position in relation to the market".
If the regular user is deleted from Clause 115(1)(c), I am not clear as to who would then be deciding whether there had been a failure to observe expected standards. I am particularly puzzled, as the noble Lords have chosen to leave the regular user in subsection (2) of Clause 115.
The noble Lord, Lord Kingsland, said in Committee that the reason that he sought to remove the expression "the regular user" was that it imported a subjective element which he wished to exclude. I simply do not understand this. There is no subjective element in the test as it stands. It is an objective test.
The view of the reasonable regular user is the view which an impartial third party who regularly uses the market would take, on an objective and reasonable basis, of the question of whether a particular person's behaviour represented a failure to observe the standard of behaviour reasonably to be expected of someone in that position.
I thought that the noble Lord, Lord Grabiner, made that entirely clear in Committee. He said in relation to Clause 115(1)(c) that,
"[it] is drafted in entirely objective terms; it is not subjective at all. I emphasise the words in the first line which states:
'which is likely to be regarded by a regular user'.
That does not mean that the person who is, so to speak, being charged with market abuse on a particular occasion; it concerns 'a regular user'—the nominal person; the anthropomorphic version of the human being we are concerned with".—[Official Report, 21/3/2000; col. 215.]
Removing the "regular user" from this element of the definition of abuse would, at a stroke, remove much of the certainty which the new test builds in. Most market participants are "reasonable regular
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users" themselves and will know what is okay and what is not. That is the whole point of the test. It is the bad apples who do not observe expected standards—the standards that the markets rely on to work properly—who are the target of the new regime.
The second amendment, Amendment No. 133, does something quite strange. Currently Clause 115(1)(c) refers to the standard of behaviour reasonably expected of a person in the position of the abuser. That person is not the abuser himself, but a hypothetical person. For example, if the alleged abuser is a company, then the person in the position of the abuser for the purposes of this clause is a.n. other company director.
If the behaviour is something which fulfils the other elements of Clause 115—for example it involves a squeeze coming with Clause 115(2)—the question the reasonable regular user is addressing is whether there was a standard of behaviour reasonably expected of any person in the same position in relation to the market as the squeezer. He does not decide whether there is a standard of behaviour reasonably expected of a person in the position of the alleged abuser by looking at the personal characteristics of the alleged abuser. That would be absurd. One would reasonably expect a dishonest person, for example, to commit abuse.
However, that is precisely the effect of Amendment No. 133. I think it should be immediately clear that this would produce a bizarre result. Why should one expect any other standard of behaviour from an abuser than a very poor one? And if that is the case, how could the FSA take action against him? How would market protections be enhanced?
I must say that I am not sure that it would be possible to drive a more damaging coach and horses through the market abuse regime than would be done by these amendments.
The noble and learned Lord, Lord Fraser, referred in advance to the relationship between market abuse and the FSA's code. I understand that he intends to return to that with his later amendments so I shall restrict my remarks to saying that what constitutes market abuse will be determined by the provisions of Clause 115. At the heart of the test set out in the clause is the concept of the reasonable person who regularly uses the market concerned.
I believe that it is within the bounds of the concept of the reasonable man that he can take a view on the acceptability of innovative behaviour, to which the noble and learned Lord, Lord Fraser, was referring, as well as on the acceptability of well-rehearsed behaviour.
The code is not determinative of what market abuse is. However, where a person acts in accordance with the code, he will have a completely safe harbour. A person who acts in contravention of the code will not automatically be found to have engaged in market abuse. But the fact that he has acted in contravention of the code will clearly carry evidential weight. But we can return to that matter on the later amendment.

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I return to Amendments Nos. 132 and 133. They would be extraordinarily damaging if they were to be agreed to and I urge noble Lords not to press them.
Lord Kingsland: My Lords, I am not surprised by the Minister's reply. He, equally, will not be surprised to hear that, having read in Hansard, tomorrow morning what he has said I shall probably think it prudent to retable this amendment on Third Reading. Meanwhile, I beg leave to withdraw it.
Amendment, by leave, withdrawn.
[Amendment No. 133 not moved.]
Lord Eatwellmoved Amendment No. 133A:
Page 56, line 5, at end insert (", acting in the interests of the market as a whole").
The noble Lord said: My Lords, on Second Reading and in Committee, my noble friend Lord Lipsey and I expressed considerable reservations about the regular user test that is the foundation stone of the definition of market abuse in Part VIII of the Bill.
Our reservations derive from two characteristics of the regular user test. First, as currently formulated, the use of the concept of the regular user to define market abuse seriously weakens current defences against market abuse by authorised persons. I provided examples at Second Reading. At no time has the Minister sought to refute those examples. I must presume that he accepts their validity.
Secondly, we believe that the regular user test provides no clear standard of acceptable behaviour by any market participant, authorised or not, since the regular user of the market, albeit a reasonable person, might, in the light of longstanding custom and practice in a given market, reasonably expect behaviour to occur, even if that behaviour was not in the interests of the operation of the market as a whole.
Noble Lords may remember that in earlier debates I illustrated the latter point by reference to an analogy drawn from the game of association football. Everyone knows that shirt-pulling has become endemic in modern professional football; and yet a regular user—that is, a reasonable professional footballer—would expect his colleagues to pull shirts, even though such behaviour is damaging to the game as a whole.
Noble Lords will be relieved to know that that is the last reference I shall make to that particular analogy, but I believe that it aptly covers the case. Most worrying of all, the point made that what is customary is what is expected by the reasonable person has not been answered by the Minister at any time. I hope that he will answer that point tonight. The point that I beg him to consider is, if in the financial services industry behaviour that abuses the market were typical of the participants in that market, why would the regular user, however honourable he might be, not reasonably expect that standard of behaviour from others? Indeed, it would be irrational to do otherwise.
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I had not intended to refer to the remarks made in Committee by my noble friend Lord Grabiner, as he is not here this evening. However, since he has been quoted extensively by the Minister, I feel that I must take up his arguments. My noble friend's argument was essentially that a regular user, being a reasonable person, could reasonably expect participants in the market to behave in an honourable manner and not to abuse the market; that is, a reasonable person will be a person of high standards and would expect others, too, to have high standards. I must say that at the time when I listened to my noble friend's argument, I found it a little odd. Even if the regular user is a person of high standards himself, why should he reasonably expect others to share those standards?
I have consulted colleagues at the University of Cambridge who hold appointments in law in an attempt to discover whether that is an oddity and is one of those charming foibles of English law designed to confuse non-lawyers. The consensus among those dons I consulted was that my noble friend presented a good case, but not a decisive case.
That is the problem with the Government's position on the regular user test. They have an argument, but it is not a conclusive argument. It is quite possible that, as currently formulated, their position will fail in the courts. In that case, the entire market abuse section of the Bill would collapse. I cannot for the life of me understand why the Government are prepared to take such a risk with that section of the Bill and with the reputation of financial services regulation in this country.
In Committee, the Minister kindly offered to meet my noble friend Lord Lipsey and me in order to allay our fears about the characterisation of the market abuse regime in the Bill. I am grateful to the Minister and to his officials for giving up their time to that meeting. Sadly, the meeting had exactly the opposite effect from that for which we had both hoped. I am even more convinced that Part VIII is seriously flawed. That is because up until the time of the meeting I had believed that Clause 116 provided a defence against the damaging interpretation of the regular user test to which I have just referred. As noble Lords will be aware, Clause 116 requires the FSA to produce a code containing such provisions as the authority considers will give appropriate guidance to those determining whether behaviour amounts to market abuse.
That, I hoped and believed, provided the opportunity for the authority to set standards and even to raise standards. The noble and learned Lord, Lord Fraser of Carmyllie, pointed out in Committee that there is a certain ambiguity in Clause 116. He has made that argument again this evening. The authority is to produce a code, but it is to provide guidance about the views of the regular user. That is the core of the ambiguity.
Sadly, when I put this point to the Minister and his officials they declared that there was no ambiguity because what is meant by Clause 116 is that the FSA should simply codify the views of the regular user. It should not express its own views. The Government's

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intention is that, in constructing the code, the authority should simply mirror the views of the regular user. Indeed, the Minister made exactly that point in reply to the noble and learned Lord, Lord Fraser of Carmyllie, a few moments ago. That interpretation may be regarded as rather odd particularly in the light of Clause 116(2) but, never mind, the Government's view is that the regular user rules, and not the authority.
That brings us back to the basic definition in Clause 115. In his defence of the regular-user test, the noble Lord, Lord Grabiner, told us that the regular user is a hypothetical individual of decent moral standards. But even a hypothetical person must draw his or her views from actual experience of the market, from the environment in which he or she works.
So let us consider how the views of a reasonable person might interact with the environment in which he or she works. Let us take as an example of a reasonable person a barrister, perhaps even a QC. Let us suppose that our barrister is an expert in tax law. Is it not reasonable to expect that our QC will, when acting for taxpaying clients, seek to identify all measures to minimise their tax liability within the bounds of the criminal law on tax evasion? That is his job. That is what he would expect a reasonable person to do. Is that not exactly how a large number of very rich people manage to pay very little tax today? Is it not that minimisation of tax payments within the law exactly what a regular and reasonable person would expect, and yet is it not clear that it is that kind of tax avoidance by the wealthy that brings the operation of the whole tax system into disrepute? That point has been well recognised by the Chancellor of the Exchequer who is now trying to correct it.
My fear is that the market abuse regime, as defined in the Bill, will have the same outcome: that the boundary to the behaviour reasonably expected by a regular user of the market will be the boundary defined by the criminal law, so that the whole attempt in this Bill to define an entirely new regime to police market abuse other than by the criminal law will fail. Noble Lords will be well aware of the fact that the criminal law regime against market abuse has not performed very well and that that failure has damaged the reputation of the City of London.
The amendment in my name and that of my noble friend Lord Lipsey seeks to rescue the regular-user test by providing that the action reasonably expected by the regular user should be such as to be,
"in the interests of the market as a whole".
The importance of this qualification should be clear from my example of the tax QC. If tax avoidance, although within the criminal law, were against the interests of the fiscal regime as a whole, perhaps by bringing it into disrepute, then in the spirit of Amendment No. 133A, it would be shunned. By analogy, behaviour that is damaging to the market as a whole would be shunned by the reasonable regular user since it would amount to market abuse if this amendment were to be accepted.
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I hope that my noble friend the Minister is minded to accept at least the spirit of this amendment. If, sadly, he is not, I ask him this: would he deem acceptable behaviour which meets the criteria of Clause 115(1)(c), as currently drafted, but which is not in the interests of the market as a whole? Would he deem that acceptable? The new market abuse regime is a vital part of this Bill and I fully support the Government's objectives in framing it. Acceptance of this amendment would secure the Government's goal beyond all reasonable doubt. Rejection of it would place the Government's goal at risk. I beg to move.
9.30 p.m.
Lord Lipsey: My Lords, this has been one of the livelier debates in the always lively proceedings on this Bill, featuring as it did at one stage in Committee a debate on whether this amendment would apply to financial markets the moral standards of the late Sir Stanley Matthews or of Diego Maradona.
This is the second cut by my noble friend Lord Eatwell and myself to try to improve the clause so as to make it clear that we want Sir Stanley Matthews financial markets. In our first attempt we suggested that there should be a reasonable and ethical user, but that did not meet the approval of the referee, so we are trying again with this amendment.
I cannot improve on the arguments set out so brilliantly by my noble friend. However, when we have discussed this matter with Ministers and their advisers, their general line has not been that we are aiming at the wrong point, but that the clause as drafted will broadly have the effect that we seek. If that is so, that is fine. The only point that I make is that it is not enough that it will have that effect, or that Ministers think it will have that effect, or even that if it came before a court that the court will consider that it will have that effect. It is terribly important that the regulator, who has to decide how, when and where to use the clause to cope with market abuse—to cope with Diego Maradona—believes that the clause will have that effect.
I do not easily understand why it is hard for the Government to accept this amendment if it is true that it is of nil effect. I believe that it would merely clarify the situation. But at least I ask that, in reply, the Minister gives the regulators the comfort that they require to make them confident that the clause indeed has the effect that he and the Government believe that it has and, therefore, that it can be effective in ensuring that Sir Stanley rules and not Mr Maradona.
Lord Fraser of Carmyllie: My Lords, the practice of indolent judges who cannot be bothered to prepare their own judgments is to say, "I concur in the judgment previously delivered". There is little in what the noble Lord, Lord Eatwell, has said that would not lead me to conclude that I could offer up the same view.
His words seem to be exceptionally apposite. They penetrated with great clarity of analysis exactly the problem about the market abuse provision that is allowed for in the Bill. I hope that the noble Lord on

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the Front Bench will not find some contentment in the idea that, if he is criticised from behind and from this side of the House, in some bizarre fashion he must have achieved an acceptable balance. This is a situation that he ought to acknowledge and understand as one that he should take away and reflect on carefully.
I do not have the advantage of being president of Queens' College, Cambridge. I greatly admire the position of the noble Lord, Lord Eatwell, and the opportunity that he has to consult such distinguished legal academics as are to be found in Cambridge. I certainly hope he talked to Dr Ferran, who contributed in such a distinguished fashion to the Joint Committee.
I hope that the Government understand that nobody is trying to attack what is being done about market abuse. We are still intent, one way or another, on achieving a regime that will be beyond challenge once it is put in place. I still have a grave concern that the provisions that are to be found in Clauses 115 and 116 simply do not mesh together. The outcome will not be a reduction of the abuse of the market that there is in London, in particular, and in the UK generally; but it will simply provide a field day for lawyers to work their way through these two sets of provisions and find that, far from being an advantage to those who wish to stamp out abuse, it will exacerbate the situation.
If the Minister looks back to such problems as there have been in relation to insider dealing—I acknowledge that his government were not in office at the time—he will realise that the one thing that all sides of the House must seek to achieve is a regime that is settled; one that is direct; and one that brings to account those who abuse the market.
I have been intrigued by this amendment. For my purpose, had the amendment been put within Clause 116, which requires the FSA expressly to put together descriptions of behaviour that amounts to market abuse, acting in the interests of the market as a whole, that might have been another route to the same objective. I am not trying to draft on my feet. I hope that those on the Government Front Bench do not regard this set of opinions as the opportunity to say that there is such a degree of division that we cannot come to an acceptable and satisfactory arrangement. We have the same objectives. I hope that the Minister will appreciate, even at this relatively late hour, that this is not a destructive approach to this part of the Bill; we want to improve it.
I am not entirely sure that my Front Bench will always agree with me. But I am not averse to the idea, as my later amendments will indicate, that the FSA should have a role in that. The only point with which I disagree in the approach of the noble Lords, Lord Eatwell and Lord Lipsey, is that I have difficulty in believing that the reasonable, regular user of the market—that objective creature—will be sharp enough to pick up the sort of abuse that may be emerging. It is important to understand that, if people wish to engage in financial services in the City and they are not sure whether or not what they propose is
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acceptable, as I understand Clause 116 and other provisions, they will have the right to go to the FSA and say, "This is what we propose to do. Is it acceptable?". If the FSA says that it is acceptable, they have their safe harbour.
In those circumstances, the FSA is in a far better position than anyone else to know about, to listen to, and to determine upon innovations in the City and then come to a conclusion as to whether or not specific innovations are acceptable. It can be spelt out there and then if it is an abuse. It follows from that that those who then pursue that innovation will suffer the penalties that flow from it. Alternatively, if the FSA regards it as being acceptable behaviour and an innovation it wishes to see continued in the City, that will not be trammelled in any way.
I have difficulty in believing that simply relying on this reasonable, regular user of the market, will provide a complete solution. I could continue to speak on this matter for a long time. It is not difficult to envisage a circumstance—there are some distinguished court practitioners in your Lordships' Chamber tonight who can also do this—when those who are reasonable, regular users of the market give evidence in the best of faith to a tribunal or other body but come to completely different conclusions. In such circumstances, what possible conclusion could the tribunal draw? The only definite view one could reach is that no decision is more obviously amenable to judicial review than that.
9.45 p.m.
Lord Newby: My Lords, these debates have been conducted on a theoretical plane and my question on the amendment is really for those who tabled it. My question relates to the more practical work that the FSA has been doing in terms of the code. As noble Lords will be aware, the authority has already gone some way towards drawing up a draft code. The matter was put out to consultation and received feedback, which was all published. What emerged and what, I suspect, the draft code will become—noble Lords will correct me if I am wrong—is the equivalent of the rules of the game, to continue the football analogy.
It seems to me that there are already equivalent provisions within the code against shirt pulling. Indeed, there are provisions against the Maradona method of scoring goals. If rules are drawn up in consultation with practitioners—that is to say, the regular users—which command broad support not just in the market place but also among the other audiences, including Members of this place, who have a chance to study such documents, I believe that we shall then have, arguably, a series of rules that will avoid many of the theoretical concerns expressed by noble Lords.
The key final point is the fact that the FSA is the referee. Indeed, if the authority were a good referee at the moment, it would, like all good referees, be penalising people who were shirt pulling; and would, equally, be penalising the Maradona. I would welcome any comments from noble Lords opposite explaining

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why, in their view, this procedure and the drawing up of the code gives them such concern about the proper avoidance of the abuse that everyone is keen to stamp out.
Lord McIntosh of Haringey: My Lords, the amendment would provide that the reasonable regular user, when considering the behaviour engaged in by person X, would look at whether that person had failed to observe the standard of behaviour reasonably expected of a person who was,
"acting in the interests of the market as a whole".
I am grateful for one thing that has emerged from this debate; namely, that my noble friend has promised not to use football analogies any more. As he knows, I am out of my depth in that respect. My noble friend the Chief Whip tells me that shirt pulling in the penalty area would immediately attract a penalty kick against the person responsible. So perhaps the analogy is not perfect. But at least we can leave that and talk in properly theoretical and metaphysical terms.
It is a fact of life that people who engage in transactions in the market do not do so because it is in the interests of the market as a whole; they do so because it is in their own interests or in those of their clients. Therefore, if we were to insert the words,
"acting in the interests of the market as a whole",
it would raise all sorts of questions about what acting in the best interests of the market meant in an individual case. Indeed, it would introduce a new standard into this area.
Let us suppose, for example, that the market is going through a volatile period. Would selling shares during that time be something that would represent acting in the interests of the market as a whole? Arguably, it might not be, but clearly we do not want to stop people selling shares during a volatile period. Perhaps another such example might help to illustrate the difficulties with this approach. I may, for example, be about to sell a large holding of shares. To minimise the impact on the market, and thus the price I can get, let us suppose that I decide to sell off those shares in small parcels. It is possible that my doing so might give a mistaken impression of supply and demand. There would be nothing wrong with what I was doing and clearly it would not fail to meet expected standards, but what if the provision were amended so that the regular user was considering my action against what he would expect from a person who is acting in,
"the interests of the market as a whole"?
if I am acting in the interests of the market, should I, or should I not, tell people that I am selling off a large number of shares? I am afraid that it is not clear that the phrase which this amendment would add to the Bill relates to what happens in financial markets even when people are not doing anything which by anyone's standards—those of the noble Lords, Lord Eatwell and Lord Lipsey, of the noble and learned Lord, Lord Fraser, or my own—is wrong in itself.
However, while people who engage in transactions in the market act in their own interest, that does not mean that anything they do in their own interest is, by
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definition, acceptable behaviour. Whether someone has committed market abuse or not depends on whether he has failed to observe expected standards. Of course markets depend upon those who use them having confidence in their fairness and efficiency. It follows, therefore, that the standard of behaviour which is reasonably to be expected of persons using such markets will be one which takes into account the need for the market as a whole to operate fairly and efficiently, which is in the interests of all users. That is implicit in the test for which Clause 115(1)(c) makes provision and it does not need to be further stated.
My noble friend drew an analogy with a tax lawyer. That analogy does not hold good because a reasonable person would expect a tax barrister to use the arguments most favourable to his client's case. That is his job as an advocate. The reason able user test is based on an objective and disinterested view of what is appropriate behaviour.
I was asked about the role of the code and whether we should use the FSA to raise or set standards. The regime rests on the definitions in Clause 115. Clause 115(2) specifically picks out three elements of behaviour: insider trading; false or misleading impression of supply or demand for investments; and distortion of the market. In constructing the code, the FSA can set down its opinion of what constitutes market abuse, but, to be abuse, market behaviour has to fail to meet expected standards. The FSA should reflect those standards. It is not for the FSA to say what the expected standards are; otherwise we could get rid of all the definitions in Clause 115 and say that market abuse is what the FSA says it is. That is not what we are doing here.
The noble Lord, Lord Lipsey, mentioned a similar point. The statute book would be several times the length it is if unnecessary words were inserted in order to make things clear which in our view are already clear. I assure noble Lords that the effect of these provisions is not to allow the worst standard of conduct which might prevail to prevail but neither is it to allow the FSA to determine what is best for markets.
As I said, on the basis that the standard of behaviour which is reasonably to be expected of persons using such markets will be one which takes into account the need for the market as a whole to operate fairly and efficiently, which is in the interests of all users, I invite my noble friend not to press the amendment.
Lord Eatwell: My Lords, I am grateful to the Minister for his reply. However, he will not be at all surprised to hear that I find it enormously disappointing. In fact, I find it distressing in the sense that he has reiterated the point—in a way he answered the point made by the noble Lord, Lord Newby—that the FSA cannot be, in the words of the noble Lord, Lord Newby, the referee. It cannot determine the rules. However, it is the regular user whom the Government believe to determine what the FSA can say. I find that position very worrying.
The noble Lord has pointed out the difficulties of the approach taken by myself and the noble Lord, Lord Lipsey. I have some sympathy with the strictures

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which he has brought to bear upon our formulation. However, I find his argument that the reasonable regular user and reasonable persons would expect the markets to be free and fair naive in the light of behaviour in financial and commodity markets around the world. That is not how markets work. I regret to say that we shall have to return to this matter at Third Reading if by that time the Government have not considered these matters further and taken the steps which will rescue this part of the Bill and allow them to achieve the goal they seek. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Fraser of Carmylliemoved Amendment No. 133AA:
Page 56, line 18, leave out ("may") and insert ("shall after consultation with all relevant interests").
The noble and learned Lord said: My Lords, we have had such an interesting and important debate that it is something of an unnecessary interlude to interject this amendment. I cannot wait to get back to the next part of our debate, which I promise the Minister will be somewhat shorter than the first part.
The amendment seeks to ensure that the Treasury will consult with all relevant interests before prescribing the markets to which the clause applies. If the Minister's response is, "Of course", that will be more than sufficient for my purposes. I beg to move.
Lord McIntosh of Haringey: My Lords, I do not think that I can quite get away with saying, "Of course", and then sitting down.
As a general point, we did, of course, twice debate in Committee obligations for the Treasury to consult on proposals to make secondary legislation; we did so on 20th March and 30th March 2000. I shall not repeat the detailed explanations that I gave there, but the Treasury will act in accordance with the usual procedures for making secondary legislation. There is a presumption in favour of consultation, and noble Lords will be aware that the Treasury has already consulted on drafts of a number of draft statutory instruments to be made under this Bill.
Specifically on the power to make orders under Clause 115, the Treasury has consulted on the proposed regulations to be made under Clause 115(3). A draft of the order was published in June 1999 in a consultation document entitled Market abuse: prescribed markets. This proposed that the regime should cover the markets run by the six recognised investment exchanges and the investments traded on them.
I should point out that we consulted more widely than would strictly be required by the amendment. As the Treasury has already done what is required by the amendment—and, indeed, gone further—I hope that the noble and learned Lord will consider that I have said the equivalent of "Of course".
Lord Fraser of Carmyllie: My Lords, I believe that the Minister could have said "Of course". I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Kingslandmoved Amendment No. 133B:
Page 56, line 43, at end insert—
("( ) Behaviour does not amount to market abuse within subsection (2)(b) if the impression given is misleading only because of information which the individual whose behaviour it is does not know about it because it was withheld from him in conformity with control of information rules.").
The noble Lord said: My Lords, in moving Amendment No. 133B, I shall speak also to the other two amendments in the group, Amendments Nos. 133E and 133F.
So far as concerns Amendment No. 133B, the Minister in another place—I think it was the honourable lady Patricia Hewitt—said in Committee that it was important that the FSA rules should be a safe harbour because they would provide for stabilisation and for Chinese walls. I think that this observation is so crucial that it ought to be stated on the face of the Bill. If the Minister were to glance at government Amendments Nos. 202 to 206, he would see that it is so stated—or, rather, that the Government intend it to be so stated—in relation to the criminal offence of market manipulation. All the Government have to do is to follow the logic of that criminal offence into the offence of market abuse.
In this case, exemption should apply where a person makes a statement, promise or forecast without knowing that it is misleading, false or deceptive because the relevant information was withheld from him in compliance with the control of information rules. In addition, the company itself should be treated as not knowing or being reckless if the individual making the statement, promise or forecast was not aware of the relevant information and was not told to make it by someone who was.
Amendment No. 133E complements opposition Amendment No. 132. The Minister will recall that Amendment No. 132 removes from Clause 115(1)(c) the expression,
"which is likely to be regarded by a regular user of that market who is aware of the behaviour as a failure on the part of the person or persons concerned to observe".
Amendment No. 133E inserts that concept in a separate part of the Bill. The Minister will recall that a similar approach was taken by the Opposition at the Committee stage.
Finally, Amendment No. 133F to Clause 119(2) is designed to bring in another ground on which the authority cannot impose a penalty. It seeks to reintroduce a situation where no penalty can be imposed if the accused did not realise that he could be misinterpreted in what he was saying or doing. The two conditions referred to in the amendment are the market abuse limbs, consisting of misleading or distorting the market. I beg to move.
10 p.m.
Lord McIntosh of Haringey: My Lords, clearly we have not succeeded in communicating the extent to which we have introduced changes to the Bill to improve protections in this area on top of those made at earlier stages of the Bill's passage through Parliament.
First, Clause 119(8) now provides that behaviour does not amount to market abuse if it conforms with FSA rules which include a provision saying that behaviour does not amount to abuse. That was inserted to remove any uncertainty that compliance with specified rules— for example, those on control of information: "Chinese walls rules" as they are known—and compliance with price stabilisation rules will provide a safe harbour from a charge of market abuse.
Secondly, we improved the protections for those who take reasonable precautions and exercise due diligence to avoid engaging in market abuse, and for those who believe on reasonable grounds that their behaviour does not amount to market abuse. In addition to these safe harbours, the Government in another place provided that behaviour which complies with express provisions of the code of market conduct, which the FSA is required to produce under Clause 116, cannot amount to market abuse.
The amendments do not make any improvements to the safe harbours we have already introduced. Amendment No. 133B would provide that it is not market abuse if an individual gives a misleading impression as a result of not knowing about something because it was withheld from him in conformity with control of information rules. We shall shortly discuss these rules in the context of government Amendment No. 156.
This is a statement of the obvious. While FSA rules on control of information could cover this situation, it is clear that the person concerned would not be breaching expected standards, and indeed that he would have reasonable grounds for believing that his behaviour was not abuse.
There may be some misunderstanding in the area of control of information. The concern is not so much with the position of the individual, who is clearly protected, but his firm. Even if various parts of the firm do not have all the information as a result of Chinese walls, the firm considered as a whole clearly will have all the information. The danger is that if one person in a firm dealing with a client does not have information which another person in the firm knows about, there is a danger that the firm, taken as a whole, will have misled the client.
While we could specify this situation and others in the Bill —for example, behaviour in conformity with price stabilisation rules—we think that the better approach is to leave it to the FSA. The FSA has discretion to make control of information rules and price stabilisation rules. It will do so, and work is in hand. But the legal position is that it does not have to. So putting explicit safe harbours on the face of the Bill rather than leaving it to the FSA to decide when safe
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harbours should apply does not really change the position. In any event we want to provide flexibility here since there may also be other rules which the FSA would want to form a safe harbour from market abuse.
The FSA will, of course, have to consult on all of its rules. In doing so, it may identify the need for further protection or conclude that it does not want to give protection in all circumstances. The unscrupulous are very good at exploiting loopholes.
Amendments Nos. 133E and 133F concern the circumstances in which the FSA can impose a penalty for market abuse or issue a public statement. As I have said, this is an area where we made improvements in Committee.
I am rather surprised by Amendment No. 133F. In Committee, noble Lords opposite tabled an amendment which sought to restrict the protection for "belief", which was present in the previous version of Clause 115, to situations where someone believed "on reasonable grounds" that he had not engaged in market abuse.
We met the substance of this amendment when we included the protections that are found in Clause 119(2). But noble Lords now follow it up with an amendment which would provide a safe harbour for someone who had given a misleading impression or distorted the market if he did not "anticipate" that his behaviour would do this. Where have the "reasonable grounds" gone on which noble Lords were so keen in Committee? Are they now saying that it is all right if someone does not have reasonable grounds for his belief?
If I assert that I really did not anticipate that my behaviour would lead to regular users being given a misleading impression, should that be the end of it, even if I did not have reasonable grounds for that anticipation? If noble Lords are not seeking to remove the "reasonable grounds" element, then this amendment adds nothing to what is already in Clause 119(2). If the noble Lord, Lord Kingsland, is seeking to remove what he previously desired to include in the Bill, I must resist that as strongly as I welcomed the previous position.
Amendment No. 133E would introduce a change which would be at best unnecessary and at worst extremely damaging. It is unnecessary if by the amendment the noble Lord, Lord Kingsland, means that the behaviour satisfies the expected standards of behaviour which a reasonable regular user of the market would expect a person in the alleged abuser's position reasonably to observe. That is already provided for. But if the noble Lord means that behaviour which is widespread can never be market abuse, then it would be a terrible change to make. I am sure that that cannot be the noble Lord's position. There is a big difference between "accepted market practice" and "acceptable market practice".
Perhaps I may give an example. Let us suppose that insider dealing were rife on a market. Would that mean that, just because everyone is "at it", it should fall outside this regime? Clearly it should be capable of being caught. That is what the regime does by

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introducing the concept of the regular market user, a reasonable man who knows right from wrong, and by looking at the expected standards of the market from his perspective. We cannot accept these amendments.
Lord Kingsland: My Lords, I thank the Minister for his response. In view of later government amendments, I was rather surprised to hear what the noble Lord said about Amendment No. 133B. However, I shall reflect on what he has said and, if necessary, reintroduce the amendment at Third Reading; likewise with respect to the noble Lord's remarks on Amendment No. 133E.
As regards Amendment No. 133F, here we have probably arrived at a point of deadlock. So, when we reach that amendment, I shall seek to test the opinion of the House. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 116 [The Code]:
Lord Fraser of Carmylliemoved Amendment No. 133BA:
Page 57, line 11, leave out ("among other things").
The noble and learned Lord said: My Lords, I have tabled three amendments that seek to amend Clause 116. It may be surprising, in view of what I have hitherto argued, but essentially they seek to restrict what should be included within the code. Thus, if my amendments were accepted, the code would not allow for a specification or description of behaviour that in the opinion of the authority amounted to market abuse. All that the code would contain would be descriptions of behaviour that in the opinion of the authority did not amount to market abuse, or factors that in the opinion of the authority should be taken into account in determining what behaviour did not amount to market abuse.
It seems to me—it follows from what the Minister said—that in the context of market abuse, the code provides for nothing more than a safe harbour; that is, if the code says that something is not market abuse, it does not matter what a reasonable regular user of the market thinks about the conduct. Under Clause 118, if the code says that certain behaviour is not market abuse, that is the end of it. Therefore, one is wholly safe, provided that what one does is within the code.
What surprises me about the Government's approach is that I believe it to be equally appropriate that the code should contain descriptions of behaviour that in the opinion of the authority amount to market abuse. In previous debates, I have indicated a special context in which I believe that that is particularly applicable; namely, where, following informal consultation with the FSA, an approach to marketing or new financial products is brought to its attention and it decides whether it is acceptable or unacceptable. If the FSA decides that that is unacceptable to someone who works in that sector, that behaviour should be capable of amounting to market abuse. However, given the way in which this part of the Bill is constructed, the matter is not as clear cut as that. If one looks at Clause 118(2), one finds that,
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"the code in force under section 116 at the time when particular behaviour occurs may be relied on so far as it indicates whether or not that behaviour should be taken to amount to market abuse".
Confronted with that provision, lawyers will believe that all their Sundays have come at a single moment. One must consider the view of the reasonable regular user of the market and, in some fashion, weigh that against what is provided for in the context of the code. The code is not to be definitive or overriding, but in some obscure way it is only to be "relied on". It is not unreasonable to envisage circumstances in which it is impossible to arrive at a clear, simple, unanimous view of what the reasonable regular user of the market would regard as acceptable. The problem is infinitely compounded if one must then look at what is in the code and decide whether one must rely on it.
My only concern in this matter, in the best interests of the financial services sector, is to achieve the greatest possible degree of certainty. I believe that, far from bringing about that desirable result, exactly the opposite is achieved because of the way that the provisions have been put together. I understand that already lawyers in the City have concluded that if the code says that something is market abuse, the arrangements will prove to be wholly unworkable. They boast about it. At an earlier stage the noble Lord asked that those people should be named. I have no intention of naming them; I shall not allow them a greater professional advantage than they might otherwise enjoy. But the Minister should understand that there are those who have already reflected on the provisions and concluded that they are unworkable. I want to ensure that they are workable.
I repeat the primary point. I am not so much concerned about those marketing arrangements which are already well established where the regular reasonable user can offer an opinion, but those where the situation is completely innovative, either in market technique or product. In those circumstances, the FSA will be in future in a far better position to come to a conclusion and say, "If you carry through such behaviour it is unacceptable". On the other hand, if it is acceptable, that is a safe harbour.
I want a framework of certainty and clarity; otherwise I am concerned that we shall achieve neither and the relationship between the two provisions will be such a muddle that it will be a happy market for lawyers but will do nothing to enhance the reputation of the United Kingdom financial services sector.
10.15 p.m.
Lord McIntosh of Haringey: My Lords, I sympathise with the intentions underlying the amendments and with what the noble and learned Lord said about the need for certainty.
Clause 116 places a duty on the FSA to prepare and issue a code which will help people to get a better understanding of what behaviour is abusive and what is not. This is called the code of market conduct.
In many circumstances, it will be obvious when abuse has occurred. I have already given some examples. You do not need a code to tell you that

683
buying or selling shares while in possession of inside information is likely to fall short of expected standards of behaviour unless there is a very good reason—for example, if circumstances forced the sale. Equally, you do not need a code to tell you that it is not market abuse if, say, a pension fund placing a big buy or sell order in the ordinary course of its business moves market prices. We have accepted that uncertainty exists at the margins. The purpose of the code is to provide greater certainty.
Perhaps I may give the analogy of the Highway Code. The Highway Code gives people a better idea of what it means to drive with or without due care and attention. What it does not do is provide a template on which a decision can be made on whether in an individual case a charge should be brought of driving without due care and attention, or whether there should or should not be a conviction in the courts on that charge. The Highway Code provides assistance but not a definitive answer in any individual case; and it is not intended to do so.
There has been plenty of consultation on the code. The FSA is engaged in an extensive consultation exercise on a draft code, Consultation Document 10. It is revising the code with the help of a practitioners group and a group of exchange and clearing house representatives.
Amendments to Clause 116 leave me a little puzzled. They would reduce the certainty which the code can provide to market participants as to whether or not their behaviour was likely to be abusive.
Amendment No. 133BA makes a drafting change which would cast doubt on what the code could contain. At present the code is not limited to specifying things described in subsection (2). So it would be possible for the code to set out the general background which might assist people in understanding the descriptions it contained, or contain descriptions of particular situations in which people should take extra care about what they do.
Under Amendment No. 133BA, it may still be possible for the code to do that. The power in subsection (2) remains permissive. But it would cast doubt on this in an unhelpful way.
Amendment No. 133BB deletes subsection (2)(a). I presume that the intention is that the code should not be able to specify descriptions of behaviour which amount to market abuse. I think that the effect would be to reduce the certainty people are looking for from the code. They would have to fall back solely on the provisions contained in Clause 115 in coming to a judgment about whether their behaviour was likely to be abusive. People would be less clear than they otherwise would be about whether the FSA would be likely to take action against them.
One of the main issues raised on the market abuse provisions during consultation and the Joint Committee scrutiny was the need for certainty. The effect of the amendment would be to reduce that. The third amendment, Amendment No. 133BC, would
684
have the same effect, making people less clear as to when they might be likely to find themselves being proceeded against for market abuse.
Of course the code cannot set out all the situations in which behaviour does not amount to market abuse. That would be impossible. The result would be that by not saying whether certain behaviour was abusive, or whether certain factors might he relevant in deciding whether abuse had taken place, people would only have certainty where the FSA had said that something was not abuse.
That is not the way in which the code should be drafted in order to provide guidance. No one has suggested in consultation that it should be drafted in the way in which the noble and learned Lord proposes, and I hope that he will not press his amendment.
Lord Fraser of Carmyllie: My Lords, I am a little surprised that the noble Lord has not grasped the technique I have deployed in the three amendments. It is the tried and tested one of looking at what I regard as an enfeebled set of provisions and suggesting their deletion—although I should wish to see them strengthened—in the hope that the Minister might be in a position to explain to me that I am wrong and that they are not as enfeebled and useless as I regard them to be.
I have said at least four times today that I believe that the FSA, particularly in regard to certain developments in the market, should be in a position to say, "That innovation is potentially abusive and we will set out in our code that if anyone pursues it he will suffer penalty". I am still completely at loss to understand why the Government are so resistant to that.
When the Minister, in a somewhat condescending fashion, referred me to the Highway Code, it did not seem to be an entirely apt comparison. If within that code the FSA says, "This behaviour is not market abuse. It matters not what any reasonable regular user of the market regards it as being", that is a total and complete safe haven for the individual who embarks on that behaviour.
That does not seem to me to be anything like an appropriate parallel with the Highway Code.
Lord McIntosh of Haringey: My Lords, I made it clear that that is the easy bit. It is the other side of the coin that is more difficult.
Lord Fraser of Carmyllie: My Lords, the noble Lord is at long last right on this matter. That is the important point that we are seeking to make.
I believe that the relationship between the two clauses is important and I was therefore strongly minded to divide the House on the matter. However, I hope that my faith is not misplaced. While I did not entirely agree with the amendment moved by the noble Lords, Lord Eatwell and Lord Lipsey, they seemed to understand what is important about establishing a clear and unequivocal relationship between Clause 115 and the code in Clause 116. I am still at a loss to

685
understand why the Government cannot bring forward their own amendments in order to put the matter beyond doubt.
I hope that between now and the next stage of the Bill the Minister will consult with those who are concerned about it. If he does not know that I am not alone in having these concerns, he ought to consult more widely. In the, I hope not vain, expectation that he will do just that, or that the noble Lords, Lord Eatwell and Lord Lipsey, may have greater powers of persuasion on the Minister, it is with considerable reluctance that I beg leave to withdraw my amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 133BB and 133BC not moved.]
Clause 119 [Power to impose penalties in cases of market abuse]:
Lord Kingslandmoved Amendment No. 133C:
Page 58, line 37, after ("If") insert ("the court on the application of").
The noble Lord said: My Lords, as the Minister will doubtless remember, this amendment and the others in this group were tabled in Committee. They seek to extract from the Government a reaction to the proposition that the imposition of a penalty by the FSA following an investigation is likely to be a contravention of the European Convention on Human Rights.
As I understand the jurisprudence of the court, a clear distinction is made between the investigative function and the function of adjudication and penalising. If the Minister follows through the logic of that jurisprudence, he will see the incompatibility of the authority either imposing or even recommending a penalty at the end of an investigation. It is in that context that these amendments have been tabled. I beg to move.
Lord McIntosh of Haringey: My Lords, this is a long list of opposition amendments with a number of government amendments in the middle. In the case of market abuse penalties, in principle there is no reason to insist that a penalty of this kind can be imposed only through the medium of the courts following an application to them by the FSA. The noble and learned Lord, Lord Donaldson, made that point when we discussed similar amendments in Committee. When there was a debate on whether the regime was criminal or non-criminal—and I am afraid that we have agreed to differ on that point—the noble and learned Lord said:
"I make it clear that I do not agree with the noble Lord, Lord Kingsland. Despite the fact that I believe this matter falls under criminal law, it does not follow that one ought to refer it to the courts".
The reason why the Bill provides for reference to the tribunal rather than application to the courts is that we consider that there are positive advantages for all concerned in that approach. The tribunal will deal solely with financial services cases. The Lord Chancellor will be able to appoint to it people with
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appropriate knowledge and experience. Over time, we can expect the tribunal to build up a considerable body of expertise in financial services, as other tribunals have done in other areas. As it will be concerned solely with referral from the FSA, the tribunal will also provide a quick and relatively inexpensive route for cases to be heard.
Although we would lose some of those comparative advantages by providing that market abuse penalties could be imposed only by the courts, I cannot see what we would gain. The Bill provides plenty of safeguards if a person wishes to contest the decision of the FSA to impose a penalty on him. The tribunal is a first-instance tribunal. It is able to look at all the facts and consider all the merits of a case. It is not inferior to the courts. It will be run as part of the court service; its members will be appointed by the Lord Chancellor; and it will ensure that people enjoy their right to a full and fair hearing under Article 6 of the European Convention on Human Rights, with which it will be fully compliant. Our amendments to this clause simply align the procedures through which the FSA must go if it proposes to impose a penalty or publish a statement about market abuse with the procedures applying more generally in the Bill.
Amendments Nos. 134 and 136 simply align the wording of Clauses 122 and 123 with that which applies elsewhere in the Bill in respect of penalties and statements. Amendments Nos. 135 and 137 delete subsection (3) of both clauses. This provision is necessary in order to avoid multiple notices and multiple rights of referral to the tribunal in respect of the same matter by the same person. The reason that those subsections are being deleted is because they are no longer needed following the introduction of Clause 388 in Committee. Clause 388(2) has the same effect as subsection (3) of Clauses 122 and 123. I commend the government amendments in this group to the House and urge the noble Lord not to press his amendments.
Lord Kingsland: My Lords, I have listened with great care to what the Minister has said and I shall reflect on it before considering whether to return to this matter at Third Reading. Meanwhile, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 133CA not moved.]
[Amendments Nos. 133D and 133E not moved.]
Lord Kingslandmoved Amendment No. 133F:
Page 59, line 7, at end insert ("or
("(c) in relation to market abuse which satisfies the condition set out in section 115(2)(b) or the condition in section 115(2)(c), he did not anticipate that his behaviour would satisfy that condition.").
The noble Lord said: My Lords, I beg to move.
10.31 p.m.
On Question, Whether the said amendment (No. 133F) shall be agreed to?
Their Lordships divided: Contents, 18; Not-Contents, 81.

Division No. 1

CONTENTS

Anelay of St. Johns, B.

Eccles of Moulton, B.

Astor of Hever, L.

Eden of Winton, L.

Attlee, E.

Elliott of Morpeth, L.

Bagri, L.

Elton, L.

Barber, L.

Ferrers, E.

Beaumont of Whitley, L.

Flather, B.

Blaker, L.

Fraser of Carmyllie, L.

Boardman, L.

Gardner of Parkes, B.

Bowness, L.

Garel-Jones, L.

Brabazon of Tara, L.

Geddes, L.

Bridgeman, V.

Goschen, V.

Brougham and Vaux, L.

Gray of Contin, L.

Burnham, L. [Teller]

Hayhoe, L.

Buscombe, B.

Henley, L. [Teller]

Byford, B.

Higgins, L.

Campbell of Alloway, L.

Hogg, B.

Campbell of Croy, L.

Holderness, L.

Carlisle of Bucklow, L.

Howe, E.

Carnegy of Lour, B.

Howell of Guildford, L.

Chilver, L.

Hunt of Wirral, L.

Clark of Kempston, L.

Hylton-Foster, B.

Cope of Berkeley, L.

Jenkin of Roding, L.

Courtown, E.

Kingsland, L.

Cranborne, V.

Kirkham, L.

Dean of Harptree, L.

Knight of Collingtree, B

Dundee, E.

Liverpool, E.

579

Luke, L.

Platt of Writtle, B.

Lyell, L.

Prior, L.

McCarthy, L.

Rawlings, B.

McConnell, L.

Reay, L.

MacFarlane of Bearsden, L.

Renton, L.

Mackay of Ardbrecknish, L.

Roberts of Conwy, L.

Marlesford, L.

Rotherwick, L.

Masham of Ilton, B.

Ryder of Wensum, L.

Mayhew of Twysden, L.

Seccombe, B.

Miller of Hendon, B.

Sharpies, B.

Monro of Langholm, L.

Shaw of Northstead, L.

Mowbray and Stourton, L.

Shrewsbury, E.

Moynihan, L.

Skelmersdale, L.

Strathclyde, L.

Northbrook, L.

Thomas of Gwydir, L.

Norton of Louth, L.

Trumpington, B.

Onslow, E.

Vivian, L.

Oppenheim-Barnes, B.

Waddington, L.

Park of Monmouth, B.

Wedderburn of Charlton, L

Pearson of Rannoch, L.

Willoughby de Broke, L.

Pilkington of Oxenford, L.

Windlesham, L.

NOT-CONTENTS

Acton, L.

Grenfell, L.

Addington, L.

Hardy of Wath, L.

Ahmed, L.

Harris of Greenwich, L.

Archer of Sandwell, L.

Harrison, L.

Bach, L.

Haskel, L.

Barnett, L.

Hayman, B.

Blackstone, B.

Hilton of Eggardon, B.

Blease, L.

Hogg of Cumbernauld, L.

Bradshaw, L.

Hollis of Heigham, B.

Bragg, L.

Holme of Cheltenham, L.

Brett, L.

Hooson, L

Brooke of Alverthorpe, L.

Howie of Troon, L.

Brookman, L.

Hoyle, L.

Brooks of Tremorfa, L.

Hunt of Kings Heath, L.

Brace of Donington, L.

Irvine of Lairg, L. (Lord Chancellor)

Burlison, L.

Carter, L. [Teller]

Islwyn, L.

Christopher, L.

Janner of Braunstone, L.

Clarke of Hampstead, L.

Jay of Paddington, B. (Lord Privy Seal)

Clinton-Davis, L.

Cocks of Hartcliffe, L.

Jenkins of Putney, L.

Crawley, B.

Judd, L.

David, B.

Kennedy of The Shaws, B.

Davies of Coity, L,

Kirkhill, L.

Davies of Oldham, L.

Laird, L.

Dholakia, L.

Lea of Crondall, L.

Diamond, L.

Lester of Herne Hill, L.

Dixon, L.

Lipsey, L.

Donoughue, L.

Lockwood, B.

Dormand of Easington, L.

Longford, E.

Dubs, L.

Lovell-Davis, L.

Eatwell, L.

Macdonald of Tradeston, L.

Elder, L.

McIntosh of Haringey, L.[Teller]

Ezra, L.

Falconer of Thoroton, L.

McIntosh of Hudnall, B.

Falkland, V.

MacKenzie of Culkein, L.

Farrington of Ribbleton, B.

Mackenzie of Framwellgate, L.

Faulkner of Worcester, L.

Mackie of Benshie, L.

Filkin, L.

Maddock, B.

Fitt, L.

Marsh, L.

Gale, B.

Mason of Barnsley, L.

Gavron, L.

Massey of Darwen, B.

Geraint, L.

Monson, L.

Gladwin of Clee, L.

Morris of Castle Morris, L.

Goldsmith, L.

Morris of Manchester, L.

Gordon of Strathblane, L.

Murray of Epping Forest, L.

Goudie, B.

Newby, L.

Gould of Potternewton, B.

Nicol, B.

Graham of Edmonton, L.

Patel of Blackburn, L.

Gregson, L.

Peston, L.

580

Pitkeathley, B.

Smith of Leigh, L.

Plant of Highfield, L.

Stallard, L.

Powell of Bayswater, L.

Stoddart of Swindon, L.

Prys-Davies, L.

Strabolgi, L.

Puttnam, L.

Symons of Vernham Dean, B

Ramsay of Cartvale, B.

Taylor of Blackburn, L.

Redesdale, L.

Tenby, V.

Thomas of Walliswood, B.

Ress-Mogg, L.

Thornton, B

Richard, L.

Tomlinson, L.

Rodgers of Quarry Bank, L.

Tope, L.

Roll of Ipsden, L.

Tordoff, L.

Russell, E.

Uddin, B.

Sandberg, L.

Varley, L.

Sawyer, L.

Warwick of Undercliffe, B.

Scotland of Asthal, B.

Weatherill, L.

Serota, B.

Whitaker, B.

Sharman, L.

Whitty, L.

Sharp of Guildford, B.

Wilkins, B.

Shepherd, L.

Williams of Crosby, B.

Shore of Stepney, L.

Williams of Elvel, L.

Simon, V.

Williams of Mostyn, L.

Smith of Clifton, L.

Woolmer of Leeds, L.

Smith of Gilmorehill, B.

Young of Old Scone, B.

Resolved in the negative, and amendment disagreed to accordingly.

Division No. 2

CONTENTS

Anelay of St. Johns, B.

Henley, L. [Teller]

Astor of Hever, L.

Kingsland, L.

Blatch, B.

Lyell, L.

Boardman, L.

Mackay of Ardbrecknish, L.

Brougham and Vaux, L.

Mancroft, L.

Burnham, L. [Teller]

Marlesford, L.

Byford, B.

Newton of Braintree, L.

Elton, L.

Northbrook, L.

Fraser of Carmyllie, L.

Shrewsbury, E.

NOT-CONTENTS

Acton, L.

Howells of St Davids, B.

Addington, L.

Howie of Troon, L.

Alli, L.

Hoyle, L.

Archer of Sandwell, L.

Hughes of Woodside, L.

Bach, L.

Irvine of Lairg, L. (Lord Chancellor)

Blackstone, B.

Borrie, L.

Jay of Paddington, B. (Lord Privy Seal)

Bragg, L.

Brett, L

Judd, L.

Brooke of Alverthorpe, L.

Kirkhill, L.

Brookman, L.

Lea of Crondall, L.

Burlison, L.

Lipsey, L.

Carter, L. [Teller]

McCarthy, L.

Christopher, L.

Macdonald of Tradeston, L.

Clarke of Hampstead, L.

McIntosh of Haringey, L. [Teller]

Cocks of Hartcliffe, L.

Crawley, B.

MacKenzie of Culkein, L.

Davies of Coity, L.

Mackenzie of Framwellgate, L

Davies of Oldham, L.

Massey of Darwen, B.

Desai, L.

Miller of Chilthorne Domer, B

Dixon, L.

Morris of Castle Morris, L.

Donoughue, L.

Newby, L.

Dubs, L.

Nicol, B.

Eatwell, L.

Pitkeathley, B.

Elder, L.

Plant of Highfield, L.

Evans of Parkside, L.

Prys-Davies, L.

Farrington of Ribbleton, B.

Ramsay of Cartvale, B.

Faulkner of Worcester, L.

Rea, L.

Filkin, L.

Sawyer, L.

Gale, B.

Scotland of Asthal, B.

Gavron, L.

Sharman, L.

Gladwin of Clee, L.

Simon, V.

Goldsmith, L.

Smith of Leigh, L.

Goudie, B.

Symons of Vernham Dean, B.

Gould of Potternewton, B.

Thornton, B.

Grenfell, L.

Tomlinson, L.

Hardy of Wath, L.

Wedderburn of Charlton, L.

Harris of Richmond, B.

Whitaker, B.

Harrison, L.

Whitty, L.

Hayman, B.

Williams of Mostyn, L.

Hilton of Eggardon, B.

Woolmer of Leeds, L.

Hollis of Heigham, B.

Young of Old Scone, B.

Resolved in the negative, and amendment disagreed to accordingly.
10.40 p.m.
[Amendments Nos. 133G and 133H not moved.]
Clause 120 [Statement of policy]:
[Amendments Nos. 133J to 133N not moved.]
Clause 122 [Warning notices]:
[Amendment No. 133P not moved.]
Lord McIntosh of Haringeymoved Amendment No. 134:
Page 60, line 23, leave out subsection (2) and insert—
("(2) A warning notice about a proposal to impose a penalty must state the amount of the proposed penalty.
(2A) A warning notice about a proposal to publish a statement must set out the terms of the proposed statement.").
The noble Lord said: I beg to move.
[Amendments Nos. 134A to 134D, as amendments to Amendment No. 134, not moved.]
On Question, Amendment No. 134 agreed to.
Lord McIntosh of Haringeymoved Amendment No. 135:
Page 60, line 24, leave out subsection (3).
On Question, amendment agreed to.
Clause 123 [Decision notices and right to refer to Tribunal]:
[Amendment No. 135A not moved.]
Lord McIntosh of Haringeymoved Amendments Nos. 136 and 137:
Page 60, line 30, leave out subsection (2) and insert—
("(2) A decision notice about the imposition of a penalty must state the amount of the penalty.
(2A) A decision notice about the publication of a staternent must set out the terms of the statement.").
Page 60, line 31, leave out subsection (3).
On Question, amendments agreed to.
Clause 124 [Notice for payment]:
Lord McIntosh of Haringeymoved Amendment No. 138:
Leave out Clause 124.
On Question, amendment agreed to.
Clause 129 [The Financial Services and Markets Tribunal]:
Lord McIntosh of Haringeymoved Amendment No. 139:
Page 62, line 16, after ("by") insert ("or under").
The noble Lord said: My Lords, Clause 129 establishes the financial services and markets tribunal. Subsection (2) specifies that the tribunal should have the functions which are conferred on it by the Bill; that is to say, those which are set out on the face of the Bill. In a number of specific instances, such as in Clause 258, which deals with open-ended investment companies, the Bill does not directly confer jurisdiction on the tribunal, but contains a power to make secondary legislation conferring jurisdiction on the tribunal. Amendment No. 139 is a technical amendment intended to take account of that tact. I beg to move.
On Question, amendment agreed to.
[Amendment No. 140 not moved.]
Lord Fraser of Carmylliemoved Amendment No. 140ZA:
Page 62, line 17, after ("may") insert ("after consulting the Lord President of the Court of Session").
The noble and learned Lord said: My Lords, I believe that I can move the amendment very shortly. If I get a bloody nose over it, I shall be more than content. My interest is not in any sense to restrict the writ of the Lord Chancellor. For reasons I have previously indicated, I should like to see the powers of the financial services and markets tribunal operate on a UK basis. That is what I understand is proposed. However, I want to ensure that the Lord Chancellor, when making rules for the tribunal, should consult the Lord President of the Court of Session as the senior judge in Scotland as well as the Council on Tribunals. I have a lurking suspicion that if there is not an expressed statutory obligation to do that, it is always implicit in the arrangements. If I am reassured on that matter, I shall readily withdraw the amendment. I beg to move.
10.45 p.m.
Lord Kingsland: My Lords, I wish to speak to Amendments Nos. 140A to 140E, which are grouped with Amendment No. 140ZA. These amendments relate to the composition of the financial services and markets tribunal. It is possible that when the Government first considered the qualifications for membership of the tribunal they concluded that it did not require to be made up of persons of very high standing in so far as their legal qualifications are concerned. Schedule 13 requires the members of the panel of chairmen to have at least seven years' standing as a qualified lawyer.
Today these qualifications seem inadequate given the importance now attached to the role of the tribunal. We believe that the tribunal justifies the presence of a High Court judge or a judge of the Court of Session to be its president and deputy president. We also believe that the seven-year qualification requirement for other members of the panel of chairmen should be increased to 10 years.
Lord McIntosh of Haringey: My Lords, the answer to the noble and learned Lord, Lord Fraser of Carmyllie, takes a page, but I do not need to say it. Yes, it is implicit. The reason why we have not included it is because there are other people to consult, such as the Lord Advocate, representing the Scottish Executive, the Law Societies of England and Wales, Northern Ireland and Scotland, the Bar Council and many others.
As regards the main opposition amendments, Amendment No. 140A required the Lord Chancellor to appoint judges of the High Court or Court of Session as the president and deputy president. The Bill provides that he must appoint the president and deputy president of the tribunal from the members of the panel of chairmen which he also appoints.
690
The current legal qualifications for these appointments under paragraphs 2(5) and 3(2) are sufficient for the proposed new tribunal and are fully in line with appointments for other tribunals. The president of the tribunal must have a 10-year legal qualification.
Of course we want the tribunal to have a high level of expertise and authority. The Lord Chancellor can make appointments at a higher level of seniority if there is a case for doing so. But we do not believe that the nature and volume of the workload of the tribunal warrants taking the unusual step of making such an appointment. The amendment would impose too much inflexibility on the appointment of the president. It would appear to prevent at a future date the appointment of, say, a retired High Court judge or even a more senior judge, should it be found that the workload justified such an appointment.
Amendments Nos. 140B to 140E require all members of the panel of chairmen to have a 10-year legal qualification as opposed to seven years. The provisions in the Bill for the panel of chairmen ensures that suitable people are appointed to the tribunal with the necessary qualification. We do not believe that it needs to be changed. It is the normal practice for other tribunals to appoint people with a seven-year qualification, such as the VAT and Duties Tribunal, employment tribunals and the transport tribunals.
If there is a case which raises legal issues of a particularly complex or ground-breaking nature, then the tribunal may appoint one or more experts to provide assistance. It can also bring in additional members of the panel of chairmen with the relevant expertise to the case in question. I hope that noble Lords will not press these amendments.
Lord Fraser of Carmyllie: My Lords, I am certainly satisfied. I beg leave to withdraw my amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 140A to 140E not moved.]
Schedule 13 [The Financial Services and Markets Tribunal]:
Lord McIntosh of Haringeymoved Amendment No. 141:
Page 267, line 13, at end insert—
("( ) for the suspension of decisions of the Authority which have taken effect;").
The noble Lord said: My Lords, in moving this amendment I would like to speak also to Amendments Nos. 142 to 149 inclusive. This is a central part of the Government's rationalisation of the procedural provisions to ensure fairness and consistency. The Government's amendments to Part IX, most of which were circulated in draft when we were in Committee, improve the way in which the decisions of the tribunal are given effect and put beyond doubt the tribunal's ability to consider all the relevant evidence.
Amendment No. 141 makes it clear that the tribunal rules made under Clause 129 may include provision for the tribunal to suspend the effect of decisions that

691
come into effect before they have considered the matter. That reflects the need to allow for supervisory decisions which need to take effect while the matter is still open to review. It is only right that in these circumstances the tribunal should have discretion to grant relief from whatever requirement or restriction has been imposed.
Amendments Nos. 142 and 149 are drafting amendments, consequential on the drawing of the distinction between supervisory notices, warning and decision notices.
Amendment No. 143 is a drafting improvement. We are anxious to make it as clear as possible that the tribunal can consider any evidence, regardless of whether it was available to the FSA or not. That is the intended effect of the current wording, but we were concerned that it may seem ambiguous so decided to put the point beyond any doubt.
Amendment No. 144 concerns the manner in which the tribunal's decisions are given effect. As the Government explained in another place, the existing drafting left the tribunal with the responsibility for giving effect to its own decisions unless it decided to remit the matter back to the FSA.
The Tribunal should not be responsible for taking the necessary administrative action to give effect to its own decisions. We have been concerned that that may lead the tribunal to be a competent authority for the purposes of the European directives, which could embroil the tribunal in much unnecessary administration. So the responsibility for giving effect to the tribunal's decisions will rest with the FSA, which has all the relevant powers. Naturally the amendments ensure that the FSA will he bound to take whatever action the tribunal determines.
Amendment No. 145 takes us back to the issue of when a decision takes effect. As we made clear in Committee, it is not our intention that the FSA should be able to demand payment of penalties or restitution, or make public statements, during the period when the person concerned has a right to refer the matter to the tribunal.
Amendment No. 145 makes that clear. The FSA cannot give effect to a decision contained in a decision notice pending a reference to the tribunal, or appeal from the tribunal to the higher courts, or while a decision remains open to such a reference being made. Once the review process is complete, action will be given effect to by a final notice under Clause 385. The final notice must then give effect to the determination made by the tribunal or, if its decision is appealed, to the judgement of the higher courts.
Amendments Nos. 146 to 148 are consequential changes. I beg to move.
Lord Kingsland: My Lords, these amendments are a series of amendments to Clause 130 and there is one to Schedule 13. The first amendment makes it clear that there can be a reference to the tribunal after a supervisory notice as well as after a decision notice, which is welcome. The second makes it clear that the tribunal can consider all evidence, even if it were available to the authority at the time of reaching a decision. The present version suggests that the tribunal can consider only evidence that was not available to the authority at the time. That is also welcome.
Subsection (4) is replaced by a series of provisions that provide for the tribunal to decide the appropriate action for the authority to take and then directs the authority to take it, which is sensible. If the reference relates to a supervisory notice, the tribunal cannot direct the authority to take action which would have required the giving of a decision notice. The two categories of offences, respectively covered by the two notices, are to be kept separate. That also seems appropriate.
Finally, the tribunal can also make recommendations as to the authority's rules or procedures. It cannot actually require changes, but presumably a recommendation would be enough.
The amendment to page 62, line 40 provides that the authority cannot take action pursuant to a decision notice during the period within which the matter to which the decision notice relates may be referred to the tribunal and, if the matter is referred to the tribunal, until the reference and any appeal is disposed of. In another place, during the Committee stage, and at every opportunity thereafter in another place and in your Lordships' House, we had been asking for this. We are very pleased to see it. I hope that the Minister will not mind me reminding him of the number of times that we have had to ask the Government to provide that.
The few final amendments merely tidy up the clause. I do not need to comment on them.
Lord McIntosh of Haringey: My Lords, I am grateful to the noble Lord for his support. On the matters on which he has been clearer than I have been in expounding the government amendments—I am sure there are many—I hope that his text can be used in Pepper v. Hart rather than mine.
On Question, amendment agreed to.
Lord Kingslandmoved Amendment No. 141A:
Page 268, line 19, at end insert—
("(3) At the commencement of any proceedings a party (other than the Authority) to those proceedings may elect either that the provisions of sub-paragraph (2) must apply, or instead of subparagraph (2), that the Tribunal has discretion to order one party to the proceedings to pay the whole or part of the costs or expenses incurred by the other party in connection with the proceedings.").

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The noble Lord said: My Lords, I must say that if the Minister would make that Pepper v. Hart concession to all my speeches in your Lordships' House on this Bill, I would be most content and much obliged.
Under paragraph 13 of Schedule 13, the tribunal may award costs against a party to proceedings only if that party has acted "vexatiously, frivolously or unreasonably" or, in the case of the authority, if the decision of the authority was unreasonable. There will be cases where the authority acted reasonably, but where the tribunal finds in favour of the other party to the proceedings. In those cases, although the authority loses the proceedings, it will not have any responsibility for the costs incurred by the other party, which could be substantial.
We accept that any alternative proposal on costs should not favour one party over another. Amendment No. 141A seeks to achieve that balance by giving the non-authority party to the proceedings the choice, at the commencement of the proceedings, either to accept the present provision in paragraph 13, in which case he will not have to pay the authority's costs if he loses but does not receive from the authority any contribution towards his costs if he wins; or to opt for the proposed alternative, which will allow the tribunal to decide costs. We believe this to be a fairer structure which does not prejudice the position of the authority. I beg to move.
Lord McIntosh of Haringey: My Lords, the aim of Amendment No. 141A is to widen the circumstances under which the tribunal can award costs. The current drafting of the Bill allows the tribunal to award costs against either party if they have acted "vexatiously, frivolously or unreasonably". In addition, subparagraph (2) makes explicit the tribunal's power to award costs against the FSA where it considers that the FSA decision giving rise to the reference was unreasonable.
As I understand it, Amendment No. 141A would give the party other than the FSA the option at the start of the proceedings to elect either that the provisions of sub-paragraph (2) "must" apply—I do not understand whether that means any more than that it just applies—or that the tribunal should have the discretion to award costs against either party regardless of whether they have acted "vexatiously, frivolously or unreasonably". That seems to go against the thrust of the Joint Committee's recommendation.
The Joint Committee recommended that we restrict the discretion of the tribunal to award costs to those cases where the tribunal considered that one or other party had acted unreasonably, vexatiously or frivolously. The committee was, I believe, concerned that a broad power to award costs could act as a deterrent to people using the tribunal.
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After considerable reflection and consultation with the Lord Chancellor's Department, we were persuaded that we had provided an unusually broad power for a tribunal of this nature and so it was narrowed in another place. We understand that the Opposition have introduced this new element of an option for the party other than the FSA in order to meet the concerns about the possible deterrent effect. However, we do not think that it is right or proper to apply this sort of provision to tribunal proceedings. We are unaware of any precedent for such a provision, and it seems inherently unfair for one party to any dispute to be able to determine the basis on which costs may—or must—be awarded.
These are fundamental questions. I hope that the noble Lord will not press his amendment
Lord Kingsland: My Lords, the noble Lord will be relieved to hear that I do not intend to press the amendment, but I shall reflect on what he said. However, the proposition that just because something has not been done before, it ought not to be done now is one which I would have thought was alien to the culture of the Government. Perhaps the Minister will surprise me.
Lord McIntosh of Haringey: My Lords, pure conservatism.
Lord Kingsland: My Lords, I leave noble Lords with that observation by the Minister. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 130 [Proceedings: general provision]:
Lord McIntosh of Haringeymoved Amendments Nos. 142 to 149 en bloc:
Page 62, line 26, after ("notice") insert ("or supervisory notice").
Page 62, line 31, leave out from ("evidence") to end of line 32 and insert ("relating to the subject-matter of the reference, whether or not it was available to the Authority at the material time").
Page 62, line 33, leave out subsection (4) and insert—
("(4) On a reference the Tribunal must determine what (if any) is the appropriate action for the Authority to take in relation to the matter referred to it.
(4A) On determining a reference, the Tribunal must remit the matter to the Authority with such directions (if any) as the Tribunal considers appropriate for giving effect to its determination.
(4B) In determining a reference made as a result of a decision notice, the Tribunal may not direct the Authority to take action which the Authority would not, as a result of section 383(2), have had power to take when giving the decision notice.
(4C) In determining a reference made as a result of a supervisory notice, the Tribunal may not direct the Authority to take action which would have otherwise required the giving of a decision notice.
(4D) The Tribunal may, on determining a reference, make recommendations as to the Authority's regulating provisions or its procedures.").
Page 62, line 40, leave out from beginning to ("until") and insert ("The Authority must not take the action specified in a decision notice—

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(a) during the period within which the matter to which the decision notice relates may be referred to the Tribunal; and

(b) if the matter is so referred,").

Page 62, line 41, leave out ("decision,") and insert ("determination.").
Page 63, line 1, leave out ("If a matter is remitted to the Authority,").
Page 63, line 2, leave out ("decision of) and insert ("determination of, and any direction given by,").
Page 63, line 5, at end insert—
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("( ) "Supervisory notice" has the same meaning as in section 390.").
On Question, amendments agreed to.
Lord McIntosh of Haringey: My Lords, I beg to move that further consideration on Report be now adjourned.
Moved accordingly, and, on Question, Motion agreed to.
House adjourned at eleven o'clock.