Financial Services and Markets Bill

HL Deb 27 March 2000 vol 611 cc526-76

4.33 p.m.

Lord McIntosh of Haringey

My Lords, I beg to move that the House do now again resolve itself into Committee on this Bill.

Moved, That the House do now again resolve itself into Committee. — (Lord McIntosh of Haringey.)

On Question, Motion agreed to.

House in Committee accordingly.

[THE DEPUTY CHAIRMAN OF COMMITTEES (Lord Murton of Lindisfarne) in the Chair.]

Clause 129 [General rule-making power]:

Lord McIntosh of Haringey

moved Amendment No. 226D: Page 60, line 6, after ("activities") insert ("or (b) with respect to the carrying on by them of activities which are not regulated activities,"). The noble Lord said: In moving the amendment, I speak also to government Amendments Nos. 230C, 230G, and 277 B; and refer to opposition Amendment No. 231XA.

We begin today's Committee with a debate on Part X of the Bill—Rules and Guidance. It is one of the most vital, if technical, parts of the Bill. Rules are a key instrument by which the authority will give effect at working level to its statutory objectives and the principles to which it must have regard. The role of guidance is to provide information and advice to the regulated community—with respect to rules but also on more general issues.

The first clause of Part X is Clause 129, the authority's general rule-making power. This is a key clause in the new regime. It confers a power on the authority to make rules applying to authorised persons in carrying on regulated activities. Clause 130 gives the FSA power to apply rules to authorised firms' non-regulated activities where it is necessary in order to avoid an adverse effect on the customers of the authorised business.

The effect of Amendment No. 226D and my intention to oppose the Question that Clause 130 stand part of the Bill will be to integrate the authority's power to make rules which affect non-regulated activities as part of its power to make general rules. Amendments Nos. 230C, 230G, and 277B delete references to non-regulated activities rules elsewhere in the Bill.

There are two main reasons for this change. First, it will bring much greater focus to the authority's remit to make non-regulated activity rules. I shall come back to that point in a moment. Secondly, although in many respects Clause 130 repeats what is in Clause 129, one point in which Clause 130 differs is that Clause 129 allows the FSA to make rules even when there is no relationship between the authorised person to whom the rules will apply and the persons, that is those consumers dealing with persons providing regulated activities, whose interests are protected by the rules. This is necessary to cover situations where rules are necessary to control systemic risk. The absence of such a provision in respect of non-regulated activities could lead to doubt about when a rule applies.

Returning to the first point, the authority will be able to make rules under the integrated power—those were Clauses 129 and 130—only if it appears to be necessary or expedient for the purpose of protecting the interests of cansumers. It is worth emphasising that the people whose interests are being protected are limited to consumers dealing with persons who are carrying on regulated activities; and that the protection is focused on protection in relation to the carrying on of those activities. It is clear as a matter of common sense that what a person does otherwise than in connection with regulated activities is capable of having an effect on his regulated activities. But that is not a licence for the authority to interfere with the running of a person's non-regulated activities.

This Bill is about regulated activities. But there is an important qualification to this. Where there is a risk that a person's non-regulated activities could damage the interests of his regulated activity customers in relation to the carrying on of regulated activities then that is a matter for the Bill. It is right that the rule-making powers of the authority should extend to this type of situation. This is the effect of our amendments. They make it clear that the authority's powers are limited to this situation That is what our Amendment No. 229 (which we have already debated) says. It is worth remembering that we are talking here about a power.

It is at the stage when the authority makes its rules that it must consider whether there are situations where non-regulated activities could damage the interests of a consumer of a regulated activity. Even if it can identify such situations, the authority must also reach the view that a rule it made could provide protection for such a consumer and that it is necessary or expedient to make that rule, bearing in mind the authority's general duties as set out in Clause 2.

As a result of the amendments, Clause 129(1) will allow the authority to make rules to protect the interests of consumers. By bringing in non-regulated activity rules into Clause 129, it will be clear that the purpose of such rules is also to protect the interests of consumers; and by making this small change all the provisions of Clause 130 can be removed.

I turn to Amendment No. 231XA. Clause 141 allows an authorised person to be sued for damages if a private person—

The Earl of Onslow

I tried very hard to understand what the Minister said. I found it immensely difficult. I shall be surprised if I am alone. Is it possible for the noble Lord to sum up what he said during the past five minutes—I see he grins with horror at the thought—in something which is called the Queen's English? I listened very hard but found it incredibly difficult to understand. I do not think that I am the most stupid Member of your Lordships' House.

Lord McIntosh of Haringey

First, this part of the Bill is about the Financial Services Authority making rules. Secondly, Clause 129 says that it makes rules about authorised persons, who are the people covered by the Bill in activities which are regulated by the Bill. Thirdly, Clause 130 states that there might be occasions when the authority must regulate activities carried out by authorised persons which are not regulated activities. Therefore, the amendments take out Clause 130 and bring those provisions into Clause 129. However, there is one exception to that. Fourthly, there must be a restriction on which unregulated activities are covered by the rule-making power.

The Earl of Onslow

That is terrific. Why the hell did he not say it before? That told us exactly what we wanted to know. I stand gobsmacked in admiration for what the noble Lord said. That explanation was very good, but the other one was very difficult to understand. I thank him.

Lord McIntosh of Haringey

It might be difficult for Members of the Committee to understand and it was difficult for me to understand. I ran a management practice and having been in business all my life I used to say to people who wrote reports for me, "Tell me what that means". After they had told me what it meant, I would say, "Well, why didn't you write that?". Unfortunately, legislation and even Ministers' speeches about legislation are different. I have to cover the waterfront and go into more detail. It was true of the noble Earl's government, too.

The Earl of Onslow

Of that, there is no doubt whatever. I was not making a party political point; I was making a general point. I am immensely impressed by the Minister's explanation.

Lord McIntosh of Haringey

And, by the way, it is what the noble Lord, Lord Saatchi, intends to vote against!

I turn to Amendment No. 231XA. Clause 141, which has nothing to do with Clauses 129 or 130, allows an authorised person to be sued for damages if a private person suffers loss as a result of the contravention of a rule. The effect of Amendment No. 231XA would be to prevent such actions for damages in respect of non-regulated activity rules.

As I explained in putting the case for the Government's amendments, we are proposing to remove the clause which confers the power to make non-regulated activity rules as such. That was the second point I made. In any event, we believe that the FSA's power to make rules relating to non-regulated activities is narrower than has often been supposed. We believe that under our new proposals it will be clear that the FSA will have a power to make rules only about non-regulated activities if it considers that it is necessary or expedient to do so in order to protect the consumers of regulated activities.

I believe that the same logic which results in the authority being given power to make rules in relation to non-regulated activities follows through to there being a right of action for breach of statutory duty in relation to contraventions of such rules. I keep looking towards the noble Earl, Lord Onslow, to make sure that he is still with me!

It is part of the necessary protection for consumers of regulated activities. The right of action for breach of statutory duty is of course only available to private persons. Perhaps I may give an example. Let us suppose that an authorised person who also carried on a non-regulated coin-dealing business were to operate an authorised collective investment scheme is a regulated activity and it is perfectly lawful to operate such a scheme as long as the operator is authorised.

However, it is not inconceivable that some rules might need to be applied to the coin dealing business—purely as a minimum—in order to make sure that the funds contributed by participants in the collective investment scheme—that is, the consumers of the regulated activity—are protected.

A rule might be necessary to require an independent valuation of any purchase for the scheme made using investors' funds which the scheme operator makes for his coin dealing business in order to avoid any conflict of interest he might otherwise have and to ensure that the scheme participants' interests are protected. It may be arguable that the rule would touch on the running of the non-regulated coin dealing business. However, it is clear that if he contravenes such a rule, and the coins are sold to the scheme at what turns out to be a disadvantageous price, there could be damage to the interests of the scheme participants. Are we together on this?

The Earl of Onslow

The noble Lord deserves great credit. I believe that I am with him on the pennies, yes.

Lord McIntosh of Haringey

That is why we believe that the FSA must have the power, exercisable only in such cases, to make rules which affect the carrying on of a non-regulated activity. It follows that if an authorised person were to breach such rules, a private person should be able to bring an action for breach of statutory duty in any case where he suffers loss or damage as a result of the rule breach. The two propositions go hand in hand.

I hope that the noble Lord will not press his amendment.

Lord Stewartby

I do not want to add to the Minister's already heavy burden, but could we have five Haringey bullet points at the beginning of each government amendment? That would make them a great deal easier to understand.

Lord McIntosh of Haringey

The risk of oversimplification is great. The case of Pepper v. Hart states that what Ministers say at the Dispatch Box when explaining Bills can sometimes be taken into account in a court of law. It is dangerous.

Lord Stewartby

I am not suggesting that he should dispense with the Treasury rhubarb, but we should all be helped by starting with such a punchy introduction.

4.45 p.m.

Lord Kingsland

My rather furtive expression exhibits my fear that when I subside my noble friend might rise again!

Our Amendment No. 231XA is an amendment to Clause 141. Under that clause, the contravention by an authorised person of the authority's rules is actionable at the suit of a private person who suffers loss as a result of the contravention. Members of the Committee are also aware that, in such circumstances, compliance with the FSA's guidance is not a defence to the statutory right to bring an action for damages. Compliance with guidance does not provide a safe harbour against proceedings under Clause 141(1).

Our amendment would add a caveat to the application of Clause 141(1) by adding to Clause 141(4) the words, or a non-regulated activity rule". Non-regulated activity rules are referred to in Clause 130. They are rules made by the FSA applying to authorised persons with respect to the carrying on by them of non-regulated activities. Rules made under Clause 131 are non-regulated activity rules. The proposed amendment would mean that the statutory right to bring an action for damages would be precluded in the case of contraventions of such rules. It is submitted that that is reasonable in principle because the statutory right in Clause 141 should be limited to breaches of the rules which apply to the authorised person's regulated activities.

For those reasons, we object to the Government's Amendment No. 226D. Our amendment draws the distinction between regulated activity and non-regulated activity, as does the Bill as drafted. We do not believe that the right to damages should apply in cases involving breach of non-regulated activities. The effect of the Government's amendment is to do away with that distinction, which we believe should be kept.

Lord McIntosh of Haringey

I commend Amendment No. 226D to the Committee.

4.49 p.m.

On Question, Whether the said amendment (No. 22613) shall be agreed to?

Their Lordships divided: Contents, 130; Not-Contents, 71.

Division No. 1
CONTENTS
Addington, L.	Crawley, B.
Alli, L.	Dahrendorf, L.
Amos, B.	Darcy de Knayth, B.
Ampthill, L.	David, B.
Archer of Sandwell, L.	Davies of Coity, L.
Ashton of Upholland, B.	Davies of Oldham, L.
Avebury, L.	Dean of Thomton-le-Fylde, B
Bach, L.	Desai, L.
Barnett, L.	Dholakia, L.
Bassam of Brighton, L.	Dixon, L.
Bledisloe, V.	Dormand of Easington, L.
Bradshaw, L.	Dubs, L.
Bragg, L.	Elder, L.
Brooke of Alverthorpe, L.	Evans of Parkside, L.
Brookman, L.	Evans of Watford, L.
Bruce of Donington, L.	Falconer of Thoroton, L.
Burlison, L.	Falkland, V.
Carter, L, [Teller]	Farrington of Ribbleton, B.
Christopher, L.	Faulkner of Worcester, L.
Clarke of Hampstead, L.	Gale, B.
Clinton-Davis, L.	Gavron, L.
Craig of Radley, L.	Gladwin of Clee, L.

Goodhart, L.	Merlyn-Rees, L.
Goudie, B.	Milner of Leeds, L.
Gould of Potternewton, B.	Morris of Manchester, L.
Grabiner, L.	Murray of Epping Forest, L.
Gregson, L.	Newby, L.
Hardy of Wath, L.	Orme, L.
Harris of Greenwich, L.	Patel of Blackburn, L.
Harris of Haringey, L.	Peston, L.
Harrison, L.	Pitkeathley, B.
Haskel, L.	Prys-Davies, L.
Hayman, B.	Puttnam, L.
Hilton of Eggardon, B.	Ramsay of Cartvale, B.
Hollis of Heigham, B.	Rea, L.
Holme of Cheltenham, L.	Rendell of Babergh, B.
Howie of Troon, L.	Rodgers of Quarry Bank, L.
Hoyle, L.	Roll of Ipsden, L.
Hughes of Woodside, L.	St. John of Bletso, L.
Hunt of Kings Heath, L.	Sandberg, L.
Irvine of Lairg. L. (Lord Chancellor)	Sawyer, L.
	Scotland of Asthal, B.
Islwyn, L.	Scrota, B.
Jay of Paddington, B. (Lord Privy Seal)	Sharman, L.
	Sharp of Guildford, B.
Jeger, B.	Shepherd, L.
Jenkins of Hillhead, L.	Shore of Stepney, L.
Jenkins of Putney. L.	Simon, v.
	Smith of Clifton, L.
Joffe, L.	Stoddart of Swindon, L.
Kennedy of The Shaws, B.	Stone of Blackheath, L.
Lea of Crondall, L.	Strabolgi, L.
Levy, L.	Symons of Vernham Dean, B.
Lipsey, L.	Thomas of Gresford, L.
Lockwood, B.	Thomas of Walliswood, B.
Lofthouse of Pontefract, L.	Thornton, B.
Longford, E.	Tomlinson, L.
Lovell-Davis, L.	Tordoff, L.
Macdonald of Tradeston, L.	Turner of Camden, B.
McIntosh of Haringey, L. [Teller]	Walker of Doncaster, L.
	Warwick of Undercliffe, B.
McIntosh of Hudnall, B.	Weatherill, L.
MacKenzie of Culkein, L.	Whitaker, B.
Mackenzie of Framwellgate, L.	Whitty, L.
Maddock, B.	Wilkins, B.
Mallalieu, B.	Woolmer of Leeds, L.
Massey of Darwen, B.	Young of Old Scone, B.
NOT-CONTENTS
Blackwell, L.	Higgins, L.
Blatch, B.	Holderness, L.
Boardman, L.	Home, E.
Brabazon of Tara, L.	Hunt of Wirral, L.
Brigstocke, B.	Jenkin of Roding, L.
Campbell of Alloway, L.	Kingsland, L.
Campbell of Croy, L.	Lucas, L.
Carnegy of Lour, B.	Luke, L.
Clark of Kempston, L.	Lyell, L.
Cockfield, L.	McColl of Dulwich, L.
Colwyn, L.	McConnell, L.
Courtown, E.	Mayhew of Twysden, L.
Cox, B.	Miller of Hendon, B.
Dean of Harptree, L.	Monro of Langholm, L.
Denham, L.	Mowbray and Stourton, L.
Eccles of Moulton, B.	Murton of Lindisfarne, L.
Elles, B.	Northbrook, L. [Teller]
Elliott of Morpeth, L.	Northesk, E.
Elton, L.	O'Cathain, B.
Fookes, B.	Onslow, E.
Gardner of Parkes, B.	Oppenheim-Barnes, B.
Geddes, L.	Park of Monmouth, B.
Gilmour of Craigmillar, L.	Peyton of Yeovil, L.
Goschen, V.	Plummer of St. Marylebone, L
Gray of Contin, L.	Prior, L.
Hanham, B	Rawlings, B.
Hayhoe, L.	Renton, L.
Henley, L. [Teller]	Roberts of Conwy, L.

Rotherwick, L.	Shrewsbury, E.
Ryder of Wensum, L.	Stewartby, L.
Saatchi, L.	Swinfen, L.
Saltoun of Abernethy, Ly.	Trefgarne, L.
Seccombe, B.	Trumpington, B
	Tugendhat, L.
Sharpies, B.	Vivian, L.
Shaw of Northstead, L.	Young, B.

Resolved in the affirmative, and amendment agreed to accordingly.

4.58 p.m.

Lord McIntosh of Haringey

moved Amendment No. 227: Page 60, line 8, leave out from ("of") to end of line 15 and insert ("consumers."). On Question, amendment agreed to.

Baroness Turner of Camden

moved Amendment No. 228: Page 60, line 17, at end insert— ("( ) The Authority may make rules under this section to require authorised persons to advise and inform persons referred to in subsection (1) about matters arising during the course of their use of the services referred to in that subsection."). The noble Baroness said: In moving this amendment, I assure Members of the Committee that it is not a technical amendment. The focus of the Personal Investment Authority with regard to consumer protection was on the selling of products and on ensuring that sellers knew their customers' needs and gave the best advice to meet those needs.

However, consumers' needs change. They may need advice and information at any time during the life of a product. Changes in consumers' needs may arise from changes in their circumstances. Consumers often need to cash in endowment policies early because they cannot afford to continue paying the premiums. There are several options for consumers, such as trading the policies, borrowing on the security of their value, or making them fully paid up. Those are often much more advantageous than simply cashing in the policies.

Consumers need to be informed about those options when they approach their life companies. Of course, some companies make a practice of advising clients in this regard. I am aware of that from my own experience some years ago when I sought to cash in a policy with my company (which was a mutual company). It advised me that I would probably be better off if I traded the policy. Not every company does that. If the client does not know, he may well lose out.

Some changes are caused by outside factors. Changes to assumptions about yields have meant that some endowment policies are not sufficient to pay off an interest-only mortgage; ISA mortgages are set up with the assumption that the investment will pay off the mortgage. If it is clear at some point that the investment will not be sufficient, consumers will need to be told early that that may be the case and what their options are. Sometimes changes in taxation will have an effect on products, and consumers will need to know about that.

The FSA should be able to make rules to require information and advice to be given in similar circumstances. Leaving it to the companies concerned may mean that consumers do not receive the information that they need at the right time.

I understand that the FSA believes that the Bill already allows it to make rules covering that, but that does not seem to me to be absolutely clear in the Bill. Therefore, I believe it necessary to have a provision on the face of the Bill which makes that absolutely clear. This may be extremely important to people at quite difficult times in their lives, when they need to have advice about the best options available. Therefore, I hope that the Government will be prepared to accept the amendment. I beg to move.

5 p.m.

Lord Kingsland

Our reaction to the noble Baroness's amendment is similar to the kind of reaction which the Minister has given to us on numerous occasions: we agree with it but we do not think it is necessary.

We think that because not only is the protection of consumers an objective contained in Clause 2(2)(c), but also in the way the objective is further elaborated in Clause 5(2)(c); almost the express terms of the noble Baroness's amendment are contained in the expression, the needs that consumers may have for advice and accurate information". Moreover, under Clause 29, there does not seem to be any constraint on the scope of rules which can be made within the objectives of the Bill.

I do not wish the noble Baroness to be in any doubt about our commitment to the principles which underlie her amendment; but for all those reasons, we believe that it is otiose.

Lord McIntosh of Haringey

I do not believe that I have used the word "otiose" once throughout the whole proceedings in Committee. It is a lovely word; that is quite true.

My noble friend's amendment to Clause 129 proposes that the FSA should have power to make rules requiring authorised persons to advise and inform consumers about matters arising during the course of their use of the authorised person's services. She gave a very good example, which was also given in another place, of a requirement on an insurer to notify a surrendering endowment policyholder of the existence of the second-hand traded endowment market.

Stephen Timms, the Financial Secretary to the Treasury, explained then that the FSA would be able to make rules using its general rule-making power, although it was for the FSA to determine whether and how to use its powers, having regard to its general duties.

I am happy to confirm that it is still the Government's understanding that the FSA would be able to make rules to deal with this problem on the basis that they would apply to authorised persons with respect to the carrying out of a regulated activity and would be for the purpose of protecting the interests of consumers. My noble friend cast doubt on that, but I really do believe that to be the case.

It is worth noting that such a rule could not have been made under the Financial Services Act 1986. Paragraph 4 Schedule 10 of that Act prevented conduct of business rules applying to a regulated insurance company, except in relation to the selling and advice of long-term policies or to the management of pension fund assets. That restriction has not been continued under this Bill and I hope that my noble friend will recognise that, in effect, we have brought her amendment into the scope of the Bill for the first time and that, therefore, she will not feel it necessary to press the amendment.

Baroness Turner of Camden

I thank my noble friend for his explanation in opposition to the amendment. It is obviously not my intention to seek to divide the Committee on I should like to think about what he said and to have a word with the people who have been advising me in this connection because it was our impression that without some wording of this kind on the face of the Bill, the FSA may very well conclude that it did not have authority to give advice in the circumstances which I have been suggesting.

However, in view of what the Minister said, I shall withdraw the amendment and consider what he said between now and Report stage. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord McIntosh of Haringey

moved Amendment No. 228A: Page 60, line 24, leave out from ("rules") to ("may") in line 25. The noble Lord said: In moving this amendment, I shall speak also to government Amendment No. 230ZA and speak in a friendly tone to opposition Amendment No. 230A because I believe that our thinking on these matters is very much at one.

Subsection (1) of Clause 131 allows the authority to make requirements relating to the financial resources of particular authorised persons. Subsection (2) allows it to direct a particular person to hold a specified amount of capital.

Amendment 230ZA deletes those subsections. The substantive change we are making here relates to the removal of Clause 131(2). Under that provision, the FSA would have been able to notify individual authorised persons as to the level of financial resources that they must maintain. Subsection (1) of Clause 131 was included only in order to provide the basis for the proposition in subsection (2). Subsection (2) needed to be stated expressly because the sort of individual notification for which it provides is not the type of provision one usually finds in rules—the general idea being that rules are legislative acts which apply to all authorised persons or specified classes of such persons.

We now intend that individual financial resources requirements for particular authorised persons will be made using the power to impose requirements in Clause 41 (in Part IV).

General provisions about financial resources will continue to be able to be made using the rule-making provisions of Clause 129. This will cover general rules about the nature of resources that a person must have. It will also allow general rules to be made which apply to all authorised persons, or specified groups of such persons, which set out formulae and so on in accordance with which the level of resources a person must have can be calculated. The power to make the rules will of course be subject to the requirements of Clause 129(1); namely, that they are necessary or expedient to protect the interests of consumers of regulated activities, a mantra which I have repeated far too many times.

We no longer think that there is any need to deal with these matters expressly in Clause 131 if subsection (2) is removed. As indicated, Clause 131(1) is there only so that subsection (2) could hang on it.

The important change that we are making here impacts directly on the rights of individual authorised persons. As indicated, individual financial resources requirements will be imposed under Part IV. Under that part, the authorised person will be able to refer to the tribunal any requirement that has been imposed on him which he thinks is unfair or disproportionate. Depending on the circumstances, he may be able to refer the matter to the tribunal before the requirement takes effect or after it has done so. It may be necessary in some cases for a requirement to take effect straight away, but in either case the authorised person may challenge the authority's decision. The FSA will also have to go through a number of procedural steps in accordance with Part IV when imposing requirements in relation to particular authorised persons.

That is a significant change from the existing provisions. Under the Bill as it stands at the moment a person has a right to challenge the FSA's decision as to the appropriate amount of financial resources only if he disobeys the requirement and the authority takes enforcement action against him. Under the proposed procedures in Part IV a person may comply with the requirement so as not to jeopardise his standing as an authorised person while at the same time questioning the appropriateness of the particular level of resources.

Amendment No. 228A follows changes already made to Schedule 6 which allow for consolidated supervision of groups. Considering the overall structure of a group is important in terms of ensuring proper supervision of members of the group who are authorised persons. The change that we propose simply recognises that in the rules which relate to authorised persons it may be necessary to impose requirements on the authorised person which are not artificially limited to the financial resources of the group. The bottom line is that it will be possible to make only rules which apply to authorised persons and only if they are necessary or expedient to protect the interests of consumers of regulated activities.

Opposition Amendment No. 230A would also have the effect of making financial resources rules subject to the procedures of Part IV. In the light of our Amendment No. 230ZA, I hope that the noble Lord will not press his amendment. I beg to move.

Lord Hunt of Wirral

Having heard the Minister's explanation I am still a little confused. From the way in which I understood what he said, I believe that deleting subsections (1) and (2) of Clause 131, which is the effect of the Minister's Amendment No. 230ZA—which, I must confess, I have only just seen; indeed, I have only just received his kind letter explaining the amendment—might well have a significant impact.

The PIA currently has discretion over certain aspects of the financial resources rules. The current wording of Clause 131 allows the Financial Services Authority a similar discretion. I understood that that was causing some disquiet within certain parts of the Government. I was therefore expecting to see some amendment to Clause 131(2)(a). That is why I am troubled by the conclusive deletion of both subsections (1) and (2).

As I understand it—perhaps the Minister can assist me—capital adequacy and expenditure-based requirements will remain the same. If Clause 131(2)(a) is removed, firms with limited financial reserves whose resources fall temporarily below the £10,000 capital adequacy limit could find themselves technically in breach. That is why hitherto the PIA has exercised discretion in that area in respect of, for example, subordinated loans and contingency liabilities. There could be other areas, but I have not had time to explore those further since I have seen the Government's amendments. I wonder whether I am right in my concern that the discretion hitherto exercised by the PIA will now be taken away from the FSA. If it is, that could have a significant impact across the financial services market in the sector to which I am referring.

Lord McIntosh of Haringey

I assure the noble Lord that there is no question of the discretionary power being taken away. It is simply being transferred to Part IV of the Bill instead of occurring here. Under Part IV the principal difference, as I said, is that it allows for an application to the tribunal to be made and for it to be made even before any rule takes effect. There is the additional complication of European Union directives and their definition of what resources are. Perhaps if the noble Lord and I are meeting tomorrow or on Wednesday, as I hope that we are, we may deal with the matter then rather than take up the time of the Committee.

Lord Hunt of Wirral

I am extremely grateful to the Minister for that explanation. All I should say in passing is that Part IV deals with applications which bring into effect the whole bureaucratic process involving payments by the applicant and a whole series of administrative arrangements. I was referring to the discretionary power of the PIA which could be exercised without an application. However, as the Minister suggests, that is a matter on which I could perhaps reflect further in the light of his helpful comments.

Lord McIntosh of Haringey

If we were to meet, I could write a note at the meeting and send it to all noble Lords taking part in the Committee proceedings.

Lord Hunt of Wirral

I am grateful to the Minister.

Lord Kingsland

Having heard the Minister's explanation of his amendment, I can confidently say on behalf of the Opposition that it satisfies the problem which concerned us. In those circumstances, there will be no need for us to press our amendment.

On Question, amendment agreed to.

5.15 p.m.

Lord McIntosh of Haringey

moved Amendment No. 229: Page 60, line 35, at end insert— ("(7) "Consumers" means persons—

1. (a) who use, have used, or are or may be contemplating using, any of the services provided by—
1. (i) authorised persons in carrying on regulated activities; or
2. (ii) persons acting as appointed representatives; or
2. (b) who have rights or interests which—
1. (i) are derived from, or are otherwise attributable to, or
2. (ii) may be adversely affected by,

the use of any such services by other persons. (8) If an authorised person is carrying on a regulated activity in his capacity as a trustee, the persons who are, have been or may he beneficiaries of the trust are to be treated as persons who use, have used or are or may be contemplating using services provided by the authorised person in his carrying on of that activity. (9) For the purposes of subsection (7) a person who deals with an authorised person in the course of the authorised person's carrying on of a regulated activity is to be treated as using services provided by the authorised person in carrying on those activities."). The noble Lord said: I beg to move.

[Amendment No. 229A, as an amendment to Amendment No. 229, not moved.]

On Question, Amendment No. 229 agreed to.

Clause 129, as amended, agreed to.

Lord Joffe

moved Amendment No. 230: After Clause 129, insert the following new clause— LIFE ASSURANCE BUSINESS RULES (". The Authority shall make rules requiring an authorised person who has permission to carry on a regulated life assurance activity to consult and account to with-profits policyholders for—

1. (a) any appropriation of reserves or surplus assets to shareholders, and
2. (b) decisions on the application or investment of assets or reserves which could adversely affect the rights of such policyholders.").

The noble Lord said: I declare an interest in that my family and I are with-profit policyholders in proprietary life insurance companies. The purpose of the amendment is to help protect the interests of with-profit policyholders in proprietary life insurance companies. Policyholders, while notionally owning the majority of assets in many life insurance companies, are normally not represented, consulted or even informed when decisions which could affect their best interests are taken by the directors. That is because the boards of such companies are elected by and legally accountable to their shareholders but not to their policyholders.

However, shareholders' interests do not always coincide with those of policyholders. Where such conflicts arise, boards of directors tend to focus on the interests of the shareholders who elect them. That is an entirely unsatisfactory state of affairs, aggravated by the fact that decisions taken by the boards are generally taker in secret and without any prior consultation with policyholders. There is not even a mechanism by which policyholders can obtain information on issues which are of vital importance to them.

The system is a model of opaqueness and lack of transparency. I shall seek to illustrate that claim by reference to a number of decisions taken by the Prudential insurance company. In so doing, I am not suggesting that that company is behaving differently from other companies in a similar position, nor am I seeking to impugn personally any of its directors.

The Prudential, as a result of the mis-selling of personal pensions, was obliged to pay compensation in the amount of approximately £2 billion to policyholders who had been mis-sold pensions. In order to find the resources to pay the compensation, it decided to utilise for the purpose what is variously known as its orphan estate, inherited estate or surplus assets.

The orphan estate does not, as may be imagined, consist solely of assets arising from unclaimed policy proceeds but rather more from surplus reserves arising from a number of sources, including in most cases underpayment of bonuses to previous generations of policyholders.

It is by no means clear who owns the orphan estate but many, including a number of actuaries, believe that policyholders might have the most valid claim to some or all of it. In practice, the Prudential may have appropriated resources arguably belonging to policyholders to Day for losses which policyholders, if they had been consulted, which they were not, could well contend had nothing whatever to do with them and should have been entirely borne by the shareholders who, after all, had elected the directors but failed to control their salespeople. Indeed, the views of policyholders on that issue may well be influenced by the findings of the Treasury Select Committee in its 9th report in 1998, paragraph 32 of which reads, The shareholders, who benefit from the profitability of the company, have a responsibility and should hear a substantial share of the loss from pensions mis-selling". On that matter we concur with the judgment of the Consumers' Association that placing responsibility on shareholders will encourage better management in future.

In making the decision to pay the compensation for mis-selling out of the orphan estate, which incidentally was approved by the Treasury, neither the Prudential board nor the Treasury consulted policyholders nor, apparently, even considered the question of accountability. After all, if £2 billion of a company's assets have been lost, somebody must be accountable. At the very minimum, policyholders whose money it may have been, or who may have been prejudiced by its loss, should have been informed of why the misselling was not prevented and who was responsible so that they could take any action they felt appropriate.

However, there is a further interesting twist. The Prudential's orphan estate, even allowing for the depletion of the £2 billion paid to policyholders who had been mis-sold, will still have within it a balance of approximately £5 billion. The board of the Prudential decided that it would like to reallocate the orphan estate.

It is by no means clear to policyholders what precisely is intended by the board or the reasons for their new-found interest in clarifying the position relating to the orphan estate. However, policyholders may well speculate that the purpose of the reallocation is more to do with enhancing shareholder value than benefiting policyholders. Does the Prudential intend to appropriate the whole of the orphan estate to shareholders, 10 per cent, or some intermediate figure? The policyholders certainly have no idea. The Prudential has been locked in negotiations with the Treasury for several years. Policyholders have been unable to extract any information on what the Prudential would like to do with the £5 billion, give or-take a couple of billion.

The response to all questions to the Prudential and the Treasury is that it is price-sensitive information for shareholders, but it apparently occurs to no one that it is vital information to policyholders who might want to block any appropriation they consider contrary to their interests.

It is also instructive to note that the Prudential, the United Kingdom's mightiest insurance company, appears to make little or no effort to communicate with its policyholders. Its annual reports are replete with references to maximising shareholder value, but I could find nothing in its recent reports about maximising policyholder value or, indeed, virtually any reference whatever to policyholders. Based solely on its annual reports, one could be forgiven for-concluding that policyholders might be an extinct species.

I am pleased to say that there is, however, potentially some good news for policyholders on at least one issue. In my discussions with the Prudential it emerged that at long last the industry is planning actively to address the communications issue through a new project called "Project Salter" headed by Sandy Leech, chief executive of Zenith Life and chair of the Association of British Insurers. Although that initiative is to be welcomed, it is a voluntary code that is proposed. We all know, based on previous experience, that voluntary codes in the life assurance industry are disregarded by many of its members and that the standards which voluntary codes set tend to be watered down to the lowest common denominator in order to attract comprehensive industry support.

Nevertheless, I urge the Government strongly to support the Salter initiative, provided that it sets high standards, is universally agreed to by the industry, and meets its timetable of setting standards by June this year and implementation in the first half of next year.

I submit that the failure of companies to consult with, and account to, their policyholders is an untenable situation and that in the Bill, one of the objectives of which is the protection of consumers, steps should be taken to ensure that companies consult with and inform policyholders about issues which may affect their best interests.

In the draft regulations just published relating to stakeholder pensions, the Government have insisted on ring-fencing with-profits funds because of their opaqueness and have called for greater transparency. That is what the amendment also seeks to achieve for with-profits policyholders. The draft regulations also set standards for product design and communication with policyholders which could serve as a model for the Salter initiative and for the implementation of the resolution I propose.

I should also like to draw attention to the relevant precedent in relation to pension funds in which the rights of pensioners are protected through direct representation on pension trustee boards. The most effective protection afforded to policyholders would be for direct representation on the boards of life assurance companies, which I hope Government will soon require. However, I appreciate that to move such an amendment at this stage would be inappropriate. Instead, the amendment I propose should be seen as a first step towards protecting the rights of policyholders. I beg to move.

Lord Haskel

I spoke to this matter at Second Reading. The noble Lord, Lord Joffe, has put the case so well and in such detail that there is no need for me to cover the ground again. However, I indicate my support for his amendment.

Lord Jenkin of Roding

Perhaps I may offer a word or two, having spent some years as chairman of a mutual life assurance company. I listened with great interest to the noble Lord, Lord Joffe, who made a convincing case. In the case of a mutual company, the policyholders have all the power in their hands. We were a statutory company. The directors were elected by policyholders and only policyholders had votes at the annual meetings. We were under considerable restraints, both under our rules and general laws, to the extent to which the board could use the policyholders' money in, for instance, taking over another company. There had to be procedures before a court with an assurance that the policyholders had been fully informed, were properly consulted, and had consented to the change.

If people want the benefits of a with-profits policy, they should go to a mutual company. Perhaps I may add that I now have nothing whatever to do with the company I chaired, nor have I been briefed by it. However, the problem faced by directors is what to do when the same policyholders learn that a bid has been made for their company. Policyholders want the money now. They put themselves into precisely the position described by the noble Lord, Lord Joffe, concerning the "Pru". I have always found that to be a disappointing trait in policyholders.

I had a short answer to questions I received in correspondence or those raised at an annual meeting. I would say, "You are in this for the long term. You have taken out a long-term life policy or pension policy in order to protect your family or yourselves in your old age. You cannot have it twice. If, when a company comes in and buys up the company, you take it as a payment, you are then a policyholder in a proprietary company and the amount of money you would have had when your policy matures will be reduced. You cannot have it twice".

I have a great deal of sympathy with the point made by the noble Lord, Lord Joffe. I do not know whether it is susceptible to rules. However, it seems to me that the mutual companies are fighting a losing battle. It has been the same as regards the building societies. A few have succeeded—the Nationwide remains where it is—but most have succumbed. Why is that? Because most of their members wanted money now rather than money in a few years' time. My faith in this form of saving in modern society has been somewhat undermined, notwithstanding that of course very large sums of money are invested regularly and entirely properly for the long term—until a bidder comes along and makes an offer of money now.

I believe this to be a real problem and I hope that, in the course of its general work of protecting consumers and giving out information, the Financial Services Authority will be able to indicate that those who take out life insurance and pension policies for the long term should almost always be advised to stick with them for the long term rather than to take a quick buck now.

5.30 p.m.

Lord Lipsey

I am aware that after such expert speeches, a few words from me may be perceived as possibly otiose. However, I believe that it is worth emphasising that the Committee will be grateful to the noble Lord, Lord Joffe, for raising this matter.

In this area we are looking at very big bucks. Some figures were published in The Sunday Times: £7.8 billion for the Prudential; £1.4 billion for Britannic Assurance; £3.8 billion for CGU; £2.1 billion for Legal & General and £2.1 billion for AXA. That total would just about fund the defence budget for a year. These are very large sums. Surely in principle it is intolerable that such sums should be dealt with by secret deals made in the back room, free from the light of publicity which would allow all those with an interest to express their opinion. No doubt the Minister will address whether the Bill deals with this question.

While I do not necessarily press this particular amendment, I hope that in the course of our debate this afternoon we shall have at least forced the issue out into the open. If we ensure that the matter is dealt with, we shall have done a service.

Lord Blackwell

While I understand the sentiments that lie behind this amendment, I have grave doubts about its practicality. If directors are conducting a business in the interests of their shareholders, the FSA has the right and obligation to put controls around the use of reserves so as to protect policyholders. However, to impose an obligation to consult with-profit policyholders on the use of those funds seems to me to present a complication in terms of who the directors are supposed to be serving and what would be the rules and appropriateness of taking decisions on the use of those reserves.

I believe that it would be cleaner if policyholders who have taken the decision that they want to invest their money in with-profits company then left it to the directors of that company to run the business so that it delivers returns in the long run that continue to attract new policyholders, and for the FSA to establish rules to ensure that policyholders are protected, rather than confusing the issue by imposing a duty of consultation. I can see that situation ending in a great deal of confusion and added bureaucracy on how decisions are taken.

Lord Grabiner

I should disclose a professional interest in some of the questions that have been raised by this proposed amendment. Having said that, I wish to comment on the drafting of the amendment rather than on its underlying merit. Perhaps I may say only that I certainly agree that the noble Lord, Lord Joffe, has identified an area of real concern here.

So far as subsection (a) is concerned, on the face of it, it is confined to the need to make rules requiring an authorised person to consult in relation to the, appropriation of reserves or surplus assets to shareholders". The example given by the noble Lord in his opening remarks concerned the activities of the Prudential, in particular the payment of victims of mis-selling. Subsection (a) would not help because the victims of mis-selling are generally not shareholders—they may be, but that would only be by chance. In that regard, the drafting is not adequate. I can think of one or two other examples, such as the use of such moneys for the payment of windfall tax. It may be that we have not yet seen the end of windfall tax. If we have not, this would obviously provide a way of meeting those liabilities. Furthermore—dare I say—there is also the possibility of such moneys being used for the purpose of paying directors' bonuses. However, I had better not say anything more about that. However, in subsection (a), the use of the word "shareholders" is not a satisfactory piece of drafting.

As regards subsection (b), I should like to home in on the word, "rights". My concern here is that the expression, "rights of such policyholders" is simply too vague and uncertain for the following reasons. First, there is no statutory definition of the expression, "reasonable expectations" in the context of a discussion about the reasonable expectations of policyholders. I believe that the only place where an attempted definition can be found is in the context of the obligations cast on a scheme actuary when he comes to advise the trustees; otherwise, one is not told what that expression means. It obviously includes statements that may have been made at the point of sale, but it could include all kinds of other things as well. Indeed, in a sense it is a highly subjective point, because one policyholder's expectation may bear little or no relation to that of another. That is one area of uncertainty.

The second area of uncertainty that I see is that, if these are rights as defined in subsection (b), I suggest that it will almost certainly be the case that what is being done with the money should not—ex hypothesi—be done with the money. That is because if the policyholders' rights are being infringed, the money should not be used for any other purpose. That leaves an inherent incongruity in the drafting which presupposes that there are rights which, so to speak, sit outside rights. That, of course, cannot be right.

The third area of uncertainty that I have identified is that it is not at all clear from the drafting of subsection (b) whether it would encompass the manner in which the money was invested. The subsection states: decisions on the application or investment of assets or reserves which could adversely affect the rights of such policyholders". That might—I suggest that it would—encompass poor quality investment. However, how does one judge that or draw attention to it? How can one substitute oneself for the person whose professional role may be precisely to deal with the investment of those assets?

With respect, I suggest that the drafting is not adequate. However, viewed as a probing exercise, perhaps I may say that the amendment raises extremely important questions.

Lord Elton

Perhaps the noble Lord, Lord Joffe, could offer a little further clarification on an important issue? I apologise to the noble Lord if I should have gathered this already. If the policyholders are to be able to require the authorised person to be accountable to them, that suggests that the policyholders will hold something approaching a veto. The noble Lord may have already explained this, but what I cannot see from the drafting of this amendment is whose will is to prevail where there is a conflict of opinion between the policyholders and the shareholders? Either a nihil obstat, as it were, will prevail, or someone on the board must have the last word.

Lord Joffe

The intention is that policyholders would be consulted. But if the impasse suggested arose between the shareholders and the policyholders, at that stage the policyholders would have the right to apply to the court to protect their interests.

Lord Donaldson of Lymington

I support what was said by the noble Lord, Lord Grabiner. This amendment speaks of rates. Let me say I have no life insurance policies, but things may have changed since the days I took out with-profits policies with satisfactory results. I was always under the impression that my only right was a contractual right. If I looked in my policy, I would certainly be guaranteed a basic return—that is what I was after—but thereafter it would depend expressly, in contractual terms, on what bonuses were declared by the board.

Unless the animal has changed considerably, this amendment will leave me in exactly the same position as I was over the years; that is, I could go to the courts and say, "This company is going bankrupt", or, "This company is not going to meet its obligations", which were merely for the basic amount.

Lord Stewartby

This amendment, in its present form, will not do, as a number of noble Lords said. But the thought behind it is important. I hope that one of the consequences of this short debate will be that the FSA will look at this area and see whether there are steps it can take to encourage greater transparency.

There is no doubt that the with-profits element, whether of a life policy or a personal pension fund, is determined in an arbitrary fashion. I strongly support any measures which make it clearer on what basis the figures are plucked out of thin air, not only to judge whether the resources of the company—whether it is an incorporated business or a mutual—were being reasonably allocated between different types of claimant on that fund, or the other comparison with the outside world as to how it was genuinely performing in relation to its competitors rather than just on the figures for a specific year.

There seems to be a gap which has widened in recent years between the information available to other sorts of investors who have benefited from a lot of initiatives by the FSA and its related bodies (a general encouragement in advertising and accounts to provide more information so that investors know where they stand) and this corner of an old system which remains unduly obscure and where it is difficult for any with-profits element to have any idea whether or not it is being fairly treated. Therefore, although I do not support the amendment, I strongly support its message.

Lord Elton

The answer of the noble Lord, Lord Joffe, to my question with the comments of the noble Lord, Lord Grabiner, show that the effect of the amendment is merely to produce a piece of machinery which in some cases, but not all, will bring to court matters which otherwise may not have gone to court. As I understand it, it is a way of enabling policyholders to realise that they have a means of testing rights which they might otherwise not have.

Many of the people we are talking about are not sophisticated policyholders and one has a great deal of sympathy with what the noble Lord, Lord Joffe, is trying to do. But this points in the direction more of some sort of ombudsman or referee rather than yet another apparatus within this legislation. If we are leaving thoughts for the FSA when it comes into being under the Act, that may be a better route rather than the route taken by the noble Lord, Lord Joffe.

5.45 p.m.

Lord McIntosh of Haringey

I should declare an interest, first, as a policyholder with Sun Life of Canada and with Scottish Widows, both of which propose to demutualise. I voted against demutualisation in both cases. I was overruled and shall be receiving cheques and/or shares in due course. So my conscience is clear.

I shall make a long boring speech and then summarise it in five or six points for the noble Earl, Lord Onslow. Of course, there can be conflicting interests between shareholders and policyholders. This amendment relates to a specific type of life insurance where policies are described as being "with profits". Commonly, "with profits" policies are insurance policies with a savings element. There is an expectation that bonuses will be paid from time to time, usually annually, depending on the performance of the fund in which the premiums have been invested. These bonuses go to increase the benefits that will be payable to the policyholder at maturity.

Current industry practice in shareholder-owned life offices is generally to distribute surplus in the fund in the proportions: 90 per cent as bonus to with-profits policyholders and 10 per cent to shareholders, although there are some exceptions. In the case of mutual life offices, all the surplus will be distributed to policyholders as there are no shareholders. However, to ensure fairly steady returns to policyholders year on year, the insurance company does not each year distribute the whole of the year's profits earned by the business. Like prudent companies in other walks of life, it creates a reserve for undistributed assets within the with-profits fund. That is called the "estate" or, in certain circumstances, the "orphan estate".

In some cases, the estate has been allowed to grow up over a long period of time and has been passed on from one generation of policyholders to the next. That is called an "inherited estate"; that is really what the orphan estate is. The estate may reach a point which exceeds that considered necessary for the efficient management of the business. We were given some figures and they are pretty big figures. In such circumstances, the company may wish to manage down the level of estate by distribution to policyholders and shareholders.

The question is: who does the undistributed sum, the inherited estate, belong to and how should it be distributed? Although inherited estates have been built up over many years, the status of the funds within them and the appropriate basis of attribution are clear. However, in a small number of shareholder-owned offices this is not so. Over the years, policies and practices in these offices may have changed so that there are doubts about the respective interests of shareholders and policyholders in relation to the attribution of surplus.

The guiding principles in relation to the attribution between shareholders and policyholders of assets from a firm's inherited estate are those set out in a statement on 25th February 1995 by Mr Jonathan Evans who was then Minister for Consumer Affairs and responsible for insurance matters within the DTI. The Government have since confirmed their agreement to those principles.

Where there is lack of clarity over the origins of the inherited estate, the regulator (whether the DTI, the Treasury or the FSA on behalf of the Treasury) has taken the view that the compatibility of any proposed attribution with these general principles needs to be considered in the light of the particular circumstances of the case. Therefore, in practice a dialogue takes place with the company over any proposed attribution. Before a final decision is taken, the regulator will also request a report on the proposals from an independent actuary and that policyholders are consulted.

This case-by-case assessment is conducted in the light of Section 45 of the Insurance Companies Act which enables the regulator to impose requirements on a company to ensure that the criteria of sound and prudent management are met. Those criteria include, having due regard to the interests of policyholders and potential policyholders". The phrase, "policyholders' reasonable expectations" which has been the subject of debate, occurs in Section 45 of the 1982 Act, but is not used in this Bill which refers here, as throughout, to the "interests of consumers".

The Act contains further safeguards for with-profits policyholders. Sections 28 to 31A provide controls over transactions involving and distributions from the assets attributable to the with-profits fund. Section 2C provides controls over transfers of business between companies; and Sections 18 to 23 require insurers to submit annual re turns to the Treasury incorporating a valuation by an appointed actuary and to make copies available to any policyholder or shareholder who asks for one.

I listened most carefully to what the noble Lord, Lord Joffe, said about the lack of transparency on the part of life insurance offices. We must consider whether the provisions in the 1982 Act, which seem, on the face of it, to answer the complaints that he made, are actually being implemented. This is a matter that I should like to consider between now and the next stage of the Bill.

The Bill will provide for the continuation of the existing protections under the Insurance Companies Act 1982. Clauses 129, 134 and 330 will enable the FSA to make rules that maintain the existing statutory safeguards in the interests of with-profits policyholders. Indeed, I understand that the FSA proposes to reproduce these in its draft interim prudential rules contained in Consultation Paper 40a. The FSA will be able to use its guidance power under Clause 148 to continue and, if necessary, supplement the existing advice and information that has been given.

Part VII of the Bill will also provide a statutory framework for the transfer of with-profits business between companies to replace Schedule 2C to the 1982 Act. Finally, the FSA will be able to impose particular requirements on an individual insurer for the purposes of protecting consumers, including of course policyholders. So the Bill will—I put it no higher at the moment—in no way reduce the existing protections available, and the FSA will be able to intervene to protect consumers using its Part IV powers.

However, the noble Lord's amendment would go further and require the FSA to make rules requiring insurers to consult and account to policyholders—I must say that I would pay more attention to the phrase "account to" than I would to "consult"—on each and every appropriation to shareholders, and other decisions that could adversely affect the rights of policyholders. Again, I listened to the debate about whether policyholders have rights that go beyond contractual rights. Clearly, this is a very difficult issue.

Clause 129 would give the FSA powers to make such rules if they appeared to be necessary or expedient for the purpose of protecting policyholders. Similarly, Clause 148 would allow the FSA to issue individual or general guidance consisting of advice or information to that effect.

However, there is a balance to be struck in deciding what degree of protection is appropriate for with-profits policyholders given the FSA's general duties in Clause 2. In particular, the FSA will need to have regard to the principle that the burdens that its rules or regulatory guidance would impose should be proportionate to the benefits. For example, in the ordinary course of events, the distribution to shareholders of their share of the surplus should be unexceptional. Similarly, it would be unusual to require an insurance company to consult policyholders about operational decisions such as asset allocations and investment decisions, which may obviously affect their investment but will usually be within the company's own discretion both as a matter of company law and under its contracts. To require companies to do this would force them to reveal commercially sensitive information about their business, which cot Id potentially prejudice the interests of both shareholders and policyholders.

Where insurance companies will owe duties to their policyholders, as they do currently, will be in relation to their policies and the actual bonuses that they declare. Companies are already required to provide an annual notice to their policyholders setting out the bonuses allocated to their policies, as well As explaining the background to the declaration.

Therefore, we do not think that the Bill should require the FSA to make rules which would make insurance companies accountable to their with-profits policyholders for operational decisions or decisions relating to shareholder distributions. This does not, of course, prevent the FSA adding to the existing requirements in response to particular problems that may arise. However, we believe that it should be a matter for the FSA to decide in the light of its general duties, consultation and cost-benefit analysis in the usual way.

Perhaps I may sum up my response for the benefit of the noble Earl, Lord Onslow. First, the Bill will certainly enable the FSA to carry on providing the sort of protection that it has in the past in relation to orphan assets. Secondly, the powers will be at least as wide and effective as those available under the Insurance Companies Act. Thirdly, we believe that those powers give a perfectly adequate regulatory response to the potential difficulties. Fourthly, the general presumption of a 90 per cent/10 per cent split will not change as a result of the Bill, but the formula must be able to take into account particular factors in some cases; for example, where there is a transfer of business and something on which a court might rule. Fifthly, the ability of the FSA to obtain independent actuarial reports on the funds and liabilities is an important tool of regulation.

I apologise for the length of my reply, but this is clearly an important issue. The fact that the noble Lord, Lord Joffe, has raised the matter has been widely welcomed by Members of the Committee. It is important for us to continue to reflect on the adequacy of the protection that is already provided. In the mean time, I hope that the criticism that has been made about the "warm wording" of the amendment will encourage the noble Lord, Lord Joffe, not to press the matter. We are certainly prepared to discuss these issues with him at any time between now and the Report stage.

Lord Peston

Before my noble friend the Minister concludes, there are two questions that I should like to ask him. I listened to this debate as a layman and was most impressed by the analysis of the problem put forward by the noble Lord, Lord Joffe. Two matters struck me as being of overwhelming interest. The first is the transparency question. It was not clear from my noble friend's reply whether he is satisfied with the transparency aspect of the matter, or whether what he said forms part of his further reflection on the matter.

The second matter which, as a layman, rather horrified me was the fact that the noble Lord, Lord Joffe, seemed to be saying—he cited but one example, but that may well have been for the sake of brevity—that certain actions were getting very close to being unlawful in terms of the use of funds. I do not speak as an expert but as someone who has simply listened to the debate. If there were any danger that these enormous amounts of orphan assets were being used in, to say the least, a doubtful way, did I understand my noble friend to say that the matter could be drawn to the attention of the FSA, which would then deal with it? Is my noble friend saying that he is confident that that is at least one response to the noble Lord, Lord Joffe? I ask these questions purely because I have been listening to the debate and am quite interested in the answers for their own sake, quite apart from the practicalities involved.

Lord McIntosh of Haringey

My noble friend's first question was about whether the existing rules were being adhered to. I read out to the Committee what I understand the Insurance Companies Act 1982 provides as regards transparency and reporting to policyholders. It seems to me that the Act makes certain provisions which the noble Lord, Lord Joffe, said were not being implemented; in other words, that particular insurance companies are not obeying those rules. I do not know whether that is the case, but it is certainly a matter that needs further investigation.

As regards uses that may be unlawful, the particular point made by the noble Lord, Lord Joffe, referred to the suggestion that such orphan assets should be used in compensation for pensions mis-selling. As I should have said before, the Government made it entirely clear on 1st July 1997 (very soon after we came into office) that surplus assets in a company's with-profits fund should be used only to meet pensions mis-selling costs, first, where any profits from the pensions business concerned would also be attributed to the with-profits fund; and, secondly, to the extent that use of such surplus was consistent with policyholders' reasonable expectations. Indeed, we have returned to the "reasonable expectations" problem. However, that is the responsibility of this Government. We did try to make it as clear as possible.

Lord Joffe

Perhaps I may comment briefly on some of the points made in the debate. I entirely agree with the noble Lord, Lord Jenkin, that policyholders often act irrationally and seldom take account of their best long-term interests. However, the distinction between a mutual and a proprietary company is that in a mutual company there is a mechanism for policyholders to object because they are the owners; in a proprietary company, which is the main subject of my amendment, the policyholders have no rights whatever other than the contractual rights that they have in relation to their policies. Perhaps I may remind the noble Lord, Lord Jenkin, that in the Nationwide case the members actually rejected the money—the bribe—offered to them.

On the question of practicality, I refer to a distinction here. The noble Lord said that one elects directors, one takes out a policy and one leaves matters to the directors. However, the distinction in the life assurance industry is that these are long-term contracts; they often run for 30 or 40 years. The directors who are elected today may be very different from the directors in charge in 20 or 30 years' time.

I think that I am grateful to the noble Lord, Lord Grabiner, for his comments on the wording of my amendment. I agree with him entirely that the amendment as phrased does not achieve its objective. Should I retable the amendment, I shall certainly take advice of the noble Lord, Lord Grabiner, on how to draft it.

6 p.m.

Lord Grabiner

There will be no charge!

Lord Joffe

I thank the noble Lord. I believe that for an ombudsman to have certain rights is a help but is not the answer because the ombudsman's powers are restricted. I am not sure whether an ombudsman would have the right to look into the position of with-profits policyholders, but I think that the awards that the ombudsman can grant are limited. I see that as a useful addition but not as a substitute for what I have proposed.

The Minister mentioned the regulator having all sorts of rights to protect the interests of with-profits policyholders. The lack of transparency and opaqueness with which the regulators operate is not something which policyholders would necessarily applaud. Policyholders have by no means complete confidence in what the Treasury and the Department of Trade and Industry have decided in the past in relation to these orphan funds. It is clear that there is a need for remedies which are not solely the prerogative of the regulators.

The question of unlawfulness was raised. I did not suggest categorically that the actions of the Pru and the other life assurance companies were in any way unlawful. The difficulty is that one does not know whether they arc unlawful because one does not know who owns the orphan assets and it is impossible for the consumer to find that out. One of the purposes of the amendment is to look into these issues.

I am pleased to hear that the Minister will reflect on these issues. I, too, wish to reflect on them before deciding what course of action to take. I thank all those who have participated in this short debate. I express my appreciation to the Minister for his patience in advising me as a novice on how to submit this probing amendment. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 130 [Non-regulated activity rules]:

On Question, Whether Clause 130 shall stand part of the Bill?

Lord McIntosh of Haringey

I gave notice of my intention to oppose this Question when debating Amendment No. 226D.

Clause 130 negatived.

Clause 131 [Miscellaneous ancillary matters]:

Lord McIntosh of Haringey

moved Amendment No. 230ZA: Page 61, line 13, leave out subsections (1) and (2). The noble Lord said: This amendment was spoken to with Amendment No. 228A. I beg to move.

On Question, amendment agreed to.

[Amendment No. 230A not moved.]

Lord Kingsland

moved Amendment No. 230B: Page 61, line 39, after ("person") insert ("carrying on a deposit-taking business"). The noble Lord said: Clause 131 deals with a number of miscellaneous and ancillary matters relating to the authority's rule-making powers set out in Clause 129. In particular, Clause 131(3) is concerned with the rules relating to the handling of money held by an authorised person in specific circumstances. These rules, I understand, are usually referred to as the client money rules.

Clause 131(4) provides that an institution, which is usually a bank, with which an account is kept in pursuance of the client money rules, does not incur any liability as a constructive trustee if money is wrongfully paid from the account unless the institution permits the payment, first, with the knowledge that it is wrongful or, secondly, having deliberately failed to make inquiries in circumstances in which a reasonable and honest person would have done so.

Given that the institution will almost certainly be a person carrying on a deposit-taking business, it would be more satisfactory if the reasonable and honest person test should apply to a reasonable and honest person carrying on a deposit-taking business. It would be difficult to judge what inquiries a reasonable and honest person would have made if that person was the proverbial man on the Clapham omnibus. It would be more sensible to apply the test to a reasonable and honest person carrying on the relevant type of activity. I beg to move.

Lord McIntosh of Haringey

This interesting amendment concerns an institution such as a bank at which an authorised person keeps a special account for its clients' money pursuant to client money rules under Clause 131. For example, when an authorised person receives money from his client, he may be required by rules to hold it on trust in a separate bank account until he invests it on his client's behalf.

The institution will be required to handle instructions from the authorised person in relation to the account. The problem for the institution is how to know if the authorised person is withdrawing money from the account to invest on behalf of his client or if he is acting fraudulently.

Under the ordinary common law a banker will not normally be liable to repay the authorised person's client unless he could be treated as a constructive trustee on the basis that he either knew the withdrawal was wrongful or if he deliberately failed to make inquiries in circumstances in which a reasonable arid honest person would do so.

For example, one might expect a reasonable arid honest person in those circumstances to be suspicious if the authorised person started taking unusually large amounts of money out of the account or asked for funds to be transferred to his own personal or business account. That test was included in the Financial Services Act and is reproduced in Clause 131(4). The amendment would add an additional clarification to that second test by emphasising that it was based on a reasonable and honest person, carrying on a deposit-taking business". I fully agree with the intention behind the amendment. However, the courts have had no difficulty in interpreting the test of a reasonable and honest person in the context of the law of constructive trusts. I respectfully suggest to the noble Lord that the clarification is unnecessary.

The test is concerned with circumstances in which a reasonable and honest person would have made inquiries. Those circumstances involve the handling of funds which have been deposited in an account with that institution pursuant to client money rules. Therefore we are already concerned with the actions of a reasonable and honest person in circumstances in which he is carrying on a deposit-taking business. I hope that on that basis the noble Lord will not press the amendment.

Lord Elton

As a listener to the debate, I had regarded the words that my noble friend seeks to insert into the clause as being some remedy for the presence of the word "deliberately" earlier in the paragraph. Can the Minister assure us that a failure through negligence by a person conducting this business is equally culpable under some other part of the Bill? Or is it that ignorance of the law is a defence, uniquely, in this position?

Lord McIntosh of Haringey

As I said, the law that applies is the law of constructive trusteeship. I would not dare to try to interpret that law. There is a great deal of case law on the subject; the issue is not a new one. I hope that the noble Lord will allow me to write to him on the subject.

Lord Elton

With eager pleasure.

Lord Kingsland

I shall avoid entering into that debate. The Minister is clearly in the frame of the mind where he says to the Opposition, "We entirely agree with the motive behind your amendment but, on the wording of the Bill, it is unnecessary". I shall reflect on his response. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord McIntosh of Haringey

moved Amendment No. 230C: Page 62, line 4, leave out ("or non-regulated activity rules"). The noble Lord said: I spoke to this amendment with Amendment No. 226D. I beg to move.

On Question, amendment agreed to.

Clause 131, as amended, agreed to.

Clauses 132 to 134 agreed to.

Clause 135 [Endorsement of codes etc. issued by other bodies]:

Lord McIntosh of Haringey

moved Amendment No. 230D: Page 63, line 14, at end insert— ("(2A) At any time when endorsing rules are in force, and if asked to do so by the Panel, the Authority may exercise its powers under Part IV or section 65 as if failure to comply with an endorsed provision was a ground entitling the Authority to exercise those powers."). The noble Lord said: In moving Amendment No. 230D, I shall speak also to Amendments Nos. 230E and 230F.

These are three technical amendments to Clause 135 in the light of discussions between the Treasury and the takeover panel. The clause confers a power on the authority to make rules endorsing the City code on takeovers and mergers (the takeover code) and the substantial acquisition rules, which I gather are known as "SARs". Generally, these endorsing rules cover areas where the FSA would not be able to make rules—that is, in relation to conduct during public takeovers. The effect of this clause is that the authority may exercise its disciplinary powers over authorised persons for a breach of the endorsed provisions of the takeover code or SARs, if the takeover panel has requested it to do so.

Amendment No. 230D proposes that a new subsection be introduced after subsection (2) enabling the authority to exercise its disciplinary powers under Part IV or Section 65 in circumstances equivalent to those set out in subsection (3). This will specifically enable the panel to invoke the authority's disciplinary powers with regard to approved persons in addition to its powers referred to in subsection (3). Amendment No. 230E, which proposes to delete the reference to Part IV in subsection (3), is consequential upon this new amendment.

Amendment No. 230F proposes that a new subsection be introduced after subsection (3) making it clear that a failure to comply with a requirement imposed, or ruling given, under an endorsed provision is to be treated as a failure to comply with the endorsed provision under which that requirement was imposed or ruling was given. This will ensure that proper account is taken of the exercise of the panel's discretion under the City code.

As I say, these are technical amendments. There is a much more important issue in relation to the takeover code which I have discussed with its representatives. I suggest that it would be more appropriate to deal with that when we come to the Opposition's proposed new clause which it seeks to have inserted after Clause 389. I beg to move.

6.15 p.m.

Lord Elton

I have a small question for the Minister. I apologise for not giving him notice of it, but it is probably very simple to answer.

It is apparent from Clause 135 what happens when the takeover panel makes a rule and the authority decides to endorse it. What happens to the endorsement when the takeover panel decides to withdraw a rule? There seems to be a machinery for putting endorsements in place; I take it that there is a machinery for removing them. I dare say that it is only the size of the Bill and the limited time that has prevented me from finding it, but I do not know where it is.

Lord McIntosh of Haringey

When these powers are being put into place, the issue is to make sure that there is not a gap—in other words, there is no period during which no rules are being applied. When a rule is withdrawn or repealed, that problem does not arise because no disciplinary action is called for.

Lord Kingsland

We are perfectly content to endorse these amendments. As the Minister is well aware, we have other concerns about the relationship between the takeover panel and the authority. We raise these concerns in Amendments Nos. 276E and 276F.

On Question, amendment agreed to.

Lord McIntosh of Haringey

moved Amendments Nos. 230E and 230F: Page 63, line 16, leave out ("IV,"). Page 63, line 18, at end insert— ("( ) For the purposes of subsections (2A) and (3), a failure to comply with a requirement imposed, or ruling given, under an endorsed provision is to be treated as a failure to comply with the endorsed provision under which that requirement was imposed or ruling was given."). On Question, amendments agreed to.

Clause 135, as amended, agreed to.

Clauses 136 to 138 agreed to.

Clause 139 [Modification or waiver of rules]:

Lord McIntosh of Haringey

moved Amendment No. 230G: Page 65, line 6, leave out paragraph (d). The noble Lord said: I spoke to this amendment with Amendment No. 226D. I beg to move.

On Question, amendment agreed to.

The Deputy Chairman of Committees (Baroness Gardner of Parkes)

In calling Amendment No. 230H, I should say that if this amendment is agreed to I cannot call Amendments Nos. 230J and 230K.

Lord Kingsland

moved Amendment No. 230H: Page 65, line 18, leave out from ("may") to ("the") in line 22 and insert ("only give a direction if it is satisfied that"). The noble Lord said: In moving Amendment No. 230H, I shall speak also to Amendment No. 231A, as the grouping requires.

Lord McIntosh of Haringey

The noble Lord will have to speak also to starred Amendments Nos. 230J and 230K because they will be pre-empted if this amendment is agreed to. He will have to make up his mind which amendment he is going to go for.

Lord Kingsland

I am most grateful to the Minister for pointing that out. I may need to sit down, reflect and stand up again before I move on to his agenda.

Amendment No. 230H relates to Clause 139. It is an important provision in the Bill which allows the authority to direct that all or any of the regulatory rules set out in Clause 139(1) are not to apply to an authorised person. It also allows the authority to direct that the rules can apply to such a person with such modifications as may be specified in a direction to be made by the authority. However, as I understand it, under Clause 139(4) the authority's power to give such a direction is qualified by two conditions. The first is that the authority must be satisfied that, compliance by the authorised person with the rules, or with the rules as unmodified, would he unduly burdensome or would not achieve the purpose for which the rules were made". The second qualification is that the authority must be satisfied that: the direction would not result in undue risk to persons whose interests the rules are intended to protect". The first qualification is a severe limitation on the ability of the authority to make use of the power of modification. It is likely that circumstances where rules would be unduly burdensome or would not achieve the purpose for which the rules were made would be rather rare. It is in a case such as this where some flexibility would be most desirable. This amendment seeks to remove the first qualification, with the result that Clause 139(4) provides that the authority may only give a direction if it is satisfied that the direction would not result in undue risk to persons whose interests the rules are intended to protect.

It is also worth noting that there are further safeguards in that under Clause 139(5) "a direction may be given subject to conditions", and the authority may also, under Clause 139(6), publish the direction in a way most suitable for bringing the direction to the attention of those most likely to be affected by it.

I turn to Amendment No. 231A which relates to Clause 148. Clause 148 relates to guidance. This amendment would ensure that an authorised person who acts in accordance with guidance is treated as satisfying the requirements of the relevant rule. The purpose of the amendment, principally, is not to forestall the authority bringing an action itself, but to prevent investors claiming that a firm has none the less contravened the rule and accordingly has brought an action for damages under Clause 141.

The issue of guidance is extremely important for the Opposition. As the Minister will be aware, one of the most important uncertainties in the field of action of the firm in the City is regulatory uncertainty. We believe that this uncertainty would be substantially reduced by a rule that stated that if an authorised person acted consistently with guidance it would make that person immune, not only from action by the FSA but also by action from a private party.

We recognise that the Minister might be reluctant to give us such a sweeping exemption. However, there is another way that this problem can be largely, if not entirely, met. That is by the authority being prepared to give specific guidance in instances where it is asked for. For example, a financial institution may, in innovatory mode, have a new way of approaching a problem which would create business not only for itself, but for the United Kingdom abroad.

If the financial institution comes to the authority and says, "I am not sure whether this complies", surely it must be in the interest of the authority to give clear guidance on whether it complies or not? What possible reason could the authority have for denying help in these circumstances? Yet, as I understand it, in another place, the Government was most reluctant to provide guidance in these circumstances.

Earlier on in Committee stage I made the statement that there seemed to me to be circumstances in which regulatory risk was a bigger risk for an operator in the City than the risk provided by the markets in which that operator conducted his business. I well remember a groan emitting from the Government benches.

This is the correct context in which to make that point again. The Government have a clear opportunity to make a statement now that if an authorised firm, operating in the market, complies with general guidance, it will be immune from suit. Or, alternatively, that to provide for an authorised firm that seeks the authority's help to decide whether or not what it is about to do might breach the law, the Government will introduce a clause in the Bill which requires the authority, within a reasonable time, to react positively to such a request. I beg to move.

Lord McIntosh of Haringey

We have had some difficulty in understanding these amendments because they are mutually contradictory. Amendment No. 230H deletes subsection (4)(a), which provides that the authority may not give a direction unless it is satisfied that: compliance by the authorised person with the rules, or with the rules as unmodified, would he unduly burdensome or would not achieve the purpose for which the rules were made". But Amendments Nos. 230J and 230K, which would be pre-empted if 230H were carried, add an additional limb to the test. An authority may give a direction if it is satisfied that the purpose for which the rules are made can be achieved in a different manner from those specified in the rules.

Taking those amendments together, it is difficult to work out which is the one I have to reply to, whether we are being asked to delete subsection (4)(a) or simply expand it by adding the third criterion. I shall assume for the purpose of this debate that the noble Lords are advocating the deletion of paragraph (a) with the insertion of an additional test. I will first argue against the deletion of paragraph (a) and then I will argue against the additional test. That should cover the ground.

With regard to deleting paragraph (a), no one appears to disagree that the rules should not be waived, if the effect of the waiver would be to bring undue risks to the interests of consumers. We think this is not enough. Where a rule can be disapplied—remember we are talking about waiving rules, disapplying rules, not imposing them—without damaging consumer interests, a question might arise that the FSA should be looking at whether the rule as a whole is justified. The use of the waiver power is envisaged in circumstances where the rule has a particular exceptional effect on a particular authorised person. So it should be incumbent on the applicant to demonstrate the effect that compliance with an FSA rule would have on him. This is the purpose of putting in paragraph (a) which it is proposed should be deleted, and which we think should not be deleted.

Moving on to the additional test proposed by the noble Lord, Amendments Nos. 230J and 230K provide that the authority may only grant a waiver or modification where it is satisfied that: the purpose for which the rules were made can be achieved in a different manner than as specified in the rules". As I have already said, it is unclear whether this is intended as an alternative to the tests already mentioned or to replace them. Either way, I must argue against them. It is not enough to know that the purpose of the rule can be achieved in some other way. The SFA would need to know that as a matter of fact the effect was being achieved by some other means; for example, that the firm was committed to not taking action of a particular kind. It is difficult to see that the authorised person would be unable to demonstrate that the rule was not either unduly burdensome or not achieving the intended effect.

It should be said that while the onus is on the applicant to show that the criteria set out in subsection (4) have been met, the FSA has said in its policy statement, the FSA's approach to giving guidance and waiver to firms in September of last year that: It will apply its general requirements in a way that allows them to be tailored to fit the circumstances of particular firms in accordance with its commitment to a flexible and differentiated risk-based approach". It should be mentioned that the waiver power in Clause 139 is wider than that in the Financial Services Act 1986 in a number of respects. It covers a wider range of issues, including for the first time cancellation rules and collective investment scheme regulations. The purpose for which the rules were made test is new, a test that will be given proper weight when considering applications for waivers. Therefore, we believe subsection (4) should contain two limbs. These have already been correctly framed in the clause as it stands.

On the issue of whether the guidance can be relied on by an authorised person as a defence for a claim for damages under Clause 141—to which the noble Lord, Lord Kingsland, referred at the opening of his speech—there is a difficulty. There is a balance to be struck between fairness to the authorised person who has done what he is told and the private person who may be deprived of a right of action that he would otherwise have. The difficulty is that if a person who has complied with the guidance is let off an action for breach of statutory duty, this has the effect of allowing the guidance to override the rule. Whether that is right in policy terms is difficult to know. But while there is this difficult balance, we think that it is important to preserve the principle that third parties, in particular, private investors, should not lose the opportunity for redress where they suffer from a breach of the law.

The noble Lord asked whether there should not be a requirement to give guidance in certain cases. In paragraph 246 of its first report the Joint Committee recommended that, a requirement would be an unreasonable burden and a restriction on its freedom of action". Our response to the noble Lord, following the Joint Committee's report, has to be negative.

6.30 p.m.

Lord Donaldson of Lymington

Perhaps I may join in this party because I met all of this in the late 1960s when the Imperial Tobacco Company came to the commercial court—I may have the details wrong—and said, "Can we lawfully run a lottery?" We went into this and I gave a judgment saying that it could. I was overruled by the Court of Appeal on the basis that it was not for the civil courts to tell people what did and did not constitute a criminal offence. I am not arguing about whether it was right in law, but I think that it was quite wrong in policy.

It must be wrong if, where there is some question as to whether one is committing a criminal offence, one cannot go to some court and say, "Look, can I do this?" If someone is told that he can do it, he must receive protection. The Minister suggested that that meant that the advice was modifying the rule. With respect, I do not agree. The Financial Services Authority is being asked to tell the person operating the market what the rule provides. If it gets it wrong, that is a pity. But there is certainly no reason why the operator—the merchant—should suffer. The FSA is not saying, "There will be a different rule for you". But if it is are saying, "It is a different rule for you", and is prepared to justify it, the new rule or different rule ought to be accepted by the trader without there being any risk on his behalf.

The Financial Services Authority is immensely powerful, immensely learned and immensely well advised. It is very highly experienced. We are entrusting it with discretionary powers. But the one thing we ought not to do is to give it a discretionary power to say, "If you use this power, you may not protect people who act on the basis of it".

I turn to much more modern times. About a year ago I heard on television a member of the other place, not acting in his parliamentary capacity, complaining bitterly that in some activity—I imagine it was agricultural—he had gone to the Environment Agency to ask for advice on what he should do. He did it and the agency promptly prosecuted him. I do not for one moment suggest that those were the actual facts, but I was horrified on the basis that those were the facts. As I understand the Minister, he would be prepared to accept a situation in which the same facts could occur in the financial context. I hope that he will not.

Lord Jenkin of Roding

Perhaps I may intervene for a moment. When I read Amendment No. 231A, I thought to myself, "That sounds very reasonable". I listened to my noble friend on the Front Bench and it still sounded fairly reasonable. I was reminded of the provisions that used to work in the field of what was called surtax or super tax. The taxpayer could apply to the commissioners for a clearance against a direction that he had to distribute so much of his profits, which would then attract taxation in the hands of the shareholders. There started to be an informal procedure whereby the taxpayer could get in touch with the commissioners and could be given a clearance that if he distributed so much the commissioners would not make a surtax direction on him. That eventually became statutory. Happily, it was eventually abolished altogether. It was a very oppressive piece of legislation for private companies.

I thought to myself, "What my noble friend is moving in Amendment No. 231A is equivalent to the surtax clearance procedure". However, on reflection, I have to say that the Minister is right. There is a third party. There is the client or customer. If a clearance were given by guidance which allowed the authorised person not to comply with particular rules, where would that leave the customer? In theory, he should be able to sue the authority. But, of course, on provisions we have already discussed, he cannot. The authority has immunity in that respect.

Therefore, as a consequence of the immunity—I totally understand the reasons for the immunity—a customer might suffer quite substantial loss because, inadvertently, the waiver of the rules produced that result. With the greatest respect to my noble friend, if he seeks to take the opinion of the Committee on that amendment, I shall he unable to support him.

Lord McIntosh of Haringey

I am grateful to the noble Lord, Lord Jenkin, for his unexpected support. When the noble and learned Lord, Lord Donaldson, was dealing with these matters in the commercial court in the 1960s I do not know whether the concept of guidance was as common as it is now. There is also the relationship between guidance and rules. 1 know that in my business —the market research business—we had a code of conduct which was in two parts. There were rules. If one broke the rules, one could he kicked out of the society. There was also good practice. If one did not adhere to good practice, one might be required to put it right; there might be lesser requirements, but they were not hanging offences. What the noble and learned Lord, Lord Donaldson, and the noble Lord, Lord Kingsland, are suggesting is that the FSA should simply tell the authorised person what the rule provides. But that would have the effect that the guidance would take precedence over the rule. It would mean that what the authority says the rule will mean will be the law, instead of what the rule actually says.

The rule surely has to take precedence over the authority's interpretation of it. The whole principle on which the Bill is based is the accountability of the authority in many different ways. One of the ways in which it is accountable is in the framing of rules. If it does that wrong, the authority is in trouble. But if it can simply interpret rules as it wishes to suit needs, even at the request of an authorised person, one loses the effect of the rule-making powers.

Lord Kingsland

This seems to be the world of Alice in Wonderland. The authority issues guidance to the authorised community; a member of the authorised community faithfully follows it; and as a result of doing so he exposes himself not only to an action by a private party but also to the authority itself, even though it is what the authority has told the authorised party to do. That cannot be right.

Lord McIntosh of Haringey

We are talking about a waiver here. The amendments would provide that a person who has complied with guidance would be let off an action for breach of statutory duty. It is the other way round.

Lord Kingsland

I am talking about my Amendment No. 231A and the shelter the guidance ought to give someone if he complies with it. I adopt wholly the speech of the noble and learned Lord, Lord Donaldson, in that respect. As he said, the authority has huge discretionary powers. If it chooses to exercise its discretionary power in a certain way and the authorised party follows the exercise of that discretionary power, that party ought not to be vulnerable.

Lord McIntosh of Haringey

I must agree to disagree. I shall think about the noble Lord's point and, without any commitment, I shall attempt to resolve the matter so that there is not a misunderstanding between us and write to him between now and Report stage.

Lord Donaldson of Lymington

While the Minister is thinking about these matters, will he think also about a confusion that has been creeping in to the discussion? I refer to the difference between "guidance" and "waiver". Noble Lords have spoken as though a waiver made by a rule-making authority were an indication that someone could by-pass the rules. I do not think that that is quite the right analysis. It is a rule-making authority that will give the waiver—perhaps "waiver" is the wrong word. The authority will modify the rule in that case, rather as the Takeover Panel has always done.

Lord McIntosh of Haringey

I have been waking up at a quarter-to-four in the morning thinking about these matters. I shall go on doing so, and I shall write to the noble and learned Lord.

Lord Kingsland

With respect to the Minister, the noble and learned Lord's intervention is pertinent. On what other basis were the amendments grouped?

Lord McIntosh of Haringey

It was the noble Lord, Lord Kingsland, who agreed to the grouping. We thought that we had grouped them together because they all dealt with conditions under which waivers could be applied.

Perhaps I may say a further word about guidance. The noble Lord, Lord Kingsland, raised this matter when we were talking about market abuse. He spoke about SEC no-action letters. No-action letters are non-binding. So long as a person has acted within current written guidance issued to him in the circumstances contemplated by the guidance the FSA will not take regulatory action against him. That was reflected in the September 1999 policy statement, to which I have already referred, on the FSA's approach to giving guidance and waivers to firms.

Similarly, where matters are referred to the tribunal, the authority's chances of successfully bringing an enforcement action in relation to a person who has fully complied with guidance must be seen as pretty low. In criminal proceedings, Clause 22 of the Bill provides that it is a defence for an accused to show in relation to an alleged false claim to be authorised or exempt that, he took all reasonable precautions and exercised all due diligence". Under Clause 23, in relation to an alleged breach of the financial promotion prohibition 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". Both defences may well focus on reliance on FSA guidance.

But the Bill does not just provide for FSA guidance. Clause 139 provides the FSA with waiver powers in relation to all or any of the rules specified in Clause 139. Once a waiver has been given, the FSA will not be able to take action for breach of a particular rule if someone has acted in accordance with the waiver. This supplements the guidance provisions under the Bill, ensuring that authorised persons are treated fairly.

In simple terms, a "waiver" means that the rule is disapplied or modified; and that has binding effect. "Guidance" is the interpretation of a rule to assist the firm; and that is not binding. We shall have to think about the different words, some of which, I admit, are not used in their normal common parlance sense. As I say, I shall wake up in the early hours of the morning, and when I have done so I shall write to all noble Lords who have taken part in the debates.

Lord Kingsland

Meanwhile, I shall console the Minister by begging leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 230J and 230K not moved.]

Clause 139, as amended, agreed to.

Clause 140 agreed to.

Clause 141 [Actions for damages]:

Lord McIntosh of Haringey

moved Amendment No. 231: Page 66, line 35, after ("include") insert ("—

1. (a) listing rules or
2. b)")

The noble Lord said: I spoke to this amendment with Amendment No. 180. I beg to move.

On Question, amendment agreed to.

[Amendment No. 231XA not moved.]

Clause 141, as amended, agreed to.

Clauses 142 to 145 agreed to.

Clause 146 [Consultation]:

Lord Saatchi

moved Amendment No. 231YA: Page 65, line 6, after ("2;') insert— ("( ) a statement of the extent to which the Authority has taken into account the matters in section 2(3) in making the proposed rules;"). The noble Lord said: In moving this amendment, I shall speak also to Amendment No. 231ZA. The Committee will note that, in addressing Amendment No. 231YA, I shall follow the path of the noble Baroness, Lady Turner, in wanting to see spelt out on the face of the Bill for the absence of doubt a matter that I in my case and the noble Baroness in her case think is of great importance.

The background to the amendment is that Clause 146 requires the FSA to carry out a consultation exercise where it proposes to make any rules. The consultation procedure is defined in the clause. First, a draft copy of the rules must be published; then, together with the rules, there will also be published a cost-benefit analysis and certain other items referred to in subsection (2).

The amendment adds a further item to the list in Clause 146(2) of items that would be published with a draft copy of the rules. The additional item that we propose is a statement showing the extent to which the FSA has taken into account the provision in Clause 146(3) in making the proposed rules. Members of the Committee will remember that Clause 2(3) requires the FSA, when discharging its general functions—which include the function of making rules—to have regard to the matters described in Clause 2(3). Among those provisions it is stated that the global nature of the financial services market and the desirability of maintaining the competitive position of the UK should be considered and regard should be paid to them. Therefore, the purpose of the amendment is to require the FSA to focus on its obligations under Clause 2(3) by producing the form of statement described in the amendment.

Amendment No. 231ZA deals with the point that the FSA's obligation to consult on the rules referred to in Clause 146 presently applies only to new rules made after the coming into force of the legislation. However, the Government are expected to introduce a series of transitional provisions which will "grandfather" a significant number of existing rules which will be carried forward under a new regime. If that is so, the cost-benefit analysis requirement will not apply to those grandfather rules. Therefore, the purpose of our amendment is to require the FSA to review all the rules made by it within a proposed period of three years after they have been made to determine whether they indeed serve the purpose for which they were made in the first place.

If the FSA concludes that the rules should be changed in a way which is in its opinion "significant", the FSA will be obliged to make new rules to which the consultation provisions of Clause 146 will apply. However, where the FSA concludes that the rules should be approved in the form then in force, or in a form which does not differ very much from those rules, it will nevertheless be obliged to carry out a consultation exercise on the rules and issue a cost-benefit analysis.

The effect of our amendments is that the FSA will be under a continuous obligation to review its rules, carry out consultation exercises and issue cost-benefit analyses, with the result that no rules will exist which are not kept up to date and tested on a regular basis against the discipline of a cost-benefit analysis.

Members on these Benches have referred on many occasions to the importance that we attach to people's concerns that the Bill has the potential to create bureaucracy and stifle competition. That is why the amendments are important to us. They mean that competition will be raised to a higher level, as we have sought to do in other parts of the Bill, and that redundant rules will die an early and timely death. I beg to move.

The Deputy Chairman of Committees

I must inform the Committee that there is a misprint in Amendment No. 231ZA. In subsection (2), "section 129" should read "section 146".

Lord Newby

While I agree with what the noble Lord, Lord Saatchi, seeks to achieve in Amendment No. 231YA, I believe that the amendment is unnecessary. Clause 146(2)(c) already requires the authority to explain why it believes that the rules that it makes are compatible with its general duties under Clause 2. By definition, that includes Clause 2(3) which is referred to in the amendment.

As to Amendment No. 231ZA, I have some sympathy with the idea that there should be a trigger whereby rules can be revised. There is always a danger that one piles rules upon rules, and one must have a trigger to review the process. However, I believe that the amendment as set out is unduly prescriptive. It requires every set of rules to be reviewed within three years, which presumably means that the review must be completed in that period. Presumably, the purpose of the amendment is that, having been reviewed within three years, the rules should be further reviewed with; n another three years. That seems to us to be unduly prescriptive. What is required is a situation in which it is relatively easy to require the authority to amend the rules either because the circumstances to which they apply have demonstrably changed or there have been complaints about them. Arguably, that can already be achieved under the Bill either by the practitioner or consumer panel expressing a view or the Treasury itself ordering a review under Clause 10, although one suspects that the latter would be to use a sledgehammer to crack a nut. I should be grateful for guidance from the Minister as to whether under the Bill as drafted it is easy for such a review to be triggered by external pressure on the authority.

I conclude with a question to the Minister and perhaps also to the noble Lord who moved the amendment. I believe that this is the first time in the Bill that the authority is required to justify its conclusions by reference in part to the publication of a cost-benefit analysis. Like motherhood and apple pie, that is one of those sentiments which sounds very good on paper, but one wonders to whom the cost and the benefit are to be applied. Who will bear the cost and who is to benefit? We have assumed that the cost will be borne by the body to be regulated and that the consumer will benefit, but we should welcome clarification on that. We should also welcome clarification on how the benefit of the rules can be quantified given that in many cases their purpose is to prevent an abuse. One can draft a paragraph and claim that it is a cost-benefit analysis which shows that the benefit is that the consumer is spared a particular abuse. That may represent potentially a huge sum compared with the relatively modest costs to the firms involved and, therefore, it may be a sensible precaution. However, one doubts whether a cost-benefit analysis often achieves the claims that are made for it.

Lord McIntosh of Haringey

The first amendment is to Clause 146 which sets out the FSA's consultation requirements when it wishes to make any rules. Those requirements were expanded and made more detailed during the passage of the Bill through the Commons. I am pleased to see that the requirements are so extensive that noble Lords opposite have drawn on the wording of new Clause 146 in framing the second amendment in this group. The effect of the amendment is to require the FSA before making a rule to issue a statement of the extent to which it has taken into account the principles—proportionality, facilitating competition and so on—to which it must have regard in discharging its functions.

There is a technical problem with the amendment—I do not make too much of it—in that it requires the FSA to take into account the principles. Clause 2 requires the FSA to have regard to the principles, not to take them into account. Therefore, it is, strictly speaking, incompatible with the requirement in Clause 2.

Fortunately, the noble Lord, Lord Newby, said it first. I support the thinking behind the amendment but believe that it is unnecessary. That is the mantra that we use in these circumstances. Clause 146(2)(c) requires the FSA when making a rule to provide an explanation of why it is compatible with its general duties under Clause 2. That clause sets out the FSA's general duties. The principles to which it must have regard are part of that clause. Therefore, the FSA is already required to explain why the rule is compatible with those principles. For that reason, we do not believe that the amendment is necessary.

Amendment No. 231ZA requires the FSA to review each and every one of its rules three years after it is made. It also requires the authority to publish a cost-benefit analysis and effectively to consult on each one every three years. I appreciate that the purpose behind the amendment is to ensure that the authority regularly reviews its rules, and that where the rules are no longer appropriate they should be changed. I agree that there should be regular review and I expect the FSA to monitor the application and implications of its rules on an ongoing basis, not just every three years; but to require the FSA to go through a public consultation exercise on each and every rule every three years is unnecessary.

In addition to the FSA's own review, the consumer and practitioner panels will play an important role in monitoring the rules on an ongoing basis. To require the FSA constantly to monitor its rules would also be administratively onerous. The noble Lord, Lord Saatchi, said that this would be a continuous obligation on the authority, and he referred to the potential to create bureaucracy. The potential to create bureaucracy is created precisely by this amendment. The amendment would place a huge strain on the authority and divert time and money away from its proper business—regulating—but it would also have knock-on effects on the regulated community and consumers. The regulated community would have to pay the costs of the review and consultation, and consumers would have to put up with the disruption involved. I fear that the effect of the amendment would be the reverse of the very admirable sentiments which the noble Lord, Lord Saatchi, expressed.

In relation to reviews under Clause 10, which was a matter touched on by the noble Lord, Lord Newby, normally they could not be triggered by outsiders unless the effect of a rule was to lead to a major regulatory upset. However, it is open to the Director-General of Fair Trading to report at any time on the competition implications of the rules, and we shall turn to that matter in a few moments.

The noble Lord, Lord Newby, also asked about the quantification of cost-benefit analyses. We have deliberately refrained from specifying the methodology of cost-benefit analyses. As the noble Lord suggests, it is rather akin to motherhood and apple pie. Those who conduct such analyses, such as the consultancy divisions of some major accountancy firms, frequently change their methodologies because a good number of them do not work. (Perhaps I should not have said that!) We do not believe that we should prescribe details of that kind in a Bill which must survive for a number of years to come. I am sorry to be discouraging about the wording of the amendments and the way in which they would operate because the original thinking behind them is very sound.

Lord Jenkin of Roding

I do not believe that the Minister has met the point raised by my noble friend and the noble Lord, Lord Newby. What appears to be missing is some way in which the practitioner community can compel the authority to review rules. Yes, the panel can make its report. We have discussed all the provisions for that. But one can envisage that an authority with these powers and the substantial domination that it will inevitably exercise will simply say, "We'll get round to it some time". The practitioner community—it might be the consumers might say, "You really should review your rules; they are not working correctly". There should be some provision which could ultimately be justiciable.

That is what my noble friend seeks. The Minister has not replied. It is hot a Clause 10 situation. I think that the phrase used is "a sledgehammer to crack a nut", but what else do we have? There needs to be some provision.

7 p.m.

Lord Elton

I support my noble friend Lord Jenkin of Roding. We have been reminded that there are bodies outside the authority which can review it or require it to review. But surely there needs to be some internal duty on the authority to maintain a regulatory system that is efficient. That may sound like befriending the practitioner at the expense of the client. But in fact the public who use the financial services in this country will be properly served only if the regulation of those services is not only effective but also efficient.

We have seen how enormously burdensome regulations can be on what we now call authorised persons if there is no satisfactory link between them and the bodies which regulate them. From time to time they thought that regulators had ears that did not work. That is why I was moved earlier to press for an effective mechanism within the practitioner panel for bringing the needs of the practitioner to the notice of the Financial Services Authority. I express badly the same fears to which other noble Lords around the Chamber have referred. The danger is that the FSA may believe that its mechanism is working wonderfully and is intellectually sound and criminologically faultless but it may cost so much to run that it will drive people out of business. The people then to suffer will be the consumers.

Lord McIntosh of Haringey

That is exactly why we have practitioner and consumer panels. Noble Lords are pushing in different directions. The noble Lord, Lord Newby, was satisfied that there was enough internal pressure in the FSA to make it review its own rules. His question was: what external pressure was there; and under what circumstances could external pressure be triggered? The noble Lord, Lord Elton, is now worried about the lack of internal pressure on a self-satisfied financial services authority which thinks that its rules are marvellous and does not want to consider changing them.

That is exactly why we have the consumer and practitioner panels. They are set up to do exactly that job. Their chairmen have to be approved by the Treasury, so they have a sufficient level of independence to provide the external trigger. At the same time they are enough within the FSA to understand the issues and developments taking place within the regulation of financial markets and financial services in order to ensure that they are capable of making a well informed and rapid response to difficulties which arise. They are available both to the financial community and to consumers to do exactly the job for which noble Lords call.

I repeat this. There are adequate external constraints on rule making. The FSA needs to comply with its general duties, objectives and principles, as we debated at length on the first day in Committee, which will require the FSA in practice to keep under review all its operations. The panels will no doubt bring pressure to bear. Surely that is what we have been debating earlier in Committee. Surely that is the proper answer to the issues raised by the amendments.

Lord Saatchi

I am grateful to my noble friends for making somewhat better than I did the point I sought to make. Having listened to the Minister I am even more of the belief that we should test the opinion of the Committee on this matter.

I agree that these amendments would place an onerous obligation on the FSA to carry out these cost benefit analyses at regular intervals; and that the FSA would not enjoy that very much. That is exactly the point. If the amendments serve as a deterrent to excessive rule making and if a burden had to be fulfilled every time a rule was made, we should regard that as a benefit to the working of the FSA.

The second amendment seeks to raise competition to a higher level. As the noble Lord, Lord Newby, and the Minister said, that matter can arguably be dealt with in other parts of the Bill. However, we regard the raising up of the competition objective and the des, re to maintain the competitiveness of the UK at every opportunity as a benefit. Therefore I should like to test the opinion of the Committee. I commend the amendment.

7.7 p.m.

On Question, Whether the said amendment (No. 231YA) shall be agreed to?

Their Lordships divided: Contents, 46; Not-Contents, 112.

Division No. 2
CONTENTS
Astor of Hever, L.	Cope of Berkeley, L.
Attlee, E.	Crathorne, L.
Blackwell, L.	Dean of Harptree, L
Blatch. B.	Denham. L.
Boardman, L.	Elton, L.
Brigstocke, B.	Ferrers, E.
Carnegy of Lour, B.	Flather, B.
Colwyn. L.	Fookes, B.

Gardner of Parkes, B.	Montagu of Beaulieu, L.
Goschen, V.	Montrose, D.
Haslam, L.	Northbrook, L.
Henley, L. [Teller]	Northesk, E.
Home, E.	Onslow, E.
Jenkin of Roding, L.	Park of Monmouth, B.
Jopling, L.	Pilkington of Oxenford, L.
Kingsland, L.	Rees,L.
Luke, L. [Teller]	Renton, L.
Mackay of Ardbrecknish, L.	Roberts of Conwy, L.
Marlesford. L.	Rotherwick, L.
Masham of Ilton, B.	Saatchi, L.
Miller of Hendon,B.	Seccombe, B.
Monro of Langholm, L.	Tugendhat, L.
Monson, L.	Vivian, L.
NOT-CONTENTS
Addington, L.	Jay of Paddington, B. (Lord Privy Seat)
Ahmed, L.
Alli.L.	Jeger, B.
Amos, B.	Jenkins of Putney, L.
Archer of Sandwell, L.	Judd,L.
Ashton of Upholland,B.	Kennedy of The Shaws, B.
Avebury, L.	Kirkhill,L.
Bach, L.	Lea of Crondall, L.
Bassam of Brighton, L.	Levy, L.
Bragg, L.	Lipsey, L.
Brooke of Alverthorpe, L.	Lockwood, B.
Brookman, L.	Lofthouse of Pontefract, L.
Brooks of Tremorfa, L.	Mclntosh of Haringey, L.
Burlison, L.	McIntosh of Hudnall,B.
Carlile of Berriew, L.	MacKenzie of Culkein, L.
Carter, L. [Teller]	Mackenzie of Framwellgate, L
Christopher, L.	Mackie of Benshie, L.
Clarke of Hampstead, L.	Maddock, B.
Crawley, B.	Mallalieu, B.
David, B.	Mason of Barnsley, L.
Davies of Coity, L.	Massey of Darwen, B.
Davies of Oldham, L.	Merlyn-Rees, L.
Dean of Thornton-le-Fylde, B.	Milner of Leeds, L.
Desai, L.	Morris of Castle Morris, L.
Dixon. L.	Murray of Epping Forest, L.
Donoughue. L.	Newby, L.
Dormand of Easington, L.	Orme, L.
Dubs, L.	Patel of Blackburn, L.
Elder, L.	Paul, L.
Evans of Parkside, L.	Phillips of Sudbury.L.
Fvans of WatforH L.	Pitkeathley, B.
Farrington of Ribbleton, B [Teller]	Plant of Highfield,L.
	Ramsay of Cartvale, B.
Faulkner of Worcester, L.	Rea, L.
Filkin, L.
Rendell of Babergh,B.	Rennard, L
Gale. B.	Richard, L.
Gavron, L.	Scotland of Asthal, B.
Gilbert, L.	Sharman, L.
Gordon of Strathblane, L.	Sharp of Guildford, B.
Goudie, B.	Simon, V.
Gould of Potternewton, B.	Stoddart of Swindon, L.
Grabiner, L.	Stone of Blackheath, L.
Hardy of Wath,L.	Symons of Vernham Dean, B.
Harris of Haringey. L.	Taylor of Blackburn, L.
Harrison, L.	Thomas of Gresford, L.
Haskel, L.	Thornton, B.
Hilton of Eggardon, B.	Tomlinson, L.
Hollis of Heigham, B.	Turner of Camden, B.
Holme of Cheltenham, L.	Walker of Doncaster, L.
Howie of Troon, L.	Warner, L.
Hoyle, L.	Whitaker, B.
Hughes of Woodside, L.	Whitty, L.
Hunt of Kings Heath, L.	Wilkins, B.
Irvine of Lairg, L. (Lord Chancellor)	Williams of Elvel,L.
	Woolmer of Leeds, L.
Islwyn. L.	Young of Dartington, L.
Janner of Braunstone, L.	Young of Old Scone, B.

Resolved in the negative, and amendment disagreed to accordingly.

7.17 p.m.

Clause 146 agreed to.

[Amendment No. 231ZA not moved.]

Clause 147 agreed to.

Clause 148 [Guidance]:

[Amendment No. 231A not moved.]

Clause 148 agreed to.

Clause 149 agreed to.

Clause 150 [Interpretation]:

Lord McIntosh of Haringey

moved Amendment No. 232: Page 70, line 22, leave out paragraph (c). The noble Lord said: Chapter III of Part X is concerned with the external competition scrutiny arrangements for the FSA. In earlier debates, I made it clear how much importance the Government attach to ensuring that the FSA gives the right weight to competition concerns. Getting the competition framework right is one of the main planks of economic growth and prosperity. But so is regulation. Without regulation there would be less investment and I do not need to spell out the adverse consequences of that. Consumers, both individually and as a whole, need to have confidence in the fairness and soundness of those with whom they deal if they are going to be willing to entrust their money to them.

The key to maximising welfare is ensuring that the level of regulation, and therefore the level of competition, is set at the right level; neither too much, nor too little. There are two ways in which that is achieved in the Bill. First, there are the internal constraints on the FSA and we have debated those. Most obviously, there are the constraints set out in the objectives and in Clause 2(3). Among those, as Members of the Committee will know, is the requirement in Clause 2(3)(f) for the FSA to have regard to the need to minimise the adverse effects on competition that may arise from any exercise of its general functions.

However, that is not all. The other matters in Clause 2(3) also act as constraints on over-regulation. There are procedural checks as well. I could single out the requirements that are placed on the FSA to consult on its regulatory provisions—rules, guidance and so on—and produce a cost benefit analysis (I can say that safely in the absence of the noble Lord, Lord Newby) which will have to look at the wider economic costs of the proposed rule or rules and not only at the direct costs for regulated persons.

In addition, we shall ask the FSA to produce an analysis in its annual report on the effect of its regulatory provisions on competition in the financial services markets. We want the FSA to take competition concerns very seriously indeed. Those are the internal constraints. Secondly, there are the arrangements for external oversight by the competition authorities. That is what this chapter of Part X is concerned with.

Let us look at the special nature of this regime. If it was not there, there would be no competition scrutiny of FSA rules and practices. Statutory rules are not covered by general domestic or European competition law. We do not claim the credit for that. It was brought in by the Financial Services Act 1986. However, we have extended it to cover all the sectors which will be regulated by the FSA. That means that, for the first time, there will be competition scrutiny of rules to cover insurance companies, friendly societies, building societies and banks.

Furthermore, not only does the Bill include a competition regime for the FSA as regulator, it will also include similar regimes which cover the rules and practices of recognised exchanges and clearing houses and, for the first time, the competent authority for listing securities. Those arrangements are intended to be along broadly the same lines as those for the FSA, and we shall bring forward amendments to achieve that in due course.

Not only do the external scrutiny arrangements mean that matters can be put right where the FSA does not get them right, but their very existence will work to reinforce the provisions which the Bill applies directly to the FSA. It will be mindful that if it does not get the balance right between competition and regulation, it will run into trouble.

We have also made a number of improvements to the way that the arrangements work in the light of Don Cruickshank's interim report on banking services in the UK. The main change is that the Competition Commission will play a very significant role in the process. Rather than Ministers taking the final decision on whet her regulatory provisions or practices have a significantly adverse effect on competition, that decision will be for the Competition Commission under the Bill. Where the commission finds that regulating provisions or practices have that effect—that is, an adverse effect on competition—it will have to come to a conclusion as to whether that effect is justified. In other words, it will balance the interests of competition against regulation and reach a view on whether the FSA got it right. Treasury Ministers came to a conclusion in this respect under the Financial Services Act 1986.

If the commission believes that the adverse effect is not justified, then the Treasury will have to direct the FSA to make changes. The only time that that does not apply is where the Treasury considers that there are exceptional circumstances which make it inappropriate or unnecessary to direct the FSA. The Bill does not spell out what those might be; we cannot predict them in advance. However, for example, it might be the need to meet the UK's international obligations.

The amendments which we propose make some further improvements to those made in another place. Amendments Nos. 232 and 233 provide necessary "tidying up". At present, the definition of regulatory provisions in Clause 150(1)(c) refers to guidance issued under Section 69. There is no guidance issued under that section. Therefore, Amendment No. 232 deletes subsection (c).

Amendment No. 233 deletes subsection (e). That subsection includes in the definition of regulating provisions in Clause 150(1) the FSA policy statements on the imposition and amount of penalties. However, such statements bite on the FSA itself; they do not require anyone else to do anything and, therefore, there is no need to cover them in this definition. The important matter is what the FSA requires or encourages people to do through rules, guidance or statements of conduct and what it does itself. Those issues are covered by the reference to regulating provisions, as amended by Amendments Nos. 50 and 51, and by the reference to practices in Clause 150(1).

Amendment No. 233A makes a change to the language used to describe what the competition authorities—that is, the Director-General of Fair Trading and the Competition Commission—should be examining. At present, Clause 150 uses language which mirrors that in the Competition Act, which itself mirrors that in Article 81 of the European Treaty. When we looked at that clause, we considered that it was not appropriate. That legislation is concerned with the anti-competitive practices of commercial undertakings, not with statutory bodies.

If we were to keep the current wording, there would be a danger that it might attract the European Court of Justice jurisprudence. That is particularly the case now that the Competition Act, which imports the treaty test into domestic law, has been enacted. That has never been our intention and there are two reasons why it concerns us. First, the jurisprudence has developed in the context of commercial undertakings. There is always a risk that this would have unforeseen, and possibly unwelcome, consequences if applied in a different context.

Secondly, we do not want the external competition scrutiny arrangements to turn on the legal issues. While that may be appropriate under the Competition Act regime, where penalties can be imposed and legal certainty is essential, here we are dealing with questions of judgment rather than law. The key question that we want the competition regulators to address is whether the FSA, in discharging its general duties, has struck the right balance between competition and regulation. The answer to that should turn more on economic than legal arguments.

That is why we are using the reporting side of the Competition Commission rather than the appeal side. It is the reporting side of the commission which considers mergers where the issues are similarly economic ones rather than legal ones. Therefore, Amendment No. 233A moves away from the Competition Act language and refers to adverse effects on competition. That is a broad term which is readily understandable and which picks up the language used in the principle in Clause 2(3)(f), which has been agreed.

In addition, this amendment allows the competition authorities to look at the regulating provisions or practices of the FSA which require or encourage people—perhaps for a good reason which I shall explain in a moment—to exploit strong market positions. In most cases where someone exploits a strong market position there will also be an adverse effect on competition, but that is not always the case. The change simply ensures that the coverage is complete.

The other amendments in this group simply make consequential changes, replacing references to significant anti-competitive effects, as currently defined in Clause 150(2), with references to significantly adverse effects on competition, as defined in this amendment. However, I am grateful to noble Lords for spotting an error in Clause 154 where the reference should indeed be to Clause 153(2). That is dealt with in opposition Amendment No. 234L. However, since the effect of my Amendment No. 234K is to amend that subsection, I am afraid that I am denied the pleasure of accepting it.

However, I am not so grateful for Amendment No. 233B, the effect of which would include in the definition of anti-competitive effect things which prejudice the competitive position of the United Kingdom. There can be no doubt about the importance of the FSA having regard to the competitive position of the United Kingdom. That is why we have included such a provision in Clause 2(3). That requires the FSA to have regard to, the international character of financial services and markets and the desirability of maintaining the competitive position of the United Kingdom". Although I have sympathy with the aim which underlies Amendment No. 233B, there is no need for it. It would be unnecessary.

If the FSA were to regulate in an anti-competitive way, it would undoubtedly impact on the competitive position of the UK, given the level of competitiveness in the global market place for financial services. However, there is no need to spell that out here. There is also a more specific point. The whole purpose of this section is to bring to bear the expertise of the competition authorities—that is, the OFT and the Competition Commission—on matters covered by Clause 2(3)(f). That expertise is not directly relevant to the other principles covered by Clause 2(3)(a) to (e). That does not in any way diminish their importance to the FSA. However, it means that there will not be a role for outside agencies to assist in taking account of those principles in the same way as there is for competition. I beg to move.

Lord Elton

Before the noble Lord sits down, perhaps I may ask whether I heard him aright, or is it the case that it is Amendment No. 234K in which the reference to Clause 154(2) should be Clause 153(2)? I believed that I heard him say that it was in Amendment No. 234L.

Lord McIntosh of Haringey

Opposition Amendment No. 234L is then dealt with by my Amendment No. 234K. Therefore, both of them correct the error.

7.30 p.m.

Lord Jenkin of Roding

We had a short discussion at the beginning of the afternoon about the volume of government amendments which are still coming on to the Marshalled List. I have one question to ask about that. I listened to the noble Lord, Lord McIntosh, with great care. He speaks fairly quickly and perhaps I do not always catch everything he says. However, it is clear that the largest number of amendments in the group seek to change the wording in relation to the adverse effect on competition from that which has prevailed in our own competition Acts to that which is appropriate for a regulatory body. I hope that I am putting that into what I might call "Onslow" language.

My question is: how did the wrong form of words get into the Bill to begin with? I should have thought that the authorities concerned, and not least parliamentary counsel who have a huge repository of wisdom in these matters, might have recognised that the wording in the Bill as originally drafted would be likely to—I coin the Minister's phrase—involve European jurisprudence. Obviously having discovered that, it is right to change it. I do not quarrel with that. But we have now been dealing with this Bill for 18 months. Why is it that that has been discovered only in the last days of the Committee stage in the second House to consider the Bill, after all that has gone before? That is relevant to the criticisms which have come from these Benches. The manner in which this legislation has been produced and is being presented to the Committee leaves a great deal to be desired.

If the amendments were in response to debating points made in another place, one would be kinder to the Government. But, as I understand it, they have discovered that their own wording was wrong. That is not a particularly good way of legislating.

Lord Elton

I cannot resist rising to that fly and telling my noble friend that that comes back to the complaint which I made ineffectively in our exchanges on whether or not we should sit as a Committee; that is, the enormous amount of legislation going through at the moment. That does not impact only on the timetable; it impacts also on the draftsmen and parliamentary counsel. The answer is that the Government are trying to do more than Parliament can properly do in the time available to it, unless we sit through August.

Lord McIntosh of Haringey

I am making no promises about sitting in August. The reason for the different wording is, as I said before, that the language at present used is that used in the Competition Act 1998. That mirrors Article 81 of the European treaty. I should add also that it is inherited from the Financial Services Act, which is the work of the previous government. When the Bill was being drawn up, the Competition Act, as it now is, was a Bill.

There are advantages in taking things slowly, over a long period, with a lot of consultation; and there are disadvantages because while that period is going on things change—for example, the demutualisation of the Stock Exchange. That requires an enormous number of amendments which are simply unavoidable.

We have been working closely with the competition authorities on the wording of the competition provisions and appropriate changes following the Cruickshank review. Again, that is a step forward. It did not exist when the Bill was drafted. If we want to incorporate those improvements and have the best Bill possible, we must deal with those matters.

While I am on my feet, I should say to the noble Lord, Lord Elton, that I wrongly said to him that our Amendment No. 234K corrects the mistake in the wording. In fact, it does not make that correction. The correction is a typing error and the Clerk advises me that that correction may be made without formal amendment.

Lord Kingsland

In one way or another, the Minister has accepted the three amendments that we have tabled in this group. Therefore, I have no need to speak to them.

On Question, amendment agreed to.

Lord McIntosh of Haringey

moved Amendment No. 233: Page 70, line 24, leave out paragraph (e). On Question, amendment agreed to.

The Deputy Chairman of Committees (Viscount Simon)

Before calling Amendment No. 233A, I should advise the Committee that if this amendment is accepted, Amendment No. 233B cannot be called due to pre-emption.

Lord McIntosh of Haringey

moved Amendment No. 233A: Page 70, line 28, leave out from ("a") to end of line 30 and insert ("significantly adverse effect on competition if —

1. (a) they have, or are intended or likely to have, that effect; or
2. (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.

()If regulating provisions or practices have the effect of requiring or encouraging exploitation of the strength of a market position they are to be taken, for the purposes of this Chapter, to have an adverse effect on competition."). On Question, amendment agreed to.

[Amendment No. 233B not moved.]

Clause 150, as amended, agreed to.

Clause 151 [Reports by Director General of Fair Trading]:

Lord McIntosh of Haringey

moved Amendments Nos. 233C to 233E: Page 70, line 38, leave out ("significant anti-competitive effect") and insert ("significantly adverse effect on competition"). Page 71, line 2, leave out ("any significant anti-competitive effect") and insert ("a significantly adverse effect on competition"). Page 71, line 8, leave out ("anti-competitive effect") and insert ("adverse effect on competition"). On Question, amendments agreed to.

Clause 151, as amended, agreed to.

Lord McIntosh of Haringey

I beg to move that the House do now resume. In doing so, I suggest that the Committee stage begin again not before 8.37 p.m.

Moved accordingly, and, on Question, Motion agreed to.

House resumed.