Lords Sitting of 9 May 2000

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

Baroness Billingham
Angela Theodora Billingham, having been created Baroness Billingham, of Banbury in the County of Oxfordshire, for life—Was, in her robes, introduced between the Baroness Crawley and the Lord Bach.
Lord Turnberg
Sir Leslie Arnold Turnberg, Knight, having been created Baron Turnberg, of Cheadle in the County of Cheshire, for life—Was, in his robes, introduced between the Lord Walton of Detchant and the Lord Winston.

House of Lords and Devolution
2.49 p.m.
Lord Dixon-Smithasked the Leader of the House:
Whether the House can exercise its responsibility towards the whole of the United Kingdom if it is unable to discuss matters for which responsibility is shared between the United Kingdom and a devolved body.
The Lord Privy Seal (Baroness Jay of Paddington): My Lords, the simple answer, which might not meet the complexity of the noble Lord's concerns, is that it is for this House to decide what it wishes to discuss, but Ministers can answer only on those matters for which they are responsible. This will include matters where responsibility is shared with one or other of the devolved administrations, but not where responsibility is wholly devolved.
Lord Dixon-Smith: My Lords, I am grateful to the noble Baroness the Lord Privy Seal for that Answer. It helps us forward to some degree. The arrangements under which the devolved bodies were established are such that the finance for them comes almost exclusively from this Parliament. Does the noble Baroness agree that in those circumstances and where matters of relative performance are under examination, it is necessary that her colleagues as Ministers give clear answers to questions about where decisions are taken on such issues?
If we do not know for certain that a particular situation arises as a result of a decision taken by a devolved body, given that the availability of funding controls everything, people of a suspicious nature such
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as myself might be inclined to the view that the fault lies within this building. If that were unjust, that would be an unfortunate situation for us all.
Baroness Jay of Paddington: My Lords, perhaps I may draw the attention of the noble Lord and the House to a helpful note recently produced by the Cabinet Office, Devolution Guidance Note 13, on the handling of parliamentary business in the House of Lords. It is publicly available and published on the Internet. The document is succinct and clear, but it is more than eight pages long so I shall not attempt to précis it in response to the Question.
It contains a number of hypothetical examples, one of which precisely addresses the point raised by the noble Lord. Example 1 in paragraph 3.6 is a question asked about the comparative performance in school examination results throughout the United Kingdom. A clear response is given. It is that although the matter is fully devolved as regards, for example, Scotland, and although the DfEE may have access to the information, the question is one for the national Parliament in Scotland.
Perhaps I may detain the House in order to repeat the hypothetical question and answer. The suggested appropriate answer is:
"The Government expect to publish results for England in [month A]. The publication of school examination results for Wales & Scotland is a matter for the National Assembly and the Scottish Executive respectively. Results for 1998 for the whole of Great Britain are available in the Library in the name of the publication".
I believe that that precisely answers the point which the noble Lord made about comparative information.
Lord Elton: My Lords, is it not a matter of surprise that guidance as to what Parliament may inquire into originates from outside Parliament and the Cabinet Office and not from the resources of Parliament itself?
Baroness Jay of Paddington: My Lords, I believe that the Cabinet Office is trying to give expression to the legislation on devolution and, indeed, to the guidance which has been agreed and discussed in the Houses of Parliament along the lines that I have described. As I said, it is intended purely as an extremely helpful and practical guide to the ways in which legislation passed by this House and another place should be put into practice.
Lord Lang of Monkton: My Lords, may I ask the noble Baroness to revise her initial Answer? Surely our constitutional arrangements do not exist for the convenience of government Ministers. If neither House of this United Kingdom Parliament can debate issues which affect the United Kingdom in the round and its constituent parts, does that not create a democratic deficit?
Baroness Jay of Paddington: My Lords, I believe that the noble Lord must have misheard what I said in my initial response. I said that, indeed, it was for this

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House to decide what it wished to debate. Ministers can be accountable for and report responsibly to this House only on matters for which they are responsible.
Lord Roberts of Conwy: My Lords, perhaps I may draw the attention of the noble Baroness to a statement contained in the Memorandum of Understanding issued last year by the noble and learned Lord the Lord Chancellor. It states that:
"The [United Kingdom] Parliament retains the absolute right to debate, inquire into or make representations about devolved matters".
If that is so, should Ministers not fully respond to such debates and inquiries about devolved matters rather than seek to brush them under the carpet?
Baroness Jay of Paddington: My Lords, I do not believe that anything that I said in response to the previous questions could possibly be described as an attempt to brush matters under the carpet. Again, perhaps I may refer to the very useful document which I mentioned previously. As I said in answer to the previous supplementary, the Cabinet Office guidance tries to give practical expression to the legislation. I believe that if the noble Lord looks, for example, at example 7 in that document, he will see that it is indeed legitimate for this House to have a Wednesday debate on a subject which would be regarded as being devolved. That is perfectly legitimate and obviously within the rules of procedure of this House. The question is: what degree of responsibility would be had by the Minister who responded to the debate for the specific policy areas which arose?
Lord Avebury: My Lords, perhaps I may make what I believe is a helpful suggestion. The example given by the noble Baroness related to comparative figures between England and Scotland. Those figures were available in tabulated form prior to 1998 but had to be obtained separately from then onwards because it became the responsibility of the Scottish Parliament. Would it not be possible for those who design the web pages of the Scottish Parliament and, say, the DfEE to put hot links between the two so that if people wanted to compare the figures between England and Scotland or, for that matter, between England and Wales, they could do so very easily on the web?
Baroness Jay of Paddington: My Lords, my common sense reaction to the noble Lord's question is that, indeed, he makes a sensible point. However, at least part of such a decision would have to be made by the Scottish Executive.
Lord Stoddart of Swindon: My Lords, is it possible for Select Committees of the House of Commons or this House to summon Ministers from the Scottish Parliament, the Welsh Assembly or the Irish Assembly?
Baroness Jay of Paddington: My Lords, that question would have to be discussed by a joint
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ministerial committee. I believe that it is more likely that in the instances where a Select Committee wanted to examine a devolved matter the relevant Secretary of State would be asked to appear. However, he would be unable to say anything which acknowledged executive responsibility for those matters.
Lord Clark of Kempston: My Lords, can the noble Baroness say whether the Government have any views as to the interpretation of the West Lothian question?
Baroness Jay of Paddington: My Lords, we have discussed the West Lothian question in this House on many occasions, and I am sure that we could continue to do so. As I understand it, the West Lothian question relates to the concerns of Members of Parliament for English constituencies about their continuing involvement in Scottish affairs. I believe that the simple answer is that, where 80 per cent of Members of another place represent English constituencies, it is unlikely that their views and their opinions will be steamrollered.

Act of Union: Bicentenary
2.57 p.m.
Lord Lairdasked Her Majesty's Government:
Whether they will reconsider their decision not to mark the bicentenary in 2001 of the creation of the United Kingdom.
The Minister of State, Cabinet Office (Lord Falconer of Thoroton): My Lords, although we have no plans at present for a formal commemoration of the 200th anniversary of the 1801 Act of Union between Great Britain and Ireland, we recognise the historic significance of that Act to the United Kingdom and, indeed, to the Republic of Ireland. Undoubtedly, we shall want to make reference to it during the course of next year. If there are proposals to mark the anniversary, we shall be interested to hear about them and shall consider whether it is appropriate to support them in any way.
Lord Laird: My Lords, I thank the Minister for his reply. However, does he not understand that there is a considerable amount of unease throughout the country about the Government's failure to mark in a significant way the 200th anniversary of the creation of the United Kingdom? Does he not believe that the contribution that the United Kingdom has made to world civilisation in the form of the industrial revolution, in the defence of freedom, culture and sport, and in passing on democratic values is worth

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celebrating specially? Will he at least confirm that the Government have no plans to spend the year 2001 apologising for the creation of the United Kingdom?
Lord Falconer of Thoroton: My Lords, I can certainly confirm that. I can also make it absolutely clear that we are as proud of the distinguished history and traditions of this country as is the noble Lord.
Lord Mackay of Ardbrecknish: My Lords, if the Government are so reluctant to celebrate the 200th anniversary of the creation of the United Kingdom of Great Britain and Ireland, will they show the same reluctance about joining with us in 2007 to celebrate the creation of the United Kingdom, England and Scotland? Or, thanks to the devolution policies, do they believe that we shall still have a United Kingdom, given that the SNP is beating the Labour Party in the opinion polls?
Lord Falconer of Thoroton: My Lords, I am glad to notice that the noble Lord believes that we shall still be the Government in 2007. Of course, I believe that there will be a United Kingdom in the year 2007. That has been made all the more certain by the devolution plans that we have introduced. Perhaps I can reiterate that we are as proud of the distinguished history and traditions of the Union as is everyone else in the House.

The Welfare State and the Elderly
3 p.m.
Earl Attleeasked Her Majesty's Government:
Whether the operation of the welfare state in respect of the elderly is satisfactory.
The Parliamentary Under-Secretary of State, Department of Social Security (Baroness Hollis of Heigham): My Lords, the measures:flowing from the Green Paper Partnership in Pensions, together with those announced in the past two Budgets, demonstrate the priority that the Government have given to ensuring a decent income in retirement and improved quality of life for pensioners; hence our proposals for an earnings-linked minimum income guarantee for poorer pensioners now as well as for a state second pension and a stakeholder pension to reduce pensioner poverty in future. The winter fuel payment, worth £3 a week, as well as the minimum tax guarantee and the provision of TV licences will benefit most eligible pensioners.
Earl Attlee: My Lords, I thank the Minister for that reply. As I had a word with her private office, she will be aware that I am straying slightly from my usual topic. At a time when we are spending over £100,000 million on social security, can the Minister explain why increasingly I meet beggars who are clearly too
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old to work and who have obviously spent most of their time in the UK? Is the problem one of social security, of law and order, or of health?
Baroness Hollis of Heigham: My Lords, I am grateful that the noble Earl told me that he would ask about beggars. However, I do not believe that that has allowed me to acquire any useful further information to share with the House. We have no statistics about the number of beggars who are elderly—presumably elderly women—for example, over 75. From my experience, beggars are usually younger people who have come to London to try their luck. Certainly any elderly person—someone over 65 or over 75—would be entitled to state benefits, including a state pension. They would be entitled to a minimum income guarantee if they did not have alternative means and they would be entitled to housing benefit.
Given that, the problem ought not to be a social security one. If they are elderly and on the streets, or in some sense sleeping rough, there may be mental health problems or substance abuse problems; certainly there are social exclusion problems.
Lord Clement-Jones: My Lords, if the Minister has had an opportunity to read the recent survey into accident and emergency departments, carried out by the Association of Community Health Councils for England and Wales and the Royal College of Nursing, she will have seen that there are horrendous examples of age discrimination against the elderly. Is it not time, as we urged on the Health Act last year, that there should be an outlawing of age discrimination in the public services?
Baroness Hollis of Heigham: My Lords, I agree with the noble Lord. The Government are entirely and utterly opposed to any discrimination against older people in the National Health Service. Any treatment of elderly people must be done on clinical grounds only, and on no other grounds at all. That is precisely why the Government and my noble friend Lord Hunt of Kings Heath are developing a National Service Framework for Older People. That is being developed this year to ensure consistent quality and decent care for older people across all health authorities.
Baroness Wilkins: My Lords, can the Minister give an assurance that the Government will follow the recommendation of the Royal Commission on Long-Term Care of the Elderly that personal care should be free of charge to those who need it? Do they recognise that personal assistance should be regarded as a fundamental human right? People who can no longer get out of bed, feed or dress themselves without personal assistance or support are not in that position from choice. That service is as essential as the National Health Service, education and others.
Baroness Hollis of Heigham: My Lords, I am batting slightly off my wicket, but I shall have a go. The noble Baroness will know that the Government are considering the Sutherland report, but have not yet

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come to a decision as to which path they will take in terms of the recommendations. They have not decided whether to follow a majority recommendation or a minority recommendation, associated with my noble friend Lord Lipsey. He made the point that, given that one is dealing with scarce resources, a real decision has to be made as to whether the cost to people of the existing service is reduced or whether that money is used to improve existing services. The Government are reflecting on that and will make a judgment in due course.
Lord Goodhart: My Lords, will the Government consider giving particular assistance to older pensioners by providing age additions to the basic state pension of a substantial amount for those aged 75, 80 and over?
Baroness Hollis of Heigham: My Lords, I accept the diagnosis of the noble Lord of who are the poorer pensioners. They tend to be the older pensioners—those over 75 or over 80—and often they are single women. The interesting proposals put forward by the Liberal Democrats, and particularly by the noble Lord's right honourable friend Steven Webb, are for a 75 per cent increase between the figures of the basic state pension and the minimum income guarantee. However, I have difficulty with the fact that he proposes that it should be funded by the removal, or the scrapping, of our proposals for the state second pension. That would mean that it would be to the disadvantage of women, carers and disabled people. Another problem is that under the Liberal Democrats' proposals, more people in 2010 would be on income-related benefits rather than fewer.
Baroness Masham of Ilton: My Lords, does the Minister believe that there are enough physiotherapists, occupational therapists and speech therapists to rehabilitate elderly people when they become ill so that they can return home, enjoy their pensions and live an independent life?
Baroness Hollis of Heigham: My Lords, perhaps I could beg the noble Earl, Lord Attlee, the next time he asks this question to go for a UQ rather than a Starred Question! I am assured by my noble friend Lord Hunt—for whose advice I am grateful—that we have a national working scheme looking at precisely those proposals. We recognise how dependent elderly people are, particularly for mobility, on physiotherapy and occupational therapy.
Lord Ashley of Stoke: My Lords, is my noble friend aware that she bats off her wicket very well indeed? I ask her to continue to do so now. Does she agree that there should be an inquiry into the allegations that some hospital trusts use "Not for resuscitation" notices in relation to elderly people without their consent and without consultation with their relatives? If she disagrees with that, I hope that she will consult her colleague. Does she agree that a step forward
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would be for the Government to demand from every hospital trust a report on how many "Not for resuscitation" notices are issued, so that those trusts with an abnormally high number can easily be identified?
Baroness Hollis of Heigham: My Lords, that is an interesting question which has been heard by my noble friend Lord Hunt and on which he will want to reflect. Perhaps I may emphasise a response I gave earlier: the Government absolutely deplore "Do not resuscitate" notices in the spirit in which the noble Lord has enunciated. That is a matter for clinical judgment within the framework of careful guidelines drawn up by the Department of Health and the BMA. It is precisely to overcome some of the apparent—I was going to say "discrepancies" but that is a cold word—different responses of hospitals to similar situations that the DoH is developing its National Service Framework for Older People to ensure consistency, decency and quality for all elderly people at a most vulnerable time—when they are in hospital.
Lord HigginsMy Lords, as the Question specifically refers to the operation of the welfare state, is it not the case that there have been considerable problems as a result of break-downs and deficiencies in computer systems, for example, in the payment of deferred pensions? Can the Minister bring us up to date on that? On the point raised by my noble friend Lord Attlee, is there not a case for carrying out a survey on the particular problem to which he has drawn the attention of the House?
Baroness Hollis of Heigham: My Lords, on the second question, I shall certainly ask my colleague in the DETR whether he can give further information on the number of women beggars. I shall write to the noble Earl, Lord Attlee, and put a copy in the Library, when we have further information.
The noble Lord, Lord Higgins, also asked about computers, particularly the NIRS2 computer. The latest information that I have on contributory benefits, as opposed to income-related benefits, is that something like 95 per cent of all benefits have now been paid and that the backlog, if it has not already been cleared, will be cleared by the end of this month. Where appropriate, compensation has been paid.
Baroness Greengross: My Lords, perhaps I may put two points.
Noble Lords: Questions!
Baroness Greengross: My Lords, I apologise. I should like to put two questions to the Minister. First, as regards homeless people and beggars, research published a while ago showed that a high proportion of elderly people are homeless in and around London. Does the Minister agree that we should set up an investigation into the current situation? Secondly, as regards "Do not resuscitate" orders, that is one example of discrimination in the NHS and I am

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grateful for the Minister's comment that this will not be tolerated. However, in this area also we do not know all the facts. Does the Minister further agree that it would be better to hold an inquiry to examine all aspects of discrimination in the NHS so that we can eliminate it on the basis of full information?
Baroness Hollis of Heigham: My Lords, noble Lords, including my noble friend Lord Hunt, have heard the points made by the noble Baroness. Obviously my noble friend will reflect on whether it makes good sense to conduct an inquiry. However, what is needed is to ensure that this does not continue to take place in the future. The best way of ensuring that is to establish a National Service Framework for Older People. That is being developed and will apply to all local authorities. I hope that, in a year or two, the noble Baroness—who has worked so wonderfully for Age Concern—will no longer consider this to be a problem.
Baroness Gardner of Parkes: My ]Lords, in the light of so many questions on health being raised today, can the Minister say whether they typify the problem of lack of cohesion between the social services and health sectors? When does she think that this gap in communication will be bridged?
Baroness Hollis of Heigham: My Lords, as my noble friend said, I do not believe that this is so much a matter of lack of joined-up government as a lack of joined-up Questions. In all seriousness, I recognise that the major concerns affecting the elderly, which range from pensions, health, housing, fuel poverty, social exclusion and so forth, need to be addressed by all government departments. That is precisely why the Prime Minister has set up an inter-ministerial group on ageing and the care of the elderly. That group will range across all the fronts of government. Furthermore, that is why my right honourable friend the Secretary of State for Social Security has become the champion of older people in that respect.

Professions Supplementary to Medicine
3.13 p.m.
Lord Clement-Jonesasked Her Majesty's Government:
What prior consultations were carried out in relation to circular HSC 2000/006 Professions supplementary to medicine: employment of practitioners in the NHS and social services departments, issued on 13th March, particularly in relation to "Acquired Rights".
The Parliamentary Under-Secretary of State, Department of Health (Lord Hunt of Kings Heath): My Lords, this circular was subject to consultation, in draft, with the professional bodies representing the nine professions then regulated by the Council for Professions Supplementary to Medicine (CPSM) and
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with NHS trusts, health authorities, the NHS Confederation, local authorities and social services directors.
Lord Clement-Jones: My Lords, I thank the Minister for that reply. However, it is quite clear that this circular was imposed on the professions involved rather than being the subject of consultation. All the organisations related to the professions allied to medicine are unanimously of the view that these arrangements and methods of dealing properly with non-fully qualified professionals will have an adverse effect on the quality of NHS treatment and also bode extremely badly for the way in which the new health professional council will be set up. Can the Minister give an assurance that arrangements related to the entry of non-qualified professionals for the other professions allied to medicine will be dealt with in a different manner? Furthermore, will there be proper consultation in the future?
Lord Hunt of Kings Heath: My Lords, this is a matter of regulation and it is entirely appropriate that the CPSM forwarded to the Government comments as regards acquired rights, which we have taken forward. It is of course for the CPSM itself to engage in discussions with its constituent boards as to how this is to be taken forward. However, I can assure the noble Lord, Lord Clement-Jones, and all noble Lords that in terms of acquired rights, this would apply to a relatively small number of people. Agreement would be given only after a rigorous process in which the individual board concerned with the individual profession will have a say.
Lord Peyton of Yeovil: My Lords, I must apologise because I have not read every word of the circular referred to in the Question. However, I am curious about the phrase, "professions supplementary to medicine". Does that phrase embrace accountants, who nowadays seem far to outnumber the medical profession, whose business it is to make people feel better? No accountant has ever done anything of that kind.
Lord Hunt of Kings Heath: My Lords, that is an extraordinarily interesting reflection. Sadly, the number of professions that can be regulated under the heading "professions supplementary to medicine" is 12. We have now reached that figure and so I am afraid that there is no room for accountants.
Earl Howe: My Lords, if it is the Government's aim to improve public protection, how can it be right to create a new regulatory body in which the majority of members will have no relevant qualifications and no first-hand knowledge of the professions in question but whose function it will be to decide whether a particular individual is fit to practise? How can that possibly be appropriate?
Lord Hunt of Kings Heath: My Lords, the new health professions council, which is to be established,

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will ensure that the public interest is brought to the fore. That is why we wish to increase the number of lay persons on the council. They will help to give strategic direction, to protect the public and to ensure that the interests of the public are given primary concern. However, I can assure the noble Earl that, as regards specific issues relating to specific professions and also to disciplinary procedures, there will be opportunities for those individual professions to be involved and consulted. At the end of the day, the new health professions council will work well with a strong, public lay involvement along with the stewardship of the relevant professions.
Baroness Gardner of Parkes: My Lords, is the Minister aware that acquired rights applied in dentistry in 1921? Anyone who had been practising as a dentist could be registered. However, it was never accepted that those who were registered as a result of acquired rights had the same skills. The circular states that there are two ways in which such rights can be acquired: first, by "grandfathering"—which means that a practitioner has been in the field for long enough; and, secondly, by acquired rights applied to employees who possess neither qualifications nor the relevant education, training and experience. As the noble Lord, Lord Clement-Jones, said, it appears that many of these people will not be adequately qualified. Does the Minister accept that there is a danger here and can he assure the House that something will be done to check on this?
Lord Hunt of Kings Heath: My Lords, the noble Baroness is right to refer to the specific classification on the use of acquired rights which will apply to practitioners who do not qualify for automatic registration but are none the less regarded as practising safely as prosthetists, orthotists or arts therapists, but not necessarily—as the noble Baroness inferred—across the full range of the practice of their particular profession. Each case will be considered on an individual basis. The board, as well as the CPSM, will have to give its approval. I can assure the noble Baroness that I suspect that there will be very few cases indeed where any problems occur. Finally, the public interest will be paramount in any decision taken.
Baroness Masham of Ilton: My Lords, does the Minister believe that complicated professions such as psychotherapy should be regulated? Their practitioners have to deal with extremely difficult problems and there could be cowboys in those fields.
Lord Hunt of Kings Heath: My Lords, I know that concerns have been expressed as to whether counselling professions in general should be regulated. The health professions council, along with provisions in the Health Act 1999, allow us to extend regulation. We have no specific plans to extend regulation in the
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way suggested, but we are talking to stakeholders in that field. We shall consider the matter further in the light of those discussions.
Lord Walton of Detchant: My Lords, does the Minister accept that, while professional self-regulation has been criticised in several quarters over the past few months, and while full lay representation on the new council is entirely right and appropriate, it would be extraordinary if qualified members of each of the 12 professions to be regulated were not to serve on the council so that they could present the professional view?
Lord Hunt of Kings Heath: My Lords, I pay tribute to the noble Lord for the contribution he has made over many years to self-regulation, in particular within the General Medical Council. I can assure the noble Lord that there will be one qualified person from each of the professions serving on the new health professions council. However, I believe it is right to balance that by increasing the number of lay representatives. Self-regulation works, but it is vitally important that there is a strong element in place to represent the public interest. In that way, the public will have confidence in what the regulatory organisation does when acting on its behalf.

Business
3.19 p.m.
Lord Carter: My Lords, at a convenient moment after 3.30 p.m. my noble friend Lord McIntosh will repeat a Statement on Rover which is being made in another place.

Horserace Totalisator Board Bill [H.L.]
Viscount Astor: My Lords, I beg to introduce a Bill to make provision for the transfer of the properties, rights and liabilities of the Horserace Totalisator Board to the Secretary of State, and to make provision for the Secretary of State to dispose of those properties, rights and liabilities. I beg to move that this Bill be now read a first time.
Moved, That the Bill be now read a first time.—(Viscount Astor.)
On Question, Bill read a first time, and to be printed.

Carers and Disabled Children Bill
Brought from the Commons; read a first time, and to be printed.
Regulation of Investigatory Powers Bill
Brought from the Commons; read a first time, and to be printed.

Business of the House: Debate, 10th May
Baroness Jay of Paddington: My Lords, I beg to move the Motion standing in my name on the Order Paper.
Moved, That the debate on the Motion in the name of the Lord Peston set down for tomorrow shall be limited to five hours.—(Baroness Jay of Paddington.)
On Question, Motion agreed to.

Financial Services and Markets Bill
3.21 p.m.
Lord McIntosh of Haringey: My Lords, I beg to move that the Bill be now further considered on Report.
Moved, That the Bill be further considered on Report.—(Lord McIntosh of Haringey.)
On Question, Motion agreed to.
Clause 131 [Legal assistance scheme]:
Lord Saatchimoved Amendment No. 149A:
Page 63, line 16, leave out ("under section 123(4)").
The noble Lord said: My Lords, my noble friend Lord Kingsland will address this group of amendments. In the meantime, with your Lordships' leave and having given notice to the Minister, I should like to ask the Minister for clarification of a significant development which has occurred since the last Report day of this Bill in your Lordships' House.
Do any noble Lords who participated in our many days of debate on this Bill share my uneasy feeling that since we last met the ground has been shifting under our feet? I refer to the merger of the London Stock Exchange with the Frankfurt Stock Exchange. That appears to raise many questions in relation to this Bill and I shall be grateful for the Minister's response to them.
As a consequence of amendments introduced by the Government in your Lordships' House, the FSA is now the responsible listing authority for the London Stock Exchange and the relevant order affecting that has already been passed in both Houses of Parliament. In the light of that, can the Minister set our minds at rest on some of the issues?
Why does the chairman of the Swedish Stock Exchange say that this merger has political undertones? If that is true, is that an appropriate role for an independent regulatory authority to play? Why does the National Association of Pension Funds say that it could lead to a mismatch of pension fund assets and liabilities? Is it true that all technology companies will in future be quoted in euros in Frankfurt? Who will be the competent listing authority for those companies? Was this merger envisaged by those who designed this Bill? What amendments to the Bill will be required at 'Third Reading to reflect the merger? Will the merged exchange be a recognised investment exchange under Part XVIII of the Bill? How will the FSA discharge its supervisory role of the merged
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exchange? What assurance do we have that the FSA will not itself be merged with the German regulator or with a new European super-regulator without coming back to Parliament first?
I hope the Minister can give us a response to some of those questions at the end of the debate on the amendments. I beg to move.
Lord Elton: My Lords, I do not know what the procedure is under these circumstances, which might have taken place before we resolved to discuss the Report stage at all. But as we are on the question of the parameters within which we are working, I am only just taking on board the significance of what my noble friend said. It seems to me that there are parts of this Bill which may need to be recommitted and that we ought to be looking at the timetable for the whole Bill and not merely for today.
Lord Northbrook: My Lords, I rise to support my noble friend Lord Saatchi. Perhaps the Minister can tell us whether the merger of the London and Frankfurt Stock Exchanges contradicts the provisions of Clause 2, subsections (3)(e) and (3)(g), which state:
"In discharging its general functions the Authority must have regard to … the international character of financial services and markets and the desirability of maintaining the competitive position of the United Kingdom [and) … the desirability of facilitating competition between those who are subject to any form of regulation by the Authority".
Lord Boardman: My Lords, I share the concern expressed by my noble friend. The Stock Exchange is central to this Bill. The changes recently announced and the introduction of Frankfurt throw fresh light on large parts of the Bill. I wait to hear what the Minister says on that point.
Lord Kingsland: My Lords, it is my task to address Amendments Nos. 149A, 158C and 158D.
If Amendment No. 149A is accepted, legal assistance will not be restricted to market abuse proceedings, which are the subject of Section 123(4), but will extend to all disciplinary proceedings initiated by the authority under the Bill. As the Minister is well aware, legal assistance is expressly provided for under Article 6(3) of the European Convention of Human Rights; that is to say, it expressly applies to criminal offences. However, as the Minister is also aware, in three recent cases in the European Court of Human Rights, it has been held that the right to legal assistance is also inherent in the protection provided by Article 6(1). The leading case is, perhaps, Rowe v. Davis, where the court stressed that Article 6(3) merely sets out examples of a fair hearing; the obligation is already contained in Article 6(1). Indeed, that point was dealt with almost a decade earlier in the case of Edwards v. the United Kingdom.
In short, it is our contention that the protections provided by Article 6 apply to the determination of all civil rights and obligations, not merely to the rights in relation to criminal accusations. Therefore, all

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disciplinary proceedings under the Bill should, in appropriate circumstances, attract legal assistance to the aggrieved party.
As regards Amendments Nos. 158C and 158D, the Government have already accepted what has come to be known as "Saunders proofing" for proceedings under that part of the Bill which deals with market abuse. In that context it is worth mentioning that in the Saunders case, in which the United Kingdom government were the defendant, the European Court of Human Rights said that non-admissibility as regards evidence was required by the fair hearing provisions of Article 6.1 not just by the provisions of Article 6.3.
In brief, it is our contention that Saunders proofing ought to apply to disciplinary proceedings under the Bill and not just to proceedings concerning market abuse. I beg to move.
3.30 p.m.
Lord McIntosh of Haringey: My Lords, before I move to the amendments before us, perhaps I may thank the noble Lord, Lord Saatchi, for drawing the attention of the House to the proposed merger of the London Stock Exchange and the Deutsche Börse and other noble Lords who have supported him in his expression of concern. I can reassure the noble Lord, Lord Saatchi, without hesitation that the full details of the merger have yet to be worked out. The FSA will need to look carefully at the regulatory implications of what emerges.
However, I understand that the intention is that the merged company will be based in, and managed from, London and that the market for blue chip shares in London will continue to be a recognised investment exchange overseen by the Financial Services Authority. The London Stock Exchange and the Deutsche Börse have also said that it is not envisaged that there will be any change in the regulatory arrangements for national markets. The regulatory framework provided by the Bill is an appropriate one and therefore there is no need for any amendments to the Bill.
Lord Elton: My Lords, perhaps the noble Lord would be kind enough to expand on that. Where transactions of the new joint exchange take place in Germany and not in England, will they be subject to British or German regulation? How will inquiries etc. be managed in such cases?
Lord McIntosh of Haringey: My Lords, the noble Lord did not use the words "super euro regulator" but they have been used. I do not care for that form of words. If there were to be a super euro regulator, that would require legislation at Community level. I have no knowledge that that is proposed. As regards who will be the competent authority for listing following the merger, as has been recognised, we have already amended the Bill in the light of the proposed demutualisation. The competent authority is, and will continue to be, the FSA. Part IV of the Financial
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Services Act has already been amended by regulations made under Section 2(2) of the European Communities Act so that the authority is the UK competent authority for listing under that Act.
Lord Elton: My Lords, I am sorry to delay the House, but sometimes the most stupid Member is the most useful because he reveals difficulties which others may not have regarded as being difficult. If a German citizen has business conducted at the German end of this new body and believes that, perhaps with justice, he has been wrongfully dealt with, will his recourse be local or will it be to London? If it is to London, surely we need to take account of that in this legislation.
Lord McIntosh of Haringey: My Lords, as the noble Lord is perfectly well aware, we are in a transitional stage between host state and home state regulation. Therefore, any answer I give to the noble Lord would necessarily be a transitional answer, which might be changed at some future stage.
While there is host state regulation, it is the location of the authorised person which determines the regulatory authority. When a move to home state regulation is complete, it will be the location of the consumer which is the relevant consideration. I believe the noble Lord's concern is that there might be some stage at which there is no proper regulatory body. I can assure him that literally dozens of pages of the Act are devoted to the issue, which is not new and not dependent on the merger of the London Stock Exchange and the Deutsche Börse to ensure that there will be neither overlap nor a gap between the provisions of regulatory authorities in different countries.
As I have just been passed a note, perhaps I may see whether there is anything further that I can add to reassure the noble Lord, Lord Elton. I am advised that nothing has changed. People in Germany can trade on the London Stock Exchange now. Where people engage, for example, in abusive behaviour, it will be possible for the local regulator, and perhaps the overseas regulator, to take action. There are arrangements in place for co-operation. I believe that that confirms what I have already said off my own bat, so to speak, as regards the fact that there is no problem either of overlap or of a gap in jurisdiction.
Lord Saatchi: My Lords, will the Minister allow just a moment for me to sum up my understanding of what he has said and express some residual concerns which are left? I am grateful to the noble Lord for his reply and to other noble Lords who have spoken.
Perhaps I may reflect on the point made by my noble friend Lord Northbrook. Clause 2(3)(e) states,
"In discharging its general functions the Authority must have regard to"—
we have discussed these words many times in our debates—
"maintaining the competitive position of the United Kingdom".

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It strikes many observers that there must be a conflict of interest in the job of being the regulator and supervisor of an exchange which includes another country. That is a problem which puzzles people.
Let us consider the EC directive on the mutual recognition of stock exchanges. That assumes that each country has its own designated stock exchange. Until last week that was true: each country had its own listing authority and stock exchange. After this merger we shall have two listing authorities, but only one stock exchange.
One of the points that arises is that as from 1st May one has to apply to the FSA to have one's shares admitted to the official list and then to the London Stock Exchange for the right to deal in those shares. But, following the merger, the admission to deal will be for dealing on the merged entity. Will the FSA have a supervisory reach over those newly listed shares on the new exchange? Is it not true that German and British shares are now subject to different listing requirements?
Therefore, is it not true that this Bill cannot be the last word on the regulation of the Stock Exchange? There will have to be consistency in listing requirements. Therefore one is bound to ask what proposals the Minister will bring forward in due course for a statutory framework for regulation of the new exchange without which the FSA will appear to be operating in an uncontrolled environment?
Lord McIntosh of Haringey: My Lords, since we are at Report stage and if we are to continue with this debate, it might be better if a separate opportunity were found for a proper debate on this matter. I am grateful to the noble Lord for seeking to raise the matter because perhaps that avoided a Statement, a Private Notice Question or some other more time-consuming business.
Clearly, my responses to the noble Lord must be confined to those matters which may be thought to be affected by this Bill. That is what I have done. I hope that I have given the noble Lord an absolute assurance that the problems he anticipates simply will not occur. In my first answer I said that the merged company will be based in, and managed from, London and that the market for blue chip shares in London will continue to be a recognised investment exchange overseen by the FSA.
I believe that that answers the noble Lord's quite specific point. As regards the more fanciful suggestions that the FSA might have to be merged with some other body, they are just that—fanciful suggestions. There are other regulatory bodies in other European countries and in particular in Germany. When and if the regulatory bodies in the other countries reach the standard which we believe we are pioneering in this country with this legislation, and when they are willing, ready and able to take on comparable responsibilities, then what is open to us is not a super regulator, in case anyone is afraid of that, but home state regulation, which is a more simple and rational basis for regulation than that which we have
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at the moment. The kind of border difficulties that seem to be anticipated by some noble Lords will no longer be in prospect. I give way.
Lord Hunt of Wirral: My Lords, I thank the Minister. I appreciate the flexibility that the noble Lord is showing when dealing with certain very fundamental questions about this Bill. However, perhaps we should bear in mind the fact that the FSA issued a press release in which it said it was working closely,
"with our German supervisory colleagues … with whom we already co-operate closely, to arrive at a sensible regulatory outcome for IX".
I suppose that what both noble Lords and I are asking is that we should be kept informed as to what this "sensible regulatory outcome" will be. Perhaps the Minister will undertake to keep us in touch with such developments so that we can then consider, if possible before Third Reading, whether further amendments are needed to bring it into effect.
Lord McIntosh of Haringey: My Lords, I believe that my responsibilities begin and end with the assurance that I have given to the House that no amendments to this Bill are required as a result of the events that have taken place, or are in the course of so doing. Of course the FSA is in discussion with the German regulator; indeed, that is entirely right. No doubt the FSA will consider it its duty to make public the results of those negotiations as and when it thinks fit. That is not a responsibility of the Government and it is not my responsibility as the Minister responsible for steering the Bill through this House.
A confusion has arisen with which I believe I should now try to deal. The obligation in Clause 2 of the Bill to maintain the competitiveness of the United Kingdom is an obligation on the FSA; it is not an obligation on every single listed exchange or clearinghouse. Even before this merger was proposed, the London Stock Exchange was on line to be demutualised—in other words, to become a private company. It is not the role of government or of legislation to state what its object should be. As long as we stick to the rule that it is the FSA which has among its principles the maintenance of the competitiveness of the British economy, we shall not: fall into the trap of thinking that that must, therefore, be the obligation of all authorised persons.
There is a danger of confusing listing, which is dealt with in Part VI of the Bill, and the regulation of trading markets that is dealt with in Part XVIII. There is only one listing authority under Part VI—namely, the FSA—and its remit under those provisions is in relation to issuers. Part XVIII of the Bill provides sufficient flexibility to enable the FSA to regulate the proposed new markets.
With the leave of the House, I think it might be proper for me to move on now to deal with the amendments before us. Clause 131 gives the Lord Chancellor the power to establish a subsidised legal

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assistance scheme by regulations. This is a freestanding scheme for legal assistance and not an extension to legal aid.
Assistance is to be provided to individuals who have referred to the tribunal a decision of the FSA to impose a penalty for market abuse. It also covers cases where the FSA proposes to make a public statement that an individual has abused the market. The limitation to market abuse proceedings reflects the fact that this scheme is to be established, as a precaution, for this category of cases where we think it is appropriate to apply the full criminal protections under the European Convention on Human Rights.
The effect of Amendment No. 149A would be to widen the coverage of the scheme to cover all decisions referred to the tribunal. This is not necessary as a matter of law, and I do not think that it would be sensible to do this as a matter of public policy. Legal assistance is not generally available in tribunal proceedings, which are intended to be speedier and less formal than court proceedings.
As I said, the additional protections that have been put in the Bill in relation to market abuse were included as a precautionary measure because of concern expressed about the possibility that the market regime might be judged to be "criminal" for ECHR purposes. The noble Lord, Lord Kingsland, repeated the claim that he has made on a number of occasions—and, indeed, in the context of a number of Bills—that this has to be a criminal offence and that the ECHR has said so. I have to point out that lawyers disagree on this matter. I am aware of what the noble Lord, Lord Kingsland, says, just as I am aware of what the noble Lord, Lord Lester, and the noble and learned Lord, Lord Millett, say. However, our evidence to the Burns Committee from Sir Sydney Kentridge and Mr James Eadie made it clear that we take the view that this is primarily a civil regime.
Perhaps I may make an analogy with the professions. For example, doctors practising medicine are subject to regulation by the General Medical Council. The European Court has had occasion to consider whether the disciplinary regime that applies to doctors, lawyers and architects should be dealt with as a civil or a criminal matter for ECHR purposes. In each case, it decided that the regime was civil. That is the analogy; it is not with the legal assistance scheme we are proposing, which is confined to market abuse, but with the legal assistance scheme that would be extended in the way suggested by these amendments.
We do not see any need to extend this protection for the exercise of the various disciplinary and other supervisory powers of the FSA, such as the power to vary a Part IV permission to restrict the carrying on of a particular kind of regulated business. These decisions are concerned with the setting and policing of standards for the regulated community and, in that
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respect, are analogous, as I said, to the regulation of professions. There is no need to extend the scheme further. As authorised persons are to pay for legal assistance under the scheme, I suggest that they are entitled to be sure that we should keep the scheme within proper bounds.
Amendment No. 158D seeks to extend protections concerning the use of compelled evidence in proceedings to those involving disciplinary measures under Part XIV, in the same way as for penalties and statements for market abuse. Again, we have included this protection as matter of precaution for market abuse cases. The amendment is unnecessary as a matter of law, as Sir Sydney Kentridge said in our evidence to the Joint Committee. Similarly, it is undesirable as matter of policy because it would place an unhelpful restraint on the FSA's ability to deal with misconduct by regulated persons.
Criminal offences, or market abuse, may be committed by a wide range of people, but disciplinary penalties under Clause 202 apply only to authorised persons. Authorisation is not just a privilege that allows a person to do financial services business; it also involves obligations. One of the most important of those obligations is to be frank with the FSA about how the authorised person's business has been conducted, including in cases where there has been misconduct.
It is important that the regulatory system should be as effective as possible in order to protect consumers, maintain market confidence and reduce financial crime. In appropriate circumstances the use of compelled evidence can be valuable for the regulatory. The existing financial services regulators use compelled evidence at present. I can see no reason to put unnecessary obstacles in the way of effective regulation. I have to resist these amendments. I hope that the noble Lord will not press them.
3.45 p.m.
Lord Kingsland: My Lords, the Minister referred to "unnecessary obstacles" being put in the way of effective regulation. However, at an earlier stage of his intervention, he said that it was highly desirable for there to be disciplinary procedures under the Bill. The Minister indicates that perhaps my noble friend Lord Saatchi should now be responding. I understood from my noble friend's opening words that he was not introducing the amendments and that that would be my task.
From my noble friend's discussions with the Minister earlier today and before proceedings commenced, he understood that he could make his opening statement about the merged stock exchange

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but that I would move the amendments in this group. That is why at the end of my intervention I said, "I beg to move".
Noble Lords: Oh!
Lord Kingsland: My Lords, I am much obliged to the Minister. I now have to recall what I .just said in order to press home the devastating point that I was about to make!
Lord McIntosh of Haringey: My Lords, I do not make the rules in this House; the rules are made by the House itself.
Lord Kingsland: My Lords, that is precisely my point. That is why I rise to speak, as I rose to speak previously. The House is clearly agreed that the procedure that I decided to follow is the appropriate procedure for your Lordships' House.
I think I was saying to the Minister that he was stressing the value, informality and speed of these proceedings. Nevertheless, the result of these informal, speedy proceedings may mean the unfair ruin of an authorised person. Therefore, the fact that these proceedings are informal does not mean that the protections under the convention, such as they are, ought not to apply.
The noble Lord said that the criminal provisions of Article 6 do not apply to disciplinary proceedings. I readily accept that that may be true, although it may not he true. That remains a matter of debate between those lawyers who are experts in this field.
However, it is not true to say that just because a matter is not a criminal matter for the purposes of Article 6, it should not nevertheless attract, in appropriate circumstances, legal assistance. My point is that, irrespective of whether disciplinary proceedings are criminal, a party who faces a trenchant punishment for being held to be in breach of the rules should, in appropriate circumstances, be the beneficiary of legal assistance.
I believe it to be further reinforced by the fact that the money that would be paid for such legal assistance comes from the authorised bodies themselves. The money does not come from the state. It comes from the pool of money that is provided by the City to the FSA. I contend, therefore, a fortiori that an authorised person, who is unable to provide for his own defence in a disciplinary proceeding, ought to have the support of the money that he himself, and the body that he worked for, paid to the FSA to provide the legal assistance which he requests.
I know that this matter will remain an issue between us throughout the afternoon and evening as regards other parts of the Bill. For that reason, at this stage I prefer to withdraw the amendment rather than press it. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 133 [Funding of the legal assistance scheme]:
Lord Kingslandmoved Amendment No. 149 B:
Page 64, line 20, leave out paragraphs (b) and (c).
The noble Lord said: My Lords, I can deal with this matter extremely quickly. The issue here is simple. If an authorised body has paid money into the legal assistance scheme, it is our contention that it should be entitled to get it back in circumstances where there is a surplus, irrespective of whether that authorised body has any other debts which it owes; in other words, there should be no set-off against a surplus of legal assistance funds. I beg to move.
Lord McIntosh of Haringey: My Lords, the effect of opposition Amendment No. 149B would be, unfortunately, to reduce the flexibility of how funding for legal assistance is collected and distributed. As the noble Lord, Lord Kingsland, said in speaking to the previous amendment, the legal assistance scheme will be paid for by levies raised by the FSA from authorised persons. The Lord Chancellor will determine the costs of the scheme and set the total which the FSA is required to raise in levies from authorised persons for a particular period. The FSA will decide on the best way to apportion this cost.
One cannot forecast precisely the amount required for legal assistance in any forthcoming period. Subsection (1) of Clause 133 provides for levies to cover anticipated or actual costs. This enables the levy to be set on as accurate a basis as possible for the forthcoming period. If the forecast of anticipated costs is an overestimate, subsection (7) enables the FSA to distribute the money back to the authorised community. Paragraph (a) allows it actively to repay the money directly to those who paid the levy, while paragraph (b), which the amendment seeks to delete, allows it instead to reduce amounts which those persons are required to pay. Paragraph (c) allows for a combination of those methods. If we retain paragraph (a), but not paragraphs (b) or (c), the FSA would have to distribute small amounts which it can much more sensibly and economically offset against the following year's fees or levy for invoicing purposes. Removing options (b) and (c) could lead to excessive costs being incurred sending out cheques for derisory amounts.
Of course, the FSA will need to exercise its discretion. I am afraid that the amendment would simply make it more difficult for the FSA to exercise a perfectly reasonable, justifiable and economical discretion.
Lord Kingsland: My Lords, I am disappointed at the Minister's reply. In my submission, the legal assistance provision should be kept quite distinct from the general administrative budget. However, at this juncture, I do not think that it would be appropriate for me to ask the opinion of the House. Therefore. I beg leave to withdraw the amendment.
The Chairman of Committees (Lord Boston of Faversham): My Lords, I believe that the House is not quite clear as to the intention of the noble Lord, Lord

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Kingsland. He said both that he wished to withdraw the amendment and that he wished to test the opinion of the House.
Lord Kingsland: My Lords, I beg the pardon of the House. I think that I said that I did not wish to test the opinion of the House and, therefore, wished to withdraw the amendment. I am sorry if I am even more inarticulate than usual this afternoon.
The Chairman of Committees: My Lords, I am sorry that I misheard the noble Lord, Lord Kingsland. I thank him for his comments.
Amendment, by leave, withdrawn.
Clause 135 [General rule-making power]:
Lord Hunt of Wirralmoved Amendment No. 150:
Page 66, line 5, after ("from,") insert ("dependent on,").
The noble Lord said: My Lords, first I thank the Minister for having generously taken the time to meet the Association of British Insurers and the British Bankers' Association, together with myself, to discuss the definition of "consumer". To quote my noble friend Lord Kingsland, I was being offered the "Lord Hunt of Wirral facility". I have never been able to probe exactly what this means, but if it means the generosity of the Minister I thank him publicly for that. I, Mr Leighton and Mr Mason felt that we had an opportunity to air concerns about the definition of "consumer".
The definition is, of course, used throughout the Bill and is more generic than the normal use of "consumer" in that it extends to any user of an authorised person's services. In that context, the Minister will be aware that I have expressed some concern that it therefore extends to those who do not directly use the services of an authorised person but are nevertheless affected by the use of those services by another, for example, the clients of a fund manager or the beneficiaries of life insurance.
Although the wording currently found in Clause 135(7)(b)(ii) undoubtedly covers the situation of a trust beneficiary, I believe that it widens the scope of the definition too far by moving away from some kind of causation (derived from or otherwise attributable to) to a general adverse effect. I believe that I gave the Minister examples of third parties with no direct rights under liability insurance policies; small shareholders or employees, who may feel that their rights are adversely affected by the take-over activities of a pension fund user or fund manager; or, once mortgage lending has become a regulated activity, neighbours affected by a new purchaser with a mortgage. I also gave the Minister an example of someone who may be affected in some way by an environmental incident. Their rights obviously would exist if there was valid insurance; they would not exist if there was not.
If I might explain to the House, the Minister has tried to allay my fears by saying, "You have to read any definition within the Long Title of the Bill". I agree that the provisions in any Bill have to be read in the
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context of its long title, but I do not believe that one should have to rely on that in working out a particular definition. I am concerned about the potential coverage of persons who have rights or interests which may be "adversely affected". That is why the second amendment standing in my name seeks to delete those particular words.
The Minister kindly said that he would carefully consider the amendment. I hope that he will be able to give me a positive response. I beg to move.
4 p.m.
Lord Kingsland: My Lords, I rise to speak to Amendment No. 151ZA, which is in this group.
I am rather surprised that the Government have not moved a little more on this point as a result of the useful debate we had in Committee. Clause 135 is the provision in the Bill which sets out the authority's general rule making power. Rules made under Clause 135 apply to authorised persons. The governing principle for making these rules is that they must be,
"necessary or expedient"—
in the view of the authority—
"for the purpose of protecting the interests of consumers".
The definition of "consumers" is to be found in Clause 135(7) and it is used elsewhere in the Bill. It is therefore of some importance. The amendment proposed is intended only to clarify the position.
Subsections (8) and (9) of Clause 135 appear to be supplementary to subsection (7). Indeed, subsection (9) begins with the words,
"For the purposes of subsection (7)".
There are no similar qualifying words in subsection (8).
The amendment seeks to correct what appears to be, quite simply, an omission. If this is not done, it would be possible to argue that subsection (8) is intended to have a more general application. One possible consequence is that all the beneficiaries of a trust—including potential beneficiaries under a discretionary trust—where the trustee is an authorised person, may be considered to be customers of that authorised person because, under subsection (8), they are to be treated as using the services of the authorised person. We assume that this is not the intention and that subsection (8) should apply only for the purposes of the "consumer" definition in subsection (7). We should simply like to have the issue clarified, hence our amendment.
Lord McIntosh of Haringey: My Lords, I am grateful to the noble Lord, Lord Hunt, for taking the trouble to table the amendments and for taking the time to come to see me, with his colleagues from the ABI and the BBA, to discuss his concerns.
As he said, he is concerned that the definition of "consumers" in Clause 135 is too broad because it extends to people who have rights or interests which may be adversely affected by the use of services by other people. In particular, he is concerned that this will mean that the FSA is trying to make wide and

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detailed rules to protect consumers who stand at some considerable distance from the use of financial services. I have considered this point carefully in the light of the points raised in Committee and in my discussions with him. I hope that I can offer him some reassurance.
As he recognised, one cannot analyse Clause 135 in isolation. It is not only a matter of the Long Title but of looking at the interests and protection of consumers with in the overall context of the Bill. In particular, first, the scope of the definition of "consumer" has to be seen in the context of the Bill's Long Title. The FSA's functions relate to the provision of regulated financial services and not to the general behaviour of customers where that is unconnected to the provision of such services.
Secondly, the FSA must exercise its functions in the light of the regulatory principles set out in Clause 2. These include the need to use its resources in the most economic and efficient way, and the desirability of facilitating competition. Both of these principles apply important balances to the scope of FSA regulation, but the key principle, also set out in Clause 2, is that regulation must be proportionate to the benefits.
Thirdly, Clause 5 makes it clear that the FSA should seek to secure the appropriate degree of protection. So it has to exercise its powers and seek to meet its objectives in a balanced, proportionate and appropriate way.
The reference to people who have rights or interests which may be "adversely affected" by the use of services by other people makes sure that rules can be made to protect those people for whom someone else—let us call him the middleman—uses financial services provided by an authorised person. Subsection (7)(b)(i) will cover persons whose rights or interests are derived from or are otherwise attributable to the middleman. An example might be a spouse or other person who is intended to benefit from a life insurance policy.
But where the middleman is acting in a fiduciary or representative capacity, these rights or interests may be derived from something other than the use of the service itself. For example, trust beneficiaries may have rights or interests deriving from the trust itself, or from decisions made by the trustee in exercising his discretion under the trust. If we are going to protect these people, we have to have the reference to people being "adversely affected" by the use of services in subsection (7)(b)(ii).
The amendments of the noble Lord, Lord Hunt, seek to replace the reference to "adversely affected" with a reference to people whose rights or interests are "dependent" on the use of services by other persons. It is a refinement on the amendment moved in Committee. I am grateful for the care that the noble Lord has given to the matter, but the concept of a right or interest being "dependent" on the use of services would not apply in all the circumstances in which a person can act on another's behalf and where we believe that it is appropriate that the FSA should be able to make rules with a view to protecting that other person's interest.
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I am sure that the noble Lord, Lord Hunt, will appreciate that it is a difficult, technical matter to try to capture the people that we are seeking to protect But it is important that they should be protected. They include, for example, members of pensions schemes. They should not be left outside the definition of "consumer".
We feel that the concerns that have been raised about the effect of the definition of "consumer" on the scope of the FSA's regulatory activities are exaggerated. I have mentioned the safeguards that are, built into the Bill—the principles under Clause 2; the consumer-protection objective as defined by Clause 5: and the Long Title of the Bill.
But we have considered—I am willing to consider it further before Third Reading—whether it is possible to formulate a definition of "consumer" that offers a more explicit reassurance about the scope of the rule-making power without creating holes in the FSA's ability to protect consumers. As I mentioned, these amendments may exclude particular groups of persons who should be treated as consumers. I hope that the noble Lord will not press them.
I turn now to Amendment No. 151ZA, which deals with the provisions about trustees in Clause 135(8). The trustees with whom subsection (8) is concerned are those who themselves perform a regulated activity in their capacity as trustees. This is distinct from the example of a trustee using the services of a third party, which I gave earlier. The purpose of subsection (8) is to make clear that the beneficiaries of the trust in these circumstances fall within the definition of "consumers".
The core definition of "consumers" is indeed in subsection (7). It refers to people,
"who use, have used, or are or may be contemplating using … services".
Strictly speaking, a trust beneficiary may not necessarily "use" the services provided by a trustee acting in his capacity as a trustee, and so he could fall outside the scope of the definition in subsection (7). So subsection (8) makes it clear that those trust beneficiaries are to be treated as "using services". In achieving this, it ties itself directly to the wording in subsection (7), saying that trust beneficiaries are to be treated as people,
"who use, have used, or are or may be contemplating using … the services".
The two provisions are entirely interlinked. There can be no doubt that subsection (8) amplifies subsection (7), and that it does nothing more. I hope that the noble Lord will not press that amendment.
Lord Hunt of Wirral: My Lords, I thank the Minister for the generous way in which he has approached this subject and for his willingness to listen and to continue the search for clarity. We are all seeking to make the Bill more certain, particularly so far as concerns definitions. The way in which the Minister laid out how he believes the definition of "consumer" has been circumscribed by the context in which it is to be found was helpful. In those

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circumstances, I should like to reflect on what he said and join him in seeing whether there is a better way to achieve our combined objective. I therefore beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 151 and 151ZA not moved.]
Lord McIntosh of Haringey: My Lords, I beg to move that further consideration on Report be now adjourned.
Moved accordingly, and, on Question, Motion agreed to.

Rover
4.10 p.m.
Lord McIntosh of Haringey: My Lords, with the leave of the House, and on behalf of my noble friend Lord Sainsbury of Turville, who is at this moment giving evidence before the Trade and Industry Select Committee in another place and therefore sends his apologies for his unavoidable absence, I should like to repeat a Statement which has been made by my right honourable friend the Secretary of State for Trade and Industry. The Statement is as follows:
"I should like to make a Statement concerning the latest developments at Rover. Earlier today BMW announced that they have agreed to sell Rover cars to the Phoenix consortium. Negotiations have been concluded and contracts signed.
"This is clearly welcome news—for the workers at Longbridge and the wider community in the West Midlands. I am sure it is news that all Members will welcome, especially my honourable friend for Birmingham Northfield, who is at Longbridge this afternoon and has worked hard to support the workforce during this difficult period. It will preserve volume car manufacture at Longbridge and will safeguard the majority of jobs there, and minimise the knock-on effects in the supply chain.
"I should like to add my personal congratulations to John Towers on the way in which he pulled the consortium together and brought what I know must have been difficult negotiations to a successful conclusion. He has been determined and dogged in the face of hostility and criticism. His personal strengths will be invaluable to the Phoenix consortium.
"Since BMW announced its decision to sell Rover, the Government's main concern has been with the workers at Longbridge, Rover suppliers, their families and communities. They have faced a considerable period of uncertainty over the past six weeks. It has been something of a rollercoaster for them—swinging between dismay and hope, as their future was decided in various negotiations with BMW. Today's news finally provides some welcome certainty for the Longbridge site.
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"However, there will still be some redundancies. Our priority is to do everything we can to help those affected, to provide training and to attract new jobs to the area. That is the role of government: to manage change; to equip people for change; not to leave them to be the innocent victims of change.
"We have always been clear that the role of government is not to run the commercial negotiations between the interested parties. The Phoenix consortium has not sought government finance for its proposals. John Towers has always maintained that the Phoenix bid is viable on its own and would get funding from commercial sources. The Government have not played the old role of throwing money at a problem in the hope that it will go away. Nor have we adopted the laissez faire attitude of the previous government—just standing to one side and doing nothing.
"Instead, we have taken an active role to facilitate the commercial negotiations over the future of Rover and to provide support for those workers and companies adversely affected by commercial decisions. Our role has been to bring people together to look at how to move forward. It was the Government who brought John Towers and BMW together for their first face-to-face meeting on 10th April. And we have remained in contact with both parties throughout. We must now turn our attention to those who will be adversely affected by today's announcement.
"I am pleased that most of the workforce will be offered a future at Rover. But today our thoughts must be with those who will lose their jobs. The Government will be doing all they can to help with this situation. I can announce that the task force will remain in place, and I expect its continuing work will take account of all developments, including the consequences of Phoenix's plans for suppliers. It will produce its final report to me in June. My right honourable friend the Secretary of State for Education and Employment and I have already put in place measures to assist any workers made redundant, to help affected supplier companies, and to help attract new investment and employment.
"I am also able to confirm that the £129 million promised to the task force will remain available for good quality projects in the region which provide long-term economic regeneration and job creation.
"We must not underestimate the remaining difficulties ahead. The new owners of Rover will have to sell cars in a highly competitive market. The car industry is a fast moving global market going through major structural change. These are difficult times for vehicle manufacturers throughout the world. But there have been a number of recent announcements which show the strength of vehicle manufacture in the United Kingdom.
"Only last week, Vauxhall announced £189 million of new investment, which will create 500 new jobs at its Luton factory. Honda has announced 130 million of investment in Swindon to allow the production of a new model. Peugeot doubled its

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production in the UK in the past year. Jaguar achieved record sales and record production in 1999. And last month's sales figures showed that British built cars increased their sales, against the general trend.
"There will be many lessons to be learnt from Longbridge upon which we will need to reflect. However, it is clear that there can be no return to outdated interventionism. The corporate state has been tried and it simply did not work. But nor did a naive reliance on laissez-faire, which led to a crippling obsession with what Government should not do. The role for Government is to create an environment which encourages enterprise and creates wealth and jobs.
"But today belongs to John Towers, the Phoenix consortium, the workers at Longbridge and the people of the West Midlands. Through adversity they have demonstrated great strengths and we look forward to working with them to meet the challenges that lie ahead".
My Lords, that concludes the Statement.
4.16 p.m.
Lord Mackay of Ardbrecknish: My Lords, perhaps I should first say how pleased I am that the noble Lord, Lord McIntosh of Haringey, has made the Statement. Given the fact that he does so much work, it seems only fair that he is allowed to give the good news as well as sometimes deal with some of the more difficult issues.
I am sure that everyone shares the Government's relief at this outcome. But, equally, I am sure that it is nothing to the relief which is being felt in the West Midlands. The whole House will wish John Towers and his consortium well in what will not be an easy task. I noticed that the Minister did not make light of the difficulties that will be facing the consortium. As the Secretary of State has received an accolade from no less a person than the Prime Minister for brokering this deal, will he be keeping a close eye on the progress of the deal and trying to solve some of the difficulties that will come through as the months pass?
That is particularly important when it comes to the number of people who will be made redundant. Various numbers have been speculated about—1,000 or 1,500. Can the Government help in that regard and give an indication of how many may be made redundant, not just in the car company itself but how that might produce a knock-on effect in some of the component companies?
Even though the task force may not have the uphill struggle it sometimes looked as if it might have to face, it will still have a difficult task in order to find jobs for those who are made redundant. I very much welcome the fact that the £120 million which has been pledged to the task force is to remain available. Has that been cleared by the European Commission?
On the subject of the European Commission, Ministers will recall that the Government had promised £150 million to BMW, although clearance had not been received from the Commission by the time BMW decided that enough was enough. I heard
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the Minister say that John Towers and his consortium had not asked for that £150 million. But perhaps I may ask whether it would still be available to them if they did ask for it.
BMW had planned to spend £1 billion on retooling the plant in order to produce a new generation of models. Is the Minister satisfied that the consortium can get access to that amount of money? It is hugely more than the £200 million mentioned in the Statement and already coming from an American bank. If it cannot get access to that kind of money, will it be looking for some kind of joint venture to provide the investment which Longbridge undoubtedly needs? I read on what we must now call the "Web" rather than the tapes that a production worker in Birmingham, Mr Roger Voice, is quoted as saying,
"It's magic news"—
none of us would disagree with that—
"but I would have to say what is the long-term plan?".
Will the Minister give some indication of the longterm plan?
BMW also owns a body plant at Swindon, which I gather employs some 3,500 men. I wonder what the position of that plant is. Phoenix has said that it has "an option on the plant". What exactly does that mean? Are there plans for its continuation?
I turn to the £500 million which the consortium will receive from BMW. What exactly is that money for? Some of it, but it is to be hoped not the whole amount., will clearly be used to fund redundancy. Do I detect that what is not required for redundancy payments may well be needed for pension fund provision, to make sure that the pension fund as it is handed over to Phoenix is in a proper state of health? I should be grateful if the Minister would clarify the position. Although it is important to have money available to fund redundancy, it is important also for the workers to know that their pension funds are secure.
While Rover sales have recently been very encouraging, do the Government accept that the rate of the euro against the pound does not help British car companies to export into Europe? Perhaps the Minister can help John Towers by having a brief word with the Chancellor of the Exchequer about this difficult problem.
Finally, perhaps I may repeat my welcome for this news and give my best wishes and those of this side of the House, and I am sure the whole House, to John Towers and his Phoenix consortium for the success of what I believe is a brave venture.
4.21 p.m.
Lord Razzall: My Lords, I should like to join in the congratulations given by the noble Lord, Lord Mackay, and I am sure Members on all sides of the House, not only to the Government on bringing forward the Statement but also to the Towers consortium. Clearly, they have pulled off a remarkable effort, contrary to every expectation in the financial world and the financial press and to the questions about whether it was capable of being done.

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Many of us have not yet seen the detail, if we ever shall, of the "boiler plate" of the transaction, but there are obviously third party organisations which are to be congratulated on their participation in the consortium. Presumably, the much vilified BMW deserves just a slight paean of praise for its participation in the financial transaction that has resulted in the Statement; as do the American banks or financial institutions which have been induced, as we are led to believe from reports in the press, to put up the £200 million of overdraft finance that the UK clearers were not prepared to put up.
I share the feelings of other noble Lords about the Statement. Its tone is absolutely right so far as the Government are concerned. This is not a self-congratulatory Statement or one in which they blow their own trumpet. All noble Lords will be grateful for that. The Government will recognise, notwithstanding the criticism that the Secretary of State has had piled upon him in the past month or two, that it would indeed be tempting for him to make the proverbial gesture with two fingers towards his critics at this moment. I am glad that he has not chosen this opportunity to do so. I listened to him making the Statement in another place. A Labour Member behind him said that there should be drinks and dancing in the streets. The Secretary of State is wise enough to realise that this is not necessarily a moment for dancing in the streets. Perhaps a modest sherry might be appropriate rather than a vintage cru. He will be the first to recognise, as will the House, that there are significant difficulties ahead for this operation. As we all know, and as many Members on the other side of the Chamber demonstrated the last time we debated the matter, there is significant surplus capacity for mass market vehicles in Europe at present. That problem has not been waved away by this transaction.
There are suggestions that, particularly at Longbridge, productivity is not what it might be. That is certainly the case in comparison with a large number of competitive mass-market plants in Europe. Dare I say that the Rover mark is not necessarily the hottest mark if you want to buy a modern mass-market car? As the noble Lord, Lord Mackay, has indicated, a massive investment programme is still necessary as regards Longbridge and to turn Rover cars into the mass-market vehicles which the consortium clearly wants them to be. There must be a question mark over where that funding will come from.
That said, I do not want to carp. This is clearly a very good day for Britain and for the motor car industry. Noble Lords would not expect me to sit down without saying—I anticipate the groans that will come from my left, or should I say my Right?—that not only is this an opportunity for the Government to think longer term about the problems of the West Midlands; it is the moment for them to take time to reflect on the damage that the exchange rate is doing to manufacturing industry and the damage that Britain's failure to join the euro is doing to manufacturing industry and to come up with a policy to get us in there as soon as possible.
4.25 p.m.
Lord McIntosh of Haringey: My Lords, I am grateful to both noble Lords for the way in which they have responded to the Statement and for the unequivocal support they have given to the result of very difficult negotiations over the past month. I am particularly grateful to the noble Lord, Lord Razzall, for his remarks about the tone of the Statement. Certainly, although we rule out the policy options both of interventionism and of laissez-faire, nevertheless, it would be easy to be triumphalist about this. Although my right honourable friend the Secretary of State deserves a great deal of credit for having brought the two parties together for the first time on 10th April, he has shown great restraint in the way he has phrased his Statement.
To respond to the noble Lord, Lord Mackay, the Secretary of State will certainly be keeping a close eye on progress in so far as it is proper for him to do so; in other words, in so far as he is not interfering with the commercial relationships of the two companies.
The noble Lord asked me whether I had any further information about the numbers of likely redundancies and likely knock-on redundancies in the West Midlands other than at Longbridge. I am afraid that I do not have any further figures. I heard the figures quoted by the noble Lord, but no doubt these issues will become clearer in the next few days.
The noble Lord, Lord Mackay, asked also whether the task force money, which will continue, has been cleared with the European Commission. Perhaps I should make it clear that the £158 million that was originally proposed in assistance included the £129 million of task force money for the West Midlands. That money was never intended to go to Rover, whether under Phoenix or any other arrangement. It is money that is largely regional assistance to the West Midlands for retraining, skills training and so on, and is therefore not subject to any European Commission regulation.
The noble Lord asked also whether there are likely to be any further joint ventures. I am afraid that it is too early for me to give any response to that question. The noble Lord is right in saying, as did the noble Lord, Lord Razzall, that there will have to be longer-term plans for the future of the Longbridge site and they must include not only the production and sale of existing models but the development of new models. In the motor car industry, firms cannot simply stand still.
The noble Lord asked what the future of the Swindon plant will be. Swindon will stay with BMW, which will no doubt make announcements about the Swindon plant in due course. I am not aware of any threat to employment at the Swindon plant.
The noble Lord asked me, quite properly, where the £500 million sweetener—I do not believe that he used that term—from BMW to Phoenix would go. My answer is that as little as possible should go in redundancy and pension payments because there should be as few redundancies as possible. As much as possible of that sum should be devoted to continuing

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the production, marketing and sales of vehicles produced at Longbridge. I am sure that that is the intention of the Phoenix consortium.
The noble Lord, Lord Razzall, made some welcome and helpful remarks about the role of the banks. Critical comments have been made in the past few days about the unwillingness of banks to support ventures of this kind. I do not have any further details about the banks which have contributed. However, they have made a valuable contribution, and the Government are grateful to everybody who has taken part in this matter. The noble Lord, Lord Razzall, is right to say that there is surplus capacity in the car market in Europe as a whole and large parts of the world. The fact that in this country in the past month Rover sales have gone up while those of BMW have reduced substantially is very welcome. That may simply be an emotional reaction, and perhaps Rover-Phoenix should not bank on that market share continuing in future months. I believe that it would be the first to say that Rover must deserve the continued increase in market share.
In expressing my gratitude to noble Lords for their appreciation of the significance of this Statement, clearly this matter is of importance not only to the Longbridge plant and the West Midlands but the country as a whole. If the noble Lord, Lord Razzall, wants to extend it to cover the exchange rate I suggest that he reads the Chancellor of the Exchequer's Meade Lecture at the London School of Economics last night.
Lord Clinton-Davis: My Lords, does the Minister agree, first, that the noble Lord, Lord Mackay of Ardbrecknish, is far more amenable to reason than his counterpart in the other place who expressed indifference to the idea that Rover should be saved in this way, albeit temporarily? Secondly, does my noble friend agree that Rover-Phoenix requires considerable support from either a British or foreign car manufacturer and cannot do it on its own? Therefore, that is a substantial reason for intensifying the search for a partner in the enterprise that Rover-Phoenix is undertaking at the present time. Can the Minister give an assurance that Rover-Phoenix is presently engaged in that search?
Lord McIntosh of Haringey: My Lords, I am not aware of what the Opposition spokesman said in another place in response to the Statement. At the time I was rather stuck to my desk here. I read a report of her response to this matter on BBC News 24 at 9.30 this morning. On the whole, the response was reasonably welcoming. She said that a good number of people would be relieved and that applications for funding would receive support. She confirmed, as we all agree, that there must be a viable business plan for the future.
In that respect I very much agree with the observations of my noble friend about the future. Perhaps this refers back to one point raised by the noble Lord, Lord Mackay. Mr Towers has said that the long-term future of Rover depends on
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collaboration and he will pursue that route in his long-term planning. I believe that that confirms the remarks of both my noble friend and the noble Lord, Lord Mackay, and the Government welcome it.
The Lord Bishop of Oxford: My Lords, obviously this is very good news. The agreement is a brave one. The new Rover 75 is a superb car and deserves to sell well not only in this country but abroad. I have one concern about Cowley. Longbridge has been mentioned a number of times. However, I am led to believe that production of the new Rover 75 as well as the old Mini will switch from Cowley to Longbridge. Cowley has been crucial to the economy of Oxford for many decades. Is the Minister able to share any information about the position of Cowley under 'the new Phoenix consortium?
Lord McIntosh of Haringey: My Lords, I hope that I am able to reassure the right reverend Prelate. It is true that Rover 75 production will move from Cowley to Longbridge. On the other hand, BMW has said that it will develop the new Mini at the Cowley site which it continues to own. I understand that that will continue to occupy the Cowley site and there will be no redundancies there.
Lord Naseby: My Lords, as I understood the position this morning, the £200 million from the American bank was subject to due diligence. First, is the Minister able to clarify whether or not that major restriction has been waived? Secondly, I understand that the £158 million and £129 million for the task force have nothing to do with Europe. Is the Minister able to confirm that none of the money that is to go to the new consortium requires approval by Europe?
Lord McIntosh of Haringey: My Lords, in response to the first question, I am not aware of any clue diligence requirement by any bank. I do not believe that such details have been made public. As far as I am aware, they have not been made available to the Government. The noble Lord may be better informed than I am on that matter. As to the £158 million and £129 million, I confirm that little, if any, of the £129 million which is to go to the task force for regeneration in the West Midlands is in any way affected by the European Commission or requires approval by it. As to any money that may go to Rover, Mr Towers and the Phoenix consortium have not asked for any state aid for Rover and none has been offered.
Baroness Crawley: My Lords, as someone who represented Longbridge as a Member of the European Parliament for 15 years until June 1999, I should like to add my congratulations to the Government, to Phoenix, the trade unions at Longbridge, the Government Office of the West Midlands and those who are very much involved in the task force. If ever an RDA chairman had a baptism of fire, it is Alex Stephenson as head of the task force. Perhaps the Minister is able to give a little more detail about the way in which the £129 million will assist the priorities

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of the task force. My noble friend referred to retraining. However, I am aware that the task force wants to diversify the manufacturing base of the West Midlands and attract new investment into that area as well as retrain any workers at Longbridge who are made redundant. I suspect that tonight workers at Longbridge will have more than a little sherry.
Lord McIntosh of Haringey: My Lords, I am grateful for my noble friend's contribution. She asked specifically about the allocation of task force money. The report of the task produced last month set out in some detail the proposed allocation of that money under various heads: skills training, development of sites and so on. I am sure that in the light of the new announcement, which means that there are going to be many fewer direct or indirect job losses than were feared, the task force will be reconsidering its priorities and the way in which it wishes to use the money. The good news is likely to be that because less will have to go on "fire fighting", more will be available for the longer-term development of manufacturing capacity and manufacturing employment in the West Midlands. I think my noble friend and the Government must await the task force's review of its own recommendations.
Lord Islwyn: My Lords, will the Minister appreciate that this agreement will be particularly welcome in the British steel industry, which is a major basic supplier to Rover? There have been ugly rumours in recent weeks and months about the future of certain steel plants in this country. Would he further consider the fact that, prior to the BMW takeover, Rover had a very useful agreement with the Japanese company Honda? Does he feel that it would be a good idea if this connection could be resumed?
Lord McIntosh of Haringey: My Lords, on my noble friend's first point, yes indeed, I am well aware that there will be much relief in the British steel industry. In particular, although he did not name it, Llanwern will be very much relieved that its sales to Longbridge will continue. It is an important contract for it. It will be important to see that the contract continues and it must also be important to the continued success of Llanwern.
As to the issue of co-operation or joint ventures with Honda, or indeed others, I can only repeat what I said in response to the noble Lord, Lord Mackay: that Mr Towers and the consortium have made it clear that they do see their future, among other things, in joint ventures. Those may well include Honda, but I do not know what their specific plans are.
Lord Shore of Stepney: My Lords, this is certainly welcome news but the big question now, as I am sure my noble friend will agree, is whether this is a temporary reprieve or really a new lease of life. I hope very much, as he does, that it will be the latter. However, there are two points which I am sure must puzzle others as well as myself. The BMW company
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was running at a loss of £700 million a year in that plant. That was last year's figure. What new factor has arisen that really seriously challenges that appallingly heavy loss figure? Secondly, because it is such a relevant factor, what advice, guidance or assurance were ministers and the Chancellor able to give the new company about the exchange rate between sterling and the euro?
Lord McIntosh of Haringey: My Lords, I think I made it clear in my response to the noble Lord, Lord Razzall, that as far as I know no assurances have been given to Mr Towers or the new consortium about the exchange rate. I am sure that my noble friend will have read the Chancellor's statement—I know he does his homework—and he will have seen that the Chancellor takes a very realistic view of the effect of the exchange rate on manufacturing industry. He is aware of the problems that arise from the strength of the pound or the weakness of the euro, according to which way round you choose to put it.
Of course it is true that in a sense nothing has changed. There is still over-capacity in the car industry as a whole, and Rover will have to fight its own corner in that respect. I think the best indication I can give to my noble friend that it is more likely to be a successful operation than has been the case in the past is that both the Phoenix consortium and BMW have said they believe that this is a winning solution and can be made to succeed.

Financial Services and Markets Bill
4.44 p.m.
Further consideration of amendments on Report resumed.
Lord Joffemoved Amendment No. 151A:
After Clause 135, insert the following new clause—
LONG-TERM INSURANCE BUSINESS RULES: REPRESENTATION OF POLICYHOLDERS
(" . The Authority shall make rules requiring an authorised person who is a body corporate who has permission to carry on regulated long-term insurance business to secure that the composition of the body's Board of Directors is such as to give a fair degree of representation to with-profit policyholders.").
The noble Lord said: My Lords, in moving this amendment I have to declare an interest in that my family and I are with-profit policyholders in proprietary life assurance companies. The purpose of the amendment is the protection of with-profit policyholders, who currently have no representation on the boards of life assurance companies. I raised this issue at Committee stage and the noble Lord the Minister has been kind enough to meet me and write to me outlining the Government's approach. However, I still cannot feel that with-profit policyholders have adequate protection, and I should like to pursue the matter further.
Without troubling your Lordships at too great length, let me just briefly outline the cause of my concern. From time to time the directors of life

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assurance companies are faced with conflicts of interest as between shareholders and policyholders. In such cases the directors, who are accountable to the shareholders who elect them, will tend to concern themselves with the best interests of shareholders rather than of policyholders, who have nobody to represent their interests.
As I did with my previous amendment, I will illustrate this type of conflict by reference to the Prudential, which is the largest life assurance company in the country, repeating that in so doing I am not suggesting that the Prudential acts differently from some other companies; nor am I seeking to personally impugn any of its directors. The Prudential board was recently faced with the decision of how to deal with the £2 billion compensation for losses arising from the mis-selling of personal pensions by salespeople whom the company had failed to properly train or control.
The company had two options. The first one was for the board to accept responsibility for the mis-selling and to write off the losses against shareholder profits. That would have wiped out entirely its profits for about two years which, to put it mildly, would not have been an attractive strategy to report to shareholders. It was, however, an option followed by at least one other with-profits company. The other option was simply to write off the losses against the orphan estate, which consists of surplus assets, the ownership of which is unclear as between shareholders and policyholders.
Faced with this very clear conflict, the board adopted the orphan estate option, with the consent of the DTI. In making this decision there was of course no one at hoard level to argue the case for policyholders and their interests. Had there been such representation, just some of the questions which would surely have been posed would have included the following. Was the board not responsible for the losses? Should not the shareholders, having elected the board, bear the losses? How could the chief executive of the Prudential for several years aggressively deny that this massive mis-selling had taken place? Why had the D'TI and, more recently the Treasury, not followed the agreed practice of consulting the policyholders before agreeing to the orphan estate being used for this purpose?
They might also have asked whether the reasonable expectations of Prudential policyholders had been met and whether the company's affairs had been managed ethically and competently. The Institute of Actuaries in 1993 had defined that as a key part of the primary expectation of policyholders. Finally, they might have asked: how could the Prudential, at a time when it was writing off a loss of £2 billion, for which the board was accountable, justify to policyholders reducing their balances, yet at the same time increasing dividends to shareholders?
It is not just the losses arising from the mis-selling of personal pensions which the Prudential policyholders would wish to query at board level. At the moment the Prudential is selling very large volumes of with-profits, single-premium bonds and paying extravagant commissions at a rate of up to 6 or 7 per cent on the
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bonds. It is the view of some actuaries that these sales enable the Prudential to give shareholders indirect access to the orphan estate and that in time the orphan estate will be eroded in order to maintain bonuses on these bonds. If there were directors elected by policyholders who would be expected to represent the interests of both shareholders and policyholders, they would want to question the unlimited marketing of such bonds and whether, if such extravagant commissions were not paid in order to buy business, policyholder bonuses might be higher.
I should like to round off the illustration of potential conflicts faced by the Prudential board by reference to what is left of the Prudential's orphan estate after the £2 billion depletion. Here we know that the Prudential is engaged in discussions with the Treasury about the orphan estate's attribution as between shareholders and policyholders, claiming that the vast majority of the orphan assets has come from shareholders. These discussions have been proceeding in great secrecy For approximately four years, but shareholders are denied any information whatsoever on the grounds that it is price sensitive information. If policyholder elected directors were present at board meetings, they would have brought pressure on the board to clarify to policyholders within a reasonable period what its intentions are so that their interests could be protected. They would also question whether the information is really price sensitive and for how long the defence of price sensitivity can be used as a means of avoiding the disclosure of essential information to policyholders. The Minister's views on this price sensitivity issue would be greatly valued.
I submit that there is a clear case for directors elected by policyholders on the boards of life assurance companies. The examples I have illustrated are not isolated cases affecting a handful of policyholders. Industry-wide we are talking about £20 billion of orphan estates and the best interests of millions of policyholders.
There is an obvious and recent precedent for my amendment. The Pensions Act 1995 provides that members of pension schemes are entitled to nominate one-third of the boards of their pension funds. During the debate relating to these issues the opposition, now the Government, argued for even greater member representation—50 per cent. Additionally, in the draft regulations recently published on stakeholder pensions, specific limitations are proposed on with-profit funds which are to be ring-fenced and which prevent any transfers to shareholders other than clearly stipulated maximum costs. I suggest that it is self-evident that with-profit policyholders—they include millions of personal pension investors— require similar protection, particularly in the light of the conduct of life assurance companies in the recent past.
Finally, I should like to put a question to the Minister. Does he accept that with-profit policyholders need protection; and how does he

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distinguish the case for protecting the interests of with-profit policyholders from that of protecting members of pension schemes and stakeholder pension members in the way described? I beg to move.
Lord Newby: My Lords, perhaps I may speak on behalf of the noble Lord, Lord Phillips of Sudbury, who has to chair a meeting.
The key question the amendment raises is how to ensure that the rights and interests of with-profit policyholders are dealt with. It is an extremely serious issue, as the noble Lord, Lord Joffe, made clear, which has not been dealt with adequately by many market participants up to this point. I suspect that it is easier to deal with such representation on the board of a mutual than a plc without opening up a wide range of other groups which might be represented on the board of a plc. I am full-square behind the amendment. It is a serious issue which is not adequately addressed in all cases under current regulation. I look forward to hearing the Minister's response on how the Government might strengthen the position of with-profit policyholders in future.
Lord Naseby: My Lords, first, I declare an interest as chairman of a friendly society and a member of the Association of Friendly Societies.
The key point of the debate is the difference between proprietary companies and mutuals. After all, the leading life with-profit policy organisation in this country is a mutual. While past performance is no guidance for future performance, if one looks at the performance of the top 10 with-profits life companies one will find that something like eight of them are mutuals. The consumer choice is there in the first place. The consumer chooses whether to invest in a with-profit policy in a proprietary company in the full knowledge that the success of that company will be shared between the with-profits holder and the shareholder. If they want to benefit from the whole of the profit, they should join those of us who are in the mutual movement.
Lord McIntosh of Haringey: My Lords, I am very tempted by the noble Lord, Lord Naseby, as one who has been—I have declared this interest to the House on another occasion—a with-profit policyholder in two mutual companies both of which decided to demutualise, against my vote. I have my own feelings on this matter. The Government's view is one which I think would be shared by the noble Lord, Lord Naseby: that there is a role for more than one form of governance in the insurance industry; and that there is a role for mutuals as well as proprietary companies. However, perhaps we are straying beyond the confines of the Bill.
We had a useful debate in Committee on the subject of the orphan estates of long-term insurers. In responding to that debate, I was able to give some assurances about the arrangements for the regulation of relevant business now under the Insurance Companies Act 1982, and how the FSA would be able
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to continue to maintain similar levels of protection using the powers conferred on the FSA by the Bill. Therefore I shall not rehearse the arguments that I put forward in Committee, nor the detail of the arrangements I described.
It was clear from our debate that a major concern was the transparency of the arrangements and the information provided to with-profits policyholders. The noble Lord, Lord Joffe, referred to that again in describing the case of the Prudential. Greater transparency is something that the FSA will be able to require using its powers under the Bill. It would be premature for me or for the FSA to say that it will do so. The FSA must come up with proposals for rules and consult on them, but I can say that it is something the FSA is considering.
Before I respond to the amendment, I should like to pick up a couple of points made by the noble Lord, Lord Joffe. I express my gratitude to him for sending a copy of his argument to me in advance. It is certainly the case that information is available to support the information sent to policyholders in the annual bonus notices. I may have given another impression at Committee stage. It may have been possible to construe my response to imply that the Treasury regulations require that information be sent to policyholders. If that were the case, I apologise. Let me explain my point so that the position is clear.
The Treasury requires a bonus notice to be given but it does not specify the information that has to be provided. However, substantial information must be published annually by insurance companies: their annual report and accounts; the regulatory return (it is still often called the DTI return); and the report of the appointed actuary. That information can be obtained from the company or Companies House.
The noble Lord, Lord Joffe, spoke in some detail about the particular company, the Pru. Since we are debating a Bill, I do not think that I should discuss the rights and wrongs of anything done by a specific company. However, perhaps I may say a word about where the Pru has got to in its proposals. I understand that it is proposing to make an attribution of the orphan estate from which the Pru would be able to make compensation claims. The appropriate share would go to policyholders.
As regards further distributions, the fact is that the Pru is not yet at the consultation stage. It would first need to obtain the approval of the regulator for the overall plan. There is not much point consulting if the FSA will reject the plan after consultation. I do not know whether that helps the noble Lord, Lord Joffe, but I took seriously his point about negotiations taking place for four years with nothing being said to with-profits policyholders.
The issue of pensions mis-selling goes wider than the Pru and the Government sought to address it soon after coming to office. Your Lordships will recall Mrs Liddell, when she held the post, severely calling insurance companies to account for pensions misselling and she demanded rectification.

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There is a relationship between pensions mis-selling and orphan estates, but the position varies between firms. The matter must be considered on a case-by-case basis. However, as the matter has been raised I want to trail arrangements which will come later in today's proceedings. Perhaps I may address my comments in particular to my noble friend Lady Turner who expressed concern about the matter.
Amendments Nos. 212 and 222 provide a framework for reviews of past business if something along the lines of pensions mis-selling were to happen again. That is for a later debate, but having regard to the prominence given to the issue by the noble Lord, Lord Joffe, that may be helpful.
The subject of the amendment, while it also relates to the question of with-profits life insurance policies, is different from the issue debated in Committee. It seeks to ensure that the interests of the policyholders may be properly represented on the board of the company concerned.
It is not true to say that the board considers only the interests of the shareholders and that no one is available to represent the interests of policyholders. The regulator will for the most part be there to ensure that lie represents the interests of the proverbial man on the Clapham omnibus and to ensure that he is properly taken into account by the company.
The amendment raises some technical difficulties because in our view it would confer a power on the authority which would not be appropriate. It goes way beyond matters of regulation and is more a matter of corporate governance.
I accept that Part V of the Bill gives the FSA certain powers in relation to the membership of the boards of authorised firms, which will allow the FSA to intervene in specific cases in order to protect the interests of policyholders: for example, to prevent a person who is unfit to be a director of an authorised firm from holding such a position; or to ensure that the board has an appropriate balance of expertise and experience and of executive and non-executive members. But there is a world of difference between an intervention power of that kind and a statutory prescription that a particular category of stakeholder should always be represented on the board.
Therefore, that is not a power which I would wish to see conferred on the FSA; nor do I believe that it is truly a financial regulatory issue. Therefore, it would be outside the scope of the Bill. Against that, I accept that the arrangements are not entirely without precedent. The Pensions Act 1995 makes arrangements allowing pensioners to be trustees of a pension fund. But in that case the assets are held in trust for pensioners, so the case for pensioner directors is stronger.
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Therefore, I would not rule out the possibility of a provision on the statute book that would have the effect of requiring policyholder representation on the board of a company whose business included with-profits long-term insurance. However, it seems to me that that is a question best considered in the wider context of the company law review and not financial regulation.
On the basis that the issue will be considered in the context of the company law review currently being carried out by the Department of Trade and Industry, I regret that I invite the noble Lord, Lord Joffe, to withdraw his amendment.
5 p.m.
Lord Joffe: My Lords, I am grateful to the Minister for his careful consideration of the amendment. As regards the distinction between mutual and with-profits companies, I fear that the mutuals are fast disappearing and that choice will soon be very limited. But that is not the main thrust of my case.
I am encouraged by the Minister's comments on the company law review and his clear acceptance that there is some merit in the points raised, in particular transparency from the point of view of policyholders. Having regard to that and the urgent need to get the Bill on the statute book in as short a time as possible, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 140 [Endorsement of codes etc. issued by other bodies]:
Lord McIntosh of Haringeymoved Amendment No. 152:
Page 68, line 24, leave out ("subsection (4) applies") and insert ("subsections (3) and (4) apply").
The noble Lord said: My Lords, Amendment No, 152 makes a minor yet necessary consequential change to Clause 140. As the House will recall, subsection (3) was inserted in Committee to enable the authority to exercise its powers under Part IV (permission to carry on regulated activities) or Clause 65 (disciplinary powers with regard to approved persons) at the request of the take-over panel. That 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 (4); namely, Parts XIII, XIV and XXV. This further amendment is consequential on the introduction of subsection {3) and I commend it to the House. I beg to move.
Lord Kingsland: My Lords, the clause refers to the power of the authority to endorse rules made by the take-overs and mergers panel. The amendment is to subsection (6) and makes clear that subsection (3) applies to the rules, as amended from time to time by the panel, as well as subsection (4). Both allow the authority to take enforcement action at the request of the panel and we are happy with the amendment.
On Question, amendment agreed to.
Clause 142 [Financial promotion rules]:
Lord McIntosh of Haringeymoved Amendment No. 153:
Page 69, line 33, leave out from ("communication") to end of line 34 and insert ("by them, or their approval of the communication by others, of invitations or inducements—

(a) to engage in investment activity; or

(b) to participate in a collective investment scheme.").

The noble Lord said: My Lords, in moving Amendment No. 153, I shall speak also to Amendments Nos. 154, 155 and 167. Clause 142 confers the power on the authority to make rules applying to authorised persons in relation to the regulation of financial promotions under Clauses 19(1) and 234(1). Clause 263, to which Amendment No. 167 applies, empowers the authority to suspend the promotion of an EEA scheme to the public where it appears that the operator has contravened the authority's financial promotion rules.
Amendments Nos. 153, 154 and 155 are technical amendments to Clause 142 restricting the application of the rule-making power set out in this clause. Amendment No. 153 to subsection (1) and Amendment No. 154 to subsection (2) are drafting changes which pave the way for the substantive Amendment No. 155.
Amendment No. 155 inserts a new subsection after subsection (2), ensuring that the authority may only regulate communications made by authorised persons which, if they were made by unauthorised persons without the approval of an authorised person, would contravene Clause 19(1), and communications which may be made by authorised persons without convening Clause 234(1).
The effect of this is that an authorised person will not be subject to rules made under the clause when he makes a communication which falls outside the scope of the controls applying to unauthorised persons imposed by Clauses 19 and 234. The Government are also proposing that a technical amendment—Amendment No. 167—be made to Clause 263(1) in order to delete the express reference to invitations and inducements,
"of a kind mentioned in Section 234(1)",
in that subsection. Given that authorised persons cannot make the kind of invitations or inducements referred to, the deleted words are unnecessary and have therefore been removed. I commend all the amendments to the House. I beg to move.
Lord Kingsland: My Lords, our understanding is that Amendments Nos. 153 to 155, which affect Clause 142, relate to the authority's power to impose financial promotion rules on FISMA-authorised firms and are technical only. Therefore, they are quite acceptable.
So far as concerns Amendment No. 167, as the Minister explained, Clause 263 relates to the power of the authority to give a direction under that clause. Even though the fund is recognised, and so for
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marketing purposes is treated as an authorised unit trust and therefore outside the marketing restrictions in Clause 234(1), that power enables the authority to require that the restrictions none the less apply. The authority can do that only if the operator of the recognised scheme—typically the manager of a non-UK open-ended investment company—has failed to comply with the FSA's financial promotion rules.
We have only one query relating to this issue. The amendment seems to provide that the invitation or inducement covers the redemption of shares as well as their promotion. The Government may like to consider that point before Third Reading.
Lord McIntosh of Haringey: My Lords, I shall be very glad to do that.
On Question, amendment agreed to.
Lord McIntosh of Haringeymoved Amendments Nos. 154 and 155:
Page 69, line 37, leave out paragraph (b).
Page 69, line 38, at end insert—
("( ) Subsection (1) applies only to communications which—

(a) if made by a person other than an authorised person, without the approval of an authorised person, would contravene section 19(1);

(b) may be made by an authorised person without contravening section 234(1).

( ) "Engage in investment activity" has the same meaning as in section 19.").
On Question, amendments agreed to.
5.15 p.m.
Lord McIntosh of Haringey Lord McIntosh of Haringey moved Amendment No. 156:
After Clause 143, insert the following new clause—
CONTROL OF INFORMATION

(".—(1) The Authority may make rules ("control of information rules") requiring an authorised person ("A") to withhold information from a person ("B") for or with whom he does business in the course of carrying on any regulated or other activity.

(2) Control of information rules may—

(a) require the withholding of information which A would otherwise have a legal obligation to disclose to B;

(b) require A to restrict or prevent the passing of information within his business.

(3) Subsection (1) applies only in relation to information obtained from a person other than B in the course of the carrying on by A of any activity, whether it was obtained by A, by an approved person or by any other person.

(4) "Approved person" has the same meaning as in section 63.").

The noble Lord said: My Lords, in moving Amendment No. 156. I shall speak also to government Amendments Nos. 157 and 218. I shall respond to anything that is said about opposition Amendment No. 157VA in due course when the amendment has been spoken to.
Amendment No. 156 inserts a new clause after Clause 143 giving the FSA the power to make rules which require an authorised firm to operate Chinese

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walls restricting or preventing the flow of information within a firm and dealing with the disclosure of certain information. These are called the "Chinese walls rules", which is not the easiest thing to say!
Chinese walls are simply established arrangements in the form of procedures, systems, management and physical location which act as barriers within a firm to ensure that information which is generated within one part of the firm or obtained from a client in one part of the firm does not penetrate another part of the firm. They are important for a number of reasons. They provide a mechanism for authorised firms to function as multi-disciplinary operations. Of course, a major point of the Bill is that it responds to the fact that much financial service activity is now multi-disciplinary.
As the Law Commission indicated in its 1995 paper, Fiduciary Duties and Regulatory Rules:
"Chinese walls are widely used in organisations which provide financial services … they are essential if the industry is to operate in its present form with multi-functional investment houses performing a wide range of services".
Those rules will continue to protect the interests of the clients of such a firm by ensuring that information which relates to a particular person in relation to a particular activity does not reach another part of the firm. They also protect the firms themselves, establishing a firm regulatory framework within which the firm must control the flows of information, both internally and externally.
The other two amendments in the group are consequential changes. Amendment No. 157 allows the authority to modify or waive control of information rules provided that the procedure set out in Clause 144 is followed; that is, rules made under the proposed new clause are treated in the same way as other rules referred to in Clause 144(1). Amendment No. 218 simply provides a definition in Clause 407 of control of information rules.
I should add that, in response to concerns raised by the City Liaison Group, the Government are currently reviewing whether adjustments to this clause would be desirable. We aim to report back on this issue at Third Reacting if, indeed, it is considered that they would be desirable. I beg to move.
Lord Kingsland: My Lords, I may take a little while both in responding to the government amendment and in speaking to my own, for which I apologise in advance.
Amendment No. 156 is headed "Control of information" but, as the Minister said, should really be headed "Chinese walls". Chinese walls are of great help to investment firms because, on the one hand they give the advantages of being in a single corporate entity but, on the other, allow the separate parts of that entity to be treated as different in law. As your Lordships are well aware, the purpose of that is to ensure that knowledge in one part of the firm, behind the Chinese wall, should not infect the other part of the firm in front of the Chinese wall.
That is crucial; because the walls protect the firm from having to use information that it receives confidentially from one client for the benefit of
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another. They help firms to deal with conflicts of interest and the strict application of fiduciary duties by which all advisers, brokers and investment managers are bound. They also protect the firm against charges of insider dealing and, I trust, market abuse. In addition, they protect the firm from contravening FSA rules which apply when it knowingly does something if the individuals that know are behind the Chinese wall and what is done is done by people m front of the Chinese wall without any cross-contamination.
As I understand it, the Chinese wall is acceptable to regulators and included in the authority's core conduct of business rules. Yet the government amendment does not provide for it at all. The amendment merely empowers the authority to make rules which require any authorised person to withhold information. That would impose an intolerable burden on small firms where there is no effective Chinese wall because none can be constructed; staff will have to segregate information in their minds and not mention it to employees who work alongside them.
So far as I am aware, the authority does not have any such rule at the moment; nor, indeed, do the SROs. Indeed, I cannot believe that the authority would want to introduce such a rule. The current provision for Chinese walls is in Section 48(2)(h) of the Financial Services Act, which empowers the authority to make rules which either enable or require information to be withheld. At the very least, Amendment No. 156 should cover both aspects.
The role of Chinese walls has, of course, changed quite a lot since the Financial Services Act was passed in 1986. In particular, the authority's rules must now cover the right not to use information held by a firm. As a matter of agency law, any information which a firm has about one client, at least arguably, is required to be used also for the benefit of all other clients. In other words, there is a requirement to abuse the inside information. I give just one example. If a firm is about to launch a bid on behalf of one client, it knows that the shares in the target company will go up in value. Therefore, it is required by agency law to buy shares in the target company for all its other clients. Clearly, that is an intolerable situation. Moreover, it is classifiable as illegal insider dealing.
The amendment must be expanded to cover permitting or requiring not only the withholding of controlled information but also the use of that information. The rules must provide that a firm is not required to use information held on the other side of the Chinese wall. That reflects the existing practice of investment banks and stockholders, and probably everyone else as well. Normally there are provisions in the client agreement which allow that to happen. However, it would be extremely helpful and perhaps—I go further—essential that the authority's rules should also allow the non-use of information held behind the Chinese wall.
Our Amendment No. 157VA seeks to solve these problems. This new clause is concerned with the position of authorised persons who comply with control of information rules as defined in government

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Amendment No. 156 but who also owe their customers fiduciary duties to make disclosure of information in the possession of the authorised person. Control of information rules recognise the concept of Chinese walls which are, as we have already noted, a common feature of the financial services business.
For present purposes, the starting point is April 1992 when the Law Commission produced a long and detailed consultation paper on the topic of fiduciary duties and regulatory rules. The paper considered the impact on fiduciary duties of compliance with regulatory rules, particularly in the context of the regulatory regime established under the Financial Services Act 1986.
One of the matters considered was whether compliance with regulatory rules, which permitted the establishment of Chinese walls, ousted the usual fiduciary duties of disclosure and avoidance of conflicts of interest which would normally have applied.
The Law Commission's consultation paper was followed in December 1995 with its report on the consultation. The Law Commission concluded on the issue of Chinese walls at paragraph 16.6 that:
"We believe that it is essential to remove any doubts, however tenuous, about the legal efficacy of the practice of withholding information by means of a Chinese wall which complies with the regulatory requirements as a method of managing conflicts of interest and duty. The Chinese wall is an essential device for the operation of the modern financial conglomerate; and the determination of its effectiveness should not be left to the uncertainties of litigation".
The Law Commission's recommendation for resolving the doubt was that:
"There should be legislative provision that a firm shall be protected from liability where (i) information is withheld from a customer (or is not available for the customer's use) pursuant to a Chinese wall arrangement which complies with the regulatory requirements; or (ii) a firm places itself in a position where its own interest on one side of a Chinese wall which fulfils regulatory requirements conflicts with a duty owed to the customer of a department on the other side of the Chinese wall, and as a result of the Chinese wall neither department knows of the firm's conflicting interest or (iii) a firm owes conflicting duties to the customers of different departments on different sides of a Chinese wall which fulfils regulatory requirements, and as a result of the Chinese wall neither department is aware of the conflict".
The Law Commission also recommended that what constitutes a Chinese wall for the purposes of the legislative provision should be laid down by the authority pursuant to delegated powers under Section 42H of the Financial Services Act 1986. That is effectively the same as the power of the authority to make control of information rules under the new clause introduced by the Government's Amendment No. 156.
The Law Commission made a number of other recommendations concerning Chinese walls and included in its report a draft clause which it was intended should be incorporated in the Financial Services Act which met the requirements of its legislative approach to dealing with the matter. In July 1998, when the Treasury issued the draft of the
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Financial Services and Markets Bill for consultation, the Treasury's overview of financial services regulatory reform, it stated at paragraph 5.11:
"We intend that the Bill as introduced into Parliament will ensure that compliance with the FSA rules relating to Chinese walls which manage or avoid conflicts of interest and help prevent insider dealing will protect a firm not only against criminal liability but also against civil action for breach of duty. This will mean that firms are not put at risk of legal challenge where they comply with these important regulatory requirements".
So clearly, in July 1998, the Treasury thought that a provision in the Bill to deal with Chinese walls was necessary. Although the Government at this late stage have tabled an amendment providing for control of information rules it is, if I may say so, of considerable surprise that, given the background to the matter, the Government do not propose to implement the Law Commission's recommendation by including in the Bill an appropriate provision. That is despite the firm statement of intention to do so in the Treasury's consultation document on the draft Bill.
Our Amendment No. 157VA is a redraft of the Law Commission's draft clause set out in its report, amended to take into account the differences between the provisions of the Financial Services Act 1986 and the provisions of the Bill. It may not be perfect in every way but we should like to know why it is that the Government do not propose to table an amendment of their own to reflect the Law Commission's proposal. Has something happened to change the Treasury's thinking on the matter? Do they think the Law Commission is wrong and, if so, why is the Law Commission wrong? A huge amount of work has been done by the Law Commission on this issue and a long consultation process has occurred. In our judgment, it would be most unfortunate if this opportunity for dealing with the issue, one way or another, was not taken.
Finally, I turn to a question of drafting in relation to the Government's amendment. It provides that its provisions should apply only in relation to information obtained from a person other than the client. However, corporate finance advisers and private equity firms would dream up their own ideas about prospective deals and would work on them accordingly. That information would not be obtained from anyone else and, therefore, the Chinese wall provisions will not apply. The amendment deals with information about clients but not information about deals. Those are my submissions.
Lord McIntosh of Haringey: My Lords, it is clear from what the noble Lord, Lord Kingsland, said that we are both trying to do the same thing but we are trying to do it in rather different ways. We are both trying to ensure that there is proper protection for an enforcement of Chinese walls and I was perhaps unwise enough to call the Law Commission report of 1995 into aid in the context of saying how important Chinese walls are. That shows that we agree about that at any rate.
So the noble Lord is now saying that our amendments are unsatisfactory; that they do not make comparable provision with Section 48(2)(h) of the

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Financial Services Act 1986 and he is asking me what has changed since the Law Commission produced its report in 1995 and since we indicated at the beginning of the consultation process on this Bill that we wished to introduce amendments to give effect to that.
I concentrate on the noble Lord's amendment because it makes the position clear as to why and how things have indeed changed.
Amendment No 157VA proposes that a person who is subject to control of information rules incurs no liability to a person for or with whom he does business in the course of carrying out any regulated activity in the circumstances set out in subsection (1) of the proposed new clause. We do not believe that amendment is necessary because we do not think that a person who has acted in accordance with statutory rules which require him to act in a particular way will be liable to a civil suit.
The Law Commission produced a report in 1995 arguing that there should be an express defence in legislation for any civil liability incurred by an authorised person who has acted in conformity with FSA "Chinese walls" rules. We undertook to address that concern in the consultation document published with the draft Bill to which the noble Lord, Lord Kingsland, referred. On balance, however, the Government believe that express provision for a defence from civil action is not necessary.
Since the Law Commission reported, and, indeed, since the consultation document published with the draft Bill, there have been developments in case law which, although not directly dealing with financial services firms, did address the issue of civil liability and procedures for dealing with conflicts of interest. The most important case here is the 1999 case of Prince Jefri Bolkiah v KPMG.
In the light of the statements of the Judicial Committee of this House in this case, it is the Government's firm belief that the courts would be unlikely to hold that someone could successfully sue an authorised person for breach of fiduciary duties where the authorised person has complied with FSA rules, which, of course, are made under Parliament's delegated statutory powers.
The Law Commission and many in the City Liaison Group, which includes the representatives of several City law firms, tend to agree with us that an explicit defence is not necessary here. In addition, there is concern that express provision could cast doubt on the current position in relation to rules made under the Financial Services Act 1986. Such a defence could also have implications in relation to the effect of compliance in other areas with rules made by the FSA under its statutory powers. The new clause has been recast so that rules will require an authorised firm to do various things.
Where an authorised person has no choice other than to comply with statutory rules, he cannot be subject to civil liability for anything that he does in accordance with those rules. Therefore, we resist the Opposition amendment.
On Question, amendment agreed to
5.30 p.m.
Clause 144 [Modification or waiver of rules]:
The Deputy Chairman of Committees (Viscount Allenby of Megiddo): My Lords, before calling Amendment No. 157, I must point out that there is an error in the Marshalled List. It should read:
"Page 70, line 3, at end insert".
Lord McIntosh of Haringeymoved Amendment No. 157:
Page 70, line 3, at end insert—
("( ) control of information rules;").
On Question, amendment agreed to.
Lord Kingslandmoved Amendment No. 157KA:
Page 70, line 16, at end insert ("and must be determined by the Authority before the end of the period of 30 days beginning with the date on which the application is received").
The noble Lord said: Clause 144 allows the authority in particular circumstances to direct that all or any of the rules set out in subsection (1) are not to apply to an authorised person or will apply to an authorised person with such modifications as the authority may direct.
That appears to be a useful provision which provides flexibility for the authority to modify or waive rules. However, subsection (4) reduces that flexibility considerably. In particular, the authority cannot use the power to waive or modify rules unless it is satisfied that compliance with the rules would be unduly burdensome or would not achieve the purposes for which the rules were made.
It seems to us that the circumstances in which the authority will be able to use its power to give directions under this clause will be rare. That is a shame. We were promised a flexible regulation, but being realistic, subsection (4) removes the benefit of flexibility that the clause could have provided. In Committee we tabled amendments with a view to increasing the authority's flexibility, but your Lordships will recall that our amendments were rejected.
The only amendment in this group that attempts to introduce a small element of increased flexibility is Amendment No. 157LA. That amends subsection (4)(a) by adding the words,
"or would be unlikely to".
Therefore, the authority could give a direction if it were satisfied that compliance with the relevant rules was unlikely to achieve the purposes for which the rules were made.
The other amendments concern the practical operation of the clause. We propose that, first, the authority should be obliged to determine applications under Clause 144 within 30 days; secondly, that the authority should be obliged when considering an application to take into account the nature of the authorised person's business and the person with whom the authorised person carries on or intends to carry on business; thirdly, that the FSA should be obliged to give an explanation of its decision if it

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decides not to give a direction; and fourthly, that the authority's power to revoke a direction already given should be subject to at least seven days, prior notice to the authorised person concerned unless the interests of consumers require otherwise.
Clause 153 is the important clause as it provides for the giving of guidance by the authority. Amendment No. 157WA deals with a relatively small but nevertheless important point. Under Clause 153(4)(c) the authority may make a charge for the giving of guidance irrespective of who requested the guidance.
We believe that for authorised persons and approved persons who are liable to be disciplined and who are liable to incur penalties if they breach the rules, it is wrong in principle that they should be charged for guidance on the rules. Such persons should be entitled to an explanation without charge.
Amendment No. 157XA would amend Clause 153 by providing that compliance by an authorised person of the FSA's guidance would not be treated as contravening the rules to which the guidance relates. If an authorised person, for example, seeks and obtains from the authority guidance on a particular rule, and acts in compliance with that guidance, he should not be treated as contravening the rule to which the guidance relates.
The Economic Secretary to the Treasury, the honourable Ms Melanie Johnson, in Committee in another place, said that she would be surprised if, in those circumstances, the authority itself would take disciplinary action against the authorised person if it proved to be the case that the authority's guidance was defective in some way or other. It would certainly be reasonable to expect that. However, our concern relates to Clause 146 under which a private person could still take action against the authorised person in the circumstances that I have described. That does not seem to us to be reasonable or to represent good regulation.
If authorised persons act in compliance with guidance, issued by the authority, they must be confident that they will not find themselves subject to actions for damages to private persons. The action for damages available to a private person under Clause 146 is subject to the defences and other incidents applying to actions for breach of statutory duty. Perhaps the Minister can tell the House whether an authorised person who, in good faith, acts in accordance with the authority's guidance would have such a defence. If such a defence is available, there can be no objection to the amount. If such a defence is not available, that confirms the need for the amendment. I beg to move.
Lord McIntosh of Haringey: My Lords, the first five of these amendments relate to Clause 144. I do not believe it was clear from listening to the noble Lord, Lord Kingsland, that Clause 144 is concerned with the power of the authority to waive or modify certain kinds of rules as set out in subsection (1). In other words, this is a clause that brings flexibility and realism
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to what may otherwise be a more rigid and threatening regime. All the amendments to Clause 144 ought to be seen in that light.
We are not happy with the amendments to Clause 144. On Amendment No. 157KA, the authority may not give a direction under Clause 144 unless it is satisfied that the various factors under subsection (4) have been met as well as the publication criteria under subsection (7).
Meeting all these requirements may involve the authority in a lengthy investigation, especially where the authorised person provides a wide range of financial services. Of course the authority will want to consider each application carefully in order to ensure that it reaches the right decision. For that reason, it cannot be sensible to bind the authority to determine all applications received under Clause 144 within the time-scale proposed in the amendment.
However, the authority has already stated in its September 1999 policy statement, The FSA's approach to giving guidance and waivers to firms, that it will develop,
"response standards to underpin the efficient operation of the waiver mechanism under the new legislation".
I hope that that will satisfy the noble Lord, Lord Kingsland.
Amendment No. 157LA, to which I believe the noble Lord, Lord Kingsland, attaches more importance, proposes to amend subsection (4)(a) so 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 be unduly burdensome or would not achieve, or would be unlikely to achieve, the purpose for which the rules were made. The "unlikely" element is introduced by the amendment.
We are certainly not keen on this amendment. If all that the authorised person has to do is to demonstrate that compliance with the rule would be unlikely to achieve the purpose for which the rule was made, there is a distinct risk that the authority may issue a waiver or modification where it later turns out that compliance with the rule did in fact achieve the purpose for which the rule was made. At the same time, it is unclear how "unlikely" would work. Who is to judge whether a rule would be unlikely to achieve the purpose for which it was made? Should it be the authority, the applicant, or is it to be judged objectively on the basis of what a reasonable man may think? If that is the case, it is not at all clear from the way in which the amendment has been drafted. I am sorry, but the amendment is defective.
Amendment No. 157MA will oblige the authority to take certain specified matters into account among other things, an authorised person's clients and business when it considers whether to issue a waiver or modify a rule. I said in Committee that, while the

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onus is on the applicant to show that the criteria set out in subsection (4) are met, the authority has already indicated in its policy statement, to which I have already referred, 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".
That is in line with the statutory objectives set out in Part I of the Bill, specifically in Clause 5, under which the authority must have regard to the differing degrees of experience and expertise that different consumers may have in relation to different kinds of regulated activity.
Amendment No. 157NA proposes to impose a requirement on the authority to give reasons in writing to an applicant whose application for a waiver or modification has been rejected. We believe that this would involve excessive bureaucracy. Imposing an absolute obligation of this nature on the authority is counter-productive and may distract the authority from meeting its regulatory objectives.
The same is true of Amendment No. 157PA. The range of circumstances in which revocations may be required will be very different. We would expect that where it can, the authority would give notice of such a revocation in order to allow the firm to arrange its affairs accordingly. As with the amendment to which I have just spoken, we do not want an extra layer of bureaucratic controls that always require the authority to give reasons.
Of course there will be cases where it will be in the interests of consumers that fast action is taken. I see that that has been recognised in new subsection (9B). However, I do not see that we need to legislate about any of this since we shall be simply stating what we would expect to happen in practice anyway. I am afraid that we are not sympathetic to any of the amendments to Clause 144.
Perhaps I may turn to Amendment No. 157XA. That would have the effect, in Clause 153, that where an authorised person acts in compliance with guidance issued by the authority, he shall not be treated as contravening a rule to which such guidance relates,
"or as thereby contravening rules".
As a claim for breach of statutory duty cannot be brought by a third party unless a rule has been contravened, this will in fact disapply Clause 146 which is concerned with action for damages in cases where guidance has been issued by the authority and relied on by an authorised person.
As regards proceedings brought under the Bill, as long as a person has acted in compliance with current written guidance in circumstances contemplated by the guidance, the authority will not take regulatory action against him. That is confirmed by the FSA in its policy statement, The FSA's approach to giving guidance and waivers to firms. Similarly, with regard to the Bill's criminal sanctions, reliance on FSA guidance will serve as a ground for the due diligence defences under Clauses 22 and 23.
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However, the Government maintain their belief that reliance on FSA guidance should not be able to block an action for damages for breach of statutory duty, even where the guidance has been published and/or takes the form of general guidance. We must preserve the principle that third parties, in particular private consumers, should not be deprived of the opportunity for redress where they suffer loss at the hands of an authorised person as a result of that person's contravention of the rule. A consumer's potential for loss, we believe, remains unaffected by the publication of the guidance, especially where guidance merely provides an interpretation of the rule, rather than an interpretation of the conduct in relation to the rule.
The Government believe that guidance should continue to have an informal status which reflects what the word "guidance" means. Rendering guidance enforceable will have the effect of giving it the status of rules. The customer of the authorised person would have been deprived of his right of action even though a particular rule had in fact been broken. From that customer's point of view, it looks as though the guidance is given more weight than the law contained in the rule. Going down this track would have important adverse consequences for authorised persons. It would be possible to change the effect of the rule without going through the necessary consultation procedures. Furthermore, it may be that the authority, conscious of the enhanced formal status of guidance which would be conferred by this amendment, may be less inclined to issue guidance. This could impact heavily on authorised persons who may wish to rely on guidance in the authority's proceedings.
However, that is not to say that guidance is not important. A court, in adjudicating a claim for breach of statutory duty, will have regard to the defendant's reliance on general, published FSA guidance—although this will depend heavily on the circumstances of the case—in assessing liability or quantum of damages. It is highly relevant. I hope that that provides the noble Lord, Lord Kingsland, with some comfort and that he will not press the amendment. Perhaps I may also say that we have written to the City Liaison Group about this point.
Amendment No. 157WA proposes a new subsection to follow subsection (4)(c) in Clause 153 which empowers the authority to make a reasonable charge for guidance where that guidance has been given in response to a request made by any person. The amendment provides that subsection (4)(c) does not apply if the request is made by or on behalf of an authorised person or an approved person within the meaning of Clause 63(13).
Frankly, I do not understand this amendment. The subject of fees was raised in Committee in another place where the Opposition proposed the deletion of subsection (4)(c). As the Economic Secretary said at the time, it is clear from the authority's published policy statement, to which I have referred, that,
"individual guidance will continue to be given on a relatively informal basis and without charge".
I hope that this will persuade noble Lords that the amendment should not be pursued.

1415
I regret that I must be so negative about these amendments, but I am afraid that we shall not be able to accept any of them.
5.45 p.m.
Lord Kingsland: My Lords, I found the experience of listening to the words of the Minister on these amendments extremely distressing. I shall look very carefully at the response of the noble Lord to the amendments that we tabled to Clause 144 in the hope that I might glean something positive from what he said.
As far as Clause 153 is concerned, in particular Amendment No. 157XA, it was plain that the Minister's reaction was totally intransigent. This is a matter to which we are certain to return at Third Reading. At that point we shall seriously consider testing the opinion of the House.
The Minister is well aware that, in continuing to ensure that the City remains a creative part of the economy, it is absolutely crucial that the balance between sensible regulation, on the one hand, and a sufficient margin for enterprise on the other, is kept. In our view, the opinions that the Minister has expressed on guidance in relation to providing a safe harbour upset that balance. In those circumstances, it is a matter to which we shall return. In the mean time, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 157LA to 157PA not moved.]
Clause 147 [Limits on effect of contravening rules]:
Lord Kingslandmoved Amendment No. 157QA:
Page 71, line 39, leave out ("made by the Authority").
The noble Lord said: My Lords, in moving Amendment No. 157QA, I shall speak also to Amendments Nos. 172A, 173A, 174A, and 175A to 175C.
Amendment No. 157QA is a small amendment to Clause 147 and seeks to remove the words, "made by the Authority", which feature after the word "rule". The reason is simple. The word "rule" is defined by Clause 407(1) as,
"a rule made by the Authority under this Act".
Therefore, it would seem that the words, "made by the Authority" in Clause 147(1) are—dare I say it?—otiose.
Amendment No. 173A to Clause 322, seeks to insert the words,
"or retain with the consent of",
after the word "to" at page 171, line 37. As your Lordships are well aware, Part XX of the Bill deals with the provision of financial services by members of the profession. Clause 322 sets out the conditions which must be satisfied by a member of a profession if he is to avoid the general prohibition against carrying on regulated activities when not authorised to do so. If that exemption is to have some use, it must be possible to satisfy the conditions.
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Our concern relates to Clause 322(3) and the requirement that the person concerned,
"must not receive from a person other than his client any pecuniary reward or other advantage, for which he does not account to his client, arising out of his carrying on of any of the activities".
The words,
"any pecuniary reward or other advantage",
are very widely drawn and would cover virtually any benefit; for example, they could cover the payment of a person's bill by a third party. How will all that work in the context of partnerships, particularly large ones which carry on a wide range of services?
Amendment No. 173A is a small attempt to assist firms to be able to satisfy the condition in Clause 322(3) by providing that the condition can be satisfied if the client consents to the retention by the relevant person of the pecuniary reward or advantage.
Amendment No. 172A is a government amendment relating to the exemption in Part XX for members of regulated professions who are carrying on regulated activities which are incidental to the carrying on of professional services. The amendment, as we understand it, limits the exempt or regulated activities to activities exempted by Part XX, which is welcome.
Amendment No. 175A seeks to amend Clause 322. Here the Part XX exemption applies only if the regulated activities carried on by the professional are all exempted by Part XX. The amendment recognises that the professional may be an exempt person for other reasons—typically where he is an appointed representative—and allows the Part XX exemption to apply even where he carries on regulated activities outside Part XX, if he carries them on as an exempt person. That amendment is also welcome. Amendment No. 175B seeks to amend Clause 327. It is consequential on Amendment No. 175A and is also completely acceptable.
I am pleasantly surprised to observe that Amendment No. 175C was tabled by us. In Committee, the Minister may recollect that I raised the question of whether the Treasury would be required to make it clear, in its regulated activities order, that merely advising on the legal implications of an investment transaction—typically an agreement for the acquisition of shares—and arranging for the documentation to be entered into, including negotiating its terms, should not be treated as investment advice or arranging deals for the purposes of authorisation. Amendment No. 175C provides for that exemption and, I readily admit, is in the nature of a probing amendment, enabling me to make this point again as the Minister will be only too well aware that there was no response from the Government in Committee.
The need for this exemption applies to all corporate financial legal advisers, but is particularly important in the case of non-UK law firms. Most of such firms, and in particular American, Australian and Canadian firms, and firms from continental Europe, establish their London offices to advise on corporate finance transactions, rights issues, placings and bond issues.

1417
None of those firms can take shelter under the Part XX exemption because they are not subject to regulation by the Law Society. That is why it is so important to make it clear that, as I believe is the law anyway, those activities which relate to the transaction in which an investment is bought or sold rather than to the investment itself, are not regulated activities.
It should be clear that activities which relate to investments, but are certainly not investment activities requiring authorisation under the Bill, do not need to he restricted in the way required by Part XX or to be subject to regulation by the Law Society and indirect oversight by the authority. I beg to move.
6 p.m.
Lord McIntosh of Haringey: My Lords, let me start with Amendment No. 157QA, which seeks to ensure that a person will not be guilty of an offence by reason of a contravention of a rule, regardless of which body authorised the rule. In particular, the intention is to ensure that a professional firm which seeks to benefit from the regime under Part XX of the Bill does not commit an offence if it carries on or holds itself out as carrying on an activity other than one which it may carry on under rules made as a result of Clause 327(3).
Any provision which had the effect intended would undermine an important effect of Clause 322(5). This subsection provides that a professional firm, seeking to benefit from the Part XX exemption, will need to ensure that it does not carry on, or hold itself out as carrying on, a regulated activity other than one which rules made as a result of Clause 327(3) allow it to carry on.
The noble Lord, Lord Kingsland, made the point about US law firms. I have the relevant copy of Hansard in front of me. I believe I answered the point then, but I shall certainly attempt to answer it now. Part XX exemption is available to members of designated professional bodies only. As it is not a legal requirement that US law firms—I suppose that that is true of Australian and Canadian firms, although I am not familiar with that issue—should register with the Law Society of England and Wales in order to provide professional services in the United Kingdom, it is unlikely that US law firms will be members of a designated professional body and so they will be unable to benefit from Part XX exemption. Therefore, if they wish to conduct a regulated activity which is excluded under the Regulated Activities Order, they will need to be authorised by the FSA.
As regards investment business, which is what I believe the noble Lord, Lord Kingsland, was speaking about, there is no current intention that the position under the Regulated Activities Order should be any different from the position under the Financial Services Act. It is difficult to see why US law firms should require authorisation under the Bill if they do not require it now under the Financial Services Act. If there are concerns on that score they can be considered in the context of our proposals for the Regulated Activities Order. I suggest that they do not need to be covered on the face of the Bill.
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I return Amendment No. 157QA. I said on 18th April at Report stage that, where a breach of Clause 322(5) prohibition occurs, it is important that the offending firm be subject to the authorisation offences set out in Clause 21. That also applies to "holding out". We cannot risk professional firms giving the impression that they are free to operate outside the regime for which Part XX of the Bill makes prevision. The Opposition's amendment is clearly intended to counter these effects.
It is important to recognise that professional firms are being treated no differently from other firms which conduct regulated activities, but which are not authorised by the FSA. I hope that the noble Lord will not pursue that amendment.
I turn now to government Amendments. Nos. 172A, 174A, 175A and 175B. I was grateful for the support for Amendments Nos. 175A and 175B. These are four amendments to Part XX of the Bill to allow professionals who are carrying out exempt regulated activities also to be exempt persons under the Bill. These are raised in response to concerns recently expressed by the Institute of Chartered Accountants. It is a new issue which has been brought to our attention; namely, that a professional firm carrying out exempt regulated activities under Part XX will be prevented from taking advantage as an exempt person of the exemption set out in Clause 37. We have concluded that Part XX should not have the effect, in keeping with our overall approach throughout the Bill, to provide for a proportionate regulatory regime while maintaining a suitable degree of consumer protection. So we are amending Clause 322 so that a professional firm carrying out exempt regulated activities under Part XX of the Bill will not be held to be in breach of the prohibition. We propose to amend Clause 322(7) so that where a professional firm carries on exempt regulated activities under Part XX, it may also carry on activities as an exempt person at the same time.
We are also amending Clause 327 so that the professional body rule-making requirement does not extend to regulated activities conducted by professional firms as exempt persons under, the Bill. As the noble Lord, Lord Kingsland, recognised, the final amendment is a technical one to the definition of "exempt regulated activities".
I turn now to the opposition Amendments Nos. 173A and 175C. The protection of consumers requires specific criteria to be met. One of these is that professional firms should not receive any benefit as a result of carrying on a regulated activity other than from clients. That is in line with a professional's general obligation to act in the best interests of his client. A professional, in considering what should be the source of any third party advice to his client, should refer solely to what his client needs.
Amendment No. 173A would allow professional firms to benefit from a commission-sharing arrangement with an independent financial adviser, when the client consents. I am sure that professional firms will always want to be seen acting in their client's best interests. However, this amendment will raise

1419
doubts about whether a client is being best served where, for example, he is steered towards an independent financial adviser who has a commission-sharing arrangement with the professional concerned rather than with one who does not. I do not believe that that is desirable.
Amendment No. 175C raises an important issue; namely, what should be the status of professionals under the new regime when providing advice on, or negotiating the terms of, an investment agreement on behalf of their clients. The noble Lord, Lord Kingsland, raised this matter at Committee stage. There is a debate on which investments and activities should be regulated. That relates to Clause 20 of the Bill and, more specifically, the Regulated Activities Order.
I hope that the House will be reassured by the fact that the draft order, which we circulated in February last year, proposes a number of exemptions which will benefit professionals as well other financial services providers. There will be a chance to debate the draft Regulated Activities Order as it is subject to the affirmative resolution. We shall clarify in due course whether the activities covered by the amendment fall within any or all of these exclusions. In the meantime I hope that it will be recognised that providing an exemption that benefits professionals solely as regards specific regulated activities will put professional firms at a competitive advantage over other financial services providers and could impact heavily on consumers. We cannot support that amendment either.
Lord Kingsland: My Lords, I am becoming more and more depressed. I shall read very carefully the Minister's reaction to all the amendments that we have tabled in order to consider what to do at Third Reading. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 151 [Consultation]:
Lord Kingslandmoved Amendment No. 157RA:
Page 73, line 2, at end insert ("together with an explanation of the methodology employed in carrying out the analysis").
The noble Lord said: My Lords, this clause concerns the consultation procedure which the authority must follow when proposing to make rules. One of the requirements is the preparation of a cost benefit analysis, which must accompany the draft of the rules when it is published for consultation.
The first of our amendments, Amendment No. 157RA, would require the cost benefit analysis to include an explanation of the methodology employed in carrying it out. I assume that there cannot be any objection to giving an explanation. There will be a methodology and it would be simple enough to set that out. It would be helpful to those considering the draft rules to know what methodology was employed and therefore what factors the authority has taken into account in determining the costs and benefits of the draft rules.
1420
We believe that one particular benefit that the authority should consider is the increase in business activity, if any, which is expected to arise if the proposed rules are made. Rules tend to restrict the way in which a person can behave. No doubt regulators see their function in terms of controlling the behaviour of those whom they regulate. In our view it would be unfortunate if the natural tendency of regulators to control, and therefore to restrict behaviour, was not counterbalanced by a requirement at least to consider the impact of their rules and regulations on business activity.
We, on this side of the House, believe that good regulation should enhance business activity. The purpose of Amendment No. 157TA is to require, as part of the cost benefit analysis to be carried out by the authority, an analysis of any increase in business activity which is expected to arise if the proposed rules are made. We have used the words "any increase" as we recognise that there may be no increase in business activity. But the provision would require the authority to apply its mind to the issue.
Amendment No. 157SA concerns Clause 151(7), which excludes the obligation on the authority to consult on proposed rules where the authority considers that the delay involved in carrying out the consultation would be prejudicial to the interests of consumers. In these circumstances, the amendment would require the authority to publish, first, a cost benefit analysis; secondly, an explanation of the purpose of the proposed rules; and, thirdly, an explanation of the authority's reasons for believing that making the proposed rules is compatible with its general duty under Clause 2, at the same time as, or as soon as practical, after the relevant rules are made. The fact that the authority can make rules without consultation in certain circumstances should not remove the authority's obligation to deal with these particular matters in relation to the rules in question.
Amendment No. 157UA to Clause 152 addresses a rather different issue. We are concerned that many of the authority's rules will escape the discipline of the cost benefit analysis requirement because they will not be made under Clause 151 and will be "grandfathered" under transitional provisions. When he replies, perhaps the Minister will be kind enough to clarify the position on the "grandfathering" of existing rules.
Our other area of concern is that rules that have been made through the consultation process, including a cost benefit analysis, may cease to be appropriate over time. There does not appear to us to be any mechanism in the Bill for the review of such rules. The Minister will recall that the Opposition tabled a provision in Committee which would have obliged the authority to review and consult on existing rules three years after they were made. We were told that that would impose too great a burden on the authority.
Our proposed amendment to Clause 152 is a much more modest proposal. It simply requires a cost benefit analysis to be carried out as soon as practicable after the third anniversary of the making of any rule. There would be no obligation to consult, but the regulated

1421
community would have the comfort of knowing that the rules which govern and regulate its activities would be scrutinised in the context of a cost benefit analysis on a regular basis. We believe that every three years is a more than reasonable period for these purposes. I beg to move.
6.15 p.m.
Lord Newby: My Lords, we have considerable sympathy with the principal purpose of this clause; namely, that the authority should publish rules in draft, seek comments on them and then explain its view on the comments received. I explained in Committee the difficulty that we have with cost benefit analysis in this context. Frankly, it is almost impossible for such an analysis to be rigorous or even, in most cases, of any value whatever. Therefore, I wish briefly to comment on three of the amendments before us.
Amendment No. 157RA is an extremely small amendment. I hesitate to say that it is almost certainly otiose, but I suspect that it is. Amendment No. 157TA seems to me to exemplify the problem with cost benefit analysis in these cases. If the amendment were carried, someone would be asked to speculate—it cannot be anything more than that—on any increase in business activity that is expected to arise if the proposed rules are made. The judgment of Solomon would be nothing compared to the task of the poor character who would have to speculate on the benefits that might accrue from the passing of a rule, the main purpose of which might be to prevent certain kinds of action rather than to promote them. So we do not support this amendment.
Therefore, a fortiori, we find Amendment No. 157UA—a watered-down variant of the amendment to which I spoke in Committee—equally unacceptable. It suggests that a procedure with which we have considerable difficulty should be repeated unnecessarily. In the circumstances, we cannot support this amendment.
Lord Boardman: My Lords, the phrase "cost benefit analysis" has crept into commercial jargon in recent years to a most unfortunate extent. It is quite meaningless, unless you have a clear definition of the costs and an equally clear definition of the benefits that are to be set against them. It has been thrown about so often to justify whatever the thrower wishes to justify that it has no reasonable translation into anything meaningful. It would be very regrettable if the phrase were left in the Bill without the addition of the amendment proposed, which would ensure that the methodology used in such calculations would be clearly shown. Without such an addition, it will be a meaningless symbol.
Lord Borrie: My Lords, I found the last two speeches from the noble Lords, Lord Newby and Lord Boardman, to be extremely refreshing. The phrase "cost benefit analysis" trips off the tongue. One hears it all the time. During the Second Reading the other day of the Utilities Bill, my noble friend made a point
1422
that I believe would be most relevant to this debate; namely, that it is easier to establish the cost side of the matter than it is to establish the benefit side. Anyone who has an anti-regulatory philosophy like the noble Lord, Lord Kingsland, is bound to want a cost benefit analysis every week or, if possible, every month.
It is very easy to establish the pound sign as regards the costs involved, but it is much more difficult to establish the nature of the benefits. When you set the two alongside each other, you often get set out very neatly on one side the sign that the accountants can understand—the pound sign and the costs—while on the other are the benefits such as greater competition, more choice and more understanding by the public of the information that they receive. The provision of that information has a cost, but it is very difficult to put a pound sign against it.
I felt that I should make those comments because the last two speeches highlighted the matter. I listened to several of the speeches made by the noble Lord, Lord Kingsland, this afternoon, so I am perhaps feeling slightly depressed because so few other voices have been heard. I was very glad to hear the last two noble Lords speaking as they did.
Lord McIntosh of Haringey: Indeed, my Lords, and that applies to my noble friend. I bear the scars of cost benefit analysis. I used to bank with the National Westminster Bank when I was in business. My branch manager, or my business centre manager as he became, used to demand proof for all the forecasts that I made. He told me that I must do it by way of cost benefit analysis. I promptly asked, "What do you mean?"— I shall not go into the detail of his response. It was probably while the noble Lord, Lord Boardman, was chairman of the National Westminster Bank, or soon afterwards. I, too, am glad that the duologue between myself and the noble Lord, Lord Kingsland, has been broken. Thank goodness for that!
The amendments now before us would change Clause 151, which sets out the consultation procedures that the FSA must follow when making rules. This is an extensive consultation procedure, which we have strengthened during the course of the Bill's passage through Parliament. It is only right that we should do so because the FSA must consult widely among the regulated community when making rules. Perhaps I may explain why, in the Government's view, two of the amendments are unnecessary and why the others are inappropriate.
Amendment No. 157RA would require the FSA to publish an explanation of the methodology that it uses when it publishes a cost benefit analysis. There are already safeguards on this in the consultation process. The cost benefit analysis is published alongside the draft rule. The FSA must give notice that representations about the draft rule may be made to the FSA. Moreover, the FSA must have regard to these representations and must, in general terms, publish an account of them and its response.
Let us suppose that the FSA made a rule that specified only in vague terms that the benefits outweighed the costs. I cannot imagine that it would

1423
take long for it to receive representations that the costs and benefits had been insufficiently justified; in other words, the incentives are already there for the FSA to explain how it arrives at the costs and benefits of any rules, with all the qualifications that have been made about the difficulties of establishing benefits.
While still on cost benefit analysis, I should point out that the Government have said on a number of occasions that we do not believe it appropriate to specify on the face of the Bill the methodology used. I said in Committee—this will teach me to make jokes—that,
"those who conduct such analyses, such as the consultancy divisions of some major accountancy firms—
making sure that the noble Lord, Lord Sharman, was present—
"frequently change their methodologies because a good number of them do not work … 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".—[Official Report, 27/3/00; col. 566.]
Allowing for my levity, the principle remains the same. If we were to specify that any increase in business activity be included as one of the benefits from a proposed rule, we would freeze cost benefit analysis and we would not have the flexibility of adopting the right kind of cost benefit analysis for the right purpose.
I turn to Amendment No. 157UA which requires the FSA to carry out a cost benefit analysis of rules three years after they have been made. I notice that the noble Lord, Lord Kingsland, has not specified that the methodology should be included in this three yearly review. The noble Lord, Lord Kingsland, seems to think that our objection to this amendment, or to the comparable amendment in Committee, is that it would create too great a burden. That is not our objection. Our objection is that the amendment would require a blanket approach to review each and every rule every three years. That means an awful lot of unnecessary work. Not every rule will need reviewing, and of those that do, for some three years will be too long to wait for a review, for others it will not be long enough.
As I said to the noble Lord, Lord Saatchi, in considering a similar amendment in Committee,
"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".—[Official Report, 27/3/00; col. 566.]
That is exactly comparable to what would happen if we had a review after a statutory period rather than when it is necessary and, for example, when the consumer and practitioner panels decide that a review is necessary after they have performed their functions of considering the effectiveness of existing rules.
I turn finally to Amendment No. 157SA. This seeks to change subsection (7) of Clause 151. This subsection allows the FSA not to comply with the consultation procedures in Clause 151 when the delay involved in doing so would be prejudicial to the interests of
1424
consumers. This is a clever amendment because it does not dispute the need for the FSA to override procedures, but asks that it publish the information required for consultation—a cost benefit analysis, an explanation of the purpose of the proposed rules—on or as soon as practicable after making the rule.
However, Clause 151 is about the FSA's consultation procedures. The cost benefit analysis and other material are to help inform consultees about the proposed rule. It seems a little bureaucratic to ask the FSA to provide supporting material for a consultation process which has been overriden.
There are legitimate concerns about the FSA providing a justification for its rules, even for those which have to be drawn up quickly. It may in the event be able to provide the information sought by the amendment when the rule is made. However, we certainly do not favour imposing a requirement on the FSA to provide supporting material after the event. I do not know whether my response will depress or distress noble Lords, but I am afraid that none of the amendments that I have addressed will work.
Lord Kingsland: My Lords, I think that everyone would agree that cost benefit analysis has its weaknesses. However, I, for one, cannot understand how cost benefit analysis can be undermined by the publication of the methodology which was used in making that analysis. I can see only that that could enhance its quality. What possible objection can the Minister have for not publishing the methodology used to compile a particular cost benefit analysis? I am forced to the conclusion that the only motive the Minister can have is to disguise the quality of the evidence, whatever that evidence may be.
The Minister must accept that the money used to pay the authority comes from the City. It does not come from the taxpayer. The City is entitled to know whether that money is being used helpfully or otherwise. It is entitled to know whether the burdens it is required to bear as the result of what the authority is doing to it yield useful results. That can be done only if the methodology by which the FSA goes about its rule-making procedure is clearly understood. In my submission the Minister's response to the amendments is totally unacceptable. In those circumstances I wish to test the opinion of the House.
6.25 p.m.
On Question, Whether the said amendment (No. 157RA) shall be agreed to?
Their Lordships divided: Contents, 92; Not-Contents, 149.

Division No. 1

CONTENTS

Allenby of Megiddo, V.

Blackwell, L.

Anelay of St. Johns, B.

Blaker, L.

Astor, V.

Blatch, B.

Astor of Hever, L.

Boardman, L.

Attlee, E.

Brabazon of Tara, L.

Beaumont of Whitley, L.

Bridgeman, V.

1425

Burnham, L. [Teller]

Mackay of Ardbrecknish, L.

Buscombe, B.

Marlesford, L.

Byford, B.

Masham of Ilton, B.

Campbell of Alloway, L.

Miller of Hendon, B.

Campbell of Croy, L.

Molyneaux of Killead, L.

Carlisle of Bucklow, L.

Monro of Langholm, L.

Carnegy of Lour, B.

Monson, L.

Clark of Kempston, L.

Mowbray and Stourton, L.

Colwyn, L.

Moynihan, L.

Cope of Berkeley, L.

Murton of Lindisfarne, L.

Courtown, E.

Naseby, L.

Cranborne, V.

Northbrook, L.

Crickhowell, L.

Northesk, E.

Dean of Harptree, L.

Norton of Louth, L.

Dixon-Smith, L.

O'Cathain, B.

Elton, L.

Onslow of Woking, L.

Flather, B.

Park of Monmouth, B.

Fookes, B.

Patten, L.

Forsyth of Drumlean, L.

Pearson of Rannoch, L.

Fraser of Carmyllie, L.

Peel, E.

Freeman, L.

Pilkington of Oxenford, L.

Gardner of Parkes, B.

Prior, L.

Geddes, L.

Reay, L.

Glenarthur, L.

Renton, L.

Glentoran, L.

Rogan, L.

Goschen, V.

Rotherwick, L.

Gray of Contin, L.

Saatchi, L.

Harris of Peckham, L.

St. John of Fawsley, L.

Henley, L. [Teller]

Seccombe, B.

Higgins, L.

Sharples, B.

Home, E.

Skelmersdale, L.

Howe, E.

Stewartby, L.

Hunt of Wirral, L.

Stodart of Leaston, L.

Jopling, L.

Strathclyde, L.

Kimball, L.

Taylor of Warwick, L.

Kingsland, L.

Thomas of Gwydir, L.

Lamont of Lerwick, L.

Trefgarne, L.

Lane of Horsell, L.

Waddington, L.

Lucas, L.

Wakeham, L.

McConnell, L.

Young, B.

NOT-CONTENTS

Acton, L.

Darcy de Knayth, B.

Ahmed, L.

David, B.

Alli, L.

Davies of Coity, L.

Alton of Liverpool, L.

Dean of Thornton-le-Fylde, B

Amos, B.

Desai, L.

Archer of Sandwell, L.

Dholakia, L.

Ashley of Stoke, L.

Dormand of Easington, L.

Ashton of Upholland, B.

Dubs, L.

Avebury, L.

Elder, L.

Bach, L.

Evans of Parkside, L.

Barnett, L.

Falkland, V.

Bassam of Brighton, L.

Farrington of Ribbleton, B.

Berkeley, L.

Faulkner of Worcester, L.

Billingham, B.

Filkin, L.

Blackstone, B.

Fitt, L.

Blease, L.

Gale, B.

Borrie, L.

Gavron, L.

Bragg, L.

Gilbert, L.

Brett, L.

Gladwin of Clee, L.

Brooke of Alverthorpe, L.

Goldsmith, L.

Brooks of Tremorfa, L.

Goodhart, L.

Burlison, L.

Gordon of Strathblane, L.

Carter, L. [Teller]

Goudie, B.

Chandos, V.

Gould of Potternewton, B.

Christopher, L.

Graham of Edmonton, L.

Clarke of Hampstead, L.

Grenfell, L.

Clement-Jones, L.

Hardy of Wath, L.

Cocks of Hartcliffe, L.

Harris of Greenwich, L.

Cohen of Pimlico, B.

Harrison, L.

Colville of Culross, V.

Hayman, B.

Craig of Radley, L.

Hilton of Eggardon, B.

Crawley, B.

Hogg of Cumbernauld, L.

Currie of Marylebone, L.

Hollick, L.

1426

Hollis of Heigham, B.

Prys-Davies, L.

Howells of St Davids, B.

Ramsay of Cartvale, B.

Howie of Troon, L.

Rea, L.

Hoyle, L.

Rendell of Babergh, B.

Hughes of Woodside, L.

Richard, L.

Hunt of Kings Heath, L.

Rodgers of Quarry Bank, L.

Irvine of Lairg, L. (Lord Chancellor)

Rogers of Riverside, L.

Sainsbury of Turville, L.

Islwyn, L.

Sawyer, L.

Jay of Paddington, B. (Lord Privy Seal)

Scotland of Asthal, B.

Serota, B.

Kennedy of The Shaws, B.

Sewel, L.

Kirkhill, L.

Sharman, L.

Lea of Crondall, L.

Sheppard of Liverpool, L.

Levy, L.

Shore of Stepney, L.

Lipsey, L.

Simon, V.

Lofthouse of Pontefract, L.

Smith of Clifton, L

Lovell-Davis, L.

Smith of Gilmorehill, B.

Ludford, B.

Smith of Leigh, L.

Macdonald of Tradeston, L.

Stoddart of Swindon, L.

McIntosh of Haringey, L. [Teller]

Strabolgi, L.

Symons of Vernham Dean, B

McIntosh of Hudnall, B.

Taylor of Blackburn, L.

MacKenzie of Culkein, L.

Thornton, B.

Mackenzie of Framwellgate, L.

Tomlinson, L.

Mackie of Benshie, L.

Tordoff, L.

Mar and Kellie, E.

Turner of Camden, B.

Mason of Barnsley, L.

Uddin, B.

Massey of Darwen, B.

Varley, L.

Merlyn-Rees, L.

Walker of Doncaster, L.

Molloy, L.

Wallace of Saltaire, L.

Morris of Castle Morris, L.

Walpole, L.

Morris of Manchester, L.

Warner, L.

Newby, L.

Warwick of Undercliffe, B.

Nicol, B.

Watson of Richmond, L.

Northfield, L.

Wedderburn of Charlton, L.

Oakeshott of Seagrove Bay, L.

Whitaker, B.

Palmer, L.

Whitty, L.

Patel, L.

Wilkins, B.

Patel of Blackburn, L.

Williams of Crosby, B.

Pitkeathley, B.

Williams of Elvel, L.

Plant of Highfield, L.

Williams of Mostyn, L.

Ponsonby of Shulbrede, L.

Woolmer of Leeds, L.

Resolved in the negative, and amendment disagreed to accordingly.
6.35 p.m.
[Amendments Nos. 157SA and 157TA not moved.]
Clause 152 [General Supplementary Powers]:
[Amendment No. 157UA not moved.]
[Amendment No. 157VA not moved.]
Clause 153 [Guidance]:
[Amendments Nos. 157WA and 157XA hot moved.]
Lord Saatchimoved Amendment No. 157YA:
After Clause 154, insert the following new clause—
("CHAPTER IIA
POLICIES RELATING TO TAKEOVER REGULATION MARKET ABUSE: BEHAVIOUR CONFORMING WITH CITY CODE

.—(1) Subject to subsections (2) and (3), the code issued under section 116 may state that behaviour of a person which is in conformity with the City Code does not amount to market abuse.

(2) Subsection (1) does not apply in respect of behaviour which satisfies the condition in section 115(2)(a).

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(3) A statement made under subsection (1) may include such conditions and limitations as the Authority considers appropriate, including conditions and limitations concerning the categories of behaviour and classes of person covered by the statement.

(4) If a person behaves in a way which fulfils the requirements of any statement included pursuant to subsection (1) in the code issued under section 116, that behaviour of his is to be taken, for the purposes of this Act, as not amounting to market abuse.").

The noble Lord said: My Lords, I hope I will be forgiven if I detain your Lordships' House for a few minutes in order to give the background to this group of amendments. I do that because when we discussed similar amendments on the last day of the Committee stage it was very late at night—I think it was nearly midnight. I think it is fair to say that the amendments evoked some sympathy from noble Lords on all sides of the House. Therefore we want to visit them in a little more detail today. We brought forward two amendments in Committee. We are again bringing forward two amendments, but in a slightly modified form. I shall explain the modifications in a moment.
We said that we believe that the best way to safeguard effective take-over regulation in the City, while also enabling the FSA to administer the market abuse regime across all markets, was to amend the Bill in two ways. First, so that behaviour which complies with the take-over code would not constitute market abuse—that is, it would be what is called a "safe harbour"; and, secondly, in cases of non-compliance with the take-over code, the panel would have the ability to pass serious cases to the FSA. This would be based, we hoped, on criteria and parameters, which we believed could be pre-agreed between the panel and the FSA, in order that the FSA could consider whether market abuse had occurred and whether to take further action. But, other than in those circumstances, the FSA would not intervene directly. That was the point of our second amendment. In other words, we were trying to say that the panel would be the initiator; it would be, if you like, the gatekeeper.
But at the time the Treasury stated that it did not want to create what it thought would be the unusual situation of a non-statutory body being responsible for deciding, in respect of certain abuses, whether and when action could be taken under a statutory regime. The position then was that the Treasury stated that it did not want the FSA's powers to intervene in cases of market abuse, as it saw it, to be fettered in any way by the existence of the Takeover Panel. The reason the Treasury gave was that it believed that self-regulation had failed in the regulation of market abuse and needed to be replaced by statutory regulation. That was the point of the Government's objection to our two amendments.
I am pleased to say that since then there have been many discussions among all the parties—the Treasury, the Financial Services Authority and the Takeover Panel—but I am disappointed to report to your Lordships' House that, despite the best efforts of all the parties concerned, they have not been able to reach an agreement. Therefore, we are having to return to these points again. Although the three parties do not appear to have reached agreement on the way forward, apparently some things have been agreed between
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them. What seems to have been agreed is that the panel system of regulation is acknowledged around the world as successful and effective. The Government's approach to the European 13th company law directive on takeovers—known as the takeover directive—makes clear that they share that view and do not wish to alter the current system.
It also seems to be agreed by the panel, the FSA and the Treasury that there is a significant overlap between the panel's regulation of takeovers and the FSA's responsibility for the new market abuse regime under the Bill. It is also agreed by the three parties that regulatory overlap is undesirable. The panel, the FSA and the Treasury are apparently also in agreement that the panel's regulation of takeovers should not be undermined and that the FSA apparently does not wish to be drawn into takeover regulation in parallel with the panel.
There, I am afraid, the points of agreement end and the points of disagreement begin. We understand that it is the panel's view that the Government's proposals in the Bill as it now stands will,
"seriously undermine effective takeover regulation as they are likely to lead to delay and will cause damaging uncertainty".
The panel also states that:
"They are also likely to lead to increased litigation".
With respect to the panel, it is agreed among all the parties that its reputation is excellent. Therefore, it is worth spending a moment looking at what the panel is saying in those quotations because they are serious and worrying charges.
It is certainly in no one's interest for one regulator to be critical of the regime of another regulator in this country if only because, human nature being what it is, the other regulator is likely then to return the compliment. That is surely not the path that we want to go down. Therefore, with the hope of bringing harmony where there is discord, if I may use a famous phrase, our new amendments have now been modified to reflect the debate in Committee and in the hope that they may in this form attract more government support.
First, our provision relating to the need for consultation by the FSA with the panel prior to any exercise of its powers which might impact on a bid has been removed. We have done that because the FSA has now offered to make a public statement which confirms that it will do just that. Secondly, a new subsection has been included in each clause to give the FSA an overriding power to impose limitations and conditions on the practice of the Takeover Panel's City code. We understand that it is desirable to give maximum flexibility to the FSA to carry out its remit. For example, if a bidder were to make a misleading statement which had an impact on the share prices of every company in the same sector as the target, the FSA should be free to take action against the bidder under the market abuse regime without the need for a request from the panel. Our proposal, which is that the FSA will have an ability to impose conditions or limitations on the conduct of the code, would allow the FSA to do that. Under these amendments, the FSA

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will be able to bypass both provisions—the safe harbour provision and the gatekeeper provision—if it feels that it urgently has to do so. The key point is that in the real world the panel is making dozens of rulings every week on the application of the City code and it constantly gives informal guidance to those who seek advice on its code. Apparently, its decisions sometimes have to be made in a matter of minutes.
The Takeover Panel as presently constituted is able to do that because interpretation of the City code is not a matter of law. The City code is no more than a n umber of general principles which are expressed in broad terms and are what a "reasonable person" or, if your Lordships prefer, a "regular user" would regard as good standards of commercial behaviour. These are applied by the panel in accordance with their spirit—in other words, to achieve their underlying purpose—and the panel can relax or modify the effect of their precise wording accordingly. The panel looks to see that the spirit is observed as well as the letter and the panel can modify or relax a rule if it considers that in the particular circumstances of the case the rule would operate unduly harshly or in an unnecessarily restrictive or burdensome manner.
That is why we believe that our amendments are consistent with the definition of market abuse in the Bill which we have now settled after lengthy debate. We have agreed that conduct is not market abuse unless it is likely to be regarded by a regular user as a failure on the part of the person concerned to observe the standard of behaviour reasonably expected. That can be applied perfectly well to the current panel procedures which we wish to preserve precisely because it is unlikely that a regular user would regard a person who has complied with his City code responsibilities as having failed to observe this standard of behaviour.
Unless conduct which conforms with the City code has the scope to create a safe harbour, which is the thrust of our first amendment, there will be scope instead for tactical complaints to the FSA during takeover bids, tactical attempts to review the FSA's decision and tactical potential for delaying the bid process. Our amendments remove those possibilities. They also remove the need for the FSA to consider complaints made to it. They also remove the possibility that the FSA may actually and publicly have to disagree with the panel. We should not provide scope for disaffected parties in a bid to make tactical complaints to the FSA regarding the panel's decisions. If they could do that, the FSA would need to give sufficient consideration to those complaints to be able to demonstrate if challenged, as it might be, that it had approached with an open mind the question of whether or not it needed to exercise its powers. In any event, the whole process of the FSA considering these matters is likely to cause delay simply because the involvement of two regulators will inevitably be slower than one. Will the FSA be able to make its decisions in the kind of timescales to which the panel operates?
Perhaps I may give an example. Consider what would happen if we open up in the Bill, as would be the case without our amendments, the possibility for
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tactical applications for judicial review of the FSA's decisions on the exercise of its enforcement powers in a hard-fought takeover battle. If the FSA does not exercise its powers, it may be reviewed on the basis that it has fettered its discretion. If it does exercise its powers, it may be reviewed on the basis that it has frustrated legitimate expectations. Either way, there is the potential for delay and confusion at a critical moment in the lives of corporations and individuals.
In conclusion, I hope that the Minister will either shortly accept the amendments or, better still, will announce that, as a result of his offices, agreement has been reached on a sensible modus operandi between the Financial Services Authority and the panel. I beg to move.
Lord Newby: My Lords, I find this to be one of the most vexing issues raised by the Bill, because one starts out with a large degree of common ground, as the noble Lord, Lord Saatchi, has outlined. First, it is clear that any overlap between the panel and the FSA in relation to market abuse should be minimised. Secondly, it is common ground that the panel does extremely valuable work, and does it extremely well, and that nothing in the Bill should undermine that work in that the FSA should not seek to duplicate the work of the panel. Thirdly, it is common ground that if the panel system fails, the FSA's powers may well be needed. But at that point the common ground breaks down.
The amendments seek to deal with the problem by, first, extending the safe harbour provision in Clause 18 to behaviour conforming with the City code and, secondly, seeking to introduce a gatekeeper provision, so that where a person has not followed the City code the FSA cannot exercise its powers under the market abuse regime, except following a request by the panel.
Both amendments seek to avoid confusion, and both would, I suspect, largely achieve that objective. Unfortunately, I am not sure that both would produce the correct result. Of the two amendments, I am sympathetic to the first. It is difficult to see an argument for pursuing someone who has complied with the City code in the circumstance in which safe harbour provisions already exist in relation to the market code that is to be introduced under Clause 16. If there is a safe harbour for the market code, the argument for having a safe harbour for the City code is extremely strong.
The second amendment causes us more difficulty. We have had significant and long discussions with both the FSA and the Takeover Panel on the issue. The Takeover Panel's view in a nutshell is that without the amendment there would be delay and a loss of effectiveness of the regulation of market abuse. The FSA's view is that if the amendment is agreed to there will be delay and a loss of effectiveness in the regulation of market abuse. Faced with those two strongly held views, our principal concern is that if the amendment were to be carried it would debar the FSA from taking action in any case where it believed there

1431
could be market abuse in the context of a merger. That seems an undesirable fettering of the role of a principal and primary regulatory body.
I am slightly concerned also about the way in which the Takeover Panel envisages the amendment operating. The first line of Amendment No. 157ZA contains the dread word "may". The amendment states that the authority "may adopt a policy". My understanding of the way in which the panel sees the amendment operating, were it to be carried, is that, before it came into effect and before the "may" became "shall" or "have to", there would need to be agreement on a policy statement as to how the two bodies would work together, a statement would need to be inserted into the market code, and operating arrangements would need to be agreed between the two bodies. Furthermore, if such a provision came into force, the FSA would have the right at some point to withdraw its agreement to the operation of the amendment. That is my understanding of how the panel sees the proposal working.
This seems to be a model. The best approach, as the noble Lord, Lord Saatchi, has said, would be for the FSA, the panel and the Treasury to produce a code of practice covering all these issues and in particular the circumstances in which the FSA might seek to intervene, and equally the circumstances in which the panel would take the lead and the FSA would not seek to intervene. In some senses that seems to be the approach that has been successfully followed by the Treasury, the Bank and the FSA in dealing with systemic risk: a policy document rather than a statement on the face of the Bill dealing with how the three bodies, all of which have a role to play in respect of systemic risk, will deal with circumstances which, in the area of mergers and takeovers, can require action to be taken very quickly. Were such an agreement to be drawn up, it would greatly reduce the likelihood and scope for judicial review, which is understandably a concern as matters stand.
Talks have been under way for some time to achieve such an agreement but they have yet to reach a positive outcome. My preference would be for the Treasury, in time-honoured fashion, to get a grip on all these matters and seek to achieve a quick agreement which would allay the fears of the panel without completely preventing the FSA from having any powers of initiative. The talks have been continuing, but, given what I have heard from the participants, without any great sense of urgency. It is the fact that there is no agreement in this area, when there has been agreement in such areas as systemic risk, which causes the problems with which we are now grappling. It would have been far preferable had such an agreement been reached by now, or if it could be reached by Third Reading. I suspect that that is wishing for the moon. However, I should welcome an assurance from the Minister that efforts to achieve an agreement will be intensified, with the Treasury taking a more proactive stance on this most vexatious matter.
Lord Forsyth of Drumlean: My Lords, I should remind the House that I have an interest in this area as a practitioner in mergers and acquisitions and as someone authorised by the FSA. All noble Lords will have seen the material circulated by the Takeover Panel. The panel is clearly concerned about these matters. I support my noble friend Lord Saatchi in these amendments because I believe that they deal with a serious issue.
I once saw a cartoon showing two Treasury officials standing outside their department in Whitehall—I hasten to add that it was while we were in government, but I am sure nothing has changed—and one was saying to the other, "Well, that's all very well in practice. What's wrong with it in theory?" I have the impression that one of those officials was responsible for drafting parts of the Bill. I give way to the Minister who I am sure is about to show his knowledge of philosophy.
Lord McIntosh of Haringey: My Lords, I would merely say that it is not Treasury officials; it is Wittgenstein.
7 p.m.
Lord Forsyth of Drumlean: My Lords, if the Minister has not learnt by now that Treasury officials were weaned on Wittgenstein, then I am very concerned indeed.
The key element is that the proposed market abuse regime would undoubtedly undermine the Takeover Panel. What has driven this proposal is the idea of having to achieve consistency. Perhaps the Minister can say who came up with the other cliché that if it is not broken we should not try to fix it. The system as it operates at present is certainly not broken; it works extremely well, and in circumstances that are often complex and require action very quickly and sometimes in the early hours of the morning, such are the extraordinary ways in which takeovers and mergers are carried out.
If the Takeover Panel had got into difficulties or had failed, one could understand the reason for this move to destroy an effective system of self-regulation. The truth is that the panel is well-established—over 30 years—and is well respected. It has the experience, ability and technical knowledge to react quickly and decisively, and also the ability to apply its rules to accommodate changing market circumstances.
Although I declared an interest, I see that at the end of the day if there is any confusion in this area it is advisers, lawyers and others who will make substantial sums of money from the fees that will be generated in order to deal with the chaos that has been caused.
The real beneficiaries of an effective takeover panel and system of regulation are shareholders. The job of the Takeover Panel is to ensure that shareholders' interests are looked after, that they are treated equally and that there is an overall framework for the conduct of takeovers. It is extraordinary that in undermining the Takeover Panel and compromising the system of takeover regulation the proposed market abuse regime

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should defeat the fundamental purpose of this Bill: effective regulation. That is what we have now. If one has two authorities with jurisdiction in an area, there is no doubt that there will be cause for confusion, delay and uncertainty. The benefits of speed and certainty of decision will be lost if ultimately the FSA has the ability to intervene during a bid.
In his opening remarks my noble friend referred to the opportunity for tactical manoeuvre if there is uncertainty in the regulatory regime. There are all kinds of very clever people in the City who earn substantial sums by exploiting precisely that opportunity. To create a statutory regime of this kind alongside the Takeover Panel will afford opportunities for judicial review and tactical delay, none of which will be in the interests of shareholders.
If the Minister is not now in a position to accept this amendment perhaps he will look at it again. In the context of takeovers it is essential to create a clear and legally secure boundary between the jurisdiction of the Takeover Panel and that of the FSA. I believe that that is in the interests not only of shareholders but the credibility of this Bill and the FSA itself. As my noble friend observed, the standing and reputation of the FSA, which are essential for the purpose of this Bill, will not be enhanced if it is drawn into controversial and protracted disputes involving complex takeover situations.
Lord Boardman: My Lords, I have known the Takeover Panel for many years, even in the days when its chairman was the noble and learned Lord, Lord Shawcross. Since then the Takeover Panel has had other distinguished chairmen. For many years I sat on that panel. I very much regret that the Takeover Panel has been hooked on to the FSA. The Takeover Panel has worked brilliantly in the most controversial areas where lawyers have not been allowed to participate. That is not a blessing with which all lawyers agree. However, it has the considerable advantage of enabling the panel to get things done speedily. Quite often the announcement of a controversial takeover will he made early in the morning and the panel meets during the day or night. A decision will be made and the code honoured, and that has been one of the great successes of the City. I very much regret that the Takeover Panel is to become bogged down in what is bound to be a mass of bureaucracy, legal cases and time-consuming arguments as a result of involvement in this Bill.
The amendment moved by my noble friend is intended, and rightly so, to reduce the amount of interference in, and give greater freedom to, the Takeover Panel. I applaud it. In many ways I should like it to go further. I support the point just made by the noble Lord, Lord Newby. If the Takeover Panel and FSA can agree with the Treasury on a system which is a continuation of what has happened in the past the panel will be able to hear the facts. Businessmen and others who understand what is at stake can reach a rapid decision, which has always turned out to be to the advantage of the shareholders concerned, rather than become involved in long drawn
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out litigation, as is inevitable when these matters are hooked on to the Bill. I support my noble friend's amendment, although I should like the Takeover Panel to be removed altogether. I understand that that now cannot be. I hope that the system can be given the degree of flexibility which this amendment provides to enable the panel to prosper and serve the industrial sector of this country well in the years ahead.
Lord Donaldson of Lymington: My Lords, I have not had the long experience of the Takeover Panel that other noble Lords, such as the noble Lord, Lord Boardman, have had. The panel swam into my ken when a company called Datafin applied for judicial review of the Takeover Panel. The argument in that case was a fascinating one. It was said on behalf of Datafin that one could not have a body of that kind with powers of life or death, albeit indirectly, over people operating in the City without some external control by the law. As I recall, the noble Lord, Lord Alexander of Weedon, appeared for the Takeover Panel. He said that, first, there was no jurisdiction to review the Takeover Panel judicially because it had no statutory base. In that he was plainly right, although it was not a very appealing argument. Secondly, the noble Lord argued that the Takeover Panel could not operate if there was a possibility of the courts intervening, particularly bearing in mind that the Takeover Panel could on occasion work at lightning speed. He asserted that it would be prevented from so doing if there was an application pending before the courts.
In that case the court decided to ignore the argument that it had no jurisdiction and indulge in a little judicial engineering, in which I take some pride. We decided that the panel could be judicially reviewed but that it never would be in the course of a bid unless the conduct of the panel had been previously condemned by the court in leisurely proceedings following a bid. I believe that that was a very good approach, and the courts have followed it ever since on the rare occasions that anyone has sought to involve them. The involvement of the courts inevitably leads to every kind of tactical manoeuvre and will kill almost any bid stone dead. I am sure that the courts retain that policy at the present time.
However, we must do something about the FSA. If one studies the amendments in broad brush outline, not in detail, one finds that they achieve exactly what the courts have achieved. There is a safe harbour for someone who complies with the City code, and for the moment that is it. If the FSA disagrees it will say to the Takeover Panel that it has got it wrong. One of the great features of the panel is its ability, without the intervention of government or either House of Parliament, to alter the City code. I expect that, as a result of discussions, the City code would be altered and in future the safe harbour would be removed. That was exactly what the courts decided in Datafin and what they have done ever since. If it appears to the FSA that the Takeover Panel is being singularly unresponsive, which is a very unlikely event, it can

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alter its policy so that the matter is taken on board straight away, and Parliament will give it the authority to do so.
It has been suggested that there should be a code devised by the parties to decide when the safe harbour applies or the FSA should exercise its discretion. I do not think that can be done, because the situations are so varied that you will always be legislating for the train which has already left the station. It really would not work. This, I think, would work. Perhaps there are refinements which could be introduced but, apart from anything else, it is important that the authority should have statutory power to adopt a policy of masterly inactivity, which of course is provided by the second amendment.
If you do not have that, you will have trouble with people going to the courts and saying either that they have confined their discretion in a way that is impermissible or that they have never thought about the matter at all. They need that even if they get nothing else, and I hope that the House, if its opinion is tested, will insist on putting these amendments into the Bill.
Lord Elton: My Lords, in considering the very illuminating remarks of the noble and learned Lord, Lord Donaldson, I hope that the Minister will consider the nature of events with which the Takeover Panel is customarily involved. My noble friend Lord Boardman has already alluded to this and I have seen it at first hand as a member of the panel in the past.
The fact is that to think of the panel as exercising the functions of a justice of the peace or a judge is to misunderstand the work that it does. The panel is more in the position of a tennis umpire who has to make immediate decisions which need to be upheld and which need to be practical. That is exactly what the panel is designed to do and what it cannot do if another authority is at any stage able to interpose and stop the game. It would be as absurd for that to happen in a takeover battle as it would be on the Centre Court at Wimbledon
In thanking the noble and learned Lord for making this so clear, I ask the noble Lord, Lord Newby, if he has a moment, to consider whether it is right for the parties which are to be regulated by this legislation actually to make it impossible to perfect the legislation by a failure to agree on how it should operate. I endorse his request that the greatest pressure should be brought to bear on those who need to declare their position on the way it will work so that that agreement shall be available before Third Reading and so that the second of these amendments—or something very like it—can also be incorporated. I can see no reason for delaying the first.
7.15 p.m.
Lord Stewartby: My Lords, I rise briefly to support my noble friend Lord Saatchi and others who have spoken about the need to resolve this matter. I have read and re-read the comments of the noble Lord,
1436
Lord McIntosh, in Committee. He said then that he did not really like the amendments because of their general approach to the Bill, but that he accepted that there was a problem here which needed to be addressed.
The difficulty in which your Lordships' House finds itself now is that we have no idea how the Government think that this issue should be resolved. It is recognised by all parties that there is an issue here which needs to be resolved, but we have reached the last day of the Report stage on legislation which over many months has been under intensive discussion and consideration in another place and in this House; yet we do not seem to be any further forward on getting an idea of how the Government or the FSA think that this issue should be dealt with.
I think the very least that the noble Lord owes us tonight is a commitment to produce the Government's view on how this matter should be dealt with before we get to Third Reading. Nobody is going to pretend that specific amendments tabled by Opposition Members on technical issues are necessarily going to be all that they should be; nor that they should necessarily be incorporated into a complex Bill of this kind as they stand on the Marshalled List.
However, I do not think that anyone denies that the situation, if not resolved, will lead to a frustration of much of the work and functions of the panel. As a number of your Lordships have said, there are two ways in which the panel's proceedings could be frustrated. One is by the injection of uncertainty. If the say-so of the panel on a matter of dispute is not to be the substantive decision on that, uncertainty could be introduced. Delay is the other danger, and I feel that is the one that would actually be more frequently used. In the very highly charged circumstances of a contested takeover bid, one of the few weapons which the target may have is to spin out the matter in the hope of causing more uncertainty among investors.
It is not just the interests of shareholders which may be damaged by this, but also the interests of the market as a whole. The market's functioning can be damaged by prolonged uncertainty, particularly when major companies are involved, in a way which can actually lead to the opportunity for market abuse elsewhere. The doubt about the status of a transaction is one of the circumstances in which malpractice may appear.
We are all in this House absolutely committed to dealing with issues of market abuse. We realise that there is a potential conflict here between statutory powers of a reserve form in the hands of the Financial Services Authority and the need for speed and decisiveness by the panel in the heated circumstances in which it is called upon to operate.
This has been a very good-natured debate, but I should not want the Government to feel that the good nature with which the debate has been conducted means that there is not here a very serious issue which has not so far been dealt with and on which, by this stage in the Bill, we ought to have had much more specific guidance from the Treasury Bench. I hope that the noble Lord who responds will be able to give us at

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least greater insight into the Government's thinking on the way they will deal with this. Better still, I think it should amount almost to a minimum commitment that something very much more specific will made available to your Lordships before Third Reading. It may be that the suggestions of the noble and learned Lord, Lord Donaldson, could be built on by the Government and formulated in a way which would fit these particular circumstances. That something needs to be done is, I think, undeniable. I think that that is the feeling in all quarters of your Lordships' House. I very much hope that the Government will find it in them to speed up the consideration of this issue and that they will come forward with a workable solution.
Lord Goldsmith: My Lords, I do not want to detain your Lordships for too long. My sight of the Takeover Panel has principally come from my work as a barrister practising to some extent in a field where the Takeover Panel operates. As the noble Lord, Lord Boardman, has said, that has not included my being allowed to appear in front of the Takeover Panel. I hope that that sort of custom will not be allowed to extend to other bodies.
As a result of having seen the way the Takeover Panel operates, I recognise that it is an effective and most important part of the operation of the financial community. Therefore, having taken note of the concerns expressed by the panel, I have had concerns a bout whether, without some degree of clarification of the ambit and the respective areas in which the two bodies will operate, it may undermine the operation of the panel.
I am not sure that some of the concerns are necessarily expressed correctly; there may be more fear than there needs to be. However, I share the concerns of others who would have liked to see some agreement reached by which the respective functions of the two bodies would be clarified.
I agree with the noble Lord, Lord Newby. I do not see immediately enormous harm in Amendment No. 157YA. Under Clauses 116 and 118 the Bill already recognises that the authority may state in a code that certain behaviour described by it will not amount to market abuse. Under Clause 118 someone who behaves in the way described will be protected from a charge of market abuse. It might be said that it is already open to the authority, therefore, to issue a code in which, if it is of that opinion, it states that conduct which complies with the City code would not amount to market abuse.
If the authority is able to do that under the Bill as drafted, it might be argued that it is unnecessary to add this provision. On the other hand, it would send a clear message that that kind of behaviour would not amount to market abuse; and that would be helpful. As drafted, the amendment does not require the authority to reach that view; it gives it the power to state that in a code, and subject to such limitations as the authority thinks fit.
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I have more difficulty with the second amendment. I understand the argument raised by the Minister in Committee: that this would appear to give a non-statutory body the power to tell a statutory body what to do. I understand the objections to that course.
I shall listen carefully to what the Minister is able to say about the discussions to which he referred in Committee and to which reference has been made by other noble Lords today. I hope that at Third Reading some agreement will be forthcoming which will clarify the differences.
Lord McIntosh of Haringey: My Lords, it is clear that there is a great deal of common ground on the issue. That common ground was expressed most clearly by the noble Lord, Lord Saatchi, in introducing the amendments and by the noble Lord, Lord Newby. We all agree that the Takeover Panel does a good job in overseeing the procedures and practices of parties to takeovers. We have agreed that it is widely respected. That goes back for many years. We want the panel to continue to do that job in the effective way it has done so to date.
We agree also that there is some overlap between some of the things the panel does and the territory covered by the new market abuse regime. However, equally clearly, that can be dealt with in the same way as other overlaps—for example, between the market abuse regime, the rules of recognised investment exchanges and clearing houses and between the ESA's role as prosecutor and that of the other prosecutors.
There is nothing inherently special about the position of the panel compared with exchanges that makes us feel that a different approach is warranted here. This is not a new concern. Overlaps exist at present between regulatory rules and some criminal offences and the rules of the Takeover Panel, exchanges and other regulatory bodies.
Where issues arise, they are dealt with at present through policy statements, practical arrangements, liaison and information sharing. There has been no difficulty about that to date; and I see no reason why there should be particular difficulty. However the panel—perhaps I may say to the noble Lord, Lord Stewartby, that it raised these issues only in the past few months, and not during the early stages of the Bill—fears that the fact that the new market abuse regime is a statutory regime will change matters. It fears that because the regime is statutory it will be easier for aggrieved parties in a hostile takeover to seek to involve the FSA in an effort to frustrate the takeover. Those parties, the argument runs, will find it easier than now, with regulation currently being largely on a contractual basis, to seek judicial review in circumstances in which the FSA decides not to respond to a request that it should consider exercising its powers under Part VIII of the Bill at a time when a takeover is in progress.
In theory, there may be something in that argument (as Wittgenstein might have said) but not in practice. It is the case that the FSA cannot bind itself never to

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consider whether it should take action under Part VIII of the Bill when a bid is in progress, but it would not be appropriate for it to do so.
I was interested to hear the explanation of the noble and learned Lord, Lord Donaldson, of judicial engineering in the Datafin case. The attitude of courts to the Takeover Panel and the takeover code is well known. They have not said that they will never intervene while a bid is in progress. They have indicated that the circumstances in which they would be prepared to do so would be very rare indeed. With great respect to the noble and learned Lord, I think that is the solution for the Takeover Panel. I believe that it is possible to do that. It is open to the FSA to adopt a similar attitude to that which the courts have adopted without running the risk of fettering its discretion in an unacceptable and irreversible way, and that is what the second amendment in particular does.
Lord Forsyth of Drumlean: My Lords, I am handicapped because I am not a lawyer. However, can the Minister deal with this specific point? If the FSA were to act as he suggested—that is, not to intervene—the argument runs that it would then be vulnerable to an action for judicial review because it had not examined the circumstances of a particular case. That would lead to delay and the kind of problems which have been described.
Lord McIntosh of Haringey: My Lords, I have the same handicap as the noble Lord. I am not a lawyer either. I plan to come to that later.
The point I make here is that the policy that the noble and learned Lord, Lord Donaldson, called masterly inactivity is as open to the FSA as to the courts. The fact that it cannot run the risk of fettering its discretion does not mean that it cannot refuse to intervene in tactical matters, and say so in advance. It would be wrong if parties to a bid and others involved in it could circumvent the clear position which the courts have adopted through the back door of the new regime in Part VIII of the Bill. The courts would not look kindly on any attempt and would look favourably on any effort by the FSA to avoid that happening.
The effects of Amendments Nos. 157YA and 157ZA would be, first, to allow the FSA to provide effectively that in the area of takeovers market abuse is whatever the Takeover Panel says it is; and, secondly, to allow the FSA to adopt a policy that it will intervene only in certain areas of market abuse where the panel invites it to do so. Thirdly, they appear to attempt to avoid the panel being in any way publicly or legally accountable for anything it did or failed to do in the course of discharging the wide-ranging functions that the amendments would by implication bestow on it.
These are serious charges about both amendments. However, I want to emphasise that the two amendments are conceptually different propositions. Amendment No. 157YA is concerned with the status of the City code and the question whether compliance with it constitutes market abuse. On the last occasion,
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two amendments covered both safe harbours and discretion as to who should take action. We rejected them. But we rejected them—it is important to note—for the same reason. As a matter of principle we do not agree that the FSA should be able to fetter its discretion in this way.
Returning to the point raised by the noble Lord, Lord Forsyth, the issue is not whether it would be subject to judicial review if it fettered its discretion; it would be reneging on the duties which will be given to it by statute in the course of the Bill.
Amendment No. 157ZA is concerned with the circumstances in which the FSA can take action where an abuse which has contravened the code occurs. It is about who takes decisions, and not, like Amendment No. 157YA, about whether the behaviour is abusive.
My concerns as a matter of principle are obvious. If the FSA agreed to "turn on" these provisions, as it would in the first line of the second amendment, the effect would be to give the Takeover Panel, a non-statutory body which is not subject to accountability or transparency arrangements comparable to those of the FSA, powers over the FSA which neither the Treasury nor Parliament has. Treasury Ministers cannot tell the FSA when something is abuse or when it is not. The definition of abuse is provided for on the face of the Bill in Part VIII.
Let us remember what we are doing in this Bill. We are setting up the FSA as the single statutory regulator of the financial services industry. What it does is conditioned by the objectives and principles which Parliament is giving it, among them the protection of consumers and the maintenance of market confidence. In the area of market abuse, we are giving it new powers to protect the financial markets, extending its reach to cover both regulated and unregulated persons. Together with that, it has statutory investigation powers enabling it to compel people to answer questions.
The Takeover Panel, however good a job it does in regulating the conduct and process of takeover powers—and we are all agreed about that—is a very different body. It is not subject to the statutory checks and balances; for example, it is not subject to consultation requirements, cost-benefit analyses, annual reports, independent complaints investigations and so on.
There are good reasons for maintaining the current non-statutory approach to the regulation of takeovers. We want the process to be as quick and efficient as possible. But where market abuse is concerned, the last word should rest with the body to which Parliament is giving the job of tackling the problem. Only in this way will we ensure that there is consistency and coherence in the regime.
We have to remember that interests other than those of shareholders in the various parties to a takeover are at stake. There is the interest of other market participants and the market as a whole, where concerns of fairness and efficiency are at the heart of what we are doing.

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Furthermore, there will be times when it is appropriate for the FSA to take action against market abuse during a takeover. The amendments recognise that—there is no disagreement about it—as has the panel in its talks with us. Examples might be where the abuse was very serious and affected companies other than those involved in the takeover or where a party to a takeover did not comply with a panel ruling.
Given that all sides acknowledge that there will be occasions when it is appropriate for the FSA to take action under its market abuse powers, the key question is who should take that decision. I believe firmly that the decision in a particular case should rest with the statutory regulator which Parliament has charged with the responsibility of tackling market abuse across the board.
I cannot accept that it is right for the FSA to be able to adopt a policy of only ever exercising its market abuse powers where a takeover is involved on the say-so of the panel. Apart from the point of principle, as a practical matter it would not be desirable for the FSA to be able to take action only at the request of the panel. The panel may not always be in possession of the facts because it does not have the direct statutory investigation powers.
However, I have been properly challenged about what the practical solution to the problem will be. I believe that it has to be, and would be if the amendments were carried, administrative arrangements; in other words, agreement between the Treasury, the FSA and the panel. As is well known, the Treasury has been brokering meetings between the panel and the FSA and I want to report on what has happened during those meetings.
There are three important factors. We have made a great deal of progress, although we have not yet completed the process. The first is a policy statement setting out the FSA's general policy in relation to takeovers. While the FSA cannot adopt a policy of never intervening regardless of the circumstances—any more than the courts can—as that would be unlawfully fettering its discretion, it can adopt a policy of not intervening generally where it feels that the panel can take adequate action. We are assured by the FSA that it will do so. That is my answer to the question posed by the noble Lord, Lord Saatchi.
I now return to the question asked by the noble Lord, Lord Forsyth. The FSA can adopt general policies to which it must be prepared to make exceptions. If the case in question does not warrant an exception being made to the general policy, a judicial review will not succeed. Of course proceedings for review may be brought, as they may be brought against the panel, but in a case such as the one I have mentioned it is unlikely that the courts will grant the necessary leave for an application to be made.
The discussions could involve a general policy of the FSA not intervening in response to a request which it believes has been made for tactical reasons and not because of the concern that serious abuse has taken place. Again, that is in answer to the concerns expressed by noble Lords opposite. That is the first front.
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The FSA is currently working with the panel on a statement which will provide as much clarity as possible on the kinds of cases in which it would seek to intervene. These will be the more serious and urgent cases involving widespread abuse which goes across sectors or involves other parties than the parties to the takeover. The FSA's intention is that the statement of policy will address issues of timing, a delay in the exercise of certain powers and whether to impose a penalty until after the completion of the bid process.
The second front is the code of market conduct provided for in Clause 116. The FSA is required to produce a code which gives appropriate guidance to those determining whether or not behaviour amounts to market abuse. The FSA is working with the panel, as it is with recognised bodies, to identify rules which are capable of providing such a safe harbour.
Finally, the FSA and the panel are working on an operating agreement setting out clearly the arrangements for the sharing of information, liaison and co-operation.
I was asked particularly by the noble Lords, Lord Newby and Lord Elton, why there appeared to be no urgency in the process. There certainly is urgency in the process. There are strong incentives for both the main parties in the negotiations to make rapid progress against a background of uncertainty as to whether the Bill would be amended. I believe that if the House is established in the view that an amendment on the face of the Bill is not the best way forward, that will help progress to be made in the negotiations. I will ask the FSA to produce a position paper before next Thursday—before the Third Reading of the Bill—for circulation to all noble Lords who have shown an interest in the matter. As I have said, the FSA is currently working on a policy statement, operating agreement and code of market conduct for safe harbours.
I am sure that those arrangements are the right way forward and provide a satisfactory solution to the problem. Under those circumstances, I cannot agree that the amendments, which are separate and not consequential on each other, would be helpful in the negotiations or would help us to reach the agreed conclusion which is necessary for both the Takeover Panel and the FSA, and I ask the House to reject them.
7.38 p.m.
Lord Saatchi: My Lords, I am grateful to my noble friends Lord Forsyth, Lord Boardman, Lord Elton and Lord Stewartby for supporting the amendments and also to the noble Lord, Lord Goldsmith, for supporting Amendment No. 157YA.
The summary of what the Minister said is that we are promised a position paper from the FSA before next Thursday. That appears to be the action that will follow from today's short debate. However, as some of my noble friends said, that is not what we are looking for at all. We are looking for a view from the Government about how they will resolve a pressing problem—which was pointedly described by the noble Lord, Lord Newby—that we have before us two

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critical regulating bodies which have an overlap in their regulatory powers. That is bad enough and is not good organisation. But what is worse is that in the overlap they have already disagreed on fundamental aspects of their respective roles. I believe that that is why the noble Lord, Lord Newby, and other noble Lords said that we need an agreement on the circumstances in which the FSA would intervene directly over the head of the Takeover Panel.
In, I believe, a most important intervention, the noble and learned Lord, Lord Donaldson, said that such an agreement could not be achieved because too many circumstances were involved. I believe that he said that he preferred our amendment which (he said in a striking phrase) gave the FSA the power to apply with "masterly inactivity". I believe that that is why he preferred our amendment to any possible agreement. However, either by way of an agreement brokered by the Treasury or by way of agreeing to these amendments, the Government will surely offer the House at Third Reading more than the position paper from the FSA.
The Treasury is responsible for the situation that we are about to enter. I hope that one way or another it will find a solution before Third Reading, either via our amendment or via an agreement. As an inducement to the Treasury to try to find such an agreement, I hope that it will reflect on the fact that if it does not, then—perish the thought!—the decision might be taken by votes in your Lordships' House. In the meantime, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 157ZA not moved.]
Clause 155 [Interpretation]:
[Amendment No. 157A not moved.]
Lord McIntosh of Haringey: My Lords, I beg to move that further consideration on Report be now adjourned. In moving this Motion, may I suggest that the Report stage begins again not before 8.42 p.m.
Moved accordingly, and, on Question, Motion agreed to.

Clothing and Textile Industry
7.42 p.m.
Lord Feldmanrose to ask Her Majesty's Government whether the state of the British clothing and textile industry is satisfactory.
The noble Lord said: My Lords, I welcome this opportunity to discuss the state of the clothing and textile industry today. In the time available tonight, I shall deal only with the clothing industry.
I have never had a financial interest in the industry, except as a long-term sleeping shareholder in one of London's leading men's tailors. My abiding interest is an affectionate and sentimental feeling for the clothing industry since 1978.
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In late 1978 the noble Lord, Lord Healey, then Chancellor of the Exchequer, invited me to become chairman of the clothing Little Neddy. I rang his office to ask whether he had made a mistake because I knew nothing about the industry. He replied that he wanted me to accept because, it was hoped, I could bring some new ideas to the industry. I accepted willingly and was quite intrigued to do so because at that time I was chairman of the Conservative Party in Greater London and was one of the people trying to bring the party back into government.
At Little Neddy meetings the manufacturers, industry unions, some retailers, trade associations and DTI officials all worked together to get down to basics. Being on the Little Neddy gave me the opportunity to be in direct contact with the industry unions, and I remain in contact with them today.
When I took over in 1978, I wrote a report which I called St Neddy. It included some of the following points. The British clothing industry had in recent years suffered from falling employment, fluctuating or falling production and large increases in the volume of imports. Increases had occurred in low-cost imports but also in high-cost imports from advanced manufacturing countries. Those goods appeared to outscore British-made goods in design, manufacture and marketing. We said that we should aim to encourage professional standards of management in the UK clothing industry, and encourage new entrepreneurs and small businesses.
I spent six interesting and exciting years as chairman of the clothing Little Neddy. During that time, we came up with many ideas, including encouraging some of the leading haute couture designers to work together with retailers in putting better design into the high street. That initiative eventually turned into the British Fashion Council. We attempted to launch a design, branding and marketing project. We tried to set up a British fashion centre in premises in the heart of London so that export buyers and major UK buyers could see virtually the whole of the British clothing industry in one stop. We held numerous meetings to bring together retailers and manufacturers so that they could discuss problems and learn from each other.
In 1982, growing job losses which arose from growing imports led us to establish a "Better Made in Britain" exhibition for clothing, knitwear and footwear. At that exhibition in 1983 40 major high street retailers exhibited their imports and challenged UK manufacturers to obtain the business, not out of patriotism but by strict commercial criteria of competitiveness of design, quality, price and availability.
The initial exhibition was a great success and "Better Made in Britain", which I later chaired as a separate organisation from 1984 to 1995, went on to run 25 exhibitions, some of them for clothing, in 14 different industries. We claim that we brought back for Britain many hundreds of millions of pounds of business and hundreds of jobs.

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We also dealt with inward investment. We arranged for the largest ever group of Japanese manufacturers to visit Northern Ireland. We worked together with the Northern Ireland Development Board and discussed further with the Japanese people the possibility of opening factories there. One or two of them did. We also encouraged clothing retailers from GB to buy from the Province.
A year ago, I joined the All-Party Parliamentary Clothing and Textiles Group. It produced a report which made many of the same points as I first made some 21 years ago; namely, that the industry currently faces the biggest challenge in its history, that low labour-cost suppliers are securing an increasingly large share of world markets, that state aids are distorting competition and that sourcing patterns on the high street are changing.
Textile and clothing represent the eighth largest manufacturing industry in the UK. It is a major employer in the East Midlands, Yorkshire, the Scottish Borders and Northern Ireland, with a presence in the north and east of London, parts of the West Midlands and the North West. Perhaps I may give some statistics about clothing. In comparing those areas between 1986 and 1999, production in the industry increased by only 8 per cent. Exports grew from £1.2 billion to £2.5 billion. Imports grew from £2.3 billion to £7.5 billion; that is, they more than trebled. The trade gap grew four-and-a-half times from £1.1 billion to £5 billion. Jobs, both in clothing and textiles, fell from 600,000 in 1981 to 300,000 in 1999 and are currently falling at the rate of 30,000 per annum.
In the past five years, 1,300 clothing firms and 400 textile firms have gone out of business. It is clear that unless positive action is taken soon, there will not be a viable industry left in 10 years' time. That would be a tragedy for our country. Today's retailing environment is more challenging than ever before. Retailers are under greater attack on margins and often have to make a trade-off between speed of delivery and price. Design is, and always was, the key. However, if we improve our design and quality so that domestic production becomes a necessity rather than simply an option, that must surely help.
It is clear that more and more basic clothing is being bought from abroad. In the past 10 years, imports from Hong Kong have trebled. Those from Turkey have increased 14 times; those from China 20 times, and even those from major European countries by 350 per cent. Wherever one looks, retailers and UK manufacturers are buying more and more goods from abroad; from a range of low-wage countries which, in the 1980s and early 1990s, were regarded as being unreliable producers.
It is not only a question of retailers buying from abroad; clothing manufacturers themselves are setting up overseas plants. In other words, UK jobs are being exported to those countries. The effect of all that will not only harm our clothing industry directly but will also harm the support industries.
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In recent months, large government grants have been allocated to the coal, motor car and aerospace industries. But unless help is given to the clothing and textile industry, I feel that we shall lose a further 100,000 to 150,000 jobs in the few years ahead. We shall then wake up and ask why we did not do something about it earlier.
Government aid to the clothing industry has been given mainly through regional selective assistance. It has been run at a low level of £4 million to £5 million per year. That assistance should now be reassessed and should be run on a national as well as on a regional basis.
I should add a few words about Marks and Spencer which has unfairly had to take the brunt of the criticism for what has happened to the British clothing industry. From my personal experience I can say that Marks and Spencer carried the industry through many difficult years by buying British, and the clothing industry would have been damaged 10 to 15 years ago had it not been for its help. That should never be forgotten.
I conclude by proposing, first, that the national strategy proposed by the textile and clothing strategy group should be approved en bloc by the DTI and that the necessary money be allocated right now.
Secondly, the DTI should investigate in depth and at speed the way in which Zara, a highly successful Spanish retailer, operates. It has over 700 stores in Spain and Europe and has recently opened several here in the UK. I understand that two-thirds of the clothing sold in the stores is made in Spain. I understand that it chooses the fabric, cuts it and gives out the work to local factories near its head office. I suggest that we send a mission to its headquarters to see what we can learn and how we can adapt its ideas to our country.
In some ways, what it is doing reminds me of the Nissan operation set up in Sunderland where the main factory and its components suppliers were on the same campus.
Thirdly, the GMB union is keen on a 'Made in Britain" label. That could help. However, it would help even more if it could be applied to a branding, marketing and advertising campaign with a brand name for quality British goods. Fourthly—and I paraphrase another expression—we need "design, design, design" with a major initiative for young designers and also to attract experienced designers to the industry.
Fifthly, we need to look at the burden of legislation, the climate change levy, parental leave and other matters which add further costs to the industry at this difficult time. We need to look again at providing more financial support for our exhibitors at overseas trade fairs.
Lastly, we need to look at sourcing in the UK more of the NHS spend of £130 million, the MoD spend of more than £100 million and relevant business from other government departments. There was recent publicity about MoD contracts going to a German company which was manufacturing its goods in

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Turkey. I should welcome the opportunity of discussing some of those ideas with the DTI at ministerial level and to offer what assistance I can.
In conclusion, I hope that the Government will do their best to help save the clothing and textile industry from disaster in the years ahead. I look forward with interest to contributions from other noble Lords and with hope to the Minister's reply.
7.53 p.m.
The Earl of Mar and Kellie: My Lords, I am grateful to the noble Lord, Lord Feldman, for tabling this Unstarred Question and hence giving us the opportunity to debate this issue. I shall be speaking mainly in a Scottish context, believing that that subject is a matter partially reserved to the United Kingdom Parliament.
Just before I was sent home last November, I began to realise as a consumer that the UK textile and clothing industry in general and the Scottish industry in particular were coming under considerable threat from imported goods. That awareness came from various sources. First, in Clackmannanshire, many textile firms have closed in the past year. That culminated in the final closure of the Paton and Baldwins hand-knitting wool factory in Alloa. In all, 1,000 jobs disappeared in a year.
Secondly, I became increasingly aware of the special context of clothing in Scottish culture, particular for men. Never before have I seen so much flamboyance among the normally shy and retiring Scottish males. Despite their reticence, my fellow Scots have the only workable national dress in Europe.
Thirdly, I began to realise that in the remote areas of Scotland there are products which are worthy of promotion. The issue of the protection of geographic indication—the so-called PGI—is clearly raised in this regard. The Shetland Islands have a long tradition of knitwear which, when combined with the Fair Isle tradition, not only forms a substantial part of Scottish culture and heritage but also has been protected since 1986 by the symbol of the "Shetland Lady" mark. The Shetland knitwear industry contributes £8 million per year to the islands' remote economy.
Similarly, the Harris tweed industry continues to contribute to the even more fragile and remote economy of the Outer Hebrides. Harris tweed has been protected for many years by the "Orb" mark. Sometimes criticised for being too conservative, it is now being produced in a wider range of weights and styles. Perhaps its greatest virtue—that it seems to be virtually bomb-proof—is also its great weakness. Plenty of people bought a Harris tweed jacket years ago and, yes, it is still doing fine.
I was pleased to receive a letter from Kim Winser, the new chief executive of Pringles of Scotland. She was keen to point out that Pringles has every expectation of building up its knitwear business in Hawick. I applaud that, especially as the Scottish Borders have been very hard hit by the closures in the face of international competition.
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So, where does that get us to in Scotland and in the United Kingdom? It is an industry to which most consumers can relate. Individuals can make purchasing decisions. By contrast, noble Lords and, indeed, other citizens cannot go out to buy a ship from the Clyde or a jet aircraft. Our very temperate climate requires us all to have a range of clothing to meet the variety of weather with which we are blessed. My point is that individuals can opt to buy Scottish or UK-produced clothing.
Clearly, it will be cheaper to buy goods from abroad, especially from the third world. I do not decry supporting the third world. Indeed, it is generally a duty which we should take upon ourselves. I recently bought a cap. The material was Harris tweed and it was assembled in Sri Lanka. That admirably met both my objectives.
So I believe that the UK industry must concentrate on the quality end of the market, but not just the luxury end of that market. It should produce distinctive material and style; make certain that the label says precisely where it is made; and trade on that indication. It should not just say "Made in Scotland" when in fact it is made in Brora, Selkirk, Sauchie, Alva, Stornaway, the Isle of Sanday or Shetland.
Penultimately, all consumers need to be reminded that the industry is subject to the slogan, "Use it or lose it". Ultimately, we should promote the idea that we are the ethnic people of the North Sea or the eastern Atlantic and that, as such, we have a distinctive heritage and tradition of dress which is worthy of our own support as well as that of those who visit our shores.
7.59 p.m.
Lord Rogan: My Lords, it is a pleasure to follow the noble Earl, Lord Mar and Kellie, and to welcome him back to the House as an official working peer.
Today's challenge and tomorrow's opportunities may best describe the collective position of the textile and clothing trade today in the United Kingdom. I have been involved in the textile business all my adult life. Indeed, my memories go back even further. I can recall, with pleasure, as a child playing hide and seek in webs of cloth in my father's cloth store. Today, I have interests in the yarn spinning and yarn processing businesses in Northern Ireland, England and in mainland Europe. While, undoubtedly, "niche" businesses within the textile industry are fairing well, collectively the industry would say that over the past three decades it cannot recall a time when the overall environment was beset by the scale of restructuring and refocusing currently upon us.
Some noble Lords may also be aware that I have an involvement in a public relations company. My experience in that industry, added to a healthy cynicism engendered from my time in politics, has taught me not to believe everything that I read in the press. If I did, I would believe that the textile industry and the clothing industry in this country had gone for ever, never to return. The reality is that the column inches devoted to recent problems do not tell the complete story.

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As the noble Lord, Lord Feldman, pointed out, the textile industry is fragmented around the kingdom and its success or failure has profound effects upon regional economies. Perhaps I may concentrate on the Northern Ireland region, which I know most intimately, to illustrate the core problems for the UK-wide industry and to identify what I feel are the solutions to those problems. If I refer to some of the more well-worn facts, you will see what I mean.
The textile and apparel industry in Northern Ireland is exclusively responsible for 20 per cent of all employment in Northern Ireland's manufacturing output, as compared to just 8 per cent of the total manufacturing output of the UK as a whole. Similar ratios apply to other textile regions in Great Britain.
Textiles account for over 20 per cent of the Northern Ireland economy's entire overseas exports. That is even more critically important to regions within Northern Ireland, such as the North West, where over 50 per cent of manufacturing jobs depend on the textile sector. Clothing and textiles contribute in excess of £1 billion in revenue towards the Northern Ireland GDP. The industry employs over 20,000 people in a population of 1.5 million. I hope you will forgive the hyperbole: textiles maintain the industrial heart and soul of Northern Ireland.
Those factors apply equally to the other textile regions of the UK, many of which are clustered in already disadvantaged urban and rural areas. From a position of stability and comfort in the mid-1990s, the UK clothing and textile sectors have been browbeaten by a sequence of market forces and consumer trends that have been as damaging as they have been relentless.
They say a week is a long time in politics. Recently, I have experienced many long weeks and hours in local politics, but nothing quite measures up to the prolonged sense of ardour experienced by all those who trade, globally or domestically, in our clothing and textile industry. From 1995 volume output from the sector has dropped 10 per cent and continues to fall. Employment has dropped some 20 per cent, a figure that resonates concern among all political representatives because of the dominant employment exposure that some regions have to the textile industry compared with others.
The introduction of the euro has been instrumental in leveraging an ever-strengthening pound. The impact on exports to Euroland is nothing short of catastrophic. If difficult fiscal conditions are combined with unpredictable high street consumption, a volatile Far East market and cheap labour driven imports, no one can be left in the dark as to the harsh reality of trying to make a profit in the industry today.
What of tomorrow? Forces of change are shaping the textile industry of tomorrow. We must re-invent our wares and the means by which we assemble and sell them if we are not to be replaced in an inevitable one-market economy. I believe that we have the fundamentals with which to do that.
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Last year the top 10 companies in Northern Ireland outperformed both the Republic of Ireland and Great Britain counterparts, each of which is growing rapidly, That was done based on modern design themes, new technologies, brand development and balanced outsourcing strategies. Companies like Desmonds, Ulster Weavers, Ewart Liddell and Ulster Carpets, to name but a few, are sound, profitable enterprises. If the transition period is to be endured without permanent discord, we must now mobilise ourselves to prepare for a new kind of industry. We must begin to develop new skills in logistics and purchasing. We must exploit the fact that our closeness to our current markets allows us quicker response tune than competitors from overseas.
We must also look for new routes into global markets. We should develop supply and out sourcing partnerships to reduce costs, to remain competitive and to remain profitable. That would enable us to maintain a base and employment in our UK mills, albeit at lower levels. We are finding new opportunities in joint ventures, combined marketing initiatives and networking visits. Competitive and commercial advantage will return to those businesses that embrace new systems and models of business.
The creativity and design flair emerging from local colleges needs to be given access to the cutting edge of new product development. The Internet and e-commerce must become essential elements of the: selling and marketing process so that we can take prominence in a global shop window that holds as much opportunity for United Kingdom manufacturers and producers as anywhere else in the world.
The way forward for our industry is now to allow for a period of subsidised transition to follow its course. Once regeneration is firmly under way, all of our businesses should look to turn prevailing market forces to our advantage and reassert the United Kingdom's position as a leading global provider of value-added, well-branded and high quality textile and clothing products. Given a fair wind and government support, I am confident that that is a position that the UK clothing and textile industry can achieve in the, short to medium term.
8.8 p.m.
Baroness Miller of Hendon: My Lords, I thank my noble friend Lord Feldman for introducing this important and timely debate, bringing with him his considerable experience in this area and enabling other noble Lords to speak from their experience.
In the centre of this Chamber is the Woolsack, a symbol that dates back to the 14th century, illustrating the importance of wool to our economy. In these days, when the history of our country is no longer taught as it was when I and most of your Lordships were at school, with the emphasis on British achievements, I imagine that the average school child, on being asked what a "spinning jenny" was, would guess that it was a member of a girl's pop group.

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But in the 18th century the whole of the world's textile industry was revolutionised by three major British inventions: the spinning jenny, the mule and the flying shuttle. The great inventors, Sir Richard Arkwright, Samuel Crompton and John Kay, were largely responsible for the great wealth that the production of textiles generated for Britain and also inspired a whole engineering industry which led the great Industrial Revolution that made Britain a world power.
And yet into what a parlous state our once great textile and clothing trade has fallen. In Victorian times it was the country's largest employer and the world's largest producer. Although Britain was once a world leader, between September 1998 and September 1999, some 36,000 textile and clothing workers lost their jobs. That represents some 650 jobs a week.
The British Textile and Apparel Federation has said that there is every sign of more than 30,000 losses this year and up to 100,000 over the next four years. These losses have largely been in packets of 50 or so here and 100 or so there. Each job lost is a personal tragedy in its own right but goes largely unnoticed nationally.
But imagine what a furore there would be if these job losses, running into thousands—as is threatened in the motor industry—were announced on just one day? However, they also form part of a pattern. Since May 1997, some 250,000 jobs have been lost in manufacturing industry, which represents a loss of 10 an hour. That has happened under the rule of a party which in its election campaign had the effrontery to accuse the Conservatives of destroying this country's industrial base.
The honourable Member for Amber Valley introduced a most instructive debate in the other place on 14th March in which she stated:
"The Government must stop writing off the industry. They must accept and believe that it is not just a sunset industry".— [Official Report, Commons, 14/3/00; col. 2WH.]
Indeed it is not.
As my noble friend Lord Feldman reminded us, the entire sector of textiles, clothing and footwear is still the eighth largest in the United Kingdom. It has sales in excess of £17 billion and currently employs 306,000 people. One quarter of those jobs are concentrated in the East Midlands. However, although the industry is larger than agriculture, the motor industry and aerospace, it receives only a fraction of the assistance that these and other smaller industries get.
The problem is largely, if not entirely, caused by large volumes of imports from countries with very low labour costs. Ironically, Britain, among other countries, helped to set up textile factories in emerging third world agricultural countries as an easy means of creating industry. As Clare Booth Luce once said,
"A good deed never goes unpunished".
However, it is not only the low labour costs and low infrastructure expenses in these countries that cause the problem. There are some self-inflicted wounds that the Government have caused to industries struggling
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against third world competitors. The British Apparel and Textile Confederation wrote to one of my researchers to say,
"The legislative burden is growing. We certainly do not need an increase in the national minimum wage this year, nor do we need the climate change levy, nor payment for parental leave, to name but three".
Exchange rates are also having an effect. I do not believe that it is the strength of sterling that is causing the problem. The value of the pound against the dollar has remained more or less constant since January 1999. But the weakness of the euro makes our exports to Europe comparatively expensive and imports from there comparatively cheap. A few years ago we had a trade in balance with the EU, whereas last year it was £6 billion in deficit.
There has been a great deal of criticism of Marks and Spencer for its shift from its "Buy British" policy. At one time, and for many years, the company proudly proclaimed that 99 per cent of its goods were manufactured in Britain. What a big boost that was to the British textile and clothing trade. Some 16 per cent of United Kingdom textile sales are made through Marks and Spencer.
Now, large volumes of the company's goods are purchased from abroad and some of its manufacturers are being encouraged to move their production to other countries. My noble friend Lord Feldman reminded us of that point. I am not here to act as an apologist for Marks and Spencer, but, as my noble friend also pointed out, it is not a part of Marks and Spencer's responsibility to subsidise the British textile industry by overpaying for the goods it wishes to purchase. That may sound brutal, but the company has two main duties: one is to its shareholders to operate in a profitable and efficient manner without infringing ethical rules; the other is to ensure that it does not damage its own business and so put the jobs of its workers at risk. Unfortunately, it seems that Marks and Spencer can survive in a highly competitive market only by buying much of its supplies from overseas, as indeed do many other retail chains operating in this country.
Then there is the matter of sourcing of goods by Her Majesty's Government. Some £1 million worth of waterproof jackets for the Navy have just been purchased from Germany. A further £6.5 million worth of combat kit for the Army was also purchased in Germany, putting 100 jobs at risk in Cumbernauld. One hundred and twenty thousand camouflage jackets and trousers were purchased from Belgium. Army boots were ordered from Brazil, forcing the closure of the last footwear factory in Wales, with the loss of 65 jobs.
The excuse for the German uniform deal was that it offered "best value for money". However, "best" according to what convoluted criteria? The Ministry of Defence has saved some unknown but obviously trivial amount compared with what the goods would have cost if they had been purchased from United Kingdom manufacturers. However, the hidden costs to the Treasury will be the unemployment pay and social security that will have to be paid to the hundreds

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of British employees thrown out of work, along with the cost to local communities dependent on the factories where they work.
The spin doctors of Millbank claim that we now enjoy the benefits of "joined up" government. If the Ministry of Defence cannot understand the dire and expensive consequences of this piece of penny-pinching, then I doubt if it is even capable of understanding, never mind joined-up government, but joined-up writing! Instead of state aid, what we see in the examples that I have cited to the House is state sabotage.
Can noble Lords imagine the reception that a British manufacturer of the same kinds of uniforms would get if it tried to sell its goods abroad? It would be told, "Why should we purchase from you when your own Government will not do so?" I wonder how many uniforms were purchased from abroad by the German and Belgian armed forces?
In Germany, the Belgian money is funnelled into its textile industries via regional and state governments, while Italy supports the industry in the poor south by government subsidies. From 1996 to 1997 regional support for the industry was £12.5 million. In 1997, under the present Government, that support fell to £5.86 million. It now stands at a paltry £4,175,000.
The next problem is that of dumping. Apart from cheap imports, we are also faced with the problem of illegal imports. Paul Gates of the National Union of Knitwear, Footwear and Apparel Trades complains that illegal imports are not being clamped down on. That includes forged designer goods.
That brings me, in conclusion, to the recommendations made by the Textile and Clothing Strategy Group which was set up by the Government. It has produced some 25 recommendations. My noble friend Lord Feldman suggested that they should be adopted en bloc. Briefly, those recommendations include working with retailers to establish more efficient supply chains; integrating United Kingdom design talent and exploiting technical expertise resources; promoting the United Kingdom's reputation for quality and excellence; and strengthening marketing skills.
On 30th March the Minister for Competitiveness told the other place that the Government were, "considering these recommendations carefully". Perhaps I may ask the Minister: are they doing so? Furthermore, can the Minister tell noble Lords when the results will be available? In my view, and I believe in the view of all noble Lords, it could not be more urgent at this time.
8.18 p.m.
The Minister for Science, Department of Trade and Industry (Lord Sainsbury of Turville): My Lords, I am delighted that the noble Lord, Lord Feldman, has given us the opportunity to debate this issue. The textile and clothing industry occupies an enormously important place in the UK economy and is of particular importance as an employer in some of the most hard-pressed parts of our country. The noble
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Lord made that very clear, as did the noble Earl, Lord Mar and Kellie, who described the situation in graphic detail. Like him, I have a particular affection for the industry, having for some time been the owner of a small clothing company that made children's frocks for M&S. I have also seen this from the viewpoint of being a small manufacturer dealing with a large retailer, which was extremely good for the soul, if not for the pocket.
There is no point in denying the fact that the clothing and textile industry is going through a tough period. There is no single reason for it. The increase in competition from low-cost supplier countries clearly plays a part; the purchasing policies of major retailers has had an impact; export-dependent companies face difficulties, not least because of the weakness of the euro. There are other reasons, too.
The competition from low-wage countries is long term—undoubtedly the most important factor in the labour-intensive parts of the industry—and is the reason why we are not the only country which has seen a contraction in its textile and clothing industry. Germany and France are in a similar situation, though Italy has survived remarkably well due to its strengths in design, marketing, investment and collaboration. There is a lesson to be learnt in that; that is, that those are the routes by which we can regain the competitive edge against low-wage countries.
As the noble Lord, Lord Feldman, made clear, major new countries are entering the industry, and countries like Morocco are having a major impact simply because they pay wages that are one-tenth the level of ours. That makes it extremely difficult to compete in a labour-intensive market. However, let me say to the noble Baroness, Lady Miller, that we do not regard the textile industry as a sunset industry. There are ways of combating that kind of competition, but it requires a high level of management skill and creativity.
We must accept that those factors will not go away and the only way that we can achieve success and a prosperous long-term future for the industry is by increasing its value added. This means improving marketing and design; increasing the level of skills in the industry; improving supply chains; harnessing better technical expertise and moving into areas of growth such as technical textiles. Those arguments apply to all regions of the country, even those that are the most dependent on the industry.
Those factors are some of the areas being addressed by the national strategy for the UK textile and clothing industry, which is being prepared by the industry-led Textiles and Clothing Strategy Group. That is an impressive body. It is well-representative of the industry and is industry-led. However, DTI Ministers encourage the work of the group and provide it with secretariat resource.
It is important that the group should be industry-led because we believe it is only the industry which can understand and solve the problems. As I understand the situation, the Textiles and Clothing Strategy Group is revising its strategy report in the light of

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comments it received from various parties interested in its consultation exercise. Altogether it received more than 50 written responses and I expect it to publish its final report shortly.
It is premature for me to offer responses to specific recommendations until the report is published and I cannot commit en bloc to those recommendations. But it is an impressive document and I can assure the House that the DTI Ministers will respond positively to the recommendations once they have been finalised. We have made sure to keep closely in touch with the group's work and my colleagues—the Secretary of State for Trade and Industry, the Minister for Small Business and E-Commerce and a Parliamentary Under-Secretary of State for Competitiveness—attended meetings of the group. The DTI Ministers will be meeting the group again soon to discuss the recommendations once they have been published.
The report is impressive in that it tackles the issues at the heart of the competitive industry—issues such as education, training and skills. One of its recommendations—taking the point of the noble Lord, Lord Feldman—relates to learning and best practice in manufacturing and retailing overseas. He mentioned a Spanish retailer in this context. We are actively considering how to take that point forward because, like him, we believe it is important to learn from best practice, particularly the sort of "just-in-time" manufacturer that he mentioned.
The report also highlights the importance of increasing added-value through increasing the design content of products, strengthening branding and exploiting high value niche markets. Those are all concepts about which the Government are extremely enthusiastic and the noble Lord can be assured that we shall do everything we can to promote that agenda.
Although the textile and clothing industry is part of the UK's traditional manufacturing base, it is nevertheless an industry driven by constant innovation. The DTI is working on a number of fronts to ensure that the wealth of talent and innovation in this country is more effectively engaged with the textile and clothing industry. For instance, we are working with the DfEE and the national training organisations for textiles and clothing—the National Textiles Training Organisation and CapitB—to develop an integrated national strategy for liaison between further and higher education and the industry; to directly influence and provide positive guidance to pre and post-16 school pupils while at the same time providing a two-way education channel between education and industry; to improve the calibre of entrants to SMEs in the apparel manufacturing industry; and to strengthen work placement and industrial staff development schemes.
Another area of innovation we are actively supporting is technical textiles. We are in dialogue with a number of companies with a view to supporting collaborative projects which will increase technical innovation in the sector. For instance, we are already supporting a company in Lancashire which is researching new methods of bonding non-woven
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materials. In that context it is interesting that the textile industry walked away with two of only 14 Foresight Link awards earlier this year. That is a tremendous achievement and shows that the industry is capable of moving forward aggressively on the innovation front.
The question of sterling was raised. We all appreciate how painful that situation is for the industry. Equally, as the Government have made clear a number of times, we do not feel that action which will effectively abandon macro-economic stability is the right way to deal with the issue.
In relation to retailer purchasing policies, I agree with the noble Lord, Lord Feldman, that it is wrong to point the finger at a company like M&S, which showed enormous loyalty over many years to the British industry. It is now under extreme competitive pressures and is having to review its strategies. I should be delighted if UK retailers increased the proportion of British-made goods they sell. But in the end that has to be their own commercial judgment. It is wrong to ask them to take those decisions on non-commercial grounds when they are under pressure from their own shareholders. We must work with the manufacturing industry to make that decision the most attractive commercial decision for them to take.
There have been a number of calls for the introduction of compulsory country-of-origin labelling. That is an issue which has been frequently considered. The simple answer is that our EU obligations do not allow us to compel manufacturers or retailers to label their products with the country of origin. There is absolutely nothing to stop manufacturers and retailers voluntarily labelling their products. I mention here that as part of its policy Marks & Spencer has done that for many years. It reports that it is not a great deal of help to the situation unless it is linked with very clear examples where that labelling may lead to an association with value for money.
We shall not be introducing legal requirements, but we are interested in working with the industry to find examples of generic brands that can be more effectively promoted. Examples that spring to mind are Harris tweed, Scottish cashmere, Nottingham lace and Yorkshire wool fabrics. That is a constructive way forward, linking origins with other considerations which consumers value and are prepared to pay for.
Perhaps I may also say to the noble Lord, Lord Feldman, that we are working closely with the British Fashion Council on the implementation of the designer fashion action plan which is again about linking high fashion to the manufacturing industry.
There have been calls from many quarters for the Government to increase their support for the textile and clothing industry. There are many schemes through which we help the industry. There are also many general schemes in which the industry can apply to take part, which can also be used for that purpose.
In conclusion the United Kingdom textile and clothing industry is currently facing a very difficult time. There is no doubt that concerted action needs to

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be taken by a number of parties, including government, to address the issues it faces. It is greatly to the credit of the industry that it is doing just that. The national strategy for textiles and clothing can provide an excellent focal point around which a number of bodies can co-ordinate their actions. I very much hope that the process of collaboration which the textile and clothing strategy group has initiated, can be continued, expanded and deepened.
As I have said already, I and my colleagues look forward to receiving the group's final recommendations. We shall respond extremely positively. Perhaps I may say once again how delighted I am that the noble Lord, Lord Feldman, drew our attention to this important area of the British economy. Working together we can do much to ensure that this industry has a prosperous future in a modern and forward-looking economy.
Baroness Amos: My Lords, I beg to move that the House do now adjourn during pleasure until 8.42 p.m.
Moved accordingly, and, on Question, Motion agreed to.
[The sitting was suspended from 8.32 to 8.42 p.m.]

Financial Services and Markets Bill
Further consideration of amendments on Report resumed.
Clause 155 [Interpretation]:
[Amendment No. 157A not moved.]
Lord McIntosh of Haringeymoved Amendment No. 158:
Page 75, line 30, after ("have") insert (", or are intended or likely to have,").
The noble Lord said: My Lords., in moving this amendment, I should like to speak also to Amendments Nos. 158A, 158B, 158BA, 158BB, 170CH, 170CJ, 17OCK and 217. These amendments make a number of minor improvements to the competition provisions of the Bill in the light of commitments made to noble Lords opposite and are designed to ensure that the Bill works properly.
Amendments Nos. 158A, 158B, 170CH and 170CJ give effect to a commitment that I gave in Committee to noble Lords opposite. They will ensure that the same limitation as applies to the documents that the director can require people to produce—namely, that they relate to a matter relevant to his investigation—also applies in the case of information.
Amendment No. 217 to Clause 407 makes a change to the definition of the word "Commission" as used in various provisions of the Bill. At present, this says that "Commission" means the "European Commission". This is relevant, for example, in Clause 195(7). However, "Commission" is also used as shorthand in Chapter III of Part X to refer to the Competition Commission. This amendment will ensure that the right meaning is attached to the term "Commission" where it occurs in the Bill. I am sure that the House will agree that that is quite an important clarification.
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Finally, Amendments Nos. 158BA, 158BB and 170CK will ensure that the wording in Parts X and XVIII are consistent. I commend the amendments to the House and beg to move.
Lord Saatchi: My Lords, as the Minister quite correctly said, Amendment No. 158 is a drafting amendment relating to competition scrutiny provisions and is absolutely fine with us. Indeed, we are grateful to him for it. Amendments Nos. 158A to 158BB relate to the power of the Director-General of Fair Trading to request information for the purposes of his review of the FSA's regulations and practices, and the sanctions that he can ask the court to impose for failure to comply with the information requirement. These are drafting amendments only and we are most grateful for them.
On Question, amendment agreed to.
Clause 157 [Power of the Director to request information]:
Lord McIntosh of Haringeymoved Amendments Nos. 158A to 158BB:
Page 76, line 42, leave out from ("control") to end of line 43.
Page 77, line 6, at end insert—
("( ) A requirement may be imposed under subsection (2) or (3)(a) only in respect of documents or information which relate to any matter relevant to the investigation.").
Page 77, line 13, leave out ("punish") and insert ("deal with").
Page 77, line 14, leave out ("had been guilty of contempt of court") and insert ("were in contempt").
On Question, amendments agreed to.
8.45 p.m.
Clause 161 [Authority's power to require information]:
Lord Kingslandmoved Amendment No. 158BC:
Page 80, line 14, leave out ("without delay") and insert ("before the end of such reasonable period as may be specified").
The noble Lord said: My Lords, this amendment is a repeat of one put forward in Committee. It has been repeated only to prompt an explanation from the Government. Under Clauses 161(2)(a), the authority can require an authorised person to provide information and documents,
"before the end of such reasonable period as may be specified"
However, when the authority authorises one of its officers to require an authorised person to provide information or documents under Clause 161(3), the officer can require that such information or documents be provided "without delay". Why is it that the authority must stipulate a "reasonable period" for providing information and documents, while one or its officers can require that they should be provided "without delay"? The amendment would merely align the two provisions so that they would be consistent.
The Government have tabled Amendments Nos. 158BD to 158BK in relation to Clause 164 and they also feature in this grouping. This series of amendments appears to reorganise Clause 164. The reorganisation will leave Clause 164(1) cove ring only

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paragraphs (b) and (c). It applies, if the circumstances arise, in the view of not only the authority but also the DTI—referred to collectively as the "investigating authorities".
Subsection (2) will be expanded to apply to both investigating authorities and not just "the Authority". Therefore, subsection (4)—the equivalent, in the case of the DTI, to subsection (2)—will be deleted. Instead, there is a replacement to subsection (4) which picks up for the authority the deleted paragraphs in subsection (1) and adds to them circumstances suggesting that there may be a contravention of other enactments where the FSA can prosecute but which are outside the new subsection (2). The only situation to which I can think that this might apply is money laundering.
Subsection (5) is deleted as part of the reorganisation. It defines "related offence", which was the previous paragraph (d) in subsection (1) but which has now been deleted and replaced by paragraph (b) in the new subsection (4). Despite the scale of this reorganisation, it seems to us to be acceptable.
Amendments Nos. 158BL to 158BM are to Clause 165. These amendments are consequential and perfectly acceptable. However, perhaps the Government could tell your Lordships whether in Clause 165(2) there should also be a reference to an investigator appointed under Clause 164(5). My reason for asking that is that subsection (2) refers to Clause 164(3) only "so far as relating to" subsection (1), now amended to "as a result or' subsection (1), and the new subsection (5) covers most of what was covered by subsection (1).
Amendments Nos. 158BM to 158NS to Clause 166 are consequential and therefore acceptable. Amendment No. 158BT to Clause 168 is consequential, but did the Government mean to delete subsection (5)?—because, if not, the amendment should require the deletion only down to the end of line 19. The other amendments, the Government will be relieved to know, in our interpretation are consequential. I beg to move.
The Deputy Speaker (Baroness Hooper): My Lords, I should draw to your Lordships' attention that Amendment No. 158BT contains a printing error. The amendment should state,
"to end of line 19",
rather than,
"to end of line 20".
Lord Bach: My Lords, we are grateful to the noble Lord, Lord Kingsland, for describing the government amendments in the group. I have a little more to say about them, but not much. There is one opposition amendment in the group compared with 20 government amendments.
Lord Kingsland: My Lords, I am most grateful to the noble Lord for giving way. I had no wish to describe the government amendments but I was compelled to
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do so by the way the grouping is arranged. We had tabled one amendment which, unfortunately, turned out to be the first in the group. Therefore it fell to me to deal with the rest.
Lord Bach: My Lords, I hope that the noble Lord does not misunderstand me. We are extremely grateful to him for doing that, perhaps more than he realises. As regards his amendment—
Lord Kingsland: My Lords, I am always pleased to throw light on the Government's amendments.
Lord Bach: My Lords, I do not think that I said that.
As I said in Committee in dealing with the opposition amendment, it is clearly important that the authority can get access to information and documents on a timely basis. This is vital for effective regulation. It is for this reason that subsection (3) of Clause 161 provides that the authority can require the information or documents "without delay".
As I attempted to explain when we considered this same amendment before, we do not agree that there should be a requirement for all requests for information to be subject to some specified period for compliance. That would be bureaucratic and quite unnecessary. The authority must, of course, be reasonable in its expectations of when information may be forthcoming. As was explained on the previous occasion, the term "without delay" means without unjustified or unreasonable delay. It does not mean instantly. That would be an absurd interpretation of the phrase.
Therefore it is clear that subsection (3) does not require a person to meet some unreasonable or impractical requirement. Imposing a requirement on the FSA to specify some reasonable period within which the requirement for information must be complied with would simply add an unnecessary bureaucratic burden. It would place a quite unnecessary onus on the FSA to decide in each case what period must reasonably be allowed for producing the information. The current wording enables the provider of the information to take such time as is necessary for providing the information so long as he does not delay in the normal sense of that word.
The noble Lord drew attention to a difference in wording between various parts of the clause. Clause 161(2) deals with the FSA sending out an information request. Subsection (3) deals with the situation where it has been deemed necessary to authorise a specific officer to obtain the documents or information. The term "without delay" reflects the more immediate purpose or nature of such a requirement, but it still means without unreasonable delay. That is why we believe that the wording in subsection (2) is appropriate in the first situation and the wording in subsection (3) is appropriate for a situation where it has been deemed necessary to authorise a specific officer to obtain documents or information.

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The government amendments all constitute improvements to the drafting. They reflect the continuing commitment of the Government to make this legislation, which is bound to be technical and complicated, as user-friendly as possible. In the course of looking at ways in which we need to align the investigation powers under Part XVII with the comparable provisions under Part XI, we have also dealt with some potential ambiguity in the drafting of Part XI.
These amendments simplify the drafting of Clause 164, which gives the authority the powers it needs to investigate possible offences and other contraventions under the Bill. They deal in a more elegant way with the fact that some types of investigation—for instance, into possible insider dealing—are powers held concurrently by both the authority and the Secretary of State for Trade and Industry.
I hope that noble Lords have seen a version of the clause as it would look if the House amends it tonight, to assist your Lordships with the changes that are made.
Building on the restructured Clause 164, the other government amendments improve the clarity of the cross references in other clauses in Part XI to the different types of investigation that may be mounted under Clause 164, and correct technical defects in the existing wording of Clauses 165(2), 168(4) and 169(5). It was not clear that these references worked correctly in identifying the cases to which those subsections apply.
These are essentially technical drafting amendments and do not represent any change in the effect of the provisions in Part XI, although the restructuring of Clause 164 has led to a relatively large number of purely consequential amendments, including additional amendments to Clause 280.
Amendment No. 158BF is part of the rearrangement of Clause 164, in that it removes subsection (1)(d), which is replaced by subsection (4)(b) in Amendment No. 158BK. But this amendment makes a subtle change to the effect of the clause, in that it deletes subsection (1)(e), which is not replaced by the other amendments. This removes an unnecessary and potentially unhelpful reference to offences that may have been committed by virtue of Clause 395. Clause 395 is concerned with circumstances in which an individual may be deemed guilty of an offence committed by a corporate body or partnership. Where it applies, its effect is that the individual is guilty of the offence under the provision which originally creates the offence. Therefore it is unnecessary to have to refer expressly to Clause 395 in Clause 164. To do so might cast doubt on the way in which Clause 395 was intended to operate. Subsection 1(e) is therefore removed.
Finally, Amendment No. 158BL brings Clause 165 into line with Clauses 163 and 164 by making it clear that one or more persons may be appointed to conduct an investigation, and that they must be competent persons.
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The noble Lord, Lord Kingsland, asked whether Clause 165(2) should refer to Clause 164(5). That is not necessary, as the powers under Clause 164(3)and (5) will be the same. I hope that that answer satisfies t he noble Lord.
9 p.m.
Lord Kingsland: My Lords, that final answer to one of my questions sums up much of the proceedings of this Bill—"it all depends by what you mean by…", and so on.
So far as concerns my Amendment No. 158BC, I am most grateful to the Minister for his explanation. I think he is saying that what I wanted to achieve from my amendment is already on the face of the Bill, and therefore I have nothing to worry about. If that is so, I happily beg leave to withdraw my amendment.
Amendment, by leave, withdrawn.
Clause 164 [Appointment of persons to carry out investigations in particular cases]:
Lord Bachmoved Amendment No. 158BD:
Page 82, line 14, leave out ("the Authority") and insert ("an investigating authority").
The noble Lord said: My Lords, I beg to move.
Lord Elton: My Lords, the odd grouping of my noble friend's amendment at the beginning of this group means that when the Minister spoke to his amendments for the first time it blocked out any comments on them because, of course, no one can speak to an amendment at Report stage after the Minister. Therefore, I am speaking on the first amendment in his group.
I wish merely to express my thanks for the circulation of the interpretation of the effect of this vast shoal of amendments, which would have been beyond me had he not sent it. Even so, the task of keeping up with the flow of government amendments—even with this facilitating assistance—is something which would normally be a full-time job for people who had the time in which to do it. I repeat the complaints made earlier by my noble friends—we have perhaps rather lost sight of the resentment that we felt in the early stages—that it is very difficult indeed for a House which is not supposed to consist of full-time professionals to keep up with the volume of technical changes that the Government are making; to highly technical legislation. But I am grateful to the Minister for having done his best to help us with the nearest thing to a Keeling schedule that he can provide. That is the point I wished to make.
Lord Bach: My Lords, I am very grateful to the noble Lord. Although it is painful to have to go through technical amendments such as these, it may be that in years to come others will thank us for having taken the trouble to do so, even shortly.
On Question, amendment agreed to.
Lord Bachmoved Amendments Nos. 158BE to 158BK:
Page 82, line 16, leave out paragraph (a).
Page 82, line 21, leave out paragraphs (d) and (e).
Page 82, line 24, leave out paragraphs (f) to (1).
Page 82, line 39, leave out ("the Authority") and insert ("an investigating authority").
Page 83, line 2, leave out ("Authority") and insert ("investigating authority").
Page 83, line 4, leave out subsections (4) and (5) and insert—
("(4) Subsection (5) applies if it appears to the Authority that there are circumstances suggesting that—

(a) a person may have contravened section 18;

(b) a person may be guilty of an offence under any enactment other than this Act—

(i) which the Authority has power to prosecute under this Act; but

(ii) which it would not otherwise have power to investigate;

(c) an authorised person may have contravened a rule made by the Authority;

(d) an individual may not be a fit and proper person to perform functions in relation to a regulated activity carried on by an authorised or exempt person;

(e) an individual may have performed or agreed to perform a function in breach of a prohibition order;

(f) an authorised or exempt person may have failed to comply with section 55(5);

(g) an authorised person may have failed to comply with section 58(1) or (2);

(h) a person in relation to whom the Authority has given its approval under section 58 may not be a fit and proper person to perform the function to which that approval relates; or

(i) a person may be guilty of misconduct for the purposes of section 65.

(5) The Authority may appoint one or more competent persons to conduct an investigation on its behalf.
(6) "Investigating authority" means the Authority or the Secretary of State.").
On Question, amendments agreed to.
Clause 165 [Investigations etc. in support of overseas regulator]:
Lord Bachmoved Amendments Nos. 158BL and 158BM:
Page 83, line 22, leave out ("a person") and insert ("one or more competent persons").
Page 83, line 24, leave out ("(so far as relating to") and insert ("(as a result of").
On Question, amendments agreed to.
Clause 166 [Investigations: general]:
Lord Bachmoved Amendments Nos. 158BN to 158BS:
Page 84, line 25, leave out ("the Authority") and insert ("an investigating authority").
Page 84, line 26, after (" 164(3)") insert ("or (5)").
Page 84, line 28, leave out paragraph (b).
Page 84, line 35, after (" 164(1)") insert ("or (4)").
Page 84, line 39, leave out from ("(2)") to second ("of") in line 40.
On Question, amendments agreed to.
Clause 168 [Additional power of persons appointed as a result of section 164(1)]:
Lord Bachmoved Amendment No. 158BT:
Page 86, line 18, leave out from ("appointed") to end of line 20 and insert ("as a result of subsection (1) or (4) of section 164").
On Question, amendment agreed to.
Clause 169 [Powers of person appointed to investigate as a result of section 164(2)]:
Lord Bachmoved Amendments Nos. 158BU and 158BV:
Page 86, line 35, leave out ("or (4)").
Page 86, line 36, leave out ("(so far as relating to") and insert ("(as a result of").
On Question, amendments agreed to.
Clause 170 [Admissibility of statements made to investigators]:
[Amendments Nos. 158C and 158D not moved.]
Lord McIntosh of Haringeymoved Amendment No. 158DA:
Page 87, line 15, leave out ("(4)") and insert ("(5)").
The noble Lord said: My Lords, I spoke to this amendment with Amendment No. 158BC. I beg to move.
On Question, amendment agreed to.
Clause 171 [Information and documents: supplemental provisions]:
Lord McIntosh of Haringeymoved Amendment No. 158DB:
Page 88, line 10, leave out ("(4)") and insert ("(5)").
The noble Lord said: My Lords, I spoke to this amendment with Amendment No. 158BC. I beg to move.
On Question, amendment agreed to.
Clause 172 [Entry of premises under warrant]:
Lord McIntosh of Haringeymoved Amendment No. 158DC:
Page 89, line 31, leave out ("(4)") and insert ("(5)").
The noble Lord said: My Lords, I spoke to this amendment with Amendment No. 158BC. I beg to move.
On Question, amendment agreed to.
Clause 174 [Obligation to notify the Authority]:
Lord Kingslandmoved Amendment No. 158E:
Page 90, leave out lines 27 and 28 and insert ("Before a person can acquire").
The noble Lord said: My Lords, I shall speak first to Amendments Nos. 158E, 158EA, 158EB, 158EC, 158H, 158J, 158K, 158L and 158M.
These amendments were tabled by the Opposition in Committee. If I recall correctly, the Minister said in Committee that he was broadly in agreement with the objectives of these amendments and that he would think about the points that had been made. The Government have not tabled any amendments to this clause, and as a reminder of the Minister's remarks, we have tabled our amendments again.

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The Minister will be relieved to hear that I do not want to repeat what I said in Committee, except to say that the corresponding provisions dealing with the obtaining of new or increased control in relation to UK authorised investment firms under the existing Investment Services Regulations 1995 use wording which mirrors our amendments. Regulation 41(1) of those regulations states that:
"No person shall become"—
a relevant controller of a UK authorised investment firm unless —
"he has served on each relevant regulator written notice that he intends to become such a controller".
We have followed this approach with our amendments as we believe that this form of wording is clearer than the present form of words in Clauses 174 and 186. I should remind your Lordships that these are not merely technical points: failure to comply with Clauses 174 and 186 constitutes a criminal offence.
So far as concerns Amendments Nos. 158F and 158G, they relate to the definition of "controller" as used for the purposes of the "control over authorised persons provisions". They refer specifically to the definition of an "associate". Importantly, it is necessary to aggregate with the acquired's own holding of shares or voting rights, the shares or voting rights of his associates, and it is provided in Clause 175(5) that "associate" has the same meaning as in Clause 412.
Clause 412 repeats the definition in the implementing regulations relating to all three single market directives. However, it seems to include as an associate a nominee company and as a result all shares held by the nominee company have to be aggregated, and this could in itself bring the notification procedures into play. Similarly, the definition extends to cover parties to an agreement for the acquisition or disposal of shares and, although acquisition and disposal probably relate to transfer of the legal title, it would be dangerous to assume that this does not include brokerage agreements.
Accordingly, it would be necessary to regard the broker as an associate and all the interests of that broker would have to be aggregated. Even worse than this, if the acquirer is the nominee company or broker, it will be necessary to aggregate with him all the holdings and voting rights of all clients, even if they have nothing to do with the nominee or broker at all. That is going far too far, especially in the case of control over authorised persons provisions, but also even in so far as the control provisions generally are concerned. In addition, I do not see how the person "H" in Clause 412(4) can possibly discover the facts which the definition of "associate" requires him to do in this regard.
The Treasury's Explanatory Notes say that the Treasury will be given the power to provide exemptions from Part XII where, for example, the definition of "associates" has the effect that two or more people would have to notify the same acquisition of shares or voting rights. That is exactly what the wide definition of "associates" always requires, as it catches
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two people in relation to the same holding of shares rather than agreements relating to two different holdings, as is surely intended. As I have explained, the scope of "associates" can be far wider than this as it can apply to all client relationships. In my submission, therefore, the Government ought to agree to this amendment or, better, agree it in Clause 412 itself.
I speak now to Amendments Nos. 219A to 219F. As your Lordships will be aware, Clause 412(1) provides that its definition of "controller" applies throughout the Bill. However, there are similar but different provisions relating to who is a controller for the purposes of Part XII—control over authorised persons—and therefore that should be expressly excluded from the terms of Clause 412(1). The definition of "associate" applies both in relation to a company in which each holder holds shares and in relation to another company in which each holder can exercise or control the exercise of voting rights. Applying that in paragraph (g), which is in any event far too wide, leads to a ridiculous situation. It means that, if a holder has a relevant agreement or arrangement with another person in relation to the company in which he holds shares, that other person is also an associate in relation to the company in which he has voting rights, even though the agreement has nothing to do with it. The converse is also true. I can therefore see no justification for this wide definition, which would lead to absurd results.
I would also emphasise that the amendment follows the wording which is in the single market implementing regulations. Those are the regulations under the European Communities Act which implement the four single market directives. It may be that the draftsman of the Bill was being over-precise in separating out the two different holdings into two different companies, but we surely have to insist that the "associate" definition stays as it is in the implementing regulations. Even if it does, it still has the problems which Amendment No. 11 tries to solve, but this peculiar extension only makes the position more inexplicable. There is really no way that any company can possibly police it. Amendments Nos. 219D and 219E delete "D" from paragraph (g) as a consequence of going with a single company test. I beg to move.
Lord McIntosh of Haringey: My Lords, in this large group of opposition amendments there is one lone government amendment, Amendment No. 159, to which I should like to speak before I refer to the opposition amendments.
The Bill introduces the controllers regime to replace the current patchwork of arrangements set out in various pieces of legislation with a single set of coherent prohibitions—provisions; it was a Freudian slip! The regime has attracted much debate during the passage of the Bill both here and in another place. The principal matter for discussion has been the scope of the obligation to notify a change in control. A number of interesting and technical examples have been put

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forward where it is felt that these obligations fall too heavily or too indiscriminately in certain circumstances.
The Government are committed to creating a regime which is both effective and fair while also ensuring that we fully and properly implement our obligations under European law. The single market directives constrain our room for manoeuvre in this area to a large degree, but we have been persuaded that there is a case for greater flexibility. With that in mind, we have tabled Amendment No. 159 to Clause 188, which introduces a power for the Treasury to exempt by order certain persons from the obligations to notify the FSA of acquisition or divestment of control. In the case of a provisional agreement to sell shares, for instance, we do not consider it necessary to require both the buyer and the seller to notify the agreement. In that situation, the seller might be exempted from the obligation to notify.
We do not think it is appropriate or sensible to seek to be definitive on the face of the Bill about the circumstances in which it would be reasonable and proportionate to disapply the notification requirements. Our discussions on this part of the Bill have thrown up a number of fairly detailed technical points and it seems likely that other circumstances will arise or will be identified in the future in which it is desirable to relieve persons of the obligation to notify using this power. But I must emphasise that this power can be exercised only in accordance with the single market directive.
In addition, the Delegated Powers and Deregulation Committee judged that the amendment raises no problems in relation to the delegated power provided for here, and I hope that the amendment will be acceptable to the House.
I turn to the Opposition amendments, beginning with those relating to nominees. The point raised by Amendments Nos. 158F—and by 158G, which seems to be a straight duplicate of Amendment No. 158F; I hope I understand it correctly—and Amendment No. 219F—
Lord Elton: My Lords, it is clear to me and it surely cannot have escaped my noble friend's notice that the last line of Amendment No. 158F contains the words,
"at the direction of Y",
and in the last line of Amendment No. 158G the words are,
"at the discretion of Y".
Presumably, therein lies the difference.
Lord McIntosh of Haringey: My Lords, I had not noticed that either. I wonder whether, with the leave of the House, the noble Lord, Lord Kingsland, would like to explain the difference between the two.
Lord Kingsland: My Lords, because I realised that there could be a difference, I referred to the amendments, rightly, as "they" and not "it"!
Lord McIntosh of Haringey: My Lords, I have already used my Browning example. Noble Lords will recall that Browning was asked late in life what his early poem, "Sordello" meant. He said,
"When it was written, God and Robert Browning knew what it meant; now only Gods knows".
Lord Kingsland: My Lords, that applies to a number of places in this building!
Lord McIntosh of Haringey: My Lords, I am delighted to have discovered the difference between the two amendments, for which I am grateful to the noble Lord, Lord Elton.
Amendment 219F, which is not the same, also concerns circumstances where there may be a degree of unnecessary double counting of shares and voting rights. The amendments seek to exempt a nominee or agent who only acts on the instructions of another person.
Unfortunately, as I explained in Committee, we cannot agree to this amendment as the terms in which it is drafted would breach the European directives; namely, Article 11 of the second banking directive and Article 9 of the investment services directive, which require notification of the holding of either capital or voting rights. I shall gladly look further at examples of possible duplication in the notification requirements to see whether we should exercise the new power to exempt particular circumstances. But that cannot be at the expense of giving full effect to the requirements of the directives.
Amendments Nos. 158E to 158EB and Amendments Nos. 158H to 158L refer to "taking steps". We are in complete agreement with the noble Lord, Lord Kingsland, that it should be only the step which results in the acquisition of control that should need to be notified. Equally, it is important that it is clear that this step should not proceed without approval.
We amended Clause 174 in another place precisely to make this clear. However, in view of the concerns expressed by the noble Lord, Lord Kingsland, in Committee, we have again consulted parliamentary counsel. We are satisfied that it is implicit that the steps referred to in Clause 174 are the steps which, if taken, would directly lead to the person concerned acquiring control and not some prior steps, and that the courts will not take the view that some first tentative step on the path to acquiring control should be notified. To be more precise, we are clear that merely instructing your broker to ask the price at which your target shares are currently trading would not trigger the obligation to notify.
We have considered whether there is anything further that might be done to make that conclusion any more secure. We do not see that there is. We certainly do not think that the amendments achieve that. We therefore take the view that the text of the Bill is correct as it stands.
I turn now to Amendment No. 219A, which appears to seek to separate the definition of "controller" under Clause 412 as it applies for the purposes of other parts

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of the Bill—for example, Part XI on investigations—from the circumstances in which acquisition of control requires notification under Part XII.
I do not think that such a separation is helpful. The concepts to be applied are the same. Having a separate definition of "controller" in Clause 412 can be seen as rather duplicative, but we think it is necessary to have a single Bill-wide definition of the term.
In practice, we shall want to keep the definition under Clause 412 in step with the notification requirements tinder Clause 175, which is why we have included a power to amend Clause 412 with the power to amend the notification requirements. I am happy to make clear for the record our intention to keep these provisions in line if that provides any reassurance.
Finally, Amendments Nos. 21913 to 219E and Amendments Nos. 158EC, 158M and 158N appear to be drafting amendments. We do not see that they add any value and we are not, therefore, inclined to accept them. I hope that the House will approve our Amendment No. 159 and that noble Lords will not feel it necessary to press the other amendments.
Lord Kingsland: My Lords, I thank the Minister for his response and derive some comfort from it in relation to our amendments. I shall look carefully at the text of Hansard to see whether I must pursue the matter at Third Reading.
The noble Lord asked whether the Opposition was prepared to support Amendment No, 159. I hope that the Minister will allow me one further request for clarification. Following on his observations, my understanding is that the amendment allows the Treasury to provide for exemptions from the notification requirements. To that extent it is, therefore, applauded. The Treasury's Explanatory Notes make clear that the power of exemption is intended to protect persons from an unnecessary obligation to notify the authority. It is explained that exemptions will be granted only in cases where the single market directives do not apply or where, for example, the definition of "associates" has the effect that two or more people must notify the same acquisition of shares or voting rights.
However, we believe that what would do most to prevent unnecessary obligations to notify would be a change in the phraseology of the notice requirement in Clause 174. It is very difficult to be able to identify the precise step that will result in somebody acquiring control under Clause 174(1). Accordingly, any act which is likely to lead to a person acquiring control may in practice cause that person to notify. The Minister has been quite helpful on that point, but it shows the importance of accepting at least the spirit of our amendment to the clause. I hope that what the Minister said does that. If so, I do not believe that we shall need to return to the matter at Third Reading.
Lord McIntosh of Haringey: My Lords, with the leave of the House, we have dealt with it in an amendment to Clause 188 because of the difficulties under Clause 174 of conformity with the European
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directives. The amendments to Clause 174 which the Opposition have tabled, and any others that we have tried to think of, simply do not work. We believe, however, that the amendment to Clause 188 provides the necessary flexibility and makes it possible for the Treasury to exempt persons under certain circumstances from the notification requirements. We share the view of the noble Lord that we should, as far as possible, reduce the burden of notification, and we believe that our Amendment No. 159 is the best way to achieve that.
Lord Kingsland: My Lords, I am most grateful to the noble Lord for again responding so fully. In the spirit of his constructive response, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 158EA to 158EC not moved.]
Clause 175 [Acquiring control]:
[Amendments Nos. 158F and 158G not moved.]
Clause 186 [Notification]:
[Amendments Nos. 158H to 158M not moved.]
Clause 187 [Offences under this Part]:
[Amendment No. 158N not moved.]
Clause 188 [Power to change definitions of control etc.]:
Lord McIntosh of Haringeymoved Amendment No. 159:
Page 98, line 30, at end insert—
("( ) provide for exemptions from the obligations to notify imposed by sections 174 and 186;").
On Question, amendment agreed to.
Clause 196 [Rescission and variation requirements]:
Lord Bachmoved Amendment No. 160:
Page 103, line 28, after ("power") insert ("of the Authority on its own initiative").
The noble Lord said: My Lords, on behalf of my noble friend I rise to move Amendment No. 160 and speak to Amendment No. 161. These amendments represent minor drafting changes and remove a degree of overlap between subsections (2) and (3) of Clause 196. At present both subsections deal with the decision of the authority to vary a requirement ors its own initiative, but subsection (2) deals also with the decision to rescind. The amendment limits subsection (2) to the situation in which the FSA decides to rescind a requirement on its own initiative. In this case a written notice must be issued specifying the date on which the requirement ceases to have effect. Subsection (3) continues to deal with the variation of a requirement of the FSA's initiative, with the lull supervisory procedure under Clause 193 being applied. This is the same procedure as applies to the original decision to impose the requirement. I beg to move.
On Question, amendment agreed to.
Lord Bachmoved Amendment No. 161:
Page 103, line 28, leave out ("or vary").

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The noble Lord said: My Lords, I beg to move this amendment formally.
On Question, amendment agreed to.
Clause 206: [Statements of policy]:
Lord Kingslandmoved Amendment No. 161TA:
Page 106, line 32, at end insert ("and
(c) the circumstances in which the Authority will take disciplinary measures under this Part.").
The noble Lord said: My Lords, under Clause 206(1) the authority must prepare and issue a statement of policy with respect to (a) the imposition of penalties under Part XIV and (b) the amount of penalties under Part XIV as well. Part XIV is that section of the Bill dealing with the power of the authority to take disciplinary measures against an authorised person who has contravened a requirement imposed on him by or under the Act.
The authority's statement of policy on the imposition of penalties and the amount of penalties themselves is important. We believe the statement should be extended to cover the authority's policy on the circumstances in which it will take disciplinary proceedings. No doubt the authority will have a policy on taking disciplinary proceedings and, in the interests of transparency, we believe that policy should be made public and be made subject to consultation under Clause 207.
Clause 206(2) sets out those matters to which the authority must have regard in the context of its policy on the scale of penalties. Amendment No. 161UA reflects our proposal that the authority's statement of policy should be extended to cover its policy on the circumstances in which it will take disciplinary proceedings. Amendment No. 161VA would add a further matter to which the authority must have regard: namely, whether the person who contravened a requirement brought the matter to the authority's attention.
We believe that this is an important consideration for the authority to have regard to when fixing penalties. On the assumption that those who do bring contraventions to the authority's attention will be eligible for lower penalties, this provision will encourage authorised persons to come forward, rather than hoping that the matter will remain undiscovered.
I now turn to Amendment No. 161WA. Financial institutions in general, and the City in particular, are very concerned, as your Lordships must by now be aware, about the authority's disciplinary powers. I hasten to add that this is not because they are frightened of being disciplined for genuine wrongdoing, but rather because of the almost unlimited circumstances in which they are at risk of being so disciplined.
The reason that firms are so concerned about discipline is the following: first, FSA rules cover virtually every aspect of an authorised person's regulated activities; secondly, the rules are generally drafted in absolute terms which apply to every single transaction. For example, a broker will normally be
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required to achieve timely execution on every trade, and a financial adviser to give suitable advice on every occasion. Accordingly, a single failure amounts to a rule breach.
Thirdly, there is no de minimus provision, which provides that a small number of failures will not amount to a rule breach. Fourthly, firms are required to keep records of their activities and generally to log rule breaches. Finally, firms are required to notify serious rule breaches to the authority, which in any case carries out routine inspections of firms.
Virtually every authorised firm will therefore be in breach of one or more rules for much of the time and will feel exposed to the risk of disciplinary action. For this reason, understandably enough, firms are concerned to ensure that there should be adequate safeguards built into the disciplinary process.
This amendment seeks to address one particular concern, which is that once the authority has decided to commence disciplinary action, by the issue of a warning notice, there should be ample opportunity for firms, and also approved persons and individuals being disciplined for market abuse, to be able to speak to an independent committee within the authority in order to attempt to settle the matter in advance of a formal tribunal hearing. At present the Bill contains very little about the procedure which is to apply between the issue of the warning notice, dealt with by Clause 203, and the issue of the decision notice, dealt with by Clause 204.
There is provision in Clause 390 that the authority must have a procedure in relation to the giving of warning and decision notices. Subsection (2) states that the procedure must ensure that the decision to give such notice should be taken by someone who is not directly involved in establishing the evidence upon which the decision was based. However, in our submission, this does not go far enough. The proposed new clause after Clause 207 seeks to codify what the authority has recommended in its response to Consultation Paper 17.
Consultation Paper 17, issued in December 1998, sets out the authority's proposals for enforcing the new regime. It attracted, as many noble Lords will doubtless be aware, a significant amount of comment, in particular in relation to ensuring that firms were able to make effective representations to the FSA without needing to go to the trouble and expense of a formal disciplinary hearing.
The authority published its response in July 1999 taking into account various responses received from the financial services industry. Pages 4 to 7 set out the authority's comments on the decision-making process. Paragraph 18 states that the authority is attracted to a disciplinary decision-making process with most of the features now contained in the proposed new clause after Clause 207.
The reason for setting the process out in the Bill rather than hoping that the authority will adopt this procedure and continue to keep it in force is to give confidence and certainty to regulated firms. Without in any way seeking to diminish the importance of

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observing the rules in the first place, and without denying that in many circumstances disciplinary action is wholly justified, firms are anxious to ensure that, if threatened with such proceedings, they have the assurance of a reasonable opportunity to seek to persuade the authority that it should not so proceed. It could, for example, be because the authority is mistaken as to the facts, has overlooked mitigating circumstances or perhaps is even treating the firm unfairly or inconsistently. I beg to move.
9.30 p.m.
Lord Bach: My Lords, Amendment No. 161VA would add a new factor to which the authority must have regard in its policy on setting penalties: whether the alleged contravenor brought the matter to the FSA's attention.
Everyone would agree that any reasonable public authority is bound to take due account of whether a person drew the authority's attention to a contravention. In another field it would be called good mitigation. The act of "owning up" is clearly a factor that should be taken into account. That is part of establishing an effective collaborative relationship between regulator and regulated.
Indeed, the authority has already made clear that this would be one of the factors that it would take into account in its policy on imposing fines on authorised persons under Part XIV and approved persons under Part V. As has been pointed out, this was factor (g) in a list of factors to be taken into account on page 36 of the authority's Consultation Paper 17, entitled Enforcing the New regime, published in December 1998.
Other factors listed on page 36 of that paper include the degree of co-operation shown in the investigation of a breach, or steps taken to prevent similar problems arising in future, neither of which appears on the face of the Bill.
Similarly, the authority dealt with the factors to be taken into account when deciding to impose financial penalties for market abuse on page 53 of CP17. These include the degree of co-operation with FSA inquiries and steps taken to address the misconduct in question. It is in any case right that we should not include factors here that are not included in the exactly equivalent provisions in relation to the financial penalty powers in, first, Part V, approved persons in Clause 69, secondly, Part VI, official listing in Clause 91, and, thirdly, Part VIII, market abuse in Clause 120.
The point is that we have identified in Clause 206 particular factors which the joint committee said should be given particular weight, but these are not exhaustive. There are clearly other factors that any reasonable public authority should take into account, one of which is whether or not the person owned up.
The FSA is well aware of that and has reflected it in its proposed policy. Indeed, it has reflected it on a wider basis than would be implied by the amendment in isolation. The policy will be carried through to its enforcement manual, which it will publish soon for further consultation.
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Amendments Nos. 161TA and 161UA seek to expand the scope of the statement of policy to be issued under Clause 206 to include a statement as to the circumstances in which the FSA will take disciplinary measures under Part XIV as opposed to the policy on imposing financial penalties. We submit that that, too, is unnecessary.
Page 35 of CP17 listed criteria which the FSA proposed to take into account in determining whether to take disciplinary action. As with the factors in fining decisions already referred to, these criteria for disciplinary actions received broad support during the process of consultation on CP17. Again, the FSA's draft enforcement manual will specifically cover these criteria, so there will be a further opportunity for consultation on them.
Our point is that we have followed the recommendation of the joint committee in prescribing what must be covered by the statement of policy. That does not mean that the authority should not publish and consult on other aspects of its policy—as indeed it has been doing—but we have not attempted to make this provision exhaustive and we do not think it necessary to do so. It is on that basis that we hope the noble Lord will agree to withdraw his amendment.
The proposed new clause after Clause 20'7 seeks to legislate for the enforcement committee, the arrangements for which were also set out in CP17. As we have made clear on a number of occasions, including in the Government's response to the Burns committee and in another place, we do not think it appropriate or desirable to set out the administrative arrangements which the FSA must follow in such detail. Instead, we have used the Bill to impose certain important parameters.
Clauses 390 and 391 require the authority to consult on and publish a statement of its procedures. In keeping with the recommendation of the Burns committee that,
"the FSA should set up an enforcement committee or some equivalent mechanism to separate the functions of investigation and enforcement",
the Government introduced subsection (2) of Clause 390. It requires that, among other things, the published procedures must be designed to secure an appropriate separation between those directly involved in building a disciplinary case and those taking the decision to proceed with the disciplinary action.
Thus the enforcement committee is the means by which the FSA currently proposes to meet that requirement, but the Bill does not prevent these administrative arrangements being developed and improved in future. Deliberately, Clauses 390 and 391 leave the way open to future development of the procedure. That is entirely in keeping with the Burns committee recommendation.
The FSA will allow time for representations to be made following the warning notice. That is already a requirement under Clause 382. The FSA has also announced that representations can be both written and oral. However, we cannot accept that there should be a requirement in the Bill that the enforcement

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committee should take oral representations from the authorised person, his legal representatives or the authority. In our opinion, that would be going too far in turning the committee into an additional tribunal.
The Government have made clear again and again that we do not believe it is desirable that the authority's internal arrangements should be turned into a rival tribunal to the independent financial services and markets tribunal established under Part IX of the Bill. That tribunal is a fully independent, first-instance tribunal and, as such, is the guarantor of a person's right to a fair hearing. Inserting a prior quasi-tribunal stage would serve only to increase the time and expense involved before the person concerned has access to the proper tribunal.
We believe that the amendment suffers from other problems; for example, the notification required under subsection (10)(a) would duplicate the notice of discontinuance which the authority is required to issue under Clause 384 where it decides not to proceed with an action proposed in a warning notice.
It is also important that we do not fudge the matter of who is taking the action in question. The amendment appears to give that responsibility to the committee, as distinct from the Financial Services Authority, although the powers are the authority's and it must be the authority that is accountable for their use.
By appearing to give the committee separate responsibility for the exercise of the authority's powers, there is a danger that the committee will separately become a competent authority for the purposes of the European directives. We have already amended Part IX of the Bill to avoid precisely that possible, and we believe unwelcome, outcome for the tribunal. It is for those reasons that we invite the noble Lord to withdraw his amendments tonight.
Lord Kingsland: My Lords, I thank the Minister for his characteristically full reply. I am, of course, disappointed that he should consider that the first three amendments to which I spoke should demand a degree of precision on the face of the Bill which he is reluctant to concede. This is not the first time that the Opposition have been presented with that view and it will probably not be the last. I have come to accept that the Government are keen to maximise the discretion that the authority should have in these circumstances. Although the Opposition disagree with that approach, it appears that that is what the City will end up with.
So far as concerns the amendment to additional Clause 207A, I should like to look in full at the answer that the noble Lord gave before I tell him whether or not this is a matter that the Opposition intend to pursue at Third Reading. For what it is worth, my own view is this: I believe that the Government are running a very high-risk policy with Article 6.1 of the European Convention on Human Rights. Should the Government's interpretation prove wrong, it is almost certain that the Bill will have to be amended.
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Clause 207A provides an extremely useful cushion to the FSA to deal with situations which, if dealt with formally, might expose the inadequacy of the protection of the individual in the Act. Therefore, I ask the Minister to reflect on what he said about our proposal. Perhaps he will surprise me and come back at Third Reading with an amendment that reflects our own. Meanwhile, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 161UA and 161VA not moved.]
[Amendment No. 161WA not moved.]
Clause 211 [Rights of the scheme in relevant person's insolvency]:
9.45 p.m.
Lord Hunt of Wirralmoved Amendment No. 161XA:
Page 110, line 21, at end insert ("; and
( ) for transferring to the scheme manager a right of recovery against that person").
The noble Lord said: My Lords, in moving this amendment, I should like to raise an important point about the financial services compensation scheme. In essence, as your Lordships will know, it is proposed to have the power to extinguish policyholders' rights to recovery and replace those rights with a claim under the compensation scheme. So the compensation scheme will have a new right to proceed as a creditor of the failed firm.
As many noble Lords will know, reinsurance contracts usually restrict liability to payments actually made by the insurer and I am concerned that the Bill's provisions will sever that link. The reinsurer would not have a contractual liability to the compensation scheme and its new right of recovery. Therefore, this amendment seeks to extend Clause 211 to allow rules to be made which transfer the liability of the insurance company in respect of the claimant to the scheme. That will be in addition to the power to extinguish the liability and confer new rights on the scheme.
However, the amendment seems to solve the problem. I should be very happy if the Government were to accept it and thus to ensure that the reinsurer would have a contractual liability under the compensation scheme. I beg to move.
Lord McIntosh of Haringey: My Lords, I am grateful to the noble Lord, Lord Hunt, for moving his amendment, for writing to me in advance and, indeed, for the positive and constructive contribution which he has been making to the Bill on a number of occasions.
I have problems with the drafting of the amendment but I shall not weary the House with those problems unless the noble Lord, Lord Hunt, wants me to. Perhaps we can have a few words in private about that.

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However, I have a question as to whether the issue which he has raised needs to be addressed. On balance, we do not believe that it does. We reached that conclusion by looking at Clauses 211 and 213 together. Clause 211 deals with the rights of the compensation scheme manager in the event that compensation is paid out to the customers of a firm which is unable or likely to be unable to meet its liabilities. For most firms, that does not raise any issues in connection with reinsurance contracts because they are not relevant to most types of business.
The issue here is effectively confined to cases of insurance company insolvency, as the noble Lord recognised. In practice, however, we believe that it will almost certainly be necessary and desirable for the scheme manager to take measures under Clause 213 where an insurance company is in financial difficulties.
Under Clause 213, the FSA will be able to make provision for the scheme manager to take measures to avoid the inconvenience and expense of allowing insurance companies to become insolvent by effecting the transfer of policies to another insurer or by providing assistance to the relevant insurer to enable it to remain in business, so allowing for a more orderly and less expensive run-off of the liabilities on its policies. Indeed, that is what the Policyholders Protection Board does at the moment.
Those measures are important. The administrative costs of liquidation for insurance companies can be extremely high because the run-off of insurance liabilities can last for several years. Not only does liquidation push up costs, it can also mean inconvenience for customers, who may face substantial delays as the liquidator seeks to calculate the insurer's overall liabilities and so determine what can be paid to individual claimants.
Where assistance under the compensation scheme is given to the insurance company under Clause 213, that will enable the insurance company to pay its policyholders itself. There will be no need to rely on the provisions in Clause 211 and therefore there is no doubt that the insurer can claim against it reinsurers.
So it is difficult to envisage the circumstances which would, in practice, give rise to the problem which is raised by this amendment. I hope that that reassures the noble Lord and, indeed, the Association of British Insurers and that he will not feel it necessary to press the amendment.
Lord Hunt of Wirral: My Lords, I thank the Minister for that response. The amendment arises from the concern about the effect on reinsurance contracts and he has given some reassuring words which I should like to consider and I know that the Association of British Insurers would also wish to read what he said. In those circumstances, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 224 [Determination under the compulsory jurisdiction]:
Lord Saatchimoved Amendment No. 161YA:
Page 118, line 18, leave out subsections (4) to (7) and insert—
("(4) The ombudsman's determination shall be binding on the respondent and the complainant and shall be final.
(5) The ombudsman's statement must—

(a) give the ombudsman's reasons for his determination; and

(b) be signed by him.").

The noble Lord said: My Lords, there are four amendments in this group. They all make distinct and different points so, perhaps tediously for your Lordships, I am obliged to describe them in turn. They all deal with what we perceive to be anomalies in the crucial ombudsman scheme. I must also confess that Amendment No. 161ZA has been tabled incorrectly. It should relate to line 13 on page 118 and not to line 37.
Clause 224(2) states that,
"A complaint is to be determined by reference to what is, in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case".
That sounds fine. However, our concern with that formulation is that it would enable the ombudsman to uphold a complaint even though a firm had observed all the FSA's rules and all the relevant legal provisions. We believe that that could be unfair to firms. It would also remove the level of certainty that firms need when devising their procedures under this regulatory regime. Therefore, this amendment proposes that the ombudsman will uphold a complaint only when the respondent has breached a rule or failed to satisfy a legal obligation or duty owed to the complainant.
Amendment No. 161YA repeats an amendment that we tabled in Committee. I shall explain again why we believe that the current provisions in subsections (4) to (7) of Clause 224 are unfair and should be amended in this way. At present, most of the existing ombudsman schemes include a provision along the lines of the current wording of subsections (4) to (7), which provides that the ombudsman's determination is not binding on the complainant but is binding on the respondent. The difference is that those schemes are voluntary schemes. They are not compulsory as is the scheme under this Bill.
There is a significant difference in principle in relation to voluntary schemes where the authorised person can choose to have the benefits of the scheme, knowing that the price that he has to pay is that any determination will be binding on him and not on the complainant. However, we believe that it is different where the authorised person has no choice about whether to join the scheme or not. It must be remembered that the complainant's position is already well protected, not least because the complainant chooses whether or not to refer a complaint to the ombudsman in the first place. We believe that if he decides to use the ombudsman scheme, he must accept that the ombudsman's determination will be binding on him.

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Amendment No. 161B relates to Clause 225(3) which provides that the ombudsman may award compensation of the same kind as a court can award for breach of contract. The issue here is that there are two different kinds of damages recognised by the law. The first is damages in negligence which are designed to place an investor back in the position he would have been in had he not been given poor advice. Typically, that is achieved by a return of the contribution that has been paid, plus interest to the investor where an unnecessary life assurance policy has been sold. That is the measure of compensation normally awarded to retail investors under the existing Financial Services Act.
By contrast, an award of damages in contract is intended to put the investor back into the position he would have been in had the contract been performed; for example, if an investor has been sold an investment with a guaranteed 9 per cent return, a court would compensate for any under-performance by requiring the firm to pay the guaranteed growth rate.
Under Clause 225(3), in most cases it will be appropriate for the ombudsman to award damages in negligence rather than in contract. It seems to us that the clause, as drafted, suggests that the ombudsman should award damages only in contract. Therefore, as indicated by our amendment, we believe that it is highly desirable for the words "or negligence" to be inserted at the end of the clause to make it clear that the ombudsman should award whatever compensation is appropriate in the circumstances and not necessarily compensation based only on breach of contract.
I turn now to the last in this group of amendments, Amendment No. 161C. This amendment amends Clause 226 which is concerned with the ombudsman's power to award costs. Again, Clause 226(3) provides that,
"Cost rules may not provide for the making of an award against the complainant in respect of the [company's] costs".
However, under subsection (4), these rules can provide for an award in favour of the company where, in the opinion of the ombudsman, the complainant's conduct was "improper or unreasonable" or,
"the complainant was responsible for an unreasonable delay".
In our view, this does not appear to be balanced. Authorised persons are bound to participate in the ombudsman scheme, but they have no redress even where the complainant acts improperly or unreasonably or has been responsible for unreasonable delay. Amendment No. 161C would allow the ombudsman scheme rules to provide for an award against the complainant in respect of the respondent's—the company's—costs in the same circumstances as already provided for in subsection (4). I beg to move.
The Chairman of Committees: Because Amendments Nos. 161A, 161B and 161C are being spoken to along with Amendment No. 161YA, I should point out to the Committee that if Amendment No. 161A is agreed to, I
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shall not be able to call Amendment No. 161B. If Amendment No. 161C is agreed to, I shall not be able to call Amendment No. 162.
10 p.m.
Lord Hunt of Wirral: I welcome the opportunity to explain the thinking that lies behind Amendment No. 161A. In doing so, I should like to mention my personal feelings about the ombudsman scheme. Noble Lords will know that for 35 years I have been a solicitor involved in advising insurance companies and their trade association, the Association of British Insurers, and the predecessor bodies.
Just under 20 years ago, as solicitor to two insurance companies in particular, I was one of the authors of the original industry scheme for the insurance ombudsman. After discussions with the National Consumer Council, we set up the scheme. Its themes could be described as informality, flexibility and speed. I believe that the scheme has been a tremendous success, as indeed have been the other schemes. I am moving this amendment in the hope that we shall retain that flexibility and speed in the new scheme, and I know that the chief ombudsman and his colleagues share that view.
What I and a number of other noble Lords seek to do in this amendment is to draw attention to what I believe to be a fairly obvious defect in the drafting of what is now Clause 225(3). Perhaps I may say how pleased I am to see sitting in their places the noble Lord, Lord Borrie, and the noble and learned Lord, Lord Donaldson of Lymington. I know that the noble Lord, Lord Phillips of Sudbury, would have been here had it been possible for him to be present. That is because we are all concerned about the defect which I shall explain and which I understand was brought to the attention of the Treasury as long ago as August last year. The Government have been on notice for several months as regards anxiety about the defect which is shared not only by the chief ombudsman, but also by the Financial Services Agency and the scheme operator whom we now know as the financial ombudsman service.
If ever there was a provision in the Bill that needs to be clear for ordinary consumers, surely this is it. Among all the provisions of the Bill, those concerning the powers of the ombudsman are most likely to be of interest to ordinary consumers. Furthermore, it is crucial for responsible members of the industry. It is of the utmost importance that everyone should be clear about the powers of the ombudsman in relation to the size and the make-up of money awards.
Of course, the whole purport behind the scheme is a reflection of the fact that the industry is rightly placing more emphasis on curing the problem as soon as possible. The FSA will be making rules to govern firms' complaints-handling activity. And most large financial service firms—banks and insurance companies—have in-house complaints-handling units. The current schemes, and indeed the new scheme, are intended to be a last resort after a complaint has been considered at senior level within a

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firm. On average, firms probably deal with between six and 10 times the number of complaints that the ombudsman ever receives.
Against that background, it is critical for complainants and their advisers to be clear about the powers of the ombudsman to make money awards. It would be most unfortunate if the ambiguity had to be the subject of regular argument before the ombudsman by sets of advisers, or, even worse, before the courts, before a clear interpretation could be established. That would do little for confidence in the industry and, indeed, for confidence in the scheme itself. Speaking as a solicitor, I feel strongly that the last thing the ombudsman scheme wants is intense learned argument over a considerable period of time.
The figures to which I have been referring as to the number of complaints handled by in-house complaints departments are not untypical throughout the industry. The cases that reach the ombudsman are, in effect, disputes that cannot be resolved even by the application of expertise and goodwill by experienced staff in complaints-handling units in industry. The complexity or novelty of the matters in issue, or perhaps the bitterness and lack of trust that may have developed, mean that the matter must be referred for independent adjudication. At that stage, therefore, when a matter is referred to the ombudsman, he must expect the parties to an unresolved dispute to be at loggerheads. It would be unfortunate, therefore, if there were further room for dispute over the ombudsman's powers because this House had failed to enact a clear provision.
I have envisaged situations where a financial firm complained of had the benefit of professional advice. But many will not seek advice. The whole ombudsman scheme is designed to be used without professional assistance. Let us consider a dispute with an investor over what is alleged to have been negligent advice. Both might stare long and hard at the words of this subsection before trying to guess its meaning, and that is the topic I want to address.
Let me for a moment reflect on the process that the Bill provides for a determination to be made. Clause 224 empowers the ombudsman to determine a complaint on the basis of what is "fair and reasonable". That is clearly wider than the definition used within a court. For example, the ombudsman might conclude, "I find that, while this company has not broken any rule or legal duty, it behaved unfairly towards the complainant and that behaviour caused the complainant financial loss of X amount and much anxiety and distress". On that basis the complaint is upheld. But what redress can follow? That is where the problem arises.
Under Clause 225, the ombudsman can either make a direction or a money award. By virtue of Clause 225(2)(b) the ombudsman may make a direction the financial consequences of which are unlimited and such a direction can encompass requirements that courts are unable to make. So in the case we are considering, the ombudsman could, for instance, direct that the institution should
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apologise; that it should write to other organisations reassuring them about the complainant's creditworthiness if that had been put in doubt; that it should reconstitute the complainant's account, as directed, and should treat as valid certain transactions it had purported to invalidate. All these matters are within the ombudsman's power even though the cost might exceed the monetary limit. They are certainly powers which are not exercisable by a court—that is my key point—nor rightly does the subsection try to constrain the ombudsman's powers by reference to the powers of a court. Such is the wide variety of possible remedies that might be appropriate in a scheme where disputes need to be settled with the minimum of authority than the power of the ombudsman needs to be generously defined.
But when considering a money award, the Bill adopts a very different approach. The ombudsman must then look to Clause 225(3) and try to understand what it means. In a money award he is required only to compensate for the kinds of loss or damage for which a court could order,
"if it were deciding an action for breach of contract".
What on earth does that mean?
There are two very different possible interpretations of that provision. The first could follow these lines: the ombudsman is permitted to construct a hypothetical contract which contemplates any form of loss or damage as potentially resulting in an award of damages for a breach of that hypothetical contract. If it is possible to envisage any contract resulting in the kind of loss for which a court could award, then the ombudsman can make an award. I shall not go into any further detail on that matter.
The second possible construction is that the ombudsman must look to the actual contract entered into by the complainant and the respondent and then consider the kind of damages that a court would have power to award for breach of that particular contract. But the problem with that interpretation is that often there will be no contract at all. What the complainant complains about is, for instance, that he has been wrongly discriminated against and has been unable to take out a contract so there is not one. Alternatively, he is a third-party beneficiary under a trust or an insurance policy and under those circumstances he is not party to a contract at all. Even if he is party to a contract, that approach might turn out to be too narrow, depending on that, if anything, which is finally specified under subsection (3)(b).
I hope that I am taking the Minister with me so far because this is such a crucial and critical point. Surely it would be absurd for the ombudsman to declare, "I find that this complaint should be upheld on the basis that in my opinion it would be fair to do so, even though a court would not. However, I am unable to award compensation for the complainant because a court would not do so".

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There appears to be a clash here between the requirement that the ombudsman should determine the outcome of complaints on a basis different from and wider than that used by the courts on the one hand, and the attempt to constrain the money awards that the ombudsman may make by reference to the powers of the court.
We have to remember that these provisions may have to be interpreted in the courts. It is that which I am seeking to avoid. In a similar context the courts have been found to be very cautious about interpreting generously provisions such as these. Unless clear words are used on the face of the legislation the courts normally say that the powers of decision-makers are to be construed no wider than the powers of the courts themselves. That is the approach that the courts have taken to quite similar provisions in the legislation relating to the powers, for example, of the pensions ombudsman. That ombudsman will be very different from the one proposed here. The courts will have their minds lead to such precedents.
My amendment and that of my noble friend, seek to clarify matters. It would make a more natural and commonly recognised distinction between financial loss under paragraph (a) and other forms of loss or damage under paragraph(b). The policy aim in separating all this is that the authority should be enabled to impose a separate limit on these forms of loss or damage under paragraph (b). I believe that the amendment would permit that to be done.
In proposing this amendment I am seeking to assist the Government to get this rather important clause right and to make sure that it is clear on the face of the Bill. There is a clear and recognised ambiguity here. I hope that it will be accepted that this ambiguity can be eradicated by enacting my amendment. The Minister may say that it is not a perfect amendment—I do not know yet. It can be argued that the expression "financial loss" should be expanded so that it could refer to future uncrystalised losses. Some people may prefer that, as a matter of policy, the authority should specify the heads of loss or damage if these are to be the subject of a separate limitation. However, these issues are of less importance than the ambiguity contained in the main provision.
I am aware that disquiet has been expressed by the FSA and by the ombudsman about the drafting of the clause. The concern was also shared by the current ombudsman schemes. I could quote from the letter from the chairman of the Council of the Banking Ombudsman dated 26th January of this year, but the Minister will be aware of that communication. Therefore, I shall just make a passing reference to it. When the Economic Secretary replied on 14th March, he said:
"It is, of course, the Government's intention that the meaning of these provisions should be clear, and I have therefore asked my officials to consider whether the clause needs amending".
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I hope that my noble friends and I have given the Government that opportunity.
Lord Borrie: My Lords, I should like to express my support for the amendment to which the noble Lord, Lord Hunt, has just been speaking. He has explained the amendment so admirably that I do not feel that I need to add to his explanation. I shall simply express my support and point out that the amendment to which my name is attached is a constructive measure and one which will be helpful in trying to explain more clearly what we all believe is the intention behind the clause; namely, the way in which the ombudsman should determine the amounts that he might award.
I wish to speak about the other amendments in this grouping, which were spoken to by the noble Lord, Lord Saatchi. I shall leave one of those amendments aside—the one referring to negligence which would be unnecessary. It cannot be read along with the amendment to which the noble Lord, Lord Hunt, myself and others have subscribed. In my view, the other three amendments to which the noble Lord, Lord Saatchi, spoke are wholly retrograde and undesirable. They show either a misunderstanding of the ombudsman system that we have come to know over many years, or a distrust or dislike of the system. I do not know which it is.
Noble Lords will already be aware that the private sector ombudsman, starting with the insurance one, began in the early 1980s—so I suppose that it has reached its majority. The parliamentary ombudsman dates back to 1967 and is concerned with matters other than breach of the law. He also deals with maladministration, if I may use the omnibus word in respect of what that particular ombudsman deals with and, similarly, do so in respect of the other ones in the public sector. The reason why I suspect a certain misunderstanding of the ombudsman system is that all of them are concerned with what one might call fairness, reasonableness and equity; they are not just concerned with the narrow question of whether someone has broken the law or certain rules.
Clause 224(2) says that the ombudsman's determination shall be on the basis of what is,
"fair and reasonable in all the circumstances of the case".
That is disliked by the Opposition Front Bench, but it follows the precedent of ombudsman schemes that I have described. I must stress that it is not intended under existing systems—or, indeed, under this Bill—that the ombudsman scheme should be a court of law.
The noble Lord, Lord Saatchi, did not mention the fact that the compensation awards are limited. The Minister will correct me if I am wrong, but I understand that it is intended that the limit of what the ombudsman can award in this area is 100,000, even in the most serious cases. Of course, if someone wishes to pursue a legal claim for more than that, he or she has the right to go to court.
That brings me to the point of how important it is that the right to go to court should be retained. In my view it should be retained until the very moment when the complainant accepts an award that has been made

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by the ombudsman. I believe that it is quite wrong for the Opposition Front Bench to suggest that the complainant should be forced to choose—ex ante, as it were, before he approaches the ombudsman at all—between a court of law and the ombudsman.
I suggest that there is a misunderstanding here. All the ombudsman schemes, including the one in this Bill, are surely designed with the idea that people should be encouraged to use them rather than a court of law. This is achieved by making the ombudsman scheme informal, by not involving lawyers and costs and certainly not by doing what the noble Lord, Lord Saatchi, wants; namely, to impose a risk that if the complainant loses his case he may have to pay the costs and the costs of the lawyers engaged by the other side. Each and every one of the three amendments which the noble Lord, Lord Saatchi, has tabled in the group we are discussing are to my mind wholly retrograde to what I might call "ombudsmanship", if there is such a word. The whole essence of the ombudsman arrangements is informality. They seek to avoid the rule that costs should follow the event; that if one loses one pays the other side's costs; and the matter of being compelled to choose between an ombudsman and a court of law right from the start.
I remind the noble Lord, Lord Saatchi, that even in the courts lawyers have recognised, at least for 20 or 30 years, that the costs rule in civil cases often has a retrograde and discouraging effect on people taking perfectly good and reasonable cases to court because they are so worried that if they lose they will have to pay the uncertain, unknown figure of costs that the other side incurs with their lawyers. Hence in the 1970s—Conservative Lord Chancellors agreed with this approach—one could bring small claims to the County Court satisfied in the knowledge that if one failed one would not have to pay the other side's costs.
I find it amazing that in the year 2000 the noble Lord, Lord Saatchi, should want to apply to the ombudsman schemes a rule that has fallen into a certain amount of desuetude, and certainly dislike, in the ordinary courts of the land. I am extremist in my views on this group of amendments. I am wholly in favour of the amendment that is proposed by the noble Lord, Lord Hunt. Noble Lords will notice that it is supported by the Cross Benches, the Liberal Democrats and a Back-Bench Conservative former Cabinet Minister. It is wholly worthy of support. The amendments proposed by the noble Lord, Lord Saatchi, on the other hand, are wholly worthy of dismissal.
10.15 p.m.
Lord Newby: My Lords, I speak to Amendment No. 162, which stands in my name and that of my noble friend Lord Sharman. I wish to comment also on other amendments in the group that we are discussing.
Like the noble Lord, Lord Hunt, we on these Benches believe that the principles of informality, flexibility and speed should characterise the work of the ombudsman in this area, as with other
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ombudsmen. We believe too in the principles of ease of access and cost-free access. Those principles informed our view of all the amendments in this group and led to the tabling of the amendment in our name.
As our amendment has not yet been spoken to, I should remind your Lordships that it seeks to delete subsection (4), which allows cost awards to be made, to put it in shorthand, against a vexatious litigant. I am sorry that even in his extremism the noble Lord, Lord Borrie, did not speak in support of this amendment. Given the arguments that he made, it is an amendment that is worthy of his support.
As I understand the situation at the moment, there are a number of ombudsmen in the financial services sector and a number of ombudsmen in other sectors. As a general rule, costs are not awarded, in any circumstances, against anyone who brings a case to the ombudsman. Obviously in some cases it may be the view of the ombudsman—it may be the view of a reasonable man or woman—that the person bringing a case to the ombudsman is absolutely obsessed by something which has no merit. But it is a part of the role of the ombudsman to deal with such cases, as well as to deal with cases that are very well founded.
If we get to a situation where ordinary people—not only obsessives—when considering what action to take after being badly done by feel that they may run into a costs award against them, this will deter the very people who should be applying to the ombudsman for redress from doing so because they will be worried that they will not be able to pay the costs. In our view, it is not a part of the plan for the ombudsman to be draconian in this respect, but, as long as this provision remains on the statute book, it will deter from going to the ombudsman the kind of people the scheme is designed to benefit.
At the same time, it will do nothing to deter the obsessive. A person with a burning grievance will take it to the ombudsman; if the ombudsman turns it down, he or she will pursue it through the courts until they reach the end of every conceivable level of redress. Not only is it wrong in principle, but it will be ineffective in practice. It will not stop the vexatious litigant from applying to the ombudsman. I urge the Government to drop this measure.
As to the other amendments, it almost goes without saying that we oppose Amendment No. 161C, which would broaden the scope for making cost awards against people bringing cases to the ombudsman. We support Amendment No. 161A. It is constructive and clarificatory and we hope that the Government will support it.
I apologise for taking the amendments in reverse order. We oppose Amendment Nos. 161ZA and 161YA. Amendment No. 161ZA would exclude a raft of cases which fall under the general heading of "maladministration" rather than a formal breach of rules. If an ombudsman is there to do anything, he is there to look at cases of plain, straightforward maladministration which the "maladministrator"—if that is the right word—refuses to accept. We believe

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that Amendment No. 161ZA would unduly constrain the kind of case in which an ombudsman can make a determination.
As the noble Lord, Lord Borrie, said, Amendment No. 161YA appears to require a potential complainant to the ombudsman to decide, before making a complaint, whether to go down the ombudsman route or the court route. This is an unnecessary and unsatisfactory choice to require people to make. It may force some people to decide on a court route who would receive a perfectly satisfactory outcome through the ombudsman route, which must be a preferable way of dealing with these issues.
In moving this amendment, the noble Lord, Lord Saatchi, said that one of the thoughts behind it was that this was a compulsory scheme rather than a voluntary scheme, and that that put it in a different category from other ombudsman schemes. That is a complete red herring. I do not see the relevance of that argument at all. Everyone, including the noble Lord, Lord Saatchi, believes that this scheme should apply across the board in the financial services sector and therefore the broad principles which apply to ombudsman schemes elsewhere should apply to it. Therefore, I would not support Amendment No. 161YA. We look forward to hearing from the Minister that he is prepared to move that little distance by agreeing to Amendment No. 162.
Lord Donaldson of Lymington: My Lords, I, too, look forward to the Minister saying that. I shall speak briefly to the amendments because they have been so fully explained.
If Amendment No. 161YA were accepted the ombudsman would be confined to dealing with cases where there had been a breach of a rule or a failure to satisfy a legal obligation. I am sure that that would be very restrictive. As has been pointed out, there have been cases of maladministration or just plain rudeness which do merit consideration by the ombudsman and in some circumstances would undoubtedly merit an award against the respondent. I know that it looks odd that one should have a unilateral ombudsman scheme—a one-way street—in which the complainant can take the matter up to, but not as far as, the award and then say, "I have not done very well here. I shall now go off to a court. Perhaps I shall do better there". But that is not what happens.
The proof of the pudding is that over many years this has been the pattern for all the ombudsman schemes. The dialogue that takes place between a complainant and the ombudsman, including very often a draft award telling the complainant what the award would contain if he persisted, has settled the matter completely. It may be illogical but it works. If ever there was a case for leaving it to work, this is it. We are not trying to invent a new ombudsman scheme. We are merely trying to rationalise a large number of ombudsman schemes, almost all of which have in common the feature that the respondent can be caught by an award but not the complainant.
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I shall move briefly on to Amendment No. 161B. I respectfully suggest to the noble Lord, Lord Kingsland, although he is not in his place, that he does not mean "negligence". He means "tort". There are many things such as defamation and the like which come under that broader heading. I just thought that I might put in my two penn'orth on that one.
Amendments Nos. 161C and 162 deal with costs. I have never litigated, except on one occasion, for fear of the costs. Perhaps I may describe the occasion when I did it. I had gone round advocating that people should put a legal expenses addition to their household comprehensive policy. The time came when I thought that I should perhaps put my money where my mouth was, provided that it was not too much money. I discovered that it was only £10 and so I did it. I then found myself in dispute with a marine surveyor and handed over the matter to the legal expenses insurers, who took it from there. It was very satisfactory. I was insured against any liability to the other side in respect of costs. This scheme will fail if people are frightened of costs.
That brings me to the amendment to which I subscribe. I agree with all the reasons which have been given. I had to ring the chief ombudsman and ask what are the rules for damages in contract. He told me about it—he reminded me of it is a better way of putting it. They are very limiting—much more limiting than they ought to be, even in regard to court cases. They certainly have no place here. I very much hope that the Minister will be able to accept our much broader suggestion.
10.30 p.m.
Lord Boardman: My Lords, I have been concerned with the creation of certain ombudsman schemes during my time in business. To the best of my knowledge, they have all worked satisfactorily from the point of view of the organisations that established them and the number of complainants whose core complaints have been met. I agree with the remarks of my noble friends Lord Saatchi and Lord Hunt of Wirral regarding the essential requirements, the fact that they can be dealt with speedily and the way in which awards were made—somewhat generously, but not generously in terms of the cost if people had suffered through their problems not being met or going to the courts.
I support the amendments. Two queries have been raised regarding the proposals of the noble Lord, Lord Saatchi. The matter of negligence was raised by the noble Lord, Lord Borrie. I interpret that as a measure of assessing the damages which could properly be awarded by an ombudsman, taking into account the various circumstances. To that extent negligence widens the field rather more than was otherwise appropriate.

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The second relates to costs. I am not sure that I understood the noble Lord, Lord Newby, but as I understand it his amendment strikes out all reference to costs. Yet the noble Lord explained that costs seemed essential to stop someone going from court to court and running them up. Whatever the noble Lord's reasoning, I believe that the provision of a deterrent in the form of costs to stop the aggressive litigant abusing the system is quite a good thing. Such a provision should be used with considerable discretion. The costs certainly should not follow the event. But if someone abuses the system by making unreasonable complaints, it should be up to the ombudsman to provide a deterrent for the future by awarding costs against that person. Subject to those qualifications, I support the amendments that have been proposed.
Lord Bach: My Lords, on behalf of the Government, let me try to take a rather tricky walk down the middle of the various amendments, incompatible as they are.
When we considered a similar clutch of amendments in Committee, I prefaced my remarks by explaining that the purpose of the ombudsman scheme was to provide a quick, cheap and informal mechanism for resolving disputes between authorised firms and consumers. It was also mentioned that over 80 per cent of complaints under the schemes we are replacing were resolved between the parties without the ombudsman having to take a decision one way or another. That is important, because it sets in context questions about who should be bound by the determination and on what basis such determinations should be reached. These issues do not even arise in the vast majority of cases.
I turn first to Amendment No. 161YA, proposing that decisions should not bind respondents. The amendment deals with the question of whether the ombudsman's decision should be binding on the complainant. This question has been raised before and has been given careful consideration. We believe that the approach taken in the Bill is the correct one. It is fundamental to the character of an ombudsman scheme that decisions should not be binding on complainants. Existing schemes are based on that premise. They provide consumers with an alternative to court action but do not deprive them of their legal rights at any stage before they decide to accept the determination. We do not believe that it would be appropriate in any way to design a new scheme in such a way as to put consumers in a less favourable position than under current schemes.
Apparently, over the past number of years, in general, complaints have been upheld only in a minority of cases: roughly 30 per cent in insurance, and roughly 40 per cent in investment matters. In the majority of cases complainants are disappointed.
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However, experience is that over the past 20 years a handful of dissatisfied complainants have gone on to take advantage of their right to pursue maters by way of court proceedings. If complainants were required to choose between the ombudsman route and abandonment of their legal rights—that might well be the effect of the amendment if passed—or to preserve their rights by issuing proceedings, it is possible that many more would choose the court route. We believe it is unlikely that that outcome will be welcomed by the financial services industry, and we invite the noble Lord, Lord Saatchi, to withdraw his amendment.
Amendment No. 161ZA relates to Clause 224. It is perhaps helpful if I explain briefly the basis on which we believe that the ombudsman should determine cases for which the Bill makes provision. We believe it is right to require the ombudsman to determine cases on the basis of what is fair and reasonable in all circumstances. Existing schemes determine cases on that basis. We believe that this arrangement has worked well, as a number of noble Lords have said this evening, and it should continue. The scheme must be quick and informal. It would be wrong to constrain the ombudsman by requiring a purely legalistic focus, or a focus on rules to the exclusion of everything else. To do so might mean that he was unable to examine all the matters, such as delay or maladministration, which were relevant to a complaint. We would certainly expect the ombudsman to take into account, where relevant, the matters mentioned in the amendment—breaches of rules or legal duties and obligations—but it would be too prescriptive to limit his role to those matters.
I turn to the first set of incompatible amendments: Amendments Nos. 161A and 161B. Amendment No. 161A in particular, with no disrespect to Amendment No. 161B, gives us some food for thought. These amendments deal with the provisions under which the ombudsman will be able to make awards of compensation for loss or damage suffered by complainants. I briefly outline the intended purpose of Clause 225(3) which has been subject to some gentle but severe criticism during the course of this evening's debate. Ombudsmen have traditionally made awards which reflect not only financial loss and other losses compensable in general commercial matters but other matters such as distress and inconvenience. Clause 225(3) is intended to allow that to continue while ensuring that the ombudsman's power to make awards for loss or damage not generally compensable in commercial litigation is limited to matters specified in rules made by the FSA.
Subsection (3)(a) is intended to cover losses for which damages would be recoverable in a breach of contract action. Subsection (3)(b) is intended to allow the FSA to specify other types of loss in respect of which the ombudsman can award compensation. We believe that that approach strikes the right balance and allows the ombudsman sufficient discretion to award compensation while ensuring clarity for the industry in respect of awards for loss or damage not generally compensable in commercial litigation.

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We have some concerns about Amendment No. 161A. We believe that that amendment, spoken to notably by the noble Lord, Lord Hunt, which removes the requirement that awards under paragraph (b) should be specified in rules, rather detracts from what we seek to achieve. We do not believe that Amendment No. 161B is appropriate. I do not want to go into details at this stage. The noble and learned Lord, Lord Donaldson, suggests that "tort" is better than "negligence" but that neither is appropriate. The Government also take that view.
We have listened with care to, and will read with even greater attention, the points made this evening and consider whether we can do anything to clarify Clause 225. If it is appropriate to do so we shall table an amendment at Third Reading. It may be that the days in between could be taken up by some discussion on possible ways round this. I do not want to hold out too much hope of movement, but we have been impressed by the arguments that have been put forward, particularly in relation to Amendment No. 161A. In view of that, I hope that the noble Lord, Lord Hunt, will not press his amendment at this particular stage.
Now I move to Amendments Nos. 161C and 162. They deal with the provisions under which the scheme operator can make rules allowing the ombudsman to award costs. We discussed similar amendments in Committee and I can assure noble Lords that we have given full and careful consideration to these provisions since that discussion.
Clause 226 as it stands allows no scope for the ombudsman to make an award of a firm's costs against a consumer. We believe that is right. The scheme is intended to provide consumers, many of whom simply will not have the resources to pursue a case through the courts, with a free means of redress. To allow a firm's costs to be awarded against a consumer could discourage consumers from using the scheme. Indeed, if such an amendment is passed, it is arguable that responsible financial companies might arm themselves with lawyers as soon as a complaint was lodged, and the ombudsman scheme would then have to make the complainant aware that he was at risk of payment of costs if he pursued his complaint.
That might be a really serious inhibition on consumers pursuing complaints. Of course we recognise that the amendment of the noble Lord, Lord Saatchi, (Amendment No. 161C) would allow such awards to be made only where the consumer had behaved improperly or unreasonably, but we still do not think that the changes proposed are desirable. We want to make sure that any action that could be taken in response to improper or unreasonable behaviour is, and is seen by consumers considering whether to use the scheme to be, controlled and proportionate. A respondent's costs could be very high, and they are beyond the control of the scheme operator.
Turning to the amendment of the noble Lord, Lord Newby, to protect against the possibility that consumers may misuse the scheme, the Bill allows the
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ombudsman—this is what the noble Lord seeks to delete—in limited circumstances to make an award of the scheme operator's costs against a complainant. We want to emphasise once again that there is no scope under the Bill for the ombudsman to award costs against a complainant, except where that person has acted improperly or unreasonably or has been responsible for unreasonable delay. We expect an award to be made only in extreme cases and only after prior warnings had been given to the complainant.
In addition—and this we consider important—the ombudsman cannot award costs against any consumer at all, even if they have behaved badly, improperly or unreasonably, unless rules have been made to allow it. The authority and the scheme operator have made it clear that there are no plans at present to allow the ombudsman to make such awards. Such rules would be made only if, in the light of experience, it proves necessary to do so.
Therefore I would describe the authority's attitude about this as being a "reserve" reserve power. The rules are not there: there is no intention to make them. They would be made only if it was thought appropriate to do so, and thus no award could be made until the rules were made.
The scope of the power to award costs to consumers who behave unreasonably or improperly is clearly defined. We would expect it to be used only in the worst cases—my next three words are important—if at all. However, we do think that it is important to have it in the Bill against potential abuse of the scheme. The scheme will give consumers access to a coherent and effective mechanism for seeking redress, and it is only fair to ask that those consumers use the scheme responsibly. It is in that context that I invite the noble Lord, Lord Newby, not to move his amendment.
Lord Saatchi: My Lords, I am grateful to noble Lords who have taken part in the short debate on this important scheme which we fully support. As I said, we see some anomalies. I can understand the merit of the amendment in the name of my noble friend Lord Hunt. He has highlighted a key point about the vagueness of the concept of a breach of a notional contract. I was encouraged by the Government's response.
However, having heard my noble friend Lord Hunt and other noble Lords describe the many merits of their amendment, I am even more confident about the merits of our amendments. The noble Lord, Lord Borrie, said that he wants more informality. That is fine. But we want more balance—if that means more formality, we say, "So be it"—so that the ombudsman will not be able to uphold complaints where a firm has observed all the FSA's rules and will be able to make claims against an unreasonable and improper complainant. I should like to test the opinion of the House.
10.45 p.m.
On Question, Whether the said amendment (No. 161YA) shall be agreed to?
Their Lordships divided: Contents, 17; Not-Contents, 86.

Division No. 2

CONTENTS

Astor of Hever, L.

Lindsay, E.

Blatch, B.

Mackay of Ardbrecknish, L.

Boardman, L.

Montrose, D.

Burnham, L.

Moynihan, L.

Northbrook, L. [Teller]

Dundee, E.

Northesk, E.

Henley, L.[Teller]

Norton of Louth, L.

Home, E.

Saatchi, L

Kingsland, L.

Skelmersdale, L.

NOT-CONTENTS

Acton, L.

Howie of Troon, L.

Alli, L.

Hoyle, L.

Amos, B.

Hughes of Woodside, L.

Archer of Sandwell, L.

Hunt of Kings Heath, L.

Bach, L.

Irvine of Lairg, L. (Lord Chancellor)

Bassam of Brighton, L.

Berkeley, L.

Jay of Paddington, B. (Lord Privy Seat)

Blackstone, B.

Borrie, L.

Lea of Crondall, L.

Brett, L.

Lipsey, L.

Brooke of Alverthorpe, L.

Macdonald of Tradeston, L.

Brookman, L.

McIntosh of Haringey, L.

Burlison, L.

McIntosh of Hudnall, B.

Carter, L.[Teller]

MacKenzie of Culkein, L.

Chandos, V.

Mackenzie of Framwellgate, L.

Christopher, L.

Massey of Darwen, B.

Cocks of Hartcliffe, L.

Morris of Castle Morris, L.

Cohen of Pimlico, B.

Newby, L.

Craig of Radley, L.

Pitkeathley, B.

Crawley, B.

Plant of Highfield, L.

Davies of Oldham, L.

Prys-Davies, L.

Donaldson of Lymington, L.

Ramsay of Cartvale, B.

Dormand of Easington, L.

Rea, L.

Rendell or Dabergn, B.

Dubs, L.

Richard, L.

Elder, L.

Sainsbury of Turville, L.

Evans of Parkside, L.

Sawyer, L.

Farrington of Ribbleton, B. [Teller]

Scotland of Asthal, B.

Sewel, L.

Faulkner of Worcester, L.

Sharman, L.

Filkin, L.

Sheppard of Liverpool, L.

Gale, B.

Simon, V.

Gavron, L.

Smith of Gilmorehill, B.

Gilbert, L.

Smith of Leigh, L.

Goldsmith, L.

Stone of Blackheath, L.

Gordon of Strathblane, L.

Symons of Vernham Dean, B.

Goudie, B.

Taverne, L.

Gould of Potternewton, B.

Thornton, B.

Grenfell, L.

Tomlinson, L.

Hardy of Wath, L.

Warner, L.

Harris of Haringey, L.

Warwick of Undercliffe, B.

Harrison, L.

Wedderburn of Charlton, L.

Hilton of Eggardon, B.

Whitaker, B.

Hollis of Heigham, B.

Whitty, L.

Howells of St Davids, B.

Williams of Mostyn, L.

Resolved in the negative, and amendment disagreed to accordingly.
10.56 p.m.
[Amendment No. 161ZA not moved.]
Clause 225 [Awards]:
[Amendments Nos. 161A and 1618 not moved.]
Clause 226 [Costs]:
[Amendments Nos. 161C and 162 not moved.]
Clause 232 [Open-ended investment companies]:
Lord Kingslandmoved Amendment No. 162A:
Page 122, line 28, at end insert—
("(4A) In determining whether the investment condition is satisfied, participation in the scheme shall he deemed to take place either at the time shares in, or securities of, BC first become available for purchase or subscription by investors or on any occasion thereafter on which the arrangements constituting BC are changed to a material extent.").
The noble Lord said: My Lords, Clause 232 sets out the new definition of open-ended investment companies. Amendment No. 162A is intended to raise a number of issues relating to the definition that we would like to have clarified.
As I said to your Lordships in Committee, broadly we welcome the definition but we believe that it has a potential flaw. The flaw is that the question of whether or not an entity is an open-ended investment company depends on the expectations of a reasonable investor participating in the collective investment scheme in relation to his ability to realise his investment.
The expectations of a reasonable investor may well differ depending on when the investment is treated as taking place. As a result, the categorisation of a collective investment scheme will depend not on the nature of the scheme itself but on what an investor's expectations may be at a particular moment in time.
I can illustrate that by reference to an example. The example assumes that subsection (4) of Clause 232 is not a desistance. An investment company is launched in year one and states that in year five it will redeem at net asset value the shares of any investor who wishes to have the shares redeemed. After year five there will be no further opportunity for investors to have their shares redeemed. I would suggest that at year one the company would not be an open-ended investment company because a reasonable investor in year one would not expect to be able to realise his investment within a reasonable period—five years being too long a period for these purposes. However, in year four a reasonable investor may expect that he would be able to realise his investment within a reasonable time—one year possibly being a reasonable period for these purposes.
Does that mean that at that point the company converts from being a closed-ended to an open-ended investment company? After year five, the opportunity for investors to have their shares redeemed would have passed. Investors would no longer have an expectation of realising their investment within a reasonable period. Does the company then become a closed-ended investment company again? I should be interested to hear the Minister's response.
In Committee the noble Lord said:
"The investment condition operates in relation to the company itself. It does not concern a particular point in time at the end of the company's life. Focusing on that particular point in time does

1495
not give an impression of the nature of the company; it is the nature of the company that counts as far as concerns the definition in the new clause". [Official Report, 9/3/2000; col. 944.]
That is a helpful statement but I believe that my example will have demonstrated that, inevitably, the question of whether a company is an open-ended investment company will be asked at points in time. At those points in time, the expectations of the reasonable investor must be considered and those expectations will change, leading to the consequences I have tried to illustrate.
Our suggested Amendment No. 162A deals with the issue by asking the question at the launch of the company, when shares in the company become available to purchase for the first time, and on each occasion thereafter when the constitutional arrangements of the company—typically, its articles of association—are changed to a material extent.
Minor variations to the articles of association—for example, to comply with listing rules—would be unlikely to result in a significant change to the constitution of the company. Therefore, we propose that those are ignored. The amendment is only a suggestion to meet the concerns that I have outlined.
When replying, I should be grateful if the Minister will deal with the following additional questions. First, when considering the reasonable investor and his expectations about realising his investment, is it necessary to consider the entirety of the investor's investment? In other words, if the investor has a reasonable expectation that he will be able to realise only half of his investment but not the whole of his investment within a reasonable time, would that satisfy the investment condition in subsection (3)?
Secondly, will the Minister please clarify what is meant by,
"calculated wholly or mainly by reference to the value of property",
in Clause 232(3)(b)? If the realisation price was equal to a Stock Exchange quoted price for the shares, I assume that that would not be calculated wholly or mainly by reference to the value of property in respect of which the scheme makes arrangements. Does the reference to "property" mean the actual property of the scheme or property of the same kind? Perhaps the word "the" should be inserted before "property" to make that point clear.
Again, what is the position if part of an investor's investment is realised on a basis,
"calculated wholly or mainly by reference to the value of property",
and part is calculated on a different basis?
One final point I should like to make is that the FSA will be able to give guidance under Clause 153 in relation to the interpretation of Clause 232, assuming that the FSA's power to give guidance with respect to the operation of the Act covers guidance on the interpretation of the definitions in the Act. However, any FSA guidance on the meaning of Clause 232 can
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only ever be the authority's view of what the clause means. Only a court will be able to determine what meaning should be given to the clause. I beg to move.
11 p.m.
Lord McIntosh of Haringey: My Lords, I am grateful to the noble Lord, Lord Kingsland, for his recognition of the Government's achievement in Committee in framing a generally acceptable definition of an open-ended investment company, although he rather spoiled it by the criticisms that he made thereafter of what I thought had gained fairly general agreement, not only in this House but in the long and fruitful consultation with industry representatives. We thought then, and think now, that we have a robust, targeted and flexible definition of an OEIC.
I stress the flexibility because the definition has to serve a number of purposes. It describes the number of companies that can be incorporated and carry on collective investment; it determines the companies to which regulations are made by the Treasury and rules made by the authority in relation to OEICs supply; and more importantly it determines the companies constituted outside the UK that are caught by the rules and regulations relating to OEICs and to collective investment schemes generally.
Largely because of that final purpose—companies constituted outside the UK—the amendment proposed carries significant risks. It reduces the flexibility of the definition by putting a qualification on the investment condition leg. As the House will recall, the definition of an OEIC in Clause 232 is framed by reference to two conditions: property and investment.
The noble Lord, Lord Kingsland, asked about the property condition. As his amendment refers to the investment condition only, I hope that he will forgive me if I deal with the matter in writing.
The investment conditions contain a requirement that a reasonable investor would, if he were to participate in the scheme, expect that he would be able to realise, within a time appearing to him to be reasonable, his investment in the scheme. That allows his expectation in relation to participation at any time in the life of the scheme to be considered.
The amendment proposes that the clause should specify the points of time by reference to which a potential participant's view of his ability to realise his investment in the scheme can be considered. Participations would be limited to the times when the shares in, or the securities of the companies first become available for purchase or subscription, or when, thereafter, the arrangements constituting the company are changed to a material extent.
As I said in Committee, the definition deliberately does not specify a time at which the open-endedness of a company must be considered. It is important that the nature of the company can be judged at any time.
The amendment would exclude from the definition, for example, a company that offered investors no right to redeem their investments for the first, say, six

1497
months after its shares became available for subscription. At that point, a reasonable investor would be likely to consider that, were he to participate in the scheme, he would not be able to realise his investment within a reasonable time. However, the same scheme could offer continuous redemption from the six-month point onwards without any change, material or otherwise, to the arrangements constituting it. But it would still not meet the definition of an OEIC.
Of course, it is essential that shares are capable of coming within the definition of an OEIC so that the rules and regulations covering collective investment schemes, for example in relation to the promotion of schemes, apply to it. Whereas Treasury regulations and FSA rules will determine the nature of OEICs that can be established in the UK, the definition has to apply to overseas established schemes as well, over whose constitution the UK authorities have no control. It is imperative that the OEIC definition is broad enough to cover a variety of such schemes that are capable of offering collective investments.
This is a new type of scheme that has been growing rather rapidly. The nature of OEICs that are being set up varies. If we were to start to lay down restrictions of the sort that are proposed by this amendment, we would run a serious risk of strangling the baby not quite at birth but in early infancy. We want OEICs to exist. They are valuable investment schemes. It is important that they should be allowed to exist and to be regulated. It would be a great shame if a restriction of this kind, which seems to be largely formalistic, were to endanger the possibility of new forms of OEICs that conform with the general definition that we agreed in Committee.
The noble Lord, Lord Kingsland, asked for an example of company changes over the years. Over time, it is perfectly possible for a company to change from closed-ended to open-ended investment. It is right that from time to time the assessment should be made. In that sense the definition is designed to be "ambulatory"—I believe I understand what that means. A hypothetical reasonable investor looks at the type of company in which he is considering investing and forms a view as to the nature of the company in the example given. The fixed term company will probably fall to be considered as a closed-ended company throughout its life, even though in its final year a view may he taken that redemption of the investment could be achieved within a reasonable period.
We cannot allow a loophole of the kind that would he provided by this amendment. More generally, the Committee will recall the government amendment in Committee which introduced a power for the Treasury to amend the OEIC definition should that become necessary. For that reason, restricting the definition, which this amendment would do, would run counter to the approach the Government are seeking to adopt here. We are deliberately looking for a broad and flexible definition, one that captures the essence of the beast while still allowing changes to be made if experience shows that they are needed. As I said in Committee, any order making such a change would be
1498
subject to the affirmative resolution procedure. I hope that, on the basis of the arguments I have put to the Committee, the noble Lord will not press his amendment.
Finally, government Amendment No. 219 is a consequential amendment arising from the changes made in Committee to the definition of an open-ended investment company.
Lord Kingsland: My Lords, with great respect to the Minister, I think it is a little rich of him to suggest that we are trying to stifle enterprise by seeking greater precision in the Bill. I believe I can honestly say that throughout the proceedings on the Bill we have sought greater precision in order to encourage enterprise, because the greater the amount of imprecision there is, the greater will be the uncertainty for those who must operate under it. The greater that uncertainty, the more likely it will be that people will become less resourceful. The whole object of seeking greater precision in these definitions is to encourage enterprise and to make OEICs work—as the Minister put it so evocatively.
Despite what the Minister has said, I hope that over the next few days he will reflect on the enhanced quality that the Opposition believe this amendment would bring to the Bill so that on Third Reading at least a little movement might be seen on this. I hope very much that we shall not have to discuss this matter again at that stage. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 253 [Directions]:
Lord Kingslandmoved Amendment No. 162B:
Page 123, line 16, leave out from ("communicate" I to end of line 17 and insert—
("to a person in the United Kingdom—

(a) an invitation to participate in a collective investment scheme; or

(b) information which is intended or might reasonably be presumed to be intended to induce any person to do so.").

The noble Lord said: My Lords, Amendments Nos. 162B and 162C concern restrictions on promotion. Clause 234 imposes special restrictions on the marketing of collective investment schemes. As it stands, the prohibition applies to even non-UK branches of the authorised person—even in relation to investors outside the UK. We wish to make the same amendments to the prohibition as we are proposing for financial promotion generally.
In another place the honourable Mrs Melanie Johnson, the Economic Secretary, said in Committee that she was beginning to realise that marketing restrictions applicable to authorised persons under the provisions of Clause 231 do not need to be as wide as those applicable to non-authorised persons under Clause 19. That is why the amendment restricts the prohibition to communications,
"to a person in the United Kingdom".

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This restriction follows the existing law. We tried several times to persuade the Minister that it would damage UK competitiveness if the local regulator allowed the marketing of collective investment schemes to particular categories of investor not allowed by the FSA—typically high net worth individuals—nd the only firms which could not market such schemes to them were authorised persons.
The prohibition applies to all authorised persons, not only UK firms. Why should non-UK firms that establish a branch in the United Kingdom, perhaps using an EC passport, have to be subject to a worldwide prohibition on marketing investment funds to prohibited categories of investor from that UK branch? In addition, if the collective investment scheme that they want to market is established in the UK—typically an English limited partnership—the non-UK firm cannot market it from any branch anywhere in the world, which is perhaps going a bit over the top. The imposition of the world-wide prohibition is likely to induce United Kingdom, or non-UK, authorised persons to use an offshore group company—for example, a special purpose subsidiary—o market the collective investment scheme to prohibited categories of investors outside the United Kingdom. It does not do anyone any good to force them to take that step and perhaps incur substantial expense.
Amendment No. 1620 seeks to make a similar amendment to the special restrictions on promoting collective investment schemes as the amendment proposed to the general prohibition on "financial promotion" marketing in Clause 19. I beg to move.
11.15 p.m.
Lord McIntosh of Haringey: My Lords, we discussed a similar issue in relation to Clause 19. This is another area where, as I indicated then, the differences between the Government and the noble Lord, Lord Kingsland, may be narrowing.
Amendment No. 162B to Clause 234(1) seeks to delete "inducement" and replace it with,
"(a) an invitation to participate in a collective investment scheme; or (b) information which is intended or might reasonably be presumed to be intended to induce any person to do so".
I understand the importance which the Opposition attach to this amendment. But there is not a great deal of difference between us in terms of policy. In Committee I undertook to look at whether Clause 234(1) needed further clarification in respect of the meaning of "inducement". As the Government said repeatedly in relation to this clause and the corresponding words of Clause 19, only promotional communications will be targeted by the prohibition. I believe that is also the intention of the Opposition's amendment.
1500
As things stand, in my view, Clause 234 as drafted is the best way of tackling these issues. The term "inducement" should, we believe, only catch communications of a promotional nature. The noble Lord, Lord Kingsland, kindly agreed to meet me this Thursday to discuss the matter in the context of Clause 19. I should like to reserve any further judgment on his amendment until we have had the opportunity to have that meeting. I hope that on that basis he will feel able to withdraw it.
Amendment No. 162C seeks to amend subsection (3) of Clause 234 so that subsection (10), which sets out the basic prohibition, does not apply unless the communication is intended or might reasonably be presumed to be intended to be acted on by a person in the United Kingdom. That too was a Committee stage amendment. But there is concern that the clause is not sufficiently clear; that the communication will only be caught if it is targeted or "directed at" a person in the UK. We have said that we believe the issue is one best dealt with in subordinate legislation and have proposed something designed to achieve that in the draft order set out in the second consultation document; namely, cutting back the "capable of having effect" test in subsection (3).
The amendment proposed by the noble Lord, Lord Kingsland, indicates why the Government's approach is prudent. It is not at all clear what "acted on" means. For example, if a communication is sent from abroad for onward transmission by an agent in the United Kingdom, is that a communication which is intended to be "acted on" by a person in the United Kingdom?
Another intention behind the amendment may be the need to address our Community obligations. Let me say categorically that the UK takes its Community obligations seriously in respect both of our treaty obligations in general and any specific legislation such as the proposed e-commerce directive, in particular with regard to the territorial jurisdiction and other requirements it might place on the UK's rules. We are committed to ensuring that these rules comply with all Community requirements. Clause 234 was amended in Committee to clarify that the Treasury can adjust the scope of the Bill's financial promotion regime in order to take full account of international and technological developments. Given our intention to modify the scope of prohibition using secondary legislation, the Government will continue to resist this amendment. I hope that noble Lords will not press it.
Lord Kingsland: My Lords, the Minister reminded me of our meeting on Thursday at 3.30 p.m. That seems a long way away at 11.20 p.m. when we have got through only half of the amendments on the third day of Report stage. Nevertheless, it has sufficient allure for me to thank the Minister for his response and the prospect of discussing all these matters again in 48 hours. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No.162C not moved.]
Clause 248 [Procedure when refusing approval of change of manager or trustee]:
Lord Kingslandmoved Amendment No. 162D:
Page 130, line 9, leave out from ("notice") to end of line 10 and insert—

("(a) to the manager if notice of the proposal was given under section 247(1) and, unless the Authority considers that there are good reasons not to do so, to the trustee; and

(b) to the trustee if the notice of the proposal was given under section 247(3) and, unless the Authority considers that there are good reasons not to do so, to the manager.").

The noble Lord said: My Lords, this amendment relates to an issue that we also discussed in Committee concerning Clause 248. As your Lordships are doubtless well aware, that clause deals with the procedure to be adopted by the authority when refusing approval of a change of manager or trustee or an alteration to an authorised unit trust scheme. Under Clause 248(1) notice of the refusal is only to be given to a person who gave notice of the proposal. In turn, that notice will be given by the trustee or the manager of the unit trust.
However, both are likely to be involved in the outcome. Our amendment in Committee was to the effect that notice of refusal should be given both to the trustee and the manager. That did not find favour on the basis that there may be confidential information in the notice which should be restricted to one party.
We accept that there should be a confidentiality override. Our amendment would oblige the authority to give the notice of refusal to both parties unless, in the case of the person who did not give notice of the proposal, the FSA considers that there are good reasons for not giving the notice of refusal to that person. In Committee the Minister said that if, as proposed, the notice went only to the applicant, the authority could, under Clause 257(4) pass on to the other party,
"such information about the revocation or variation, in such a way, as it considers appropriate".—[Official Report, 27/3/00, col.629.]
However, as is clear, Clause 257(4) deals with revocation or variation and does not address the circumstances set out in Clause 248(1). There is no provision elsewhere for passing on information in the event of the refusal of a request to replace the manager or trustee.
As regards Amendment No. 264A, the introduction of the supervisory notice procedure for certain types of enforcement action has resulted in the removal of these cases of the 28-day minimum period for representations. Without fettering the authority's discretion, we believe that it is important to introduce a test of reasonableness in Clause 255(4)(d) for making representations. The authority would still be able to specify a period which allowed for no representations before the event in the case of an urgent decision, but would require a reasonable period for representations
1502
after the decision had been taken. It would also establish a discipline requiring a reasonable period to be specified in non-urgent cases. I beg to move.
Lord McIntosh of Haringey: My Lords, it is no disrespect to the amendment to remind the House of the very specialist nature of the clauses that it is proposed to amend. We are talking about a requirement on the authority to give a warning notice under Clause 248 when it has been notified of a proposed change in the identity of either the trustee or the manager.
In Clause 247, the Bill requires the manager to notify a proposal to replace the trustee and the trustee to notify a proposal to replace the manager. The amendment says that the authority has to give a warning notice to both. As the Bill stands, if the authority proposes to refuse to approve such a replacement—and only in those circumstances—it must simply give a warning notice to the party that notified it of the proposal.
The amendment would simply put an extra administrative burden on the FSA and would complicate the procedures. It is not just that extra notices would be required; the issue of a decision notice to persons who have received a warning notice also triggers the right for the party that has been given the notice to refer the matter to the tribunal. It would be quite inappropriate for both parties to have rights of referral to the tribunal when the refusal would generally be counter only to the interests of the party proposing the change, who would not of course be the one whose replacement was being refused.
It is also important that the person who has to present the case, both to the authority and to the tribunal if necessary, is the person who will retain a continuing responsibility for the scheme. He will be the party with the interest in the proposed replacement of the other party and must make the case for it. It may be that the person who is to be replaced wishes to give up his role in relation to the scheme. In such a case, if he were aggrieved by a refusal from the authority effectively to release him from his obligations, he could seek judicial review of the authority's conduct in an appropriate case.
Of course we appreciate that a change in the manager or trustee of a scheme has a significant impact on the regulation of the scheme. It may well be that the authority chooses to discuss the matter with the party who it is proposed to replace. However, that should not be an obligation as suggested in this amendment.
Amendment No. 164A would require the authority to specify a "reasonable" period within which a person to whom it has issued a notice of its proposal to issue a direction under Clause 253 may make representations to the authority. The amendment is unnecessary as the authority, being a public body, is bound in any event to act reasonably. Persons to whom notices are issued would have recourse to the normal legal remedy of judicial review were it not to allow a reasonable period for representations. The amendment would add nothing to that. Moreover, it

1503
would contrast with similar provisions in other clauses of the Bill; for example, in the second new procedure clause recently inserted after Clause 51. It would also be unhelpful to cast doubt on the authority's duty to act reasonably in these cases by explicitly specifying such a requirement in Clause 255. I hope that noble Lords will not pursue these amendments.
Lord Kingsland: My Lords, I am most grateful to the Minister for his reply. I have heard many reasons for not inserting the word "reasonable" in an Act of Parliament but never that one. So, yet again, the noble Lord has made legislative history.
Lord McIntosh of Haringey: My Lords, it was exactly the same sort of argument.
Lord Kingsland: My Lords, as I said, the Minister has made legislative history yet again. Indeed, the noble Lord has confirmed what I just said.
I make no apology for the fact that these amendments concern very specific matters in the Bill. But, of course, the Bill is about individuals conducting their economic life on a daily basis. These details matter enormously to the success of their enterprise. In my submission, it is perfectly proper for the Opposition to deal with detailed matters by way of amendments where that is appropriate. However, I might have misunderstood what the Minister said.
Lord McIntosh of Haringey: My Lords, I deeply apologise if there was any suggestion in my response that it was inappropriate or improper for the Opposition to raise these matters. I had no intention of giving that impression. I was simply pointing out the very specialist nature of the clauses which it is proposed to amend.
Lord Kingsland: My Lords, I am much obliged to the Minister for his response. Perhaps I read too much into his opening remarks. I thought he was suggesting that the amendment was unnecessary or, perhaps, rather tiresome. However, he clearly took neither view and I am most grateful to him for his clear explanation.
I very much regret that the amendments seem to have had no impact whatever on the Minister. However, he will be relieved to hear that instead of pressing them now I shall read what he has said and consider whether they ought to be brought back at Third Reading. In the meantime I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
11.30 p.m.
Clause 253 [Directions]:
Lord McIntosh of Haringeymoved Amendments Nos. 163 and 164:
Page 132, line 6, leave out from ("scheme") to end of line 8.
Page 132, line 9, leave out from ("up") to end of line 11.
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The noble Lord said: My Lords, these amendments have already been spoken to with Amendment No. 107. I beg to move Amendments Nos. 163 and 164 en bloc.
On Question, amendments agreed to.
Clause 255 [Procedure on giving directions under section 253 and varying them on Authority's own initiative]:
[Amendment No. 164A not moved.]
Lord McIntosh of Haringeymoved Amendments Nos. 165 and 166:
Page 133, line 29, at end insert—
("( ) If the direction imposes a requirement under section 253(2)(a), the notice must state that the requirement has effect until—

(a) a specified date; or

(b) a further direction.

( ) If the direction imposes a requirement under section 253(2)(b), the scheme must be wound up—

(a) by a date specified in the notice; or

(b) if no date is specified, as soon as practicable.").

Page 134, line 7, at end insert—
("(12) For the purposes of subsection (1)(c), whether a matter is open to review is to be determined in accordance with section 386(6A).").
The noble Lord said: My Lords, these amendments were debated with Amendment No. 107. I beg to move Amendments Nos. 165 and 166 en bloc.
On Question, amendments agreed to.
Clause 263 [Power of Authority to suspend promotion of scheme]:
Lord McIntosh of Haringeymoved Amendment No. 167:
Page 137, line 29, leave out ("of a kind mentioned in section 234(1)").
The noble Lord said: My Lords, this amendment was debated with Amendment No. 48. I beg to move.
On Question, amendment agreed to.
Clause 264 [Procedure on giving directions under section 263 and varying them on Authority's own initiative]:
Lord McIntosh of Haringeymoved Amendment No. 168:
Page 139, line 28, at end insert—
("(14) For the purposes of subsection (1)(c), whether a matter is open to review is to be determined in accordance with section 386(6A).").
The noble Lord said: My Lords, this amendment was debated with Amendment No. 107. I beg to move.
On Question, amendment agreed to.
Clause 265 [Procedure on application for variation or revocation of direction]:
Lord McIntosh of Haringeymoved Amendment No. 169:
Page 139, line 39, at end insert—
("( ) If the application is refused, the operator of the scheme may refer the matter to the Tribunal.").

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The noble Lord said: My Lords, this amendment was debated with Amendment No. 107. I beg to move.
On Question, amendment agreed to.
Clause 278 [Procedure on giving directions under section 277 and varying them otherwise than as requested]:
Lord McIntosh of Haringeymoved Amendment No. 170:
Page 146, line 23, at end insert—
("(12) For the purposes of subsection (1)(c), whether a matter is open to review is to be determined in accordance with section 386(6A).").
The noble Lord said: My Lords, this amendment was debated with Amendment No. 107. I beg to move.
On Question, amendment agreed to.
Clause 280 [Power to investigate]:
Lord McIntosh of Haringeymoved Amendment No. 170A:
Page 146, line 40, leave out ("The Authority or the Secretary of State") and insert ("An investigating authority").
The noble Lord said: My Lords, in moving Amendment No. 170A I wish to speak also to Amendments Nos. 170AA, AB, AC, AD, AE, AF, AG, AH AJ, AK and AL. This group of amendments has come about in part as a result of concerns raised in Committee about the need to align the circumstances in which an investigator appointed under this clause may obtain information subject to banking confidentiality with those set out in Clause 171 for investigations under Part XI.
Amendment No. 170AK amends Clause 280 so that it accords precisely with the circumstances set out in Clause 171 by inserting the provision for banking confidentiality to be lifted when the investigating authority directs, or when the person to whom confidentiality is owed permits. We have also, as I indicated to your Lordships that we would, tabled amendments to introduce further aspects of the Part XI investigations provisions which are appropriate for investigations concerning collective investment schemes. These amendments ensure that the provisions in the Bill are not any less effective than those in the 1986 Act.
Overall, this group streamlines the drafting, and reduces the potential for ambiguity or uncertainty arising from differences in terminology. I have taken the opportunity to supply noble Lords with a copy of Clause 280, as amended by these amendments.
Amendments Nos. 170A, AB, AC, AE and AF are all drafting amendments adjusting the wording of Clause 280 to reflect the use of the term "investigating authority" in Part XI as a result of the amendments we have discussed to that part.
Amendment No. 170AL ensures that the term "investigating authority" has the same meaning as it has under Part XI, that is, either the FSA or the Secretary of State. Amendment No. 170AG is a further consequential drafting change.
Amendment No. 170AD deletes subsection (4) to Clause 280 which allows the administering of oaths to those under investigation. This is unnecessary, and
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potentially confusing, as Clause 173, which applies to investigations under this clause by virtue of subsection (7), already allows the courts to deal with a person who does not comply with the requirements of the investigations regime as if he were in contempt. Also, Clause 173(4) already makes it an offence to provide false information. Again, this aligns the clause more precisely with Part XI.
Clause 280(7) currently ensures that lawyers may be required to furnish the names of their clients and that liens are not affected by the production of a document. Amendment No. 170AH extends certain other provisions of Clause 171 which are also appropriate to this kind of investigation. These are the powers to take copies or extracts of documents; to require explanations of documents; and to require a person to give an explanation where he fails to produce a document.
Amendment No. 170AJ provides for a power of entry of premises under warrant for collective investment schemes investigations. This is a vital element in ensuring that these powers are effective and it will bring Clause 280 more fully in line with the current position under the Financial Services Act 1986.
Amendment No. 170AA is a drafting amendment which aligns the wording of the Part XVII regime with that of Part XI as regards the persons permitted to conduct investigations.
I hope that noble Lords will appreciate the desirability of these amendments. I beg to move.
Lord Kingsland: My Lords, as I understand them, these amendments bring the power of the authority to appoint investigators in relation to collective investment schemes into line with the provisions relating to investigations generally, and they seem satisfactory. They give the authority and the Secretary of State the power to enter premises under a warrant; to require an authorised person or an employee to explain what is meant by a document disclosed to the investigator; and to tell the investigator where a missing document is.
I have one suggestion, which I offer with great respect, and it concerns new subsection (9) introduced by Amendment No. 170AK. As we have been made aware by the Minister, this amendment provides for the obligation of confidence to be overridden on the instructions of the investigating authority. In my view, this is so serious that I should like to propose to the Minister that the instruction ought to be given by a senior official not personally involved in the meeting with the authorised person concerned.
Lord McIntosh of Haringey: My Lords, I am grateful for the general welcome. I am interested in what the noble Lord said about Amendment No. 170AK. This amendment inserts the provision for banking confidentiality to be lifted when the investigating authority directs or when the person to whom confidentiality is owed permits. I do not think it would be particularly necessary to have a senior

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officer of the investigating authority required to lift confidentiality when the person to whom confidentiality is owed permits, but I shall think about the requirement for a senior officer of the investigating authority to be called in in other circumstances. If I may, I shall write to the noble Lord on that point.
On Question, amendment agreed to.
Lord McIntosh of Haringeymoved Amendments Nos. 170AA to 170AL:
Page 146, line 40, leave out ("a person") and insert ("one or more competent persons").
Page 146, line 41, leave out ("and report on") and insert ("on its behalf').
Page 147, line 7, leave out ("Authority or the Secretary of State") and insert ("investigating authority").
Page 147, line 30, leave out subsection (4).
Page 147, line 35, leave out ("the Authority") and insert ("an investigating authority").
Page 147, line 37, leave out paragraph (b).
Page 147, line 39, leave out ("cases") and insert ("case").
Page 147, line 43, after ("Subsections") insert ("(2) to").
Page 147, line 44, at end insert—
("( ) Subsections (1) to (9) of section 172 apply in relation to a person appointed under subsection (1) as if—

(a) references to an investigator were references to a person so appointed;

(b) references to an information requirement were references to a requirement imposed under section 171 or under subsection (3) by a person so appointed;

(c) the premises mentioned in subsection (3)(a) were the premises of a person whose affairs are the subject of an investigation under this section or of an appointed representative of such a person.").

Page 147, line 47, after ("unless") insert ("subsection (9) or (10) applies.
(9) This subsection applies if—

(a) the person to whom the obligation of confidence is owed consents to the disclosure or production; or

(b) the imposing on the person concerned of a requirement with respect to information or a document of a kind mentioned in subsection (8) has been specifically authorised by the investigating authority.

(10) This subsection applies if').
Page 148, line 6, at end insert—
("( ) "Investigating authority" means the Authority or the Secretary of State.").
On Question, amendments agreed to.
Clause 281 [Exemption for recognised investment exchanges and clearing houses]:
Lord McIntosh of Haringeymoved Amendment No. 170AM:
Page 148, line 17, leave out ("and its recognised nominee (if any) are") and insert ("is").
The noble Lord said: My Lords, I am afraid this is an even worse list. In moving Amendment No. 170AM I shall speak also to Amendments Nos. 170AN, 170AP, 170AQ, 170AR, 170AT, 170AU, 170AV, 17OAW, 170AX, 170BA, 170BB, 170BC, 170BF, 170BG, 170BH, 170BJ, 170BK, 170BL and 170U. I think that is the list.
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These amendments remove the provisions concerning recognised nominees from the Bill. The effect of these provisions would have been to allow a recognised body to apply for exempt status to be given to bodies carrying out certain functions on its behalf.
We introduced this concept into the Bill in another place in order to facilitate the application for recognised status by two or more bodies which together formed an exchange or clearing house but which singly did not do so and might, therefore, have had difficulty in applying for recognition.
The particular case which prompted us was that of ISMA (the International Securities Market Association), which sets the rules for the Eurobond market, and ISMA Limited, a subsidiary which carries out functions on ISMA's behalf. However, following the introduction of the recognised nominee provisions we have reviewed the regime closely with the FSA and have had discussions with the recognised bodies and with ISMA. We have identified a flaw in the way the provisions work which has convinced us that it would not be safe to proceed with them.
Recognised bodies will be subject, as now, to recognition requirements concerning their fitness and properness, financial resources and so on. Where they breach these requirements, the FSA can take action. Under the Bill, this will include a power to direct the recognised body to comply with the requirements as well as, in extremis, to revoke the body's recognition.
The flaw in the recognised nominee arrangements is that it may not be possible for the FSA to take action against a recognised nominee, or indeed a recognised body, where the recognised nominee does something which would have been a breach of the recognition requirements if the recognised body had done the same thing itself—that is, the recognised nominee would not be "standing in the shoes" of the recognised body. This potential problem arises because the recognition requirements do not bite directly on the recognised nominee. This creates a serious shortcoming in the supervision of recognised bodies.
Having looked at the options available to us, we have concluded that the best alternative is to remove the recognised nominee arrangements from the Bill. As far as ISMA is concerned, we intend to address the matter in the regulated activities order. Our intention is broadly to replicate the existing arrangements in the Financial Services Act 1986 under which ISMA is recognised as an international securities self-regulating organisation. I beg to move.
Lord Kingsland: My Lords, as the Minister said, the idea of recognised nominees was conceived in the course of the passage of the Bill through another place and was so inserted. Here we are, several stages on in your Lordships' House and now the Minister has informed us, doubtless for very good reasons, that the concept of recognised nominees is being expunged. The Minister is a well-known expert on English literature. He will recall the name of the author, because I cannot, who claimed to have spent the whole of the morning inserting a comma in his text and the

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whole of the afternoon deciding on whether or not to take it out. Was it Henry James? I cannot believe that, for once, I have stumped the noble Lord.
Lord McIntosh of Haringey: My Lords, the noble Lord teases me. I am embarrassed. I commend the amendment to the House.
On Question, amendment agreed to.
Lord McIntosh of Haringeymoved Amendments Nos. 170AN to 170AR:
Page 148. line 22, leave out ("or by its recognised nominee on its behalf—).
Page 148, line 24, leave out ("and its recognised nominee (if any) are") and insert ("is").
Page 148, line 27, leave out ("or by its recognised nominee on its behalf").
Page 148, line 29, leave out subsection (4).
On Question, amendments agreed to.
Clause 282 [Qualification for recognition]:
Lord Saatchimoved Amendment No. 170AS:
Page 149, line 11, at end insert
("(6) Regulations made under subsection (1) must provide as recognition requirements—

(a) a requirement that the investment exchange or clearing house must establish and maintain arrangements for the investigation by a person independent of the investment exchange or clearing house of complaints arising in connection with the activities of the investment exchange or clearing house;

(b) a requirement that the arrangements established by the investment exchange or clearing house for the taking of disciplinary measures in relation to its members comply with the requirements of the European Convention on Human Rights; and

(c) a requirement that the investment exchange or clearing house is subject to restrictions on the disclosure of confidential information obtained from other persons equivalent to the restrictions which apply to the Authority under this Act.").

The noble Lord said: My Lords, Amendment No. 170AS concerns Clause 282 and the Treasury's regulations setting out the requirements which must be satisfied by an investment exchange or .a clearing house if it is to qualify as a body in respect of which the FSA may make a recognition order and which, if a recognition order is made, it must continue to satisfy if it is to remain a recognised body.
Such recognised bodies are regulated entities, and regulators themselves in that they regulate the conduct of their members and take disciplinary action against them. To some extent, the role of these quasi-regulators has escaped detailed scrutiny during the passage of the Bill. The purpose of Amendment No. 170AS is to raise a number of issues concerning the criteria which the Treasury will lay down as recognition requirements under Clause 282.
The amendment proposes as recognition requirements matters which already apply to the FSA; notably, an independent complaints investigator, disciplinary measures in relation to members of the recognised body which comply with the requirements of the ECHR, and an obligation not to disclose confidential information obtained from third parties.
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I hope the Minister will be able to confirm that these requirements represent the bare minimum that the Treasury will be setting out in the regulations under Clause 282.
Perhaps the Minister would also confirm that these are indeed the recognition arrangements that will apply to the merged LondonFrankfurt recognised exchange.
11.45 p.m.
Lord McIntosh of Haringey: My Lords, when we discussed the Bill's provisions dealing with recognised bodies in Committee, I made it clear that we should deal with the requirements on internal arrangements and the operation of recognised investment exchanges and recognised clearing houses in the recognition requirements that the Treasury will make under the powers of Clause 282(1)—in other words, not on the face of the Bill. We consulted on a draft of these requirements in February last year. So, although I agree with much of the substance of the amendment, I do not think it would be appropriate to place such a provision on the face of the Bill.
The noble Lord, Lord Saatchi, seeks to place on the face of the Bill details of how recognised bodies should operate. The problem with that, and the reason that we decided to do it by secondary legislation in the first place, is that we should not be able to update the requirements as necessary to take account of developments in the industry. We should run the risk of either over-loading the face of the Bill with detail or of missing some important points.
The amendment would do three things. First, paragraph (a) would require each recognised body to appoint an independent complaints investigator. One of the recommendations of the Burns committee was that the recognised body should be required, as a condition of having statutory immunity, to have "an adequate complaints procedure in place". The Government have accepted that recommendation. They have given a commitment that the recognition requirements will provide that all recognised bodies must have independent and fair arrangements for dealing with complaints. I am happy to repeat that commitment. I do not believe the amendment to be necessary.
Paragraph (c) of the amendment provides that recognised bodies must maintain restrictions on the disclosure of confidential information "equivalent" to those imposed on the FSA. I share concern that the recognised bodies should not be able to disclose information that they have received in confidence unless there is a good reason for doing so. They will, of course, be subject to the common law duties of confidentiality as they are now, so they will not be able to disclose confidential information unless the public interest in disclosing it outweighs the public interest in maintaining confidence.
If anything further is required—and I do not think it is—that can be addressed when we come to make the recognition requirements. If anything needs to be done, it should not be done by applying arrangements

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that are the equivalent, or the same as, those applying to the FSA. The FSA is a different animal from the recognised bodies, having different functions under the Bill.
Paragraph (b) of the amendment would require recognition requirements to be made under which recognised bodies would have to comply with the requirements of the European Convention on Human Rights. In one sense, that is simply unnecessary. The Bill is drafted on the assumption that the recognised bodies will be public authorities for the purpose of the Human Rights Act 1998. But in so far as it is necessary to make provisions to take account of that in the recognition requirements, we should of course do so.
The noble Lord asked whether these criteria would apply to the merged exchange. As I said earlier, that is the expectation, although the exact form of the merged body, and hence the regulatory arrangements, are not yet clear.
Even in the absence of the noble and learned Lord, Lord Donaldson, for the record I should like to refer to a matter that he raised and argued in Committee; namely, that, in order to ensure consistency between the disciplinary arrangements of recognised bodies and the market abuse regime under the Bill, it would be helpful if the tribunal to be established under the Bill were to have a role in relation to the disciplinary decisions of recognised bodies. I said at the time that I was not attracted to the idea, but since then I have talked to the noble and learned Lord and corresponded with him. We have concluded that, given the overlap between the market abuse regime and some of the rules of recognised bodies, there is merit in ensuring that it would be possible for the tribunal to be given a role in such disciplinary cases if that were considered desirable in the future.
We have decided to table amendments to deal with this matter at Third Reading. We intend that the power should take the form of allowing the Treasury to extend the jurisdiction of the tribunal to cover specified types of hearing before the disciplinary proceedings of recognised bodies. Before such power is implemented we shall consult the exchanges and the clearing houses. I am sorry to add that point to my response, but I want to put it on the record for the benefit of the noble and learned Lord, Lord Donaldson. As to the amendment that we are now debating, I hope that I have persuaded the noble Lord not to press it.
Lord Saatchi: My Lords, I thought I heard the Minister say that in the context of the merged London and Frankfurt exchanges, the regulatory arrangements were not yet clear.
Lord McIntosh of Haringey: My Lords, that was not quite what I said. I said that the exact form of the merged body was not clear which meant that the appropriate regulatory arrangements for that merged
1512
body were not clear. That does not mean that there is any doubt about the availability of suitable regulatory arrangements.
Lord Saatchi: My Lords, does the Minister accept that the statement that the regulatory arrangements are not yet clear is slightly at odds with his view expressed earlier today that the regulatory arrangements are as contained in this Bill? If they are not yet clear, how can he be certain that the arrangements are as described in this Bill?
Lord McIntosh of Haringey: My Lords, I do not want to leave the House with the wrong impression. This Bill provides for suitable regulatory arrangements for any possible final constitution of the merged body.
Lord Saatchi: My Lords, I shall not press the point further. I am sure that the Minister understands what I am getting at. I should like to study the Minister's response in Hansard—I was distracted by the interest generated in the statement of the noble Lord—before deciding what to do at Third Reading. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 283 [Application by an investment exchange]:
Lord McIntosh of Haringeymoved Amendments Nos. 170AT to 170AX:
Page 149, line 16, leave out subsection (2).
Page 149, line 23, leave out paragraph (d).
Clause 284 [Application by a clearing house]:
Page 149, line 39, leave out subsection (2).
Page 150, line 3, leave out paragraph (d).
Clause 286 [Recognition orders]:
Page 150, line 31, leave out subsections (2) and (3).
The noble Lord said: My Lords, I beg to move Amendments Nos. 170AT to 170AX en bloc.
The Deputy Speaker (Lord Skelmersdale): My Lords, I am in the hands of the House but it is a bit naughty.
On Question, amendments agreed to.
Lord McIntosh of Haringeymoved Amendment No. 170AY:
Page 150, line 39, leave out ("299") and insert ("(Recognition orders: role of the Treasury)").
The noble Lord said: My Lords, it is perfectly proper at Report stage to move en bloc amendments which cover more than one clause.
In moving Amendment No. 170AY, I should like to speak also to Amendments Nos. 170B, 170BD, 170BE, 170BM, 170BT, 170BX to 170CG, 170D to 170L and 170V. It takes half an hour to turn over the pages of the amendments. It reminds me of the time that I began to read Proust's A la recherche du temps perdu in French. I say this for the benefit of the noble Lord, Lord Kingsland. It took me two hours to cut the pages, which was as long as I would normally have spent reading an entire book.

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This group of amendments brings the competition scrutiny arrangement for recognised bodies into line with those which have been put in place for the FSA in Chapter III of Part X. We indicated on a number of occasions that we would table amendments to this end. We have already debated these arrangements as far as concerns the FSA. The key changes which the arrangements make are to give the Competition Commission an important role in scrutiny arrangements and to restrict the role of the Treasury in second-guessing the competition authorities compared with the position now. I hope that, provided noble Lords are satisfied with such details as they wish to have, they agree that the objective of the amendments is wholly admirable.
We believe that these are important changes. Like the FSA, it is possible that recognised bodies which have regulatory functions in relation to the markets that they run and the clearing services that they provide can do things which have an adverse impact on competition. Although there may be good reasons to justify this in a particular case, it is important that these bodies are subject to a robust, thorough and effective external scrutiny in this respect. Ensuring that action can be taken where competition is damaged unnecessarily is vital to getting the regulatory balance right. This was recognised in the Financial Services Act 1986, which put in place a similar competition scrutiny regime for recognised bodies. It is, if anything, even more important now in the age of globalisation.
I should draw attention to two main differences of substance between the arrangements put in place for recognised bodies in Part XVIII and those which we have debated in respect of the FSA in Part X. These are, first, that the regime has to cover applicants for recognition, as well as bodies which are already recognised. This adds not inconsiderably to the complexity of these clauses, compared with those in Part X.
The second difference is that the recognised bodies themselves can exploit the strength of their market position. This is because, in spite of having some regulatory responsibilities, they arc also commercial bodies. The FSA is not in the same position and it is therefore necessary for the competition scrutiny regime to be able to consider whether an exchange or clearing house is exploiting its strong market position, for example, to keep potential new entrants at bay. Apart from these differences, the regime put in place is the same as that which we have agreed should apply to the FSA. I hope that I may commend these amendments to the House. I beg to move.
On Question, amendment agreed to.
Lord McIntosh of Haringeymoved Amendment No. 170B:
Page 151, line 3, leave out ("299") and insert ("(Recognition orders: role of the Treasury)").
The noble Lord said: My Lords, I beg to move this amendment.
On Question, amendment agreed to.
Clause 287 [Liability in relation to recognised body regulatory functions]:
Lord McIntosh of Haringeymoved Amendment No. 170BA:
Page 151, line 4, leave out from ("body") to ("are") in line 5 and insert ("and its officers and staff").
The noble Lord said: My Lords, I beg to move this amendment, already spoken to.
On Question, amendment agreed to.
Clause 289 [Notification requirements]:
Lord McIntosh of Haringeymoved Amendments Nos. 170BB, 170BC, 170BD and 170BE:
Page 152, line 11, leave out ("or its recognised nominee (if any)").
Page 152, line 16, leave out ("or its recognised nominee (if any)").
Page 152, line 40, leave out subsection (8).
Page 152, line 43, leave out ("(8)") and insert ("(7)").
The noble Lord said: My Lords, I beg to move these amendments en bloc. They have been spoken to.
On Question, amendments agreed to.
Clause 292 [Authority's power to give directions]:
Lord McIntosh of Haringeymoved Amendment No. 170BF:
Page 153, line 38, leave out ("or its recognised nominee (if any)").
The noble Lord said: My Lords, I beg to move this amendment, which has already been spoken to.
On Question, amendment agreed to.
Clause 293 [Variation of recognition order in relation to recognised nominee]:
Lord McIntosh of Haringeymoved Amendment No. 170BG:
Leave out Clause 293.
The noble Lord said: My Lords, I beg to move this amendment, which has already been spoken to.
On Question, amendment agreed to.
Clause 295 [Directions and revocation: procedure]:
Lord McIntosh of Haringeymoved Amendments Nos. 170BH, 170BJ, 170BK, 170BL and 170BM:
Page 155, line 8, leave out ("or (4)(b)").
Page 155, line 15, leave out subsection (4).
Page 155, line 31, leave out ("or (4)(b)").
Page 155, line 40, leave out subsection (8).
Page 156, line 7, leave out subsection (11).
The noble Lord said: My Lords, I beg to move these amendments en bloc. They have already been spoken to.
On Question, amendments agreed to.
Clause 298 [Interpretation]:
Lord McIntosh of Haringeymoved Amendment No. 170BN:
Page 157, line 23, at end insert—
(""practices" means—

(a) in relation to a recognised investment exchange, the practices of the exchange in its capacity as such; and

(b) in relation to a recognised clearing house, the practices of the clearing house in respect of its clearing arrangements;").

The noble Lord said: My Lords, in moving Amendment No. 170BN, I should like to speak also to Amendments Nos. 170BP, 170BQ, 170BR, 170BS, 170BU, 170BV, 170BW, 170N, 170P, 170R and 170S. These amendments are a further part of the changes that we have said that we should make to bring the competition scrutiny regime in Part XVIII into line with that of Part X. They concern the description of what is covered by the regime. As in the case of the FSA, the director general will keep under review the rules, guidance and practices of recognised bodies.
Amendments Nos. 170BN, 170BP and 170BQ define what the practices of recognised bodies are for that purpose and make a drafting correction concerning the description of the criteria which recognised bodies laid down when determining to whom they will provide clearing services.
Amendments Nos. 170BR and 170N, 170P and 170R simply remove a number of unnecessary references in this part of the Bill to the trading practices of those subject to the rules of recognised exchanges and clearing houses. That is because the regime is concerned with ensuring that the recognised bodies do not require their members to engage in practices which are unnecessarily anti-competitive. It is not concerned with what those members get up to of their own accord. That is a matter covered by the Competition Act 1998.
Amendment No. 170BS brings the description of what the regime is aimed at—things which have a significantly adverse effect on competition—into line with the wording introduced in Part X in Committee.
Finally, Amendments Nos. 170BU, 170BV and 170BW make a drafting correction to Clause 298, which currently talks about guidance where it should talk about regulatory provisions, which includes rules as well as guidance. I beg to move.
On Question, amendment agreed to.
Lord McIntosh of Haringeymoved Amendments Nos. 170BP to 170BW:
Page 157, line 29, leave out ("particulars described") and insert ("criteria mentioned").
Page 157, line 31, leave out ("particulars described") and insert ("criteria mentioned").
Page 157, leave out lines 32 to 41.
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Page 157, line 42, leave out from ("Chapter") to end of line 45 and insert ("regulatory provisions or practices have a significantly adverse effect on competition if—

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

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

( ) If regulatory provisions or practices have or are intended or likely to have, the effect of requiring or encouraging exploitation of the strength of a market position they are to be taken, for the purposes of this Chapter, to have an adverse effect on competition.").
Page 158, line 1, leave out subsection (3).
Page 158, line 8, leave out ("guidance has, or is") and insert ("regulatory provisions have, or are intended or").
Page 158, line 9, leave out ("it is") and insert ("the provisions concerned are").
Page 158, line 10, leave out ("it") and insert ("them").
On Question, amendments agreed to.
Clause 299 [Examination of rules and guidance]:
Lord McIntosh of Haringeymoved Amendment No. 170BX:
Leave out Clause 299.
On Question, amendment agreed to.
Clause 300 [Continuing scrutiny]:
Lord McIntosh of Haringeymoved Amendment No. 170BY:
Leave out Clause 300.
On Question, amendment agreed to.
Clause 301 [Initial report by Director General of Fair Trading]:
Lord McIntosh of Haringeymoved Amendments Nos. 170C to 170CC:
Page 159, line 13, leave out from ("284") to ("in") in line 14 and insert—
("( ) The Authority must send to the Director such information in its possession as a result of the application for recognition as it considers will assist him in discharging his functions").
Page 159, line 16, leave out from ("must") to end of line 24 and insert ("issue a report as to whether—

(a) a regulatory provision of which a copy has been sent to him under subsection (1) has a significantly adverse effect on competition, or

(b) a combination of regulatory provisions so copied to him have such an effect.").

Page 159, leave out lines 26 to 34 and insert ("significantly adverse effect on competition,").
Page 159, line 35, at end insert—
("( ) When the Director issues a report under subsection (2), he must send a copy of it to the Authority, the Competition Commission and the Treasury.").
On Question, amendments agreed to.
Lord McIntosh of Haringey Lord McIntosh of Haringey moved Amendment No. 170CD:
After Clause 301, insert the following new clause—
FURTHER REPORTS BY DIRECTOR GENERAL OF FAIR TRADING
(".—(1) The Director must keep under review the regulatory provisions and practices of recognised bodies.

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(2) If at any time the Director considers that—

(a) a regulatory provision or practice has a significantly adverse effect on competition, or

(b) regulatory provisions or practices, or a combination of regulating provisions and practices have such an effect,

he must make a report.
(3) If at any time the Director considers that—

(a) a regulatory provision or practice does not have a significantly adverse effect on competition, or

(b) regulatory provisions or practices, or a combination of regulatory provisions and practices do not have any such effect,

he may make a report to that effect.
(4) A report under subsection (2) must contain details of the adverse effect on competition.
(5) If the Director makes a report under subsection (2), he must—

(a) send a copy of it to the Treasury, to the Competition Commission and to the Authority; and

(b) publish it in the way appearing to him to be best calculated to bring it to the attention of the public.

(6) If the Director makes a report under subsection (3)—

(a) he must send a copy of it to the Treasury, to the Competition Commission and to the Authority; and

(b) he may publish it.

(7) Before publishing a report under this section, the Director must, so far as practicable exclude any matter which relates to the private affairs of a particular individual the publication of which, in the opinion of the Director, would or might seriously and prejudicially affect his interests.
(8) Before publishing such a report, the Director must exclude any matter which relates to the affairs of a particular body the publication of which, in the opinion of the Director, would or might seriously and prejudicially affect its interests.
(9) Subsections (7) and (8) do not apply to the copy of a report which the Director is required to send to the Treasury, the Competition Commission and the Authority under subsection (5)(a) or (6)(a).
(10) For the purposes of the law of defamation, absolute privilege attaches to any report of the Director under this section.").
On Question, amendment agreed to.
Clause 302 [Further reports by Director General of Fair Trading]:
Lord McIntosh of Haringeymoved Amendment No. 170CE:
Leave out Clause 302.
On Question, amendment agreed to.
Clause 303 [Reports: supplementary]:
Lord McIntosh of Haringeymoved Amendment No. 170CF:
Leave out Clause 303.
On Question, amendment agreed to.
Clause 304 [Investigations by Director General of Fair Trading]:
Lord McIntosh of Haringeymoved Amendments Nos. 170CG to 170CK:
Page 160, line 40, leave out ("302") and insert ("(Further reports by Director General of Fair Trading)").
Page 161, line 3, leave out from ("control") to end of line 4.
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Page 161, line 10, at end insert—
("( ) A requirement may be imposed under subsection (2) or (3)(a) only in respect of documents or information which relate to any matter relevant to the investigation.").
Page 161, line 20, leave out from ("Court;") to ("Scotland") in line 21 and insert ("or (b) in").
On Question, amendments agreed to.
Lord McIntosh of Haringey Lord McIntosh of Haringey moved Amendments Nos. 170D to 170G:
After Clause 304, insert the following new clause—
("Role of the Competition Commission
CONSIDERATION BY COMPETITION COMMISSION
.—(1) If subsection (2) or (3) applies, the Commission must investigate the matter which is the subject of the Director's report.
(2) This subsection applies if the Director sends to the Competition Commission a report —

(a) issued by him under section 301(2) which concludes that one or more regulatory provisions have a significantly adverse effect on competition, or

(b) made by him under section (Further reports by Director General of Fair Trading)(2).

(3) This subsection applies if the Director asks the Commission to consider a report—

(a) issued by him under section 301(2) which concludes that one or more regulatory provisions do not have a significantly adverse effect on competition, or

(b) made by him under section (Further reports by Director General of Fair Trading)(3).

(4) The Commission must then make its own report on the matter unless it considers that, as a result of a change of circumstances, no useful purpose would be served by a report.
(5) If the Commission decides in accordance with subsection (4) not to make a report, it must make a statement setting out the change of circumstances which resulted in that decision.
(6) A report made under this section must state the Commission's conclusion as to whether—

(a) the regulatory provision or practice which is the subject of the report has a significantly adverse effect on competition, or

(b) the regulatory provisions or practices or combination of regulatory provisions and practices which are the subject of the report have such an effect.

(7) A report under this section stating the Commission's conclusion that there is a significantly adverse effect on competition must also—

(a) state whether the Commission considers that that effect is justified; and

(b) if it states that the Commission considers that it is not justified, state its conclusion as to what action if any the Treasury ought to direct the Authority to take.

(8) Subsection (9) applies whenever the Commission is considering, for the purposes of this section, whether a particular adverse effect on competition is justified.
(9) The Commission must ensure, so far as that is reasonably possible, that the conclusion it reaches is compatible with the obligations imposed on the recognised body concerred by or under this Act.
(10) A report under this section must contain such an account of the Commission's reasons for its conclusions as is expedient, in the opinion of the Commission, for facilitating proper understanding of them.

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(11) The provisions of Schedule 14 (except paragraph 2(b)) apply for the purposes of this section as they apply for the purposes of section 158.
(12) If the Commission makes a report under this section it must send a copy to the Treasury, the Authority and the Director.").
After Clause 304, insert the following new clause—
("Role of the Treasury
RECOGNITION ORDERS: ROLE OF THE TREASURY
.—(1) Subsection (2) applies if, on an application for a recognition order—

(a) the Director makes a report under section 301 but does not ask the Competition to consider it under section (Consideration by Competition Commission);

(b) the Competition Commission concludes—

(i) that the applicant's regulatory provisions do not have a significantly adverse effect on competition; or

(ii) that if those provisions do have that effect, the effect is justified.

(2) The Treasury may refuse to approve the making of the recognition order only if they consider that the exceptional circumstances of the case make it inappropriate for them to give their approval.
(3) Subsection (4) applies if, on an application for a recognition order, the Competition Commission concludes—

(a) that the applicant's regulatory provisions have a significantly adverse effect on competition; and

(b) that that effect is not justified.

(4) The Treasury must refuse to approve the making of the recognition order unless they consider that the exceptional circumstances of the case make it inappropriate for them to refuse their approval.").
After Clause 304, insert the following new clause—
DIRECTIONS BY THE TREASURY
(".—(1) This section applies if the Competition Commission makes a report under section (Consideration by Competition Commission)(4) (other than a report on an application for a recognition order) which states the Commission's conclusion that there is a significantly adverse effect on competition.
(2) If the Commission's conclusion, as stated in the report, is that the adverse effect on competition is not justified, the Treasury must give a remedial direction to the Authority.
(3) But subsection (2) does not apply if the Treasury consider—

(a) that, as a result of action taken by the Authority or the recognised body concerned in response to the Commission's report, it is unnecessary for them to give a direction; or

(b) that the exceptional circumstances of the case make it inappropriate or unnecessary for them to do so.

(4) In considering the action to be specified in a remedial direction, the Treasury must have regard to any conclusion of the Commission included in the report because of section (Consideration by Competition Commission)(7)(b).
(5) Subsection (6) applies if—

(a) the Commission's conclusion, as stated in its report, is that the adverse effect on competition is justified; but

(b) the Treasury consider that the exceptional circumstances of the case require them to act.

(6) The Treasury may give a direction to the Authority requiring it to take such action—

(a) as they consider to be necessary in the light of the exceptional circumstances of the case; and

(b) as may be specified in the direction.

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(7) If the action specified in a remedial direction is the giving by the Authority of a direction—

(a) the direction to be given must be compatible with the recognition requirements applicable to the recognised body in relation to which it is given; and

(b) subsections (3) and (4) of section 292 apply to it as if it were a direction given under that section.

(8) "Remedial direction" means a direction requiring the Authority—

(a) to revoke the recognition order for the body concerned; or

(b) to give such directions to the body concerned as may be specified in it.").

After Clause 304, insert the following new clause—
STATEMENTS BY THE TREASURY
(".—(1) If, in reliance on subsection (3)(a) or (b) of section (Directions by the Treasury), the Treasury decline to act under subsection (2) of that section, they must make a statement to that effect, giving their reasons.
(2) If the Treasury give a direction under section (Directions by the Treasury) they must make a statement giving—

(a) details of the direction; and

(b) if the direction is given under subsection (6) of that section, their reasons for giving it.

(3) The Treasury must—

(a) publish any statement made under this section in the way appearing to them best calculated to bring it to the attention of the public; and

(b) lay a copy of it before Parliament.").

On Question, amendments agreed to.
Clause 305 [Procedure on exercise of certain powers by Treasury]:
Lord McIntosh of Haringey Lord McIntosh of Haringey moved Amendments Nos. 170H to 170L:
Page 161, line 22, leave out from beginning to ("such") in line 24 and insert—
("(1) Subsection (2) applies if the Treasury are considering—

(a) whether to refuse their approval under section (Recognition orders: role of the Treasury);

(b) whether section (Directions by the Treasury)(2) applies; or

(c) whether to give a direction under section (Directions by the Treasury )(6).

(2) The Treasury must—
(a) take").
Page 161, line 29, leave out ("302;") and insert ("(Further reports by Director General of Fair Trading) or by the Competition Commission under section (Consideration by Competition Commission):").
Page 161, line 31, leave out ("299 or 300:") and insert ("(Recognition orders: role of the Treasury) or (Directions by the Treasury):").
Page 161, line 32, leave out ("had").
On Question, amendments agreed to.
Clause 306 [Monopoly situations etc.]:
Lord McIntosh of Haringeymoved Amendment No. 170M:
Leave out Clause 306.
The noble Lord said: My Lords, in moving Amendment No. 170M I should like to speak also to Amendments Nos. 170Q and 170T.

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These amendments complete the changes needed to align the competition provisions in Part XVIII with those in Chapter III of Part X: we indicated at earlier stages that we would do this. Amendment No. 170M deletes Clause 306 and removes a bar on the Competition Commission looking at a recognised body's regulatory provisions and practices when investigating whether a monopoly situation exists under the Fair Trading Act 1973. We removed a similar bar in the regime in Part X in response to Don Cruickshank's interim report on banking services in the United Kingdom.
Amendments Nos. 170Q and 170T narrow the exclusion from the Competition Act 1998 in the same way as we have in Part X. Again this was in response to the Cruickshank recommendations. I beg to move.
On Question, amendment agreed to.
Clause 307 [The Chapter I prohibition]:
Lord McIntosh of Haringeymoved Amendments Nos. 170N to 170R:
Page 162, line 42, leave out paragraph (b).
Page 163, line 1, leave out paragraph (b).
Page 163, line 7, leave out ("contemplated") and insert ("encouraged").
Page 163, line 8, leave out from first ("practices") to end of line 9.
On Question, amendments agreed to.
Clause 308 [The Chapter II prohibition]:
Lord McIntosh of Haringeymoved Amendments Nos 170S and 170T:
Page 163, line 21, leave out paragraph (b).
Page 163, line 25, leave out ("contemplated") and insert ("encouraged").
On Question, amendments agreed to.
Clause 309 [Interpretation of Part XVIII]:
Lord McIntosh of Haringeymoved Amendments Nos. 170U and 170V:
Page 164, leave out lines 8 and 9.
Page 164, line 12, leave out ("300(3);") and insert ("(Directions by the Treasury)(8);").
On Question, amendments agreed to.
Clause 313 [The core provisions]:
Lord McIntosh of Haringeymoved Amendment No 170W:
Page 166, line 23, leave out ("381") and insert ("380").
The noble Lord said: My Lords, in moving Amendment No. 170W, perhaps I may say that there are two Opposition amendments in the group. If I may, I shall comment on them after they have been spoken to by noble Lords opposite.
Amendment No. 170W is a minor consequential amendment that I hope will not detain us. It removes the reference to Clause 381 from Clause 313(1), which lists the core provisions which may be applied to members of Lloyd's by an insurance market direction
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under Clause 312. The reason for the amendment is that Clause 381 has been deleted as part of the package of decision-making amendments. I beg to move.
Lord Kingsland: My Lords, in this group the Opposition have Amendments Nos. 170X and 170Y, to which I can speak briefly. They concern Lloyd's and matters of consultation.
In our view a proposed exercise of powers under Clause 315 to make a direction should be accompanied by an explanation. If the direction needs to be made urgently and therefore without consultation it should still be accompanied by a cost benefit analysis and a statement of reason.
Lord McIntosh of Haringey: My Lords, I am grateful for that terse or, indeed, telegraphic introduction to the two amendments.
Amendment No. 170X would require the authority, when consulting on a direction under Clauses 312, 314 or rules under Clause 318, to specify the purpose of the direction or the rules. This amendment points to one of the few discrepancies between the consultation requirements under Clause 151 that relate to general rules and the other consultation requirements in the Bill.
The Government brought very extensive amendments at the Report stage in another place to align the consultation procedures across the Bill in so far as it was appropriate to align them. Clause 151 includes a requirement for rules to be accompanied by an explanation of their purpose. That requirement does not feature in the other equivalent provisions.
The reason is simple. We believe that the purpose of the proposed rules, codes, directions, policy statements (or however they are described) will be fairly clear and so there is no need for this provision. If it ever turned out that the purpose was unclear, I find it difficult to imagine that the FSA would not add suitable words to clarify the point.
By contrast, I believe that clarity may be lacking quite regularly when the authority exercises its general rule-making powers under Part X of the Bill. It is for that reason that the additional requirement features in Part X but not elsewhere. It is therefore unnecessary and simply destroys the symmetry we have now managed to achieve across the Bill.
Amendment No. 170Y is similar to Amendment No. 157UA which we debated earlier today on the consultation on rules made under Part. X. It seeks to apply certain procedural requirements where powers are exercised in cases of urgency. Specifically, it would require the FSA to publish the information required for consultation—that is, a cost-benefit analysis and an explanation of the purpose of the proposed rule or direction—when giving the direction or making the rule.
The cost-benefit analysis and other material are to help inform the public about the proposed rule as background to the consultation. It seems unnecessarily bureaucratic to ask the FSA to provide supporting material for a consultation process which

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the amendment acknowledges has had to be avoided for legitimate and defensible reasons. I have to say that in cases of genuine urgency, I doubt that it would be possible to prepare a meaningful and robust cost-benefit analysis without inflicting the very delays we are seeking to avoid under this special procedure.
As I said in the case of Amendment No. 157UA, we would not favour imposing a requirement on the FSA to provide supporting material after the event, although clearly anything it is able to do—either formally or informally—will be welcome. It is worth remembering that in the case of Lloyd's the target of such rules or directions will be a much narrower class. Before the rules or directions were given, in most cases, even in cases of urgency, there would have been technical discussions between the society and the FSA during which the scale of burdens imposed and the purpose were adequately discussed.
I also believe it unlikely that the FSA would exercise powers under the urgent procedure in anything but exceptional and therefore rare circumstances. I hope that that will encourage the noble Lord not to press his amendments. I commend Amendment No. 170W to the House.
On Question, amendment agreed to.
Clause 315 [Consultation]:
[Amendments Nos. 170X and 170 Y not moved.]
Clause 317 [Requirements imposed under section 316]:
Lord McIntosh of Haringeymoved Amendments Nos. 171 and 172:
Page 169, line 23, after ("If") insert ("the Authority decides to refuse").
Page 169, line 23, leave out ("is refused").
On Question, amendments agreed to.
Clause 320 [Authority's general duty]:
Lord McIntosh of Haringeymoved Amendment No. 172A:
Page 170, line 18, after ("may") insert (", as a result of this Part,").
On Question, amendment agreed to.
Clause 322 [Exemption from the general prohibition]:
[Amendments Nos. 173 to 174 not moved.]
Lord McIntosh of Haringeymoved Amendment No. 174A:
Page 171, line 44, at end insert ("; or
( ) one in relation to which he is an exempt person.").
On Question, amendment agreed to.
[Amendment No. 175 not moved.]
Lord McIntosh of Haringeymoved Amendment No. 175A:
Page 172, line 4, at end insert ("(other than regulated activities in relation to which he is an exempt person)").
On Question, amendment agreed to.
Clause 327 [Rules in relation to persons to whom the general prohibition does not apply]:
Lord McIntosh of Haringeymoved Amendment No. 175B:
Page 175, line 18, leave out ("of regulated activities by those members") and insert ("by those members of regulated activities (other than regulated activities in relation to which they are exempt persons)").
On Question, amendment agreed to.
[Amendment No. 175C not moved.]
Clause 329 [The Friendly Societies Commission]:
Lord McIntosh of Haringeymoved Amendment No. 176:
Page 176, line 14, at end insert—
("(4) Part IA of Schedule 18—

(a) removes certain restrictions on the ability of incorporated friendly societies to form subsidiaries and control corporate bodies; and

(b) makes connected amendments.").

The noble Lord said: My Lords, in moving Amendment No. 176 I wish to speak also to Amendments Nos. 177, 227 and 228. These amendments will amend the Friendly Societies Act 1992 to confer greater freedoms on incorporated friendly societies to form and own subsidiaries and jointly controlled bodies. The amendments have been brought forward in line with a commitment given by the Economic Secretary to the Treasury at Report stage in another place. The commitment was given in response to an amendment tabled by the Liberal Democrats. I gather that the proposals had all-party support, and I hope that the amendments will be welcomed as warmly by your Lordships as was the policy announcement in another place. I beg to move.
On Question, amendment agreed to.
Schedule 18 [Mutuals]:
Lord McIntosh of Haringey Lord McIntosh of Haringey moved Amendment No. 177:
Page 277, line 39, at end insert—
("PART IA
FRIENDLY SOCIETIES: SUBSIDIARIES AND CONTROLLED BODIES
Interpretation
In this Part of this Schedule—
"the 1992 Act" means the Friendly Societies Act 1992; and
"section 13" means section 13 of that Act.
Qualifying bodies
.—(1) Subsections (2) to (5) of section 13 (incorporated friendly societies allowed to form or acquire control or joint control only of qualifying bodies) cease to have effect.
(2) As a result, omit—

(a) subsections (8) and (11 ) of that section, and

(b) Schedule 7 to the 1992 Act (activities which may be carried on by a subsidiary of, or body jointly controlled by, an incorporated friendly society).

Bodies controlled by societies
In section 13(9) (defined terms), after paragraph (a) insert—
"(aa) an incorporated friendly society also has control of a body corporate if the body corporate is itself a body controlled in one of the ways mentioned in paragraph (a)(i), (ii) or (iii) by a body corporate of which the society has control;".
Joint control by societies
In section 13(9), after paragraph (c) insert—
"(cc) an incorporated friendly society also has joint control of a body corporate if—

(i) a subsidiary of the society has joint control of the body corporate in a way mentioned in paragraph (c)(i), (ii) or (iii);

(ii) a body corporate of which the society has joint control has joint control of the body corporate in such a way; or

(iii) the body corporate is controlled in a way mentioned in paragraph (a)(i), (ii) or (iii) by a body corporate of which the society has joint control;",

Acquisition of joint control
In section 13(9), in the words following paragraph (d), after "paragraph (c)" insert "or (cc)".
Amendment of Schedule 8 to the 1992 Act
.—(1) Schedule 8 to the 1992 Act (provisions supplementing section 13) is amended as follows.

(2) Omit paragraph 3(2).

(3) After paragraph 3 insert—

"3A.—(1 ) A body is to be treated for the purposes of section 13)9) as having the right to appoint to a directorship if—

(a) a person's appointment to the directorship follows necessarily from his appointment as an officer of that body; or

(b) the directorship is held by the body itself.

(2) A body ("B") and some other person ("P") together are to be treated, for the purposes of section 13(9), as having the right to appoint to a directorship if—

(a) P is a body corporate which has directors and a person's appointment to the directorship follows necessarily from his appointment both as an officer of B and a director of P;

(b) P is a body corporate which does not have directors and a person's appointment to the directorship follows necessarily from his appointment both as an officer of B and as a member of P's managing body; or

(c) the directorship is held jointly by B and P.

(3) For the purposes of section 13(9), a right to appoint (or remove) which is exercisable only with the consent or agreement of another person must be left out of account unless no other person has a right to appoint (or remove) in relation to that directorship.
(4) Nothing in this paragraph is to be read as restricting the effect of section 13(9)."
(4) In paragraph 9 (exercise of certain rights under instruction by, or in the interests of, incorporated friendly society) insert at the end "or in the interests of any body over which the society has joint control".
Consequential amendments
.—(1) Section 52 of the 1992 Act is amended as follows.

(2) In subsection (2), omit paragraph (d).

(3) In subsection (3), for "(4) below" substitute "(2)".

(4) For subsection (4) substitute—

"(4) A court may not make an order under subsection (5) unless it is satisfied that one or more of the conditions mentioned in subsection (2) are satisfied.
(5) In subsection (5), omit the words from "or, where" to the end.
References in other enactments
. References in any provision of, or made under, any enactment to subsidiaries of, or bodies jointly controlled by, an incorporated friendly society are to be read as including references to bodies which are such subsidiaries or bodies as a result of any provision of this Part of this Schedule.").
On Question, amendment agreed to.
Clause 342 [The record of authorised persons etc.]:
Lord Bachmoved Amendment No. 177A:
Page 181, line 37, after ("relates;") insert—
("( ) approved person;").
The noble Lord said: My Lords, on the fifth day in Committee the noble Lord, Lord Saatchi—I am sorry not to see him in his place; I believe that he will also be sorry not to be in his place—moved an amendment that required the authority to maintain a public record of certain details about approved persons under Part V. That amendment was defeated.
At the time I spoke against the amendment. Our main concern was that from the outset the authority might have difficulty in establishing the relevant part of the public record. The particular difficulty arises because of the grandfathering arrangements that are proposed for employees of authorised firms. Our intention is that, for the purposes of Part V of the Bill, people should automatically be treated, as having been approved for any controlled functions that they were performing when that part of the Bill is brought into force. The process will be automatic and we cannot be sure that the authority will have all the, information in time for the public record to go live on day one.
However, we agree that it would be desirable to remove uncertainty on the question of the coverage of the register, and we have now brought forward amendments which require certain information to be included. That is the minimum that must be included. The authority may add to that such other information as it sees fit. The authority proposes also to include information about the controlled functions for which the person has approval. We have not made that a requirement as we do not yet know how approvals will be classified by the authority. Therefore, we cannot express what they would insert in the register.
By bringing forward the amendments in this group and by paying the necessary compliment to the noble Lord, Lord Saatchi, I hope that it will be clear that the Government have taken careful note of the points made by the noble Lord in Committee. We shall

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endeavour, working with the authority, to bring the arrangements into force at the earliest moment. It shows that the Government listen. I beg to move.
Lord Kingsland: My Lords, this is indeed a rare moment to savour. The Government have thought again in the most constructive way. I should like to draw to the attention of the noble Lord, Lord Bach, that, if my memory serves me correctly, the noble Earl, Lord Home, also spoke most eloquently to that amendment and, indeed, I see that he is in his place. I believe that the House owes a great deal to his persuasive argument which led to the Government's change of mind.
12.15 a.m.
Lord Bach: My Lords, I am grateful to the noble Lord for reminding me of the noble Earl's contribution. I should pay him the same tribute as I paid to the noble Lord, Lord Saatchi.
On Question, amendment agreed to.
Lord McIntosh of Haringeymoved Amendments Nos. 177B and 177C:
Page 182, line 23, at end insert—
("(g) in the case of a person who is an approved person—

(i) his name;

(ii) the name of the relevant authorised person;

(iii) if the approved person is performing a controlled function under an arrangement with a contractor of the relevant authorised person, the name of the contractor.").

Page 183, line 3, at end insert—
("(8) "Approved person" means a person in relation to whom the Authority has given its approval under section 58 and "controlled function" and "arrangement" have the same meaning as in that section.
(9) "Relevant authorised person" has the meaning given in section 65.").
On Question, amendments agreed to.
Clause 343 [Restrictions on disclosure of confidential information by Authority etc]:
Lord McIntosh of Haringeymoved Amendment No. 178:
Page 183, line 16, leave out from beginning to ("and") and insert ("any provision made by or under this Act;").
The noble Lord said: My Lords, in moving this amendment I should like to speak also to Amendments Nos. 179 to 183. These amendments are intended to address concerns about the width of the power in Clause 344 which the Delegated Powers and Deregulation Committee raised in its report on the Bill. The committee recommended that the Bill be amended to restrict that power in a way which clearly limits it to information needed for regulatory and other public functions. These amendments achieve that.
Amendments Nos. 178, 182 and 183 make technical drafting amendments to Clauses 343 and 344. I beg to move.
On Question, amendment agreed to.
Clause 344 [Exceptions from section 343]:
Lord McIntosh of Haringeymoved Amendments Nos. 179 to 183:
Page 184, line 6, after ("is") insert ("—
(a) made for the purpose of facilitating the carrying out of a public function; and
(b)")
Page 184, line 13, after ("prescribed") insert ("public").
Page 184, line 17, after ("prescribed") insert ("public").
Page 184, line 23, leave out sub-paragraphs (ii) and (iii).
Page 184, line 35, at end insert—
("(5) "Public functions" includes—

(a) functions conferred by or in accordance with any provision contained in any enactment or subordinate legislation;

(b) functions conferred by or in accordance with any provision contained in the Community Treaties or any Community instrument;

(c) similar functions conferred on persons by or under provisions having effect as part of the law of a country or territory outside the United Kingdom;

(d) functions exercisable in relation to prescribed disciplinary proceedings.

(6) "Enactment" includes—

(a) an Act of the Scottish Parliament;

(b) Northern Ireland legislation.

(7) "Subordinate legislation" has the meaning given in the Interpretation Act 1978 and also includes an instrument made under an Act of the Scottish Parliament or under Northern Ireland legislation.").
On Question, amendments agreed to.
Lord McIntosh of Haringeymoved Amendment No. 183VA:
After Clause 345, insert the following new clause—
COMPETITION INFORMATION
(".—(1) A person is guilty of an offence if he has competition information (whether or not it was obtained by him) and improperly discloses it—

(a) if it relates to the affairs of an individual, during that individual's lifetime;

(b) if it relates to any particular business of a body, while that business continues to be carried on.

(2) For the purposes of subsection (1) a disclosure is improper unless it is made—

(a) with the consent of the person from whom it was obtained and, if different—

(i) the individual to whose affairs the information relates, or

(ii) the person for the time being carrying on the business to which the information relates;

(b) to facilitate the performance by a person mentioned in the first column of the table set out in Part I of Schedule (Competition Information) of a function mentioned in the second column of that table;

(c) in pursuance of a Community obligation;

(d) for the purpose of criminal proceedings in any part of the United Kingdom;

(e) in connection with the investigation of any criminal offence triable in the United Kingdom or any part of the United Kingdom;

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(f) with a view to the institution of, or otherwise for the purposes of, civil proceedings brought under or in connection with—

(i) a competition provision; or

(ii) a specified enactment.

(3) A person guilty of an offence under this section is liable—

(a) on summary conviction, to a fine not exceeding the statutory maximum;

(b) on conviction on indictment, to imprisonment for a term not exceeding two years or to a fine or to both.

(4) Section 343 does not apply to competition information.
(5) "Competition information" means information which—

(a) relates to the affairs of a particular individual or body;

(b) is not otherwise in the public domain; and

(c) was obtained under or by virtue of a competition provision.

(6) "Competition provision" means any provision of—

(a) an order made under section (Competition scrutiny);

(b) Chapter III of Part X; or

(c) Chapter II of Part XVIII.

(7) "Specified enactment" means an enactment specified in Part II of Schedule (Competition Information).").
The noble Lord said: My Lords, in moving this amendment, I shall speak also to Amendment No. 226YA. These amendments are concerned with competition gateways. They form a new clause and a new schedule and they are the final chapter in the improvements we have made to the competition scrutiny regimes in the Bill. They address a concern raised in Committee in another place. They provide protection for confidential information obtained by the Director General of Fair Trading and the Competition Commission in carrying out their competition scrutiny responsibilities under the Bill.
They make it clear that such information must be kept confidential unless the persons concerned are content that it should be revealed or because it is necessary for the performance of one of a number of specific public purposes. Those purposes are set out in subsection (2) of the new clause and (.he new schedule. They are in line with the Competition Act 1998. I beg to move.
On Question, amendment agreed to.
Clause 377 [Restitution orders in cases of market abuse]:
Lord McIntosh of Haringeymoved Amendment No. 183WA:
Page 200, line 39, leave out from ("person"1 to end of line 40 and insert ("("the person concerned")—

(a) has engaged in market abuse, or

(b) by taking or refraining from taking any action has required or encouraged another person or persons to engage in behaviour which, if engaged in by the person concerned, would amount to market abuse,

and the condition mentioned in subsection (1A) is fulfilled,
(1A) The condition is—").
The noble Lord said: My Lords, in moving this amendment, I shall speak also to Amendments Nos. 183XA, 183YA, 183ZA, 183A, 183AA, 183AB, 183AC, 183AD, 183AE, 183AF, 183AG, 183AH,
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183AJ, 183C and 183D. I shall respond to Opposition Amendments Nos. 183WAA and 183ADA when they have been spoken to by them.
When we come to our amendments, the substantive change made by this group is to allow the FSA and the courts to order a person who requires or encourages another person to engage in market abuse to pay restitution. Clause 119(1)(b) already allows the FSA to impose a penalty or make a statement when someone does that. Of course, the FSA can impose a penalty only where it would have been market abuse if the person concerned had engaged in the behaviour themselves, rather than requiring or encouraging another to do so.
Amendments Nos. 183WA and 183AD ensure that restitution can be made in that situation. I do not believe that anyone can dispute the need for that.
The protections for reasonable belief and due diligence will also apply in that circumstance. The FSA and the courts will not be able to order restitution where the persons who required or encouraged behaviour had reasonable grounds for believing that their behaviour was not of that type, or exercised all due diligence and took all reasonable precautions to avoid behaving in that way.
Noble Lords opposite have tabled Amendments Nos. 183WAA and 18ADA which amend our amendments. We had sight of those only this morning. I would prefer that they speak to those amendments before I respond to them. I beg to move.
The Chairman of Committees: My Lords, Amendment No. 183WAA is on the supplementary sheet and it is an amendment to Amendment No. 183WA.
Lord Kingslandmoved, as an amendment to Amendment No. 183WA, Amendment No. 183WAA:
Line 4, in paragraph (b), after ("has") insert ("knowingly").
The noble Lord said: My Lords, Amendments Nos. 183WA to 183ZA give the court power, on an application by the authority, to award compensation—restitution—against someone who instigates market abuse: he "requires or encourages" the abuser.
The danger is that the court may treat the authorised person as encouraging the abuse because, without knowing about the abuse, it agrees to "approve" a client's communication for the purposes of Clause 19 without being able to discover whether it contains untrue or misleading statements.
The government amendment on restitution does not change the scope of the offence, but regrettably makes it more likely that the authority will want to hit the investment bank or stockbroker that unwittingly takes part in the market abuse. Typically, that will be where it approves, for the purposes of Section 57 of the Financial Services Act, a press release or takeover document at the request of the client. The firm is already required by FSA rules to ensure that the document is not misleading. That will be continued by

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the authority under the new regime. Neither the FSA nor the authority would bring an action against a firm if it had tried to find out the true position.
However, if the authority can now get restitution in those circumstances, so that innocent investors receive some compensation, I believe that the authority would try to do so. That is the background to our amendments. The authorised person has to know what he is doing in encouraging the commission of market abuse.
Your Lordships are well aware that the Financial Services and Markets Bill already empowers the authority to impose unlimited fines on innocent third parties who require or encourage another person to engage in market abuse. Typically, where a corporate finance firm approves for issue a takeover circular containing statements that it did not know were misleading, that phraseology is less draconian than the Government wanted initially and is a concession that the Government made at the urging of our shadow Treasury team. The authority is unlikely to impose a large fine on an innocent third party, but is much more likely to seek restitution in the circumstances of actual loss.
It is fair to say that the Opposition have so far failed to bring an intent element into the liability to require restitution. None the less, the Government have provided that the innocent third party should not have to pay compensation if he exercised all due diligence to avoid encouraging the abuse. However, he may not do enough for the defence to apply. Nevertheless, it would be unfair to require him to pay compensation if he did not know that what he had agreed to did in fact constitute market abuse.
The problem would disappear if, as we have urged, some element of intent was required before the market abuse of misleading the market was committed. Currently, the market abuser is guilty even if he did not know that he could be misinterpreted. The amendment proposes therefore that the accused should be guilty of committing or encouraging market abuse if intent can be presumed from the facts, which are then proved.
I believe that I am right in saying that Amendment No. 183 is—I hesitate to use the word "otiose" and will therefore use the expression "no longer necessary". Government Amendment No. 183YA brings in safe harbours for reasonable belief and due diligence. That is an initiative that we had requested. I can now withdraw the amendment and I thank the Government for their conduct. I beg to move.
Lord McIntosh of Haringey: My Lords, I am grateful to the noble Lord for introducing these two pairs of amendments. It may be better to consider them in that way. The first pair comprises Amendments Nos. 183A and 183B and the second pair is the two amendments to our amendments, Amendments Nos. 183WAA and 183ADA.
The noble Lord, Lord Kingsland, was quite right to observe that we have gone further than his Amendments Nos. 183A and 183B. His amendments
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would require the FSA and the courts, when deciding how much restitution a person who had engaged in market abuse should pay, to have regard to whether he had reasonable grounds for believing that his behaviour was not market abuse or whether he had taken all reasonable precautions and exercised due diligence. Having considered the issue carefully, we feel that the better approach is to provide that restitution cannot be ordered against a person in this position rather than just that "regard" should be had to these factors. Our amendments not only cover the points raised in Amendment No. 183A, but indeed go further than that. I am grateful for the noble Lord's recognition of that fact.
I cannot be so friendly about Amendments Nos. 183WAA or 183ADA which would only allow the FSA or the courts to order restitution where someone had "knowingly" required or encouraged another to engage in behaviour which would be construed as market abuse if he had done it himself. I do not know whether these amendments, which were tabled very late, were put down in response to the wholly inaccurate press comments on these matters over the weekend. I regret that the amendments raise the familiar issue of intent. If the noble Lord thinks that I shall accept them because the Opposition Treasury Front Bench in another place is moving backwards, I am afraid that I shall have to disabuse him.
"Knowingly" clearly adds little to "required" since the circumstances in which one person requires another to do something without being aware of what he is doing are likely to be rare. Nevertheless, it is conceivable that a person may negligently require another to engage in abusive behaviour in the same way as a person may negligently engage in abusive behaviour himself. The simple answer is to take care. That is why we have introduced protections for those who do so.
Knowledge is also, to a certain extent, often implicit in "encouraging". However, again in this case we do not want it to be a requirement of the regime for the FSA to have to prove someone's mental state. We have debated this matter again and again. I can do no better than to recall the example of my noble friend Lord Grabiner's much slandered six year-old son and the possibility of his arguing that he did not know that he was going to break the window at which he aimed a stone, or, in the case of "encouraging", that his giving the stone to another boy and pointing at the window did not amount to "knowingly encouraging".
"Encouraging" is not a new concept. What constitutes encouragement in a specific situation will ultimately be a matter for the courts. But it is something which those who advise the industry, when change was made to the regime in another place, signalled that they were content with. It was a change welcomed by the Opposition in another place, and indeed a change that went further than that suggested by the Opposition. Noble Lords also did not comment on this point when analogous provisions in Part VIII were debated.

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Of course, the FSA will be able to provide guidance on the market abuse regime in the code. Indeed, it is obliged to do so. And it is obliged to consult the public. If any further clarity is needed as to the situations in which someone may have action taken against them for encouraging market abuse, then this is the place for it.
We seem again to have "over-lawyering" creeping in, I am sorry to say. It is worth my reiterating that this regime is not designed to catch people out. We made that clear on many occasions. It is designed to protect markets and market users from abuse. What constitutes abuse depends on the expected standards of the market and in certain circumstances may include negligent behaviour; for example, not putting out information to the market which should be put out. That will depend on the market in question. We put in safeguards to protect those who have a reasonable belief or who take due diligence. The regime now strikes the right balance. Et is effective and fair. I commend the changes to the House and urge the noble Lord, Lord Kingsland, not to press his amendment to my amendment.
Lord Kingsland: My Lords, I shall read carefully in Hansard what the Minister said and will let him know now that I shall return to this matter at Third Reading. Meanwhile, I beg leave to withdraw the amendment.
Amendment No. 183WAA, as art amendment to Amendment No. 183WA, by leave, withdrawn.
On Question, Amendment No. 183WA agreed to.
12.30 a.m.
Lord McIntosh of Haringeymoved Amendments Nos. 183XA to 183ZA:
Page 200, line 41, leave out ("him") and insert ("the person concerned").
Page 200, line 43, at end insert—
("( ) But the court may not make an order under subsection (2) if it is satisfied that—

(a) the person concerned believed, on reasonable grounds, that his behaviour did not fall within paragraph (a) or (b) of subsection (1); or

(b) he took all reasonable precautions and exercised all due diligence to avoid behaving in a way which fell within paragraph (a) or (b) of subsection (1).").

Page 200, line 46, leave out ("(1)") and insert ("(1A)").
The noble Lord said: My Lords, with the leave of the House I shall move Amendments Nos. 183XA to 183ZA en bloc. I beg to move.
On Question, amendments agreed to.
[Amendment No. 183A not moved.]
Lord McIntosh of Haringeymoved Amendments Nos. 183AA to 183AC:
Page 201, line 13, leave out ("paragraph (a) of that subsection") and insert ("subsection (1A)(a)").
Page 201, line 15, leave out ("paragraph (b) of that subsection") and insert ("subsection (1A)(b)").
Page 201, line 28, leave out ("(1)") and insert ("(1A)").
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The noble Lord said: My Lords, with the leave of the House I shall move Amendments Nos. 183AA to 183AC en bloc. I beg to move.
On Question, amendments agreed to.
Clause 378 [Power of Authority to require restitution]:
Lord McIntosh of Haringeymoved Amendment No. 183AD:
Page 201, line 41, leave out ("and") and insert (", or
(b) by taking or refraining from taking any action has required or encouraged another person or persons to engage in behaviour which, if engaged in by the person concerned, would amount to market abuse.
and the condition mentioned in subsection (2A) is fulfilled,
(2A) The condition is—").
The noble Lord said: My Lords, I beg to move.
[Amendment No. 183 ADA, as an amendment to Amendment No. 183AD, not moved.]
On Question, Amendment No. 183AD agreed to.
Lord McIntosh of Haringeymoved Amendments Nos. 183AE to 183AJ:
Page 201, line 42, leave out ("him") and insert ("the person concerned").
Page 201, line 44, at end insert—
("( ) But the Authority may not exercise that power as a result of subsection (2) if, having considered any representations made to it in response to a warning notice, there are reasonable grounds for it to be satisfied that—

(a) the person concerned believed, on reasonable grounds, that his behaviour did not fall within paragraph (a) or (b) of that subsection: or

(b) he took all reasonable precautions and exercised all due diligence to avoid behaving in a way which fell within paragraph (a) or (b) of that subsection.").

Page 202, line 6, leave out ("(2)") and insert ("(2A)").
Page 202, line 8. leave out ("(2)") and insert ("(2A)").
Page 202, line 10, leave out ("(2)") and insert ("(2A)").
The noble Lord said: My Lords, with the leave of the House I shall move Amendments Nos. 183AE to 183AJ en bloc. I beg to move.
On Question, amendments agreed to.
[Amendment No. 183B not moved.]
Lord McIntosh of Haringeymoved Amendments Nos. 183C and 183D:
Page 202, line 16, leave out ("(2)") and insert ("(2A)").
Page 202, line 18, leave out ("(2)") and insert ("(2A)").
The noble Lord said: My Lords, with the leave Of the House I shall move Amendments Nos. 183C and I 83D en bloc. I beg to move.
On Question, amendments agreed to.
Clause 381 [Notice for payment]:
Lord McIntosh of Haringeymoved Amendment No. 184:
Leave out Clause 381.
On Question, amendment agreed to.
Clause 383 [Decision notices]:
Lord Bachmoved Amendment No. 185:

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Page 203, line 35, leave out paragraph (b).
The noble Lord said: My Lords, these amendments represent 12 government amendments; namely, Amendments Nos. 185, 186, 187, 188, 195, 196, 197, 198, 199, 200, 201, and 212A. There are four opposition amendments; namely, Amendments Nos. 188A, 199A, 199B and 199C. I am happy to say that as regards the last amendment the Government accept it and they are grateful to the Opposition for having spotted the point.
Perhaps I may move the government amendments briefly and then invite the Opposition to speak to theirs. The Government's amendments in this group complete the rationalisation of the authority's decision-making procedures under the Bill. They are not very substantial, making a number of necessary further adjustments to Part XXVI mainly to reflect the other amendments we have considered at Report stage.
Clause 383 deals with decision notices. Amendment No. 185 deletes subsection 1(b) which is the requirement for a decision notice to specify the date on which the decision takes effect following the rationalisation. That is otiose because only supervisory notices will be capable of specifying a date on which the decision takes effect. Amendment No. 186 deletes subsection (3) for the same reason.
Clause 384 requires a notice of discontinuance to be issued when the FSA decides not to proceed with action proposed in a warning notice or for which a decision notice has been issued. Amendments Nos. 187 and 188 make minor drafting improvements to Clause 384 to make clear that that also applies where the refusal of an application which has been dropped was not a complete refusal of the original application. The previous text appeared only to apply to a complete refusal.
Clause 387 determines which decisions attract the third party's rights under Clause 388 to receive copies of warning and decision notices, to make representations, refer matters to the tribunal and the rights of access to material under Clause 389. These are the kinds of decisions which we have loosely described as disciplinary-type decisions. As we made clear in Committee, we propose to apply these provisions to certain types of supervisory-type decisions; namely, those which involve the final cancellation of authorisation, approval or recognition.
Amendments Nos. 195 and 197, therefore, add to references to warning and decision notices issued under the second new clause after Clause 51, which deal with the cancellation of a Part 1V permission. Similarly, Amendments Nos. 196 and 198 add references to warning and decision notices issued under Clause 66, which concern the exercise of the FSA's disciplinary powers under Part V of the Bill or the power of the competent authority for listing under Clause 87 to cancel a person's approval to act as sponsor for listing. Again, the Government consider it appropriate to apply Clauses 388 and 389 to these decisions.
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Amendment No. 199 is a minor drafting change correcting a punctuation omission. Amendment No. 200 adds various references to clauses which involve supervisory notices to Clause 390. Amendment No. 201 alters some of the existing paragraph references in order to refer quickly to those places where the term "supervisory notice" applies. Amendment No. 212A is a consequential amendment. Clause 400 deals with the consequences of a Treasury direction made under Clause 398 in order to implement a third country decision. That is a decision taken by the European Council or the European Commission to restrict market access to persons from certain non-EEA countries on the grounds that reciprocal market access to persons from the EEA is not available in those countries.
Subsection (1) of Clause 400 disapplies the normal warning and decision notice procedure where refusal of an application for permission is given in accordance with such direction. The amendment simply updates the references to the procedural provision in line with Amendments Nos. 107 to 112.
If it is convenient to the House I invite the Opposition to speak to their amendments.
Lord Kingsland: My Lords, the Opposition has four amendments in this group but, as the Minister has kindly said, our Amendment No. 199C has been accepted by the Government for which we are duly grateful.
I shall deal with Amendments Nos. 199A and 199B and then go on to deal with Amendment No. 188A. That may seem numerically illogical but politically my contribution will accordingly rise to a crescendo.
As far as concerns Amendments Nos. 199A and 199B, a major preoccupation for firms that are at present subject to disciplinary proceedings is that the regulator is at a considerable advantage, first, because it possesses a full file of evidence relating to the firm's alleged offence which the firm may not have; and, secondly, because the regulator also possesses full information about its other disciplinary cases which enables it to make a comparison between the seriousness of the offence of the firm in question and other firms' offences. As disciplinary cases are nearly always held in private, this information is never made generally available.
Those two disadvantages are magnified in the case of disciplinary action being taken against an individual, who will not necessarily have access to his own firm's information relating to the circumstances of the alleged offence. Clause 389 gives a statutory right of access to material upon which the authority has relied; and what is now defined as "secondary material", which is other material that the authority has considered and which might undermine that decision.
However, there are significant carve-outs in subsections (2) to (7). One of those exclusions is of particular concern; namely, where the material was taken into account by the authority for the purpose of comparison with other cases. The present regulators

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are under a duty to exercise their disciplinary powers in a consistent fashion. It is virtually impossible for a firm to prove whether or not it is observing this requirement if it does not have access to other comparable material. Therefore, it is essential that this kind of information is revealed. There is no requirement for full case papers or the names of other firms to be revealed. All that is necessary is for the authority to produce a schedule of the other cases and their key characteristics.
Before I turn to Amendment No. 188A, I should like to make two short observations on Clause 390. I hesitate to continue because I am not certain whether these have been covered completely by Amendment No 199C. Perhaps the Minister could assist me in this respect.
Lord Bach: My Lords, as I understand it, the amendments that touch on Clause 390 are one Opposition amendment, Amendment No. 199C, which we have accepted, and two government amendments, namely Amendments Nos. 200 and 201. I dealt with the latter shortly, but I did deal with them. Amendment No. 200 adds various references to clauses which involve supervisory notices under Clause 390. It is a consequential amendment on the addition of the new clause after Clauses 51 and 77. Amendment No. 201 alters some of the existing paragraph references in order to refer correctly to those places where the term "supervisory notice" applies. Those are the only amendments which relate to Clause 390.
Lord Kingsland: My Lords, I am much obliged to the Minister. I think this follows logically from what he said, but perhaps the noble Lord could just confirm that the tribunal's ability to take into account a failure by the authority to follow its procedure under Clause 390(12) applies when a supervisory notice is given, as well as when a warning or decision notice is issued. I think it follows, from what the Minister said, that he agrees with that approach. If he confirms that, I need not say anything more about Amendment No. 199C. I see that he confirms that. I am much obliged.
I turn to Amendment No. 188A. The Minister will be well aware of what lies behind Amendment No. 188A. It is the firm belief of the Opposition that the procedure followed in the underlying clause breaches the European Convention on Human Rights. I expect that the Minister is, at least in part, familiar with the argument that I am about to deploy. However, just in case he is not, I draw his attention again to the case of Fayed v. the United Kingdom. The Minister will recall that one of the issues in this case was whether the DTI inspectors, who were looking into the takeover of Harrods, had to comply with the ECHR.
The Fayeds argued that the making, and subsequent publication of, the inspectors' report damaged their reputation and, thereby, their civil rights to honour and reputation. The European Commission of Human Rights was, however, of the opinion that Article 6(1) of the convention was not applicable to the proceedings conducted by the inspectors because those
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proceedings did not determine any civil right or obligation. The same view was subsequently adopted by the court, which stated that it was,
"satisfied that the functions performed by the Inspectors were in practice as well as in theory essentially investigative … The Inspectors did not adjudicate, either in form or in substance [and] did not make a legal determination as to criminal or civil liability … The purpose of their enquiry was to ascertain and record facts which might subsequently be used as a basis for action by other competent authorities.
In Fayed v. the United Kingdom, the role of the inspectors was indeed limited to investigating the facts. But the role of the authority under the Bill in relation to this clause is completely different. The authority does not only investigate the facts, but also imposes a fine—albeit subject to a later independent tribunal hearing. It is quite clear that the authority reaches a view as to whether the accused is or is not guilty; and the accused obviously would argue that he is not. If the accused does not make the effort to appeal to the tribunal and incur the costs of an appeal, there will be an adjudication on a dispute by the prosecutor rather than by an "independent and impartial tribunal". This is, in our view, impermissible under the convention. A prosecuting authority can prosecute but cannot impose a penalty.
I make it clear, of course, that we are not suggesting that the authority cannot reach a settlement with an accused. If the accused is willing to settle, there is no need for a determination of his civil rights and obligations. The informal procedure which the authority wants to bring in, that already exists in the SROs, can therefore continue, but not the other set of circumstances which we believe is incompatible with the convention. I hope that the Minister, on due and mature reflection, will come to the same conclusion.
12.45 p.m.
Lord Bach: My Lords, I shall speak to the Opposition amendments in the order in which the noble Lord, Lord Kingsland, spoke to them. Amendments Nos. 199A and 199B concern access to authority material. They both concern material to which the authority is not required to give access. Subsections (2) and (3) of Clause 389 enable the authority to withhold material in a number of circumstances, including where the material is subject to legal privilege; where it is only being considered by the authority with a view to maintaining consistency of approach between different cases; where providing access would not be in the public interest; and, lastly, where access would be unfair given the likely significance of the materials of the current case weighed against the potential prejudice to the commercial interest of another person.
Amendment No. 199B would require the authority to provide a written summary of any such evidence and to allow access to the material for the tribunal. We believe that this goes too far.
Subsections (4) and (5) require notice to be given of the fact that material is being withheld on grounds that it is subject to privilege, or because the authority has taken the view that access would be unfair or against

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the public interest. Where such a view has been reached, subsection (5) also requires these reasons to be included in the notice. This will enable the person who is subject to the notice to consider whether he should refer the matter to the tribunal.
In this respect, may I make it clear to the noble Lord that Clause 389 deals only with the material to which the authority is or is not required to provide access at the warning notice/decision notice stages. Nothing in Clause 389 constrains the rights of the tribunal to consider relevant evidence. Our amendments to Part IX of the Bill have been drafted to put this beyond all doubt. If the matter is referred, it will be for the independent tribunal to consider whether the material should be disclosed. That will be covered by the tribunal's procedural rules.
Turning to Amendment No. 199A, subsection (2) of Clause 389 ensures that the authority is able to consider how similar or comparable cases have been dealt with in order to ensure proper consistency in its proposed actions and penalties, without thus opening up sensitive commercial details about other businesses to scrutiny by the subject of the action currently proposed. As my noble friend Lord McIntosh said in Committee:
"If action is being taken against a person X, it is no business of X's whether or not similar action was previously taken against another person, Y".—[Official Report, 30/3/00; col. 1032.]
Indeed, disclosure might well be unfair, particularly if the action in the earlier case had not been pursued.
Nor were we attracted to the idea of requiring the authority to provide summaries with the identities of the persons in the comparative cases removed. This is administratively burdensome and might not always be effective in protecting the legitimate commercial interests of the persons involved in those cases.
I appreciate that Amendment No. 199A does not seek to impose a requirement on the FSA but simply says that subsection (2) of Clause 389 does not prevent the FSA from providing a summary of the principal characteristics of those cases. Let me assure the noble Lord, if I can—as my noble friend attempted to do in Committee —that, as currently drafted, subsection (2) does not prevent this.
Let me repeat another assurance given in Committee: there will be considerable material in the public domain to assist our character X, the subject of a notice, in assessing whether the action proposed is in line with general authority policy and practice. Apart from the statement of the policy on financial penalties, which we have discussed already, there will be considerable detail on already determined cases.
I have already said how grateful we are to the noble Lord for tabling Amendment No. 199C. When it comes to the vote on that amendment, we shall vote with him to accept it.
I turn now to Amendment No. 188A, which the noble Lord considered to be the high point of his speech. The amendment requires that if the person concerned does not opt to refer the matter to the tribunal the authority would be obliged to do so or to
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drop the action proposed. Effectively, it would require all decisions to be referred to the tribunal. This is entirely unacceptable. We have explained on a number of occasions that we do not think it is necessary or desirable to involve the tribunal in all decisions as a matter of course. That would be burdensome not only for the authorised community but also for the authority.
We have deliberately structured the procedures to make reference to the tribunal a right, to be exercised at the discretion of person against whom the authority is taking action or in respect of whom the authority is taking a decision. Importantly, this approach has been considered and endorsed by the Joint Committee chaired by the noble Lord, Lord Burns, and, we believe, was also recognised by the industry as being in its own interests. Requiring all decisions to be considered by the tribunal would be too costly for all concerned—the FSA, the industry and the taxpayer, who, of course, funds the tribunal.
I understand from the noble Lord's remarks that his concern is that providing for a decision to take effect without adjudication by the independent and impartial tribunal if the matter is not referred might conflict with the requirements of the ECHR. There has been correspondence on this matter following the noble Lord's remarks in Committee concerning the Fayed judgment. The Government have never sought to argue that disciplinary action under the Bill does not potentially involved a determination of a person's civil rights and obligations. However, it is not a necessary consequence of that that disciplinary action can be taken only if the case has been argued in front of a tribunal. Article 6.1 of the convention—we shall soon all know it by heart—says:
"In the determination of his civil rights and obligations of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law".
There can be no question that the Bill confers the necessary entitlement to such a hearing. It allows all those against whom the FSA proposes to take disciplinary action to refer the matter to the independent tribunal to be established under the Bill. Where there has been a breach of rules, the authority simply comes to a decision as to what disciplinary action it believes should be taken in all the circumstances of the particular case. In reaching that conclusion, the authority does not determine anyone's civil rights or obligations through the process. It takes an administrative, not a judicial, decision. Once that conclusion has been reached, the person is entitled to refer the matter to the tribunal. The FSA's decision has no effect—I underline that—where a person chooses to exercise his right to have the matter referred to the tribunal. Where the person concerned does exercise his right, then it is the tribunal which determines the person's civil rights and obligations. If a person chooses not to refer the matter to the tribunal, the FSA can proceed to take a final decision. Of course, in such a case the person affected by that decision will have chosen freely not to exercise the entitlement which the convention requires should be afforded to him.

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In sum, therefore, we believe that the Bill does provide the appropriate convention safeguards. It is not necessary to provide for all decisions to be taken by the tribunal; nor, for the reasons which I have attempted to give, is it desirable to provide for that. Therefore, in spite of the eloquent way in which the noble Lord put his case, we do not believe that the provision goes against the ECHR. I invite the noble Lord to consider what has been said. I beg to move.
On Question, amendment agreed to.
Lord McIntosh of Haringeymoved Amendment No. 186:
Page 204, line 8, leave out subsection (3).
On Question, amendment agreed to.
Clause 384 [Notice of discontinuance]:
Lord McIntosh of Haringeymoved Amendments Nos. 187 and 188:
Page 204, line 26, leave out from ("if") to ("of") in line 27 and insert ("the discontinuance of the proceedings concerned results in the granting").
Page 204, line 27, at end insert ("warning or decision").
On Question, amendments agreed to.
Clause 385 [Final notice]:
Lord Kingslandhad given notice of his intention to move Amendment No. 188A:
Page 204, line 33, leave out from ("130(1)") to end of line 35 and insert ("by the person concerned, the Authority must either itself refer the matter or give the person concerned a notice of discontinuance in relation to it.").
The noble Lord said: My Lords, I am most grateful to the Minister for giving such a full reply in response to Amendment No. 188A. I shall read very carefully what he said before deciding whether to pursue this matter at Third Reading. The weak point of his argument concerns a situation in which an individual chooses not to pursue his rights in the tribunal. In these circumstances, he will suffer a penalty which has been determined by the authority. I entirely understand that the noble Lord's answer will be, "Ah, but that situation was chosen by the individual's free will". It is in relation to whether he is right about the effect of that that any future argument on the matter will take place.
I shall not move the amendment.
[Amendment No. 188A not moved.]
The Chairman of Committees: My Lords, in putting the following amendments, I should point out to your Lordships that there is a mistake in the Marshalled List as printed. In line 3 of Amendment No. 191, the word "section" should be "subsection".
1 a.m.
Lord McIntosh of Haringeymoved Amendments Nos. 189 to 191:
Page 205, line 11, at end insert—
("(5A) A final notice about a requirement to make a payment or distribution in accordance with section 378(3) must state—

(a) the persons to whom,

(b) the manner in which, and

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(c) the period within which.

it must be made.").
Page 205, line 15, after ("(5)(b)") insert ("or (5A )(c)").
Page 205, line 19, at end insert—
("( ) If all or any of a required payment or distribution has not been made at the end of a period stated in a final notice under section (5A)(c), the obligation to make the payment is enforceable, on the application of the Authority, by injunction or, in Scotland, by an order under section 45 of the Court of Session Act 1988.").
On Question, amendments agreed to.
Clause 386 [Publication]:
Lord McIntosh of Haringeymoved Amendments Nos. 192 to 194:
Page 205, line 33, at end insert․
("( ) When a supervisory notice takes effect, the Authority must publish such information about the matter to which the notice relates as it considers appropriate.").
Page 205, line 38, at end insert—
("(6A) For the purposes of determining when a supervisory notice takes effect, a matter to which the notice relates is open to review if—

(a) the period during which any person may refer the matter to the Tribunal is still running;

(b) the matter has been referred to the Tribunal but has not been dealt with:

(c) the matter has been referred to the Tribunal and dealt with but the period during which an appeal may be brought against the Tribunal's decision is still running; or

(d) such an appeal has been brought but has not been determined.").

Page 205, line 39, at end insert—
("( ) "Supervisory notice" has the same meaning as in sect ion 390.").
On Question, amendments agreed to.
Clause 387 [Application of sections 388 and 389]:
Lord McIntosh of Haringeymoved Amendments Nos. 195 to 198:
Page 206, line 3, after ("section") insert ("(Cancellation of Part IV permission: procedure)(1).").
Page 206, line 4, after ("66(1),") insert ("87(4)(b),").
Page 206, line 7, after ("section") insert ("(Cancellation of Part IV permission: procedure)(2),").
Page 206, line 8, after ("66(4),") insert ("87(6)(b),").
On Question, amendments agreed to.
Clause 388 [Third party rights]:
Lord McIntosh of Haringeymoved Amendment No. 199:
Page 206, line 38, at end insert ("or").
On Question, amendment agreed to.
Clause 389 [Access to Authority material]:
[Amendments Nos. 199A and 199B not moved.]
Clause 390 [The Authority's procedures]:
Lord Kingslandmoved Amendment No. 199C:
Page 209, line 5, after ("giving") insert ("a supervisory notice or").

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The noble Lord said: I beg to move.
On Question, amendment agreed to.
Lord McIntosh of Haringeymoved Amendments Nos. 200 and 201:
Page 209, line 15, at end insert—
("() (Exercise of own-initiative power to vary Part IV permission: procedure)(4), (7) or (8)(b);
() (Discontinuance or suspension: procedure)(2) or (5);
() 193(3), (6) or (7)(b);").
Page 209, line 17, leave out paragraphs (b) and (c) and insert—
("() 264(3), (7)(a) or (9)(a) (as a result of subsection (8)(b));
() 278(3), (6) or (7)(b);").
On Question, amendments agreed to.
Clause 392 [Misleading statements and practices]:
Lord McIntosh of Haringeymoved Amendment No. 202:
Page 210, line 27, at end insert—
("( ) In proceedings for an offence under subsection (2) brought against a person to whom subsection (1) applies as a result of paragraph (a) of that subsection, it is a defence for him to show that the statement was made in conformity with price stabilising rules or control of information rules.").
The noble Lord said: My Lords, in moving this amendment, I should like to speak also to Amendments Nos. 203 to 206. The first two amendments in the group, Amendments Nos. 202 and 203, arise from the introduction of the new clause concerning control of information rules and fulfil a commitment to provide a defence from the offence of misleading statements and practices for behaviour in conformity with such rules. Such a defence currently exists in the Financial Services Act 1986. The amendments also ensure that there is a defence for behaviour in conformity with price stabilisation rules for both the offences in Clause 392.
The other amendments in the group make drafting changes, correcting the way in which Clause 392 relates to Schedule 2 dealing with regulated activities. I beg to move.
Lord Kingsland: My Lords, I do not seek to question the objective of the amendment, which relates to the market manipulation offence and the intention of which is entirely helpful. Perhaps I may make a point about the drafting.
A misleading statement, promise or forecast is exempted from the offence if it is made in conformity with control of information rules; but that would seem to apply only where the person making it is aware of the information and is allowed or required not to mention it.
With respect, I do not think it proper to provide an exemption for this, because it involves—does it not?—a deliberate lie. It would be much better if the individual concerned did not say anything. But what is perhaps more likely in practice is that the person who makes the statement, promise or forecast is the company acting through an individual who is not aware of the true position because he is on the wrong side of the Chinese wall. That ought to be covered as
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well, or perhaps instead. In this case, an exemption should apply where the person makes the statement, promise or forecast without knowing that it is misleading, false or deceptive because the relevant information is withheld from him in compliance with the control of information rules. In addition, the company should not be treated as knowingly or recklessly making such a statement if the individual who makes the statement, promise or forecast is not aware of the relevant information and is not told to make it by somebody who is. I am aware that I have not canvassed this matter with the Minister. He may well wish to reflect on what I have said and return to it at Third Reading.
Lord McIntosh of Haringey: My Lords, I shall seek to avoid that. The control of information rules are, as I believe the noble Lord, Lord Kingsland, is aware, the Chinese wall rules. Subsections (1) and (2) of Clause 392 make it an offence knowingly or recklessly to make misleading statements in order to induce someone to enter into an investment agreement, or if the person is reckless as to whether it will induce someone to do it. Subsection (3) goes on to provide that it is an offence for a person to act in a way which creates a false or misleading impression if it is done for the purpose of creating that impression and thereby induces someone to enter into an investment agreement.
Subsection (4) provides certain defences. Amendments Nos. 202 and 203 are intended to fill a number of gaps in the coverage of these defences. At the moment subsection (4) provides that a person is not guilty of an offence under subsection (3) if he takes action in conformity with price stabilisation rules made by the FSA under Clause 141. That is repeated in Amendment No. 202. However, that amendment extends the provision to cover not only actions but also statements and thus also provides a defence to the offence created by subsections (1) and (2).
Amendment No. 202 also creates a new defence to the offence created by subsections (1) and (2). This follows the introduction of an amendment which enables the FSA to make control of information rules; in other words, Chinese wall rules. Accordingly, it will be a defence for a person to show that he acted in conformity with the control of information rules; that is to say, that he operated so-called "Chinese wall" rules. It would be a defence for him to say that he was on the wrong side of the Chinese wall and could not, therefore, be expected to act in the way that he would have done had he been on the other side of it.
Lord Kingsland: My Lords, I am most grateful to the Minister for that helpful explanation.
On Question, amendment agreed to.
Lord McIntosh of Haringeymoved Amendments Nos. 203 to 206:
Page 210, line 35, at end insert ("; or
(c) that he acted or engaged in the conduct in conformity with control of information rules").
Page 211, line 14, after ("2") insert ("(except paragraphs 25 and 26)").

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Page 211, line 14, leave out ("subsection (9)") and insert ("subsections (8) and (9)").
Page 211, line 15, leave out ("that subsection") and insert ("each of those subsections").
Page 211, line 17, after ("subsection") insert ("(8) or").
On Question, amendments agreed to.
Clause 395 [Offences by bodies corporate etc.]:
Lord McIntosh of Haringeymoved Amendment No. 207:
Page 212, line 5, leave out subsection (3).
The noble Lord said: My Lords, in moving Amendment No. 207, I should like to speak also to Amendments Nos. 208 to 211. When we debated this clause in Committee, the noble Lord, Lord Kingsland, drew attention to a possible ambiguity in the wording. As he pointed out, it was not clear whether in referring to offences committed by partnerships in England or Scotland what was being referred to was the jurisdiction in which the offence was committed or the jurisdiction in which the partnership was formed. I said that the Government were aware of that and would address it in due course. We have managed to do so as part of an improvement to the clause to achieve fairness.
The purpose of the clause is to enable persons in positions of managerial responsibility within businesses to be prosecuted alongside the business itself if that business has committed an offence which they have connived at or consented to, or which is the result of the neglect of their duties. That must be right. At the moment, company directors and officers, and members of partnerships constituted under the law of Scotland, are treated differently from members of partnerships constituted under the law of England and Wales or the law of Northern Ireland. While directors and Scottish partners commit an offence only if they are actively involved in the wrongdoing, or let it arise through their own neglect, English, Welsh and Northern Irish partners are effectively deemed to have been involved in any offence under the Bill committed by their partnership, unless they cart show that they did not know it was being committed or that they took reasonable steps to prevent it.
We have reviewed the matter and believe that the position is unfair. Amendments Nos. 207 and 208 make it clear that all partners are to be treated in the same way as company directors and officers. In doing this, the amendments remove any need to refer in the clause to the nationality of individual partners because all partnerships are now covered by the provisions of subsection (4). They also, coincidentally, rectify the ambiguity identified by the noble Lord, Lord Kingsland, earlier.
Amendments Nos. 209, 210 and 211 are intended to ensure that this clause covers not only corporate bodies and partnerships but also unincorporated associations, and they substantially reproduce the equivalent provisions in the Financial Services Act 1986. I beg to move.
Lord Kingsland: My Lords, I am most grateful to the noble Lord the Minister for at least reflecting on one of the things we said in relation to this clause.
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On Question, amendment agreed to.
Lord McIntosh of Haringeymoved Amendments Nos. 208 to 210 inclusive:
Page 212, line 10, leave out ("in Scotland").
Page 212, line 23, at end insert—
("() If an offence under this Act committed by an unincorporated association (other than a partnership) is shown—

(a) to have been committed with the consent or connivance of an officer of the association or a member of its governing body, or

(b) to be attributable to any neglect on the part of such an officer or member,

that officer or member as well as the association is guilty of the offence and liable to be proceeded against and punished accordingly.").
Page 212, line 26, after ("unincorporated") insert ("association").
The noble Lord said: My Lords, I beg to move these amendments en bloc.
On Question, amendments agreed to.
Lord McIntosh of Haringeymoved Amendment No. 211:
After Clause 397, insert the following new clause—
JURISDICTION AND PROCEDURE IN RESPECT OF OFFENCES
(" .—(1) A fine imposed on an unincorporated association on its conviction of an offence is to be paid out of the funds of the association.
(2) Proceedings for an offence alleged to have been committed by an unincorporated association must be brought in the mime of the association (and not in that of any of its members).
(3) Rules of court relating to the service of documents are to have effect as if the association were a body corporate.
(4) In proceedings for an offence brought against an unincorporated association—

(a) section 33 of the Criminal Justice Act 1925 and Schedule 3 to the Magistrates' Courts Act 1980 (procedure) apply as they do in relation to a body corporate:

(b) section 70 of the Criminal Procedure (Scotland) Act 1995 (procedure) applies as if the association were a body corporate;

(c) section 18 of the Criminal Justice (Northern Ireland) Act 1945 and Schedule 4 to the Magistrates' Courts Northern Ireland) Order 1981 (procedure) apply as they do in relation to a body corporate.

(5) Summary proceedings for an offence may be taken—

(a) against a body corporate or unincorporated association at any place at which it has a place of business;

(b) against an individual at any place where he is for the time being.

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(6) Subsection (5) does not affect any jurisdiction exercisable apart from this section.
(7) "Offence" means an offence under this Act.").
The noble Lord said: My Lords, I beg to move this amendment formally.
On Question, amendment agreed to.
Lord McIntosh of Haringeymoved Amendment No. 212:
Before Clause 398, insert the following new clause—
SCHEMES FOR REVIEWING PAST BUSINESS
(" .—(1) Subsection (2) applies if the Treasury are satisfied that there is evidence suggesting—

(a) that there has been a widespread or regular failure on the part of authorised persons to comply with rules relating to a particular kind of activity; and

(b) that, as a result, private persons have suffered (or will suffer) loss in respect of which authorised persons are (or will be) liable to make payments ("compensation payments").

(2) The Treasury may by order ("a scheme order") authorise the Authority to establish and operate a scheme for—

(a) determining the nature and extent of the failure;

(b) establishing the liability of authorised persons to make compensation payments; and

(c) determining the amounts payable by way of compensation payments.

(3) An authorised scheme must be made so as to comply with specified requirements.
(4) A scheme order may be made only if—

(a) the Authority has given the Treasury a report about the alleged failure and asked them to make a scheme order;

(b) the report contains details of the scheme which the Authority propose to make; and

(c) the Treasury are satisfied that the proposed scheme is an appropriate way of dealing with the failure.

(5) A scheme order may provide for specified provisions of or made under this Act to apply in relation to any provision of, or determination made under, the resulting authorised scheme subject to such modifications (if any) as may be specified.
(6) For the purposes of this Act, failure on the part of an authorised person to comply with any provision of an authorised scheme is to be treated (subject to any provision made by the scheme order concerned) as a failure on his part to comply with rules.
(7) This section applies whenever the failure in question occurred.
(8) "Authorised scheme" means a scheme authorised by a scheme order.
(9) "Private person" has such meaning as may be prescribed.
(10) "Specified" means specified in a scheme order.").
The noble Lord said: My Lords, I referred to this amendment and to Amendment No. 222, which is grouped with it, much earlier in our debates on this Bill. Amendment 212 allows the Treasury, by order, to authorise the FSA to establish and operate a scheme requiring firms to review their past business and, where appropriate, make restitution where retail customers have suffered loss.
This is an important power, as illustrated by the cases of mis-selling which have come to light in recent years, particularly cases of personal pensions, under which the value of redress offered and accepted
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already amounts to over £3 billion. In this sort of case experience has shown that it is expedient to require all firms which have conducted a certain class of business to check their past business, even though the regulator cannot know that every one of those firms will turn out to have failed to comply with the rules. However, this is not a power we envisage being used regularly.
The amendment reflects a commitment given in Committee by the Economic Secretary to the Treasury. It also, I believe, meets the concerns raised by my noble friend Lady Turner when tabling her Amendment No. 167 in Committee. At that time I promised my noble friend a Government amendment to Part X but we have looked at it again and it does not really fit in there. It does not sit comfortably with the Part XXV restitution powers. The nature of the exercise carried out in the unusual circumstances in which a review will be required is such that it involves a combination of mapping out the matters that fall to be dealt with under the scheme, detailed provisions to determine how the scheme will operate and the making of payments in an appropriate case.
So we have created a specific power for the creation of schemes under secondary legislation. The Treasury will, by order under the Bill, authorise the FSA to establish and operate the scheme: it will be set up under the order. The Delegated Powers and Deregulation Committee have considered our approach and raised no concern.
Amendment No. 222 specifies that the Treasury orders under this clause must be made by affirmative resolution of both Houses of Parliament. This will ensure that any such arrangements must be subject to debate. This will be informed by the report and other details that must be provided before the Treasury can make an order under the power. I beg to move.
On Question, amendment agreed to.
Clause 400 [Consequences of a direction under section 398]:
Lord McIntosh of Haringeymoved Amendment No. 212A:
Page 214, line 22, leave out ("section 51 does") and insert ("subsections (7) to (9) of section 50 do").
On Question, amendment agreed to.
Clause 405 [Gaming contracts]:
Lord McIntosh of Haringeymoved Amendment No. 213:
Page 218, line 9, leave out ("any contract") and insert ("a contract if").
The noble Lord said: My Lords, with Amendment No. 213, I should like to speak also to Amendments Nos. 214 and 215. These amendments make changes to Clause 405 in line with a commitment that we made in Committee in another place to look again at the clause and ensure that it is capable of giving the same protection for the enforceability of certain contracts, which might otherwise be subject to the statutory and common law rules relating to gaming provided for under the existing legislation.

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These regulations are important—at least they are for some people—although they are technical amendments. The clause as it stands is too narrow, because under subsection (2)(b) it expressly applies only to regulated activities. Therefore, it would not apply to a contract entered into in the course of any activity benefiting from the exclusion of the scope of regulated activities under the Bill. This contrasts with the Financial Services Act 1986 which states that contracts entered into in the course of an activity which benefits from an exclusion set out in Part III or IV of Schedule 1 to that Act do benefit from the exemption set out in the Act.
At the same time subsection (2) of Clause 405 does not work in its current form. It refers to regulated activities falling within paragraph 2 of Schedule 2, whereas in fact no activities as such fall within Schedule 2, given that Schedule 2 simply provides an indicative list of the sort of things about which orders under Clause 20 may be made rather than sets out which activities will be regulated under the Bill.
Amendments Nos. 213 to 215 introduce a new Treasury order-making power which will be used to specify which contract-based activities will be covered by the statutory exemption from unenforceability replacing the reference to regulated activities in subsection (2)(b). I beg to move.
On Question, amendment agreed to.
1.15 a.m.
Lord McIntosh of Haringeymoved Amendments Nos. 214 and 215:
Page 218, line 10, at beginning insert ("it is").
Page 218, line 11, leave out paragraph (b) and insert—
("(b) the entering into or performance of it by either party constitutes an activity of a specified kind or one which falls within a specified class of activity; and
(c) it relates to an investment of a specified kind or one which falls within a specified class of investment.
(3) Part II of Schedule 2 applies for the purposes of subsection (2)(c), with the references to section 20 being read as references to that subsection.
(4) Nothing in Part II of Schedule 2, as applied by subsection (3), limits the power conferred by subsection (2)(c).
(5) "Investment" includes any asset, right or interest.
(6) "Specified" means specified in an order made by the Treasury.").
On Question, amendments agreed to.
Lord McIntosh of Haringeymoved Amendment No. 216:
After Clause 406, insert the following new clause—
("Service of notices
SERVICE OF NOTICES
.—(1) The Treasury may by regulations make provision with respect to the procedure to be followed, or rules to be applied, when a provision of or made under this Act requires a notice or other document to be given.
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(2) The regulations may, in particular, make provision—

(a) as to the manner in which a document must be given;

(b) as to the address to which a document must be sent;

(c) requiring, or allowing, a document to be sent electronically;

(d) for treating a document as having been given, or as having been received, on a date or at a time determined in accordance with the regulations;

(e) as to what must, or may, be done if the person to whom a document is required to be given is not an individual;

(f) as to what must, or may, be done if the intended recipient of a document is outside the United Kingdom.

(3) Subsection (1) applies however the obligation to gibe a document is expressed (and so, in particular, includes a provision which requires a document to be served or sent).
(4) Section 7 of the Interpretation Act 1978 (service of notice by post) has effect in relation to provisions made by or under this Act subject to any provision made by regulations under t his section.").
The noble Lord said: My Lords, this new clause enables the Treasury, by order, to specify the way in which notices given to or by the authority (or other relevant persons) are to be taken to have been given. On the face of it, it may appear a minor point but precision would be important if, for example, a person had a specified number of days in which to do something from the date on which the notice was deemed to have been given or there was a question as to whether the notice was served on an appropriate person.
Such matters could be extremely important if the possibility of referring a matter to the tribunal depended on when the notice was deemed to have been given. Clearly it is also important that a notice should be given to an appropriate person in the firm, often the company secretary but certainly not the cleaner.
Section 204 of the Financial Services Act makes specific provision about service of notices. The Government considered making similar provision in the Bill. However, the Section 204 provision would not adequately deal with the range of matters that would need to be covered given the much wider scope of the Bill.
A further concern is that the provisions of Section 204 of the 1986 Act envisage service of notice in hard copy. Since that provision came into force, the use of the fax machine has become commonplace and acceptable for many types of formal communication but is not provided for under the 1986 Act. Clearly the development of new forms of transrnission—mobile short messaging, electronic mail and other Internet-based communications systems—means that the extended use of electronic communications is inevitable. The Government would not wish to prevent the financial services industry from benefiting from the use of those technologies in its dealings with the regulator. For example, to keep regulatory burdens low, the authority is currently exploring an Internet-based system to enable firms to apply for approvals under Clause 58 of the Bill for their prospective employees.
This new clause is a routine procedural measure which forms an important part of the overall package of measures to ensure that the authority acts appropriately when it carries out its regulatory functions. I beg to move.
On Question, amendment agreed to.
Lord McIntosh of Haringeymoved Amendment No. 216A:
After Clause 406, insert the following new clause—
("Jurisdiction
JURISDICTION IN CIVIL PROCEEDINGS
.—(1) Proceedings arising out of any act or omission (or proposed act or omission) of—

(a) the Authority,

(b) the competent authority for the purposes of Part VI,

(c) the scheme manager, or

(d) the scheme operator,

in the discharge or purported discharge of any of its functions under this Act may be brought before the High Court or the Court of Session.
(2) The jurisdiction conferred by subsection (1) is in addition to any other jurisdiction exercisable by those courts.").
The noble Lord said: My Lords, with Amendment No. 216A I should like to speak also to Amendment No. 226ZA. These amendments effectively transpose the arrangements under Section 188 of the Financial Services Act 1986 so as to enable a person to seek judicial review of the authority, the competent authority under Part VI, the compensation scheme manager or the ombudsman scheme manager before an appropriate court in any part of the United Kingdom.
This is necessary because under the Civil Jurisdiction and Judgements Act 1982 a case against a company registered under the Companies Acts would normally need to be brought in the jurisdiction in which the company has its registered office. The companies to which these provisions relate are all registered in England and Wales. So without this provision a person would not otherwise be able to bring a case for judicial review before the Court of Session or the High Court in Northern Ireland. I beg to move.
On Question, amendment agreed to.
Clause 407 [Definitions]:
Lord McIntosh of Haringeymoved Amendments Nos. 217 and 218:
Page 219, line 16, at end insert ("(except in provisions relating to the Competition Commission)").
Page 219, line 17, at end insert—
(""control of information rules" has the meaning given in section (Control of information)(1):").
On Question, amendments agreed to.
[Amendment No. 218A not moved.]:
Lord McIntosh of Haringeymoved Amendment No. 219:
Page 220, line 3, leave out ("233(2)") and insert ("232").
On Question, amendment agreed to.
Clause 412 [Controller]:
[Amendments Nos. 219A to 219F not moved.]
[Amendment No. 220 had been withdrawn from the Marshalled List.]
Lord Bachmoved Amendment No. 220A:
After Clause 416, insert the following new clause—
TRANSITIONAL PROVISIONS
(".—(1) Subsections (2) and (3) apply to an order under section 416 which makes transitional provisions or savings.
(2) The order may, in particular—

(a) if it makes provision about the authorisation and permission of persons who before commencement were entitled to carry on any activities, also include provision for such persons not to be treated as having any authorisation or permission (whether on an application to the Authority or otherwise);

(b) make provision enabling the Authority to require persons of such descriptions as it may direct to reapply for permissions having effect by virtue of the order:

(c) make provision for the continuation as rules of such provisions (including primary and subordinate legislation) as may be designated in accordance with the order by the Authority, including provision for the modification by the Authority of provisions designated;

(d) make provision about the effect of requirements imposed, liabilities incurred and any other things done before commencement, including provision for and about investigations, penalties and the taking or continuing of any other action in respect of contraventions;

(e) make provision for the continuation of disciplinary and other proceedings begun before commencement, including provision about the decisions available to bodies before which such proceedings take place and the effect of their decisions;

(f) make provision as regards the Authority's obligation to maintain a record under section 342 as respects persons in relation to whom provision is made by the order.

(3) The order may—

(a) confer functions on the Treasury, the Secretary of State, the Authority, the scheme manager, the scheme operator, members of the panel established under paragraph 4 of Schedule 17, the Competition Commission or the Director General of Fair Trading:

(b) confer jurisdiction on the Tribunal;

(c) provide for fees to be charged in connection with the carrying out of functions conferred under the order;

(d) modify, exclude or apply (with or without modifications) any primary or subordinate legislation (including any provision of or made under, this Act).

(4) In subsection (2) "commencement" means the commencement of such provisions of this Act as may be specified by the order.").
The noble Lord said: My Lords, Amendments Nos. 220A and 226 deal with transitional arrangements for bringing the Bill into force. It is of course our intention to ensure that the transition to the new regime is as smooth as possible and causes the minimum disruption to firms and, indeed, to the regulators who we do not wish to be distracted from doing their core work.
We believe that it is sensible to make transitional provisions in an order as provided for under the new clause. Part of the reason is that we are moving from nine existing regulators—not counting the recognised professional bodies or Lloyd's—each with their own regulatory frameworks under six principal Acts of Parliament.
While our approach is very simple in policy terms, the precise arrangements will be very complex and very detailed. It would add substantially to the length of the Bill to include these provisions. More importantly, we wish to be able to publish the secondary legislation in draft before it is made so that those affected by it, and especially the industry, will be able to consider the arrangements and comment if they see any difficulty with the detail of the proposals. I believe that there has been widespread support for the Government's approach.
I turn to Amendment No. 226. In Committee, the Government moved amendments which introduced arrangements to enable the FSA to work with the self-regulating organisations under the Financial Services Act 1986 to bring about their demise. I can remind your Lordships that the amendments have the effect of removing the risk of challenge as the independence of the SROs diminishes in the months to come.
Amendment No. 226 is consequential to those changes. It ensures that those transitional arrangements for the SROs come into force on the passing of the Act rather than on a day to be appointed. The current statutory framework under the 1986 Act has caused some problems for the FSA as it has sought to restructure the various regulators that are merging together. Understandably, the FSA now wishes to press on with its preparations. I beg to move.
On Question, amendment agreed to.
Clause 417 [Regulations and orders]:
Lord Bachmoved Amendment No. 220B:
Page 225, line 35, leave out from ("make") to ("is") in line 36 and insert ("an order which is conferred on the Treasury by this Act and any power to make regulations which is conferred by this Act").
The noble Lord said: My Lords, I shall first introduce the Government's amendment which simply tidies up a few loose ends. There is an Opposition amendment in the group which will no doubt be spoken to.
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The Bill confers a number of powers to make orders. Some refer to administrative functions of the authority. For example the FSA may make a prohibition order under Clause 55 in relation to an individual who it considers unfit to perform certain functions. The court may also make orders for particular purposes. It may, for example, make orders under Clause 194(3) in relation to injunctions against incoming insurance companies from other EEA member states.
While I am sure it will be clear to most people that such orders—as opposed to orders made by the Treasury—are exercisable by statutory instrument, that is not the effect of Clause 417(1) as currently drafted. The Government's amendment makes it clear that those order-making powers conferred on the Treasury are exercisable by statutory instrument. However, court orders will be made in the usual way. FSA orders will be made in accordance with the relevant procedural requirements under the Bill.
The same issue does not arise in the case of regulations as all powers to make regulation under the Bill are to be exercisable by statutory instrument, whether they are exercised by the Treasury or other Ministers of the Crown. I beg to move.
Lord Newby: My Lords, I wish to speak to Amendment No. 221. This amendment is self-explanatory. It requires simply that, where the Treasury plans to introduce regulations or orders, it makes proper provision for those regulations or orders to be considered in draft by all those who might have an interest in them. It also makes provision for representations to be duly considered and for the Treasury to respond to the representations before the regulations or orders are considered by Parliament.
The reason for proposing the amendment is extremely straightforward. Much secondary legislation will come forward under this Bill. As we have seen in this House on a number of occasions during this Session, the role of Parliament in scrutinising secondary legislation is in reality extremely limited. The point at which secondary legislation can be given careful scrutiny is before it is laid before Parliament. This amendment enables that to be required of the Treasury as a matter of course.
When the Minister moved Amendment No. 220A, I was very interested to hear him say that the Government would be issuing draft orders or, perhaps, regulations and looking for comments. This amendment seeks merely to make that a requirement rather than an optional extra.
Lord Saatchi: My Lords, I speak briefly in support of the amendment of which we are co-authors. As the noble Lord, Lord Newby, said, one of the points made at an earlier stage of the Bill was that, despite its enormous length, it is in many ways a skeleton

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Bill—I believe that that was the phrase used—for the reason that he gave; that is, so much is submerged and yet to come in the form of codes, guidance, manuals, regulations or orders.
We believe that this amendment is important because it would require the Treasury to consult on regulations to be made under the Act. In fact, I believe that the Treasury usually does consult, but there is no obligation to do so. Just as important, there is no obligation to make any public response to consultation.
In relation to consultation on this Bill and on the draft orders that have been published, we gather that some of those involved with the Treasury have described it as a "black hole"; in other words, as an entity which absorbs a tremendous amount of comment and suggestion but where the response is not visible to the naked eye. I am sure that the Minister will say shortly that he does not wish to be too prescriptive about the Treasury's role. However, I hope that he will understand that our concern arises because so many important regulations to be made under the Bill have yet to appear.
Therefore, a proper consultation exercise, as proposed by the noble Lord, Lord Newby, with a requirement for a public response should be made in relation to all these future regulations. We can see no reason in principle why the Treasury should not be obliged to consult. It would be a valuable discipline to do so. It would mean, as the noble Lord, Lord Newby, said, that secondary legislation that comes before Parliament would have the added benefit of being considered by Parliament following a proper public consultation. It would be extraordinary if the Government found it difficult to accept this most reasonable amendment.
Lord Bach: My Lords, I must confess to having feelings of some dismay to see this amendment on the Marshalled List. It concerns a matter that we have debated at least twice. I suppose that there is no harm in debating it a third time. The last time that we did so was in the context of an amendment tabled by the noble and learned Lord, Lord Fraser of Carmyllie, on the second day of Report.
This amendment would require the Treasury to consult on all orders and regulations proposed under the Bill. As I attempted to explain a few minutes ago, it will not always be the Treasury that will make regulations and orders under the Bill. Other departments will have responsibility for making certain regulations. Some powers to do things by order will be exercised by the authority itself or by the court, although, of course, such orders are not orders in the sense of secondary legislation.
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But the amendment does not make that distinction, so it is defective in that it requires all such consultations to be conducted by the Treasury. We believe that the Treasury already has a good record. It has regularly consulted on proposals generally in the financial services field in recent years and specifically on Bill-related matters. It has already been consulting on the draft secondary legislation it proposes to make under the Bill.
We have had formal public consultations on a number of draft Statutory Instruments and more informal discussions with industry representatives on some other drafts; for example, amendments to building and friendly societies legislation.
We have also had discussions on the underlying policy in order to inform the drafting process and we consulted on a draft of the Bill, although noble Lords may be forgiven for forgetting that, given the time that has passed since then.
The Treasury proposes to continue to consult where that is helpful. We have even given specific commitments to do so in certain cases. It is, of course, well established Cabinet Office procedure that departments should seek to consult as they consider most appropriate and produce regulatory impact assessments before making any legislation that imposed burdens. The Treasury will always ensure that it complies with relevant guidance of the kind I have just mentioned.
This Bill imposes statutory consultation requirements on the authority. That is right for the authority, given its legal status. But the Treasury is rather different from the authority. The Government are directly accountable to both Houses of Parliament and Parliament rightly scrutinises and questions what the Government do. The Bill does not change that.
So the reality is that if the Treasury should fail to follow the procedures set out in those Cabinet Office guidelines, it will be open to Parliament to question that. It is of course the case that amendments to the best practice promoted by the Cabinet Office will flow through to the exercise of the powers under the Bill. The amendment before us would seem to cast matters in stone.
Finally, we need to look at the amendment in a wider context. There is nothing special about the powers under the Bill for the Treasury or Ministers to make orders and regulations. They are normal arrangements and we have applied the standard procedures.
I remind noble Lords that the Treasury has submitted a number of memoranda to our own Delegated Powers and Deregulation Committee explaining the delegated legislative powers under the Bill. The Government have responded positively to recommendations made by the committee when it considered the consultation draft of the Bill. After the Bill was brought to this House from another place, the Government have accepted every recommendation made by the committee.

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I repeat that departments are expected to follow Cabinet Office guidelines, just as they are required to respect parliamentary procedure. There is nothing special about the powers in the Bill. There are a lot of them because it is a big Bill covering a wide subject area and they are also related to matters which are largely technical.
We maintain that this Government have reinforced the procedures for consultation and regulatory appraisal compared with the system that we inherited. If noble Lords opposite believe that those arrangements are still inadequate, that rather begs the question what they must have thought about the rather more lax procedures which the previous government applied. That is perhaps a matter which is best pursued in another context. Indeed, if there are inadequacies in the Cabinet Office guidelines, it would be useful if those issues were raised so that those views could be taken into account when the guidelines are next reviewed.
The logic of the amendment is that all departments should be under a duty to consult on all secondary legislation all the time. We believe that that is unnecessary and, we would argue, positively undesirable. Government departments should consult where it is appropriate for them to do so and it is the responsibility of Parliament to ensure that they do.
I hope that the noble Lord, Lord Newby, will take some comfort from my remarks and will be satisfied to some degree by the assurances that I have given him.
Lord Newby: My Lords, I am not sure that I can take much comfort from what the Minister has said. When he started he made an extremely valid point about certain orders under this Bill not being secondary legislation and that, therefore, there was a defect in the drafting, of which I can see the strength. I thought he would suggest coming forward with an amendment that rectified that defect, given that he started off by being so positive about publishing draft regulations and orders that are secondary legislation.
In relation to the phrase "the Treasury would normally consult", as a general rule departments consult when it is helpful or appropriate to do so. That begs the question: to whom it is helpful and to whom it is appropriate? I am not happy simply to accept that the Treasury, when it believes that it is helpful and appropriate to do so, will publish draft orders. However, I accept that the drafting may be defective. Therefore, I shall look at this and I may return to the matter next week.
On Question, amendment agreed to.
[Amendment No. 221 not moved.]
Clause 418 [Parliamentary control of statutory instruments]:
Lord McIntosh of Haringeymoved Amendments Nos. 222 to 225:
Page 226, line 3, after ("232(5)") insert (", (Schemes for reviewing past business)").
Page 226, line 19, at end insert—
("() it varies a previous order made under section 19(5) so as to make section 19(1) apply in circumstances in which it did not, as a result of that previous order, apply;").
Page 226, line 21, after ("19(9)") insert ("or (9A)").
Page 226, line 23, at end insert ("; or
() it adds one or more investments to those which are controlled investments for the purposes of section 19").
On Question, amendments agreed to.
Clause 420 [Commencement]:
Lord McIntosh of Haringeymoved Amendments Nos. 226 and 226YA:
Page 227, line 1, leave out subsection (1) and insert—
("(1) The following provisions come into force on the passing of this Act—

(a) this section;

(b) sections 417, 419 and 422;

(c) paragraphs 1 and 2 of Schedule 20.").

Before Schedule 19, insert the following new schedule—
("SCHEDULE
COMPETITION INFORMATION
PART I
PERSONS AND FUNCTIONS FOR THE PURPOSES OF SECTION (Competition information)
1. The Table set out after this paragraph has effect for the purposes of section (Competition information)(3)(b).

TABLE

PERSON

FUNCTION

1. The Commission.

Any function of the Commission under Community law relating to competition.

2. The Comptroller and Auditor General.

Any function of his.

3. A Minister of the Crown.

Any function of his under a specified enactment.

4. Director General of Telecommunications.

Any function of his under a specified enactment.

5. Director General of Gas Supply

Any function of his under a specified enactment

6. The Director General of Gas for Northern Ireland.

Any function of his under a specified enactment.

7. The Director General of Electricity Supply.

Any function of his under a specified enactment.

8. The Director General of Electricity Supply for Northern Ireland.

Any function of his under a specified enactment.

9. The Director General of Water Services.

Any function of his under a specified enactment.

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10. The Civil Aviation Authority.

Any function of that authority under a specified enactment.

11. The Rail Regulator.

Any function of his under a specified enactment.

12. The Director General of Fair Trading.

Any function of his under a specified enactment.

13. The Competition Commission.

Any function of the Competition Commission under a specified enactment.

14. The Authority.

Any function of the Authority under a specified enactment.

15. A person of a description specified in an order made by the Treasury.

Any function of his which is specified in the order.

PART II
THE ENACTMENTS

1. The Fair Trading Act 1973

2. The Consumer Credit Act 1974

3. The Estate Agents Act 1979

4. The Competition Act 1980

5. The Telecommunications Act 1984

6. The Airports Act 1986

7. The Gas Act 1986

8. The Control of Misleading Advertisements Regulations 1988

9. The Electricity Act 1989

10. The Broadcasting Act 1990

11. The Water Industry Act 1991

12. The Electricity (Northern Ireland) Order 1992

13. The Railways Act 1993

14. Part IV of the Airports (Northern Ireland) Order 1994

15. The Gas (Northern Ireland) Order 1996

16. The EC Competition (Articles 88 and 89) Enforcement Regulations 1996

17. The Unfair Terms in Consumer Contracts Regulations 1999

18. This Act.

19. An enactment specified for the purposes of this paragraph in an order made by the Treasury.").

On Question, amendments agreed to.
Schedule 19 [Minor—and—Consequential Amendments]:
Lord McIntosh of Haringeymoved Amendment No. 226ZA:
Page 279, line 10, at end insert—
("The Civil Jurisdiction and Judgments Act 1982 (c. 27)
In paragraph 10 of Schedule 5 to the Civil Jurisdiction and Judgments Act 1982 (proceedings excluded from the operation of Schedule 4 to that Act), for "section 188 of the Financial Services Act 1986" substitute "section (Jurisdiction in civil proceedings) of the Financial Services and Markets Act 2000".").
On Question, amendment agreed to.
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Schedule 21 [Repeals]:
Lord Hunt of Wirralmoved Amendment No. 226A:
Page 282, line 12, at end insert—

("1923 c. 8.

The Industrial Assurance Act 1923.

The whole Act.

1948 c. 39.

The Industrial Assurance and Friendly Societies Act 1948.")

The whole Act.

The noble Lord said: My Lords, it must be a special privilege to have the honour of opening the final debate on the third day of the Report stage of the Financial Services and Markets Bill at just after 25 minutes to two. I thank the Government most warmly for giving me this opportunity. On several occasions in the other place assurances were given about the repeal of the industrial assurance Acts. I have been carefully watching the Order Paper over the past few weeks, but sadly no government amendments to the necessary effect have yet been tabled.
I do not expect to speak for more than 45 minutes! However, to be clear about this matter, the industrial assurance Acts of 1923 and 1948 once provided consumers with a necessary degree of protection for those buying low premium life assurance policies where premiums are paid in cash to company agents visiting someone's home. Those days are now over and save for one small area that I shall cover, those Acts are now an encumbrance and not a protection. The Acts, for example, forbid the conversion of the collection of premiums by standing order or direct debit and that severely damages the value that policyholders ultimately receive.
However, for existing policyholders the Acts provide certain protection where the assurance contract confers a right to the policyholder that has a monetary value. One example is the written notices that have to be sent to policyholders before a policy can be terminated. I acknowledge that that protection will have to be re-enacted in a suitable form, either in the FSA's rules or in a statutory instrument. In the meantime, I cannot see any reason why those Acts should not be included to be repealed when the Bill becomes an Act. I beg to move.
Lord Bach: My Lords, at this hour I can hardly do anything other than respond positively to the amendment of the noble Lord. It would be churlish to do otherwise. I can respond by assuring him of the Government's continued commitment to the repeal of the industrial assurance Acts. The Acts impose restrictions on the conduct of home services assurance businesses that are necessary, particularly given the nature of the powers to be conferred on the authority more generally by the Bill.

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The constraints under the existing statutory framework are driving providers out of the market. That, in turn, means that those who are most likely to benefit from the kinds of services provided by home services are being denied access to valuable products to help them to save and provide for their futures.
In other debates we have explained that the Government are committed to taking practical steps to help disadvantaged consumers and repeal of much of this legislation is one such measure that we shall adopt. The amendment before the House may not be adequate because it will be necessary to make certain savings to the industrial assurance Acts for existing policies. That will be necessary because those Acts confer certain rights on policyholders and must be protected. However, I can tell the noble Lord that the Government will bring forward an amendment at Third Reading that will include provisions to ensure that the Acts cease to have effect while enabling any necessary savings to be made.
Lord Hunt of Wirral: My Lords, even at this late hour, I must say to the Minister how warmly I appreciate his generous words. I fully accept what he
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has said and I look forward to seeing the amendment when it is brought forward at Third Reading next week. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord McIntosh of Haringeymoved Amendments Nos. 227 and 228:
Page 283, line 2, column 3, at beginning insert—

("In section 13, subsections (2) to (5), (8) and (11).")

Page 283, line 2, column 3, at end insert—

("In section 52, subsection (2)(d) and, in subsection (5), the words from "or where" to the end.

Schedule 7.

In Schedule 8, paragraph 3(2).")

The noble Lord said: My Lords, these amendments were spoken to with Amendment No. 176. I beg to move.
On Question, amendments agreed to.
House adjourned at eighteen minutes before two o'clock.