Lords Sitting of 16 March 2001

Preamble
The House met at eleven of the clock: The LORD CHANCELLOR on the Woolsack.
Prayers—Read by the Lord Bishop of Hereford.

Financial Services and Markets Act 2000 (Regulated Activities) Order 2001
Lord McIntosh of Haringey Lord McIntosh of Haringey rose to move, That the order laid before the House on 27th February be approved [9th Report from the Joint Committee].
The noble Lord said: My Lords, with the leave of the House, I should like to speak also to the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 and the Financial Services and Markets Act 2000 (Exemption) Order 2001.
Those of us who carry the campaign medals from the Financial Services and Markets Bill 2000 will recall that, complicated though the primary legislation was, the regulations which were to follow the primary legislation threatened to be even more complicated. We now come to Parliament with the secondary legislation under the Financial Services and Markets Act.
The Financial Services and Markets Act 2000 provides a far-reaching overhaul of financial services regulation. It establishes the Financial Services Authority as a single statutory regulator of UK financial services. In place of nine regulators, there will be one. In place of eight dispute procedures, there will be one ombudsman. In place of five compensation schemes, there will be one. That will benefit both practitioners and consumers. The Financial Services and Markets Act was subject to a great deal of consultation and scrutiny both within Parliament and outside. I do not need to detain your Lordships with the history of that.
We are making good progress on the implementation of the Act. We are seeking Parliament's approval, including through this debate, of seven statutory instruments—the orders before the House are the first three—which will set the boundaries of the new framework for financial regulation. The instruments will, between them, define the extent of FSA regulation, the framework for the marketing of financial services and the provision of financial services by professional firms. We also expect to seek shortly Parliament's approval of a number of other statutory instruments. Those will complete legislation under the Act on market abuse, recognition requirements for clearing houses and investment exchanges and appointed representatives of authorised persons.
The Economic Secretary to the Treasury was able to announce on Wednesday the latest date on which the main provisions of the Act will come into force, a date
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known in financial services jargon as N2. In doing so, she took into account the need for firms and consumers to enjoy the benefits of the regulatory framework as soon as practicable, balanced against the need to give financial services firms a reasonable time to prepare between announcing a firm date and N2. She announced our aim that N2 be no later 'than the end of November this year. As soon as she is in a position to announce the actual day of N2, she will do so. I should make clear that this is not an aspiration or a working assumption. Firms should prepare for N2 on that basis.
The legislation for which we are seeking parliamentary approval will enable the FSA to finalise many of its rules and give financial services firms greater certainty about how the Financial Services and Markets Act will affect them. On the basis of our continuing to make progress, I understand that the FSA expects to be in a position to make the key provisions of its rule book no later than the end of July. I should add that while the target for N2 means that the main provisions of the Act will come into force no later than the end of November, there will he some variations to that.
In respect of mortgages, given that this is an activity which has not hitherto been subject to regulation., it is appropriate to give the FSA and mortgage lenders more time to prepare for regulation. We intend regulation of mortgages to begin nine months after N2. In respect of funeral plan contracts, we intend the relevant provisions to come into force on 1st January 2002. Deposit taking by credit unions will also be regulated for the first time under the Financial Services and Markets Act. That will take place from 1st July 2002.
Finally, on implementation, a number of the provisions of the Act will need to be commenced prior to N2. For example, the FSA itself will have to be established in order to make its rules. The Financial Services and Markets Act 'Tribunal will also need to be established in order to begin its work of determining cases arising, for example, from certain applications before N2 for authorisation after N2. The provisions to be commenced early will be set out in commencement orders in the usual way. Some provisions—the powers to make statutory instruments and interpretative provisions—have already been brought into force by the first commencement order.
I now turn to the orders which are the subject of this debate. It is no exaggeration to say that the regulated activities order is the most important piece of secondary legislation under the Financial Services and Markets Act. It defines the scope of what is to be regulated by the FSA. The regulated activities order was issued twice for public consultation: once in February 1999 and then again in October last year. The order sets out the activities and investments which will be subject to regulation by the FSA, and which are, under existing legislation, contained in different financial services, banking and insurance legislation. Having all the regulated activities specified in a single order will be one of the key benefits of the new

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framework and will be appreciated, in particular, by the estimated 665 firms which are currently subject to authorisation by more than one regulator.
The boundaries of FSA regulation are to be set by Treasury Ministers accountable to this House. The Act provides various accountability mechanisms for the FSA itself. But we should be clear that the scope of what the FSA regulates is a matter firmly reserved for Ministers. Moreover, if Ministers wish to extend the scope of FSA regulation where it had not hitherto applied, that requires, as with this debate, an affirmative resolution process with a debate and vote in both Houses of Parliament.
I turn now to the scope of regulation set out in the regulated activities order. It is fair to say that in nearly all cases the order brings about only small changes to the existing scope of regulation. Thus, for example, Article 25(2) of the order states:
"Making arrangements with a view to a person who participates in the arrangement buying, selling, or underwriting investments … (whether as principal or agent) is also a specified kind of activity".
This provision is substantially derived from paragraph 13(b) of Schedule 1 to the Financial Services Act 1986. But we have introduced a new exclusion for arranging deals in investments, where the arrangements merely provide the means where one party to a transaction is able to communicate with other such parties. This change, although highly technical and specific, is designed to ensure that information transmitters, such as telecommunications companies and Internet service providers will not be regarded wholly as arranging deals in investments. This change is not untypical of the adjustments we have made to many of the provisions of the regulated activities order compared with existing legislation.
Perhaps I may draw the attention of the House to areas of significant change in the regulated activities order. The order brings into the scope of FSA regulations for the first time mortgages, pre-paid funeral plans, stakeholder pension schemes and aspects of Lloyd's insurance. The grounds for bringing these activities into regulation vary for each activity, but in all cases it will, if necessary, enable a different balance between the interests of firms and consumers to be struck compared with the absence of regulation. And, if redress is necessary, regulation will provide easier means of redress for consumers.
We have also introduced a new risk management exclusion which is designed to replace the permitted person regime in the Financial Services Act. These new areas of regulation were of course subject to consultation with those affected. The regulated activities order will reduce the scope of regulation in other cases. These are in relation to, first, the issue of debt securities, where we have excluded from the scope of deposit taking sums received in consideration for the issue of debt securities over one year; where the securities have a maturity of less than one year, we have excluded from the scope of deposit taking such sums only where the securities are offered to professional investors and have a minimum denomination of £100,000.
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Secondly, the order will reduce the scope of the activity of arranging deals in investments, for the reasons that I have given previously. Thirdly, we have also reduced the scope of regulation in relation to vehicle breakdown insurance, where we have removed the requirement that such insurance be normally available throughout the mainland of Great Britain, for the exclusion from the activity of effecting and carrying out contracts of insurance to apply. We are satisfied that in those areas where the scope of regulation is being reduced, consumer protection will not be prejudiced.
I shall turn more briefly to the exemption order and the business order. In my view, the provisions of the regulated activities order, and of the business order and the exemption order, are compatible with the convention rights within the meaning of the Human Rights Act 1998. The exemption order, as its name suggests, exempts from the requirement for FSA authorisation, named persons in respect of classes of regulated activity or, in some cases, particular regulated activities. There are bodies for which authorisation by the FSA would be either inappropriate or unnecessary. In almost all cases, these are bodies which are carrying out some kind of public policy function such as the Bank of England or a tourist board. Alternative mechanisms exist, therefore, of ensuring that they undertake regulated activities in a way which does not damage the interests of consumers. Moreover, as public policy bodies, potential competition concerns from their exemption from FSA authorisation do not arise.
Our intention under the exemption order has been broadly to ensure that those persons who were exempt under previous legislation do not need to seek FSA authorisation. In a number of cases, however, it has not been necessary to provide a specific exemption where one had been provided previously. That is, first, because the test for whether a person is carrying on regulated activities in the first place, and hence might conceivably need an exemption, is that they do the activities by way of business. We have concluded that in a number of cases, for example, Church bodies, this is not the case.
Secondly, it makes no sense under a single regulator of financial services for persons to be authorised in respect of some activities and exempt in others. Under the new regime, a person's Part IV permission can simply be extended to take account of activities for which they were previously exempt. Having said that, we do not wish the provisions of the Act to apply to the activities of persons who will be authorised under the new regime, but who had an exemption for certain activities under previous legislation. This has been achieved via an exclusion in the regulated activities order.
Thirdly, some exemptions have been removed because they are no longer necessary. An example is that for nationalised industries accepting deposits from other nationalised industries. Lastly, some exemptions have been updated to reflect wider developments; for example, developments in the gas and electricity markets.
Finally, I turn to the business order. As I have already said, a person is carrying on regulated activities only if he does so by way of business. That term is not further defined in the Act and will have its usual meaning. But there are circumstances where, although a person might otherwise be regarded as carrying on activities by way of business for the purposes of FSA regulation, we wish to deem him not to be doing so. The converse also applies: there are circumstances in which somebody would usually be regarded as not carrying out an activity by way of business, but we wish to regard him as in fact doing so.
Existing legislation on banking, insurance and investment services each has slightly different business tests. We have therefore used the business order to, in effect, retain the business tests for predecessor legislation. This will make easier the transition to the new framework for all financial services firms as the business tests with which they are familiar will continue to apply.
I have been informed that the City Liaison Group has asked the Treasury to clarify a few technical points on the regulated activities order, and I shall ask Treasury officials to clarify those points in due course.
Finally, I should draw the attention of the House to one section of the business order which implements one of the recommendations by Paul Myners in his report to the Chancellor on institutional investment. The change will enable the trustees of an occupational pension scheme to invest in an authorised fund which invests in private equity without the trustees themselves having to be authorised. This change is fully in line with the Government's objective of encouraging greater investment in private equity. I commend the change, the business order, the regulated activities order and the exemption order to the House. I beg to move.
Moved, That the order laid before the House on 27th February be approved [9th Report from the Joint Committee].—(Lord McIntosh of Haringey. )
Lord Newby: My Lords, I am grateful to the Minister for his detailed explanation of the orders. Those of us who sat through the long discussions on the Bill find it fascinating to return to these issues.
I have only one substantive point to make on the orders. It relates to the question of mortgage intermediaries and mortgage advice. Noble Lords may recall that there was much discussion when the Bill was passing through the House about the whole question of bringing mortgages within the scope of the Bill and about the point at which that activity should be regulated. The problem at the moment is that neither mortgage intermediaries nor those giving advice on mortgages are to be regulated. We are in the interesting situation where the industry wants more rather than less regulation in this area; it wants these two categories of people to be brought within the scope of the legislation.
So far as concerns mortgage intermediaries, about half of all borrowers seek advice from intermediaries before approaching a particular lender. My
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understanding is that the FSA has suggested that one way forward would be to make a rule requiring lenders to take responsibility for ensuring that mortgage intermediaries comply with the FSA's rules for lenders on providing borrowers with pre-sale information. However, this proposal has met with widespread opposition from lenders and intermediaries alike, because it is really regulation by the back door. It would be costly and wasteful. The FSA believes that if there should be control over what information intermediaries provide, it should be in a position to regulate that process by authorising intermediaries directly.
The second, broader, issue concerns the fact that there is no provision for the regulation of mortgage advice. Again, the consultation has suggested fairly unanimously that this should be brought within the scope of the Act. My recollection is that when we were looking at these two different areas when the Bill was passing through the House, the strong advice that we had from the Treasury and the FSA in relation to mortgage advice was that it should not be brought into the scope of the Bill at that stage because it would place a considerable additional burden on the FSA in terms of the range of businesses that were being regulated and that the matter should be left for the time being and looked at later.
In view of the preponderance of advice and opinion within the mortgage industry that mortgage advice and mortgage intermediaries should be brought formally within the firm regulatory framework of the FSA, can the Minister say where discussions have got to on these issues and, secondly, whether, in the tight of the consultation, there will be a serious look at bringing these two areas of activity within the scope of the regulations?
11.15 a.m.
Lord Kingsland: My Lords, yesterday, in the 10th Standing Committee on Delegated Legislation in another place, a very full debate took place on these three orders between my honourable friend Mr Howard Flight and the Minister, Miss Melanie Johnson. In those circumstances, nothing would be gained by rehearsing what was said in every detail. That is, of course, on the assumption that the Minister's responses today will reflect those of his honourable friend in another place.
Lord McIntosh of Haringey: My Lords, the noble Lord, Lord Kingsland, has that assurance.
Lord Kingsland: My Lords, I had hoped that it was not an unreasonable assumption as only 24 hours have passed.
The Minister was kind enough to see me, together with Mr Charles Abrams, the distinguished financial securities lawyer, to discuss these orders some weeks ago. Although we were not as successful as we had hoped, I should like to thank the Minister and his officials for all the time that they took over our concerns.

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I should also like to pause here, if I may, to pay a tribute to Mr Charles Abrams, who does not, at the moment, enjoy the best of health. His remarkable grasp of the Act has played a major part in shaping the Opposition's approach to it throughout its long passage through another place and through your Lordships' House. But I know that the Minister will agree that Mr Abrams' contribution has transcended matters of party politics. It is no exaggeration to say that he has made a major contribution to everyone's approach to the Bill, whether in government or opposition, whether in the City or the professions; and, in doing so, he has performed a significant act of public service.
I cannot let the orders go without saying some things about them. It is a sadness that your Lordships' House is unable to amend orders, especially when such orders will play a leading role in the future activity of the most successful sector of our economic life in the United Kingdom.
I wish to refer to four matters which are raised by the first order; that is the regulated activities order. The first concerns arranging deals in investments falling under Article 25(2) of the Financial Services Act. That article covers all arrangements made in order to enable participants to buy or sell investments. The scope of the "arranging deals in investments" category of regulated activity should, in our view, be much more restricted. Were I able to amend the order, I would suggest the following amendment:
"Making arrangements with a view to inviting, influencing or persuading someone to enter into a transaction under which a person who participates in the arrangements will buy, sell, subscribe for or underwrite investments falling within paragraph (1)(a), (b) or (c) (whether as a principal or an agent)".
Secondly, I am still concerned with those parts of the order which deal with specific exemptions for professionals when providing professional services under Article 67. There is still no specific exemption for lawyers and accountants.
There is, indeed, now a more relaxed exemption than in the previous version of the order for "necessary activities", which applies if the activity is reasonably thought to be necessary. However, this still does not solve the problem where professional firms will not want to risk getting "reasonably thought to be necessary" wrong, and so commit a criminal offence. Moreover, the exemption is made worse because it applies only if no other activities carried on by the professional firm consist of other regulated activities; and this seemingly applies anywhere in the world, if my interpretation of Article 67(1)(a) is correct.
I therefore propose that Article 67(1) should be amended as follows:
"(1) There are excluded from Articles 21, 25(1) and (2) 40 and 53 any activity which
(a) is carried on in the course of carrying on any profession or business which does not otherwise consist of carrying on regulated activities in the United Kingdom; and
(b) either:
(i) may reasonably be regarded as a necessary or desirable part of other services provided in the course of that profession or business; or
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(ii) relates only to negotiating or the legal or commercial consequences of an investment transaction or an agreement therefor".
The exemption for arranging deals with or through FISMA-authorised firms may be helpful. However, in many other cases there will be no FISMA-authorised firm involved. This exemption cannot apply in these cases. It is therefore necessary to provide an exemption which is expressly directed to the position of professions.
The consultation document issued by the Treasury in February 1999, with the first draft of the regulated activities order, stated expressly in Section 3 that the Government wanted to avoid professionals seeking authorisation on a precautionary basis merely in order to ensure that, in advising their clients in a professional capacity, they did not commit a criminal offence. The Treasury indicated that the regulated activities order would therefore seek to define activities regulated under the Bill in a way which leaves as little room for doubt as possible, thereby minimising the number of firms which seek authorisation on a precautionary basis.
It is surely inappropriate, in any case, that firms which only provide legal or accountancy advice to corporations or private individuals, on transactions, or negotiations, should be regarded as providing a financial service. In our view, these are not investment activities at all; they are merely "professional activities connected with investments".
Thirdly, I turn to the signature of investment agreements. There should be an exemption from Article 21 (dealing with investments as agent) where a person merely signs an investment agreement on behalf of another person in circumstances where it is not itself a party and has no discretion as to the terms of that agreement. I am advised that the FSA regards this as constituting "dealing as an agent"; the person signing is binding the party to the agreement by signing for him and is, therefore, agreeing to do whatever it is that that party has to do "as agent". The person signing does not "agree to buy [or sell] as agent" anything; he merely agrees that the party to the agreement will buy or sell.
It would seem to us that the appropriate exemption in the order should read as follows:
"(1) There shall be excluded from Article 21 any transaction which is or is to be entered into by a person as agent only in that he signs or will sign an agreement for that transaction as signatory for one of the parties to that agreement at the direction of that party.
(2) For the purposes of sub-paragraph (1) above, a person signs an agreement at the direction of a party only if the party has approved that agreement or an agreement in substantially the same form as that agreement".
Fourthly, I turn to the definition of "shares". The definition in Article 76(1)(b) treats as "shares" interests in any unincorporated body constituted under the law of a country or territory outside the United Kingdom. Accordingly, the Netherlands, Antilles or Cayman Islands or indeed Channel Islands limited partnership will be treated as a company as well as a collective investment scheme.

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When it comes to marketing, therefore, it will always be necessary to fall within exemptions from both the Public Offers of Securities Regulations 1995, which apply to "shares" within what would be Article 76(1)(b), and the restrictions on marketing collective investment schemes, under Section 238(1). As I understand it, this is because, if there is no exemption, both the Section 238 restrictions and the prospectus requirement under the POS regulations apply, whether or not the unincorporated body is open-ended. This contrasts with a corporate collective investment scheme—a body corporate is a collective investment scheme only if it is open-ended. If it is, the POS regulations do not apply to it. The definition should therefore be changed.
I should like to mention two further matters arising under this order, although I am still not quite sure, having read the proceedings in another place, what is the Government's position on them. The first of these concerns the definition of "close relatives" under Article 3(1).
The definition of "close relatives" in the exemptions ought to include trustees of trusts where the only beneficiaries are close relatives. This is especially important in relation to the exclusions for activities carried on in connection with a body corporate. Many family companies use trustees—for example, if a spouse is given only a life interest or any children are minors. Unless the definition of "close relatives" is extended in this way, the exclusions cannot be used.
The final area of uncertainty concerns the removal of the ISD passport for non-UK EEA banks. The regulations should reinstate the unilateral ISD passport which has been granted to non-UK EEA credit institutions—in other words, the passport similar to the passport granted by the investment services directive to non-bank investment firms which has been granted by the Treasury to credit institutions from the EEA which are not incorporated in the UK.
As I recall, when we asked for the reinstatement of the unilateral passport when the Bill was going through this House, the Government stated that the Treasury had never unilaterally granted any such passport. I have always been puzzled by that statement and respectfully disagree with it.
The Treasury has indeed granted this passport. The passport covers the ISD activities not covered by the second banking directive, especially arranging deals in the secondary market and receiving and transmitting orders. As I understand it, the FISMA does not continue this unilateral ISD passport and, consequently, will significantly prejudice incoming EEA banks. It will also be helpful to the United Kingdom to continue this passport because United Kingdom banks can similarly be benefited when they use their outgoing passport.
Finally—your Lordships will be relieved to hear—perhaps I may make one observation on the draft of the Carrying on Regulated Activities By Way of Business Order.
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We, of course, support the proposed exemption of pension fund trustees from the need to be FISMA-authorised which is imposed by Article 4(1). The exemption appears in Article 4(1)(b) and applies even if decisions to invest in private equity funds within paragraph (6) are not taken by FSIMA-authorised or exempted firms or overseas persons. This exception o the general rule that the exemption applies only if all decisions on investments are taken by firms falling within these permitted categories reflects an important recommendation in the Myners report, as it removes a regulatory obstacle to venture capital investment by pension funds.
However, in our view, the exemption does not go far enough. All that it achieves is to ensure that I he actual decision can be taken by the pension fund trustees. They still need to be advised by one of these permitted persons. This means that the trustees still have to find a permitted person who knows about venture capital, become its client and, at least in the case of FISMA-authorised firms, go through a "know your customer" inquiry. Indeed, if the FSA conduct of business rules reflect the existing IMRO requirements in this regard, the FISMA-authorised firm has to treat the pension fund as a private client and comply with the suitability requirement. In our view, this is both cumbersome and expensive and still represents a significant regulatory obstacle. We recommend that the requirement in paragraph (6)(b) should be deleted.
We also think that the definition of "relevant investment" in paragraph 7 should be restricted. This is because "shares" include interest in non-UK collective investment schemes. Otherwise, the two-tier fund (where the body corporate itself invests in relevant investments; for example, where the body corporate is an investment trust or venture capital trust) becomes a three-tier fund, where the fund in the second tier is not restricted to private equity. If this amendment is not accepted, it would surely be appropriate to allow for these three-tier funds to be established through UK collective investment schemes as well.
I would, without in any way embellishing upon them, like to associate myself with the remarks of the noble Lord, Lord Newby, with respect to mortgage advisers and mortgage intermediaries.
11.45 a.m.
Lord McIntosh of Haringey: My Lords, I am grateful to both noble Lords for the care with which they have responded to these orders. I shall do my best to respond to the points that have been made.
I start with the issue of mortgage lenders. This was referred to mainly by the noble Lord, Lord Newby, but with the assent of the noble Lord, Lord Kingsland. The Treasury's consultation in 1999 showed that what prospective borrowers really need is clear and comparable information about the mortgages on offer. We decided that there was no need to regulate mortgage advice and that we did not need to regulate mortgage brokers, only mortgage lenders. Lenders should be more familiar with those who distribute

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their products. That has the advantage of reducing the work of the FSA to a reasonable level, allowing a slightly faster introduction than might otherwise be possible. Some 8,000 additional brokers would need to seek authorisation from the FSA as opposed to the 200 or so lenders.
The Government are committed to reviewing the operation of the Financial Services and Markets Act in the round two years after N2; that is, before the end of 2003, in response to the Cruickshank review. Experience in those two years could point to the need for less rather than more regulation in this area. However, I think it will be clear that we have not ruled out the possibility of extending regulation if that is necessary. We shall return to that issue in due course.
As to whether we should regulate advice, surely mortgages are not inherently complex. One borrows money against one's home and one pays off the loan over an agreed term. The original consultation showed that there was a lack of clarity and transparency over redemption penalties, for example. That was the main cause of consumer detriment. As regards mortgages, customers are not entrusting their own funds to financial firms; it is the other way round. We think that the review that I mentioned will deal with the issue which was raised.
The noble Lord, Lord Kingsland, made a number of points. I shall try to deal with them as best I can. He mentioned arranging deals in investments. It was proposed that we should include an exclusion from the activity of arranging deals in investments where the arrangements consist only of an activity which is not a regulated activity. But as the purpose of the regulated activities order is to specify regulated activities, it does not make sense to exclude activities which are not regulated activities. What we have done is to reduce the scope of the activity of arranging deals in investments by including a new exclusion from the activity where the arrangements merely provide the means by which one party to a transaction, or potential transaction, is able to communicate with other parties.
The noble Lord, Lord Kingsland, also referred to Article 67 on specific exclusions for professional firms. We have not included a specific exclusion from the activity of arranging deals in investments for professional firms because we doubt that merely preparing or negotiating legal documentation for a transaction would amount to arranging deals in investments. If the activities of a professional firm spill over to arranging deals in investments, the firm may be able to rely on the exclusion in Article 67 which will be available where, first, the activity is carried on in the course of a profession which does not otherwise consist of regulated activities and, secondly, may be reasonably regarded as a necessary part of other services provided in the course of that profession. In any case we have liberalised the exclusion in Article 67, which is based on paragraph 24 of Schedule 1 to the
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Financial Services Act 1986, by changing the wording from,
"is a necessary part of other services",
to,
"may reasonably be regarded as a necessary part",
to make it more useful to professional firms.
The fallback is that if a professional firm's activities do not fall within the exclusion in Article 67, it will be open to the firm to submit to the regime for professionals in Part XX of the Act. But, to give a specific exclusion for the activity of arranging deals in investments for professional firms would undermine the regime in Part XX without any of the checks and balances which are built into that regime.
I hope that my remarks will be less complex as regards signing an investment agreement. We do not agree that merely signing an agreement comprises dealing as an agent. We do not believe that that concern is well founded. I understand the concern about the definition of shares because of the scope of the Public Office of Securities Regulations of 1995. The right solution would seem to be to change the Public Office of Securities Regulations, not the regulated activities order. The definition of shares reflects that in the 1986 Financial Services Act, and the change proposed seems a rather odd way of dealing with the problem, if there is a problem, which could have a number of unintended consequences.
I turn to the definition of a close relative. We have already amended the exclusion in Article 70—articles carried on in connection with the sale of a body corporate—so that "close relative" includes trustees of trusts where beneficiaries are close relatives. It is not appropriate to amend the definition of close relative in the rest of the regulated activities order.
On the universal passport issue to cover ISD activities, this is a matter for regulations to be made under Schedule 3 to the Financial Services and Markets Act. I was interested in the remarks of the noble Lord, Lord Kingsland, about pension fund trustees. I referred to that in the closing minute of my introductory speech. It is a deliberate policy to require trustees to get advice from an authorised person. That in turn reflects requirements of the Pensions Act. Where there is more than one tier, each fund must have as its primary purpose investment in private equity. We have gone a long way in implementing Mr Myners' recommendations but we do not think that we should go the extra mile which the noble Lord, Lord Kingsland, proposes.
I hope that that deals with the issues raised in the debate. I commend the orders to the House.
On Question, Motion agreed to.

Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001
Lord McIntosh of Haringey: My Lords, I beg to move the second Motion standing in my name on the Order Paper.

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Moved, That the draft order laid before the House on 27th February be approved. [10th Report from the Joint Committee.]—(Lord McIntosh of Haringey.)
On Question, Motion agreed to.

Financial Services and Markets Act 2000 (Exemption) Order 2001
Lord McIntosh of Haringey: My Lords, I beg to move the third Motion standing in my name on the Order Paper.
Moved, That the draft order laid before the House on 27th February be approved. [10th Report from the Joint Committee.]—(Lord McIntosh of Haringey.)
On Question, Motion agreed to.

Financial Services and Markets Act 2000 (Professions) (Non-Exempt Activities) Order 2001
11.52 a.m.
Lord McIntosh of Haringey Lord McIntosh of Haringey rose to move, That the draft order laid before the House on 27th February be approved [10th Report from the Joint Committee].
The noble Lord said: My Lords, in moving that the draft order laid before the House on 27th February be approved, I shall speak also to the Financial Services and Markets Act 2000 (Designated Professional Bodies) Order 2001. It may be for the convenience of the House if I speak to the second order first because it sets the context.
Nearly 15,000 firms of solicitors, accountants and actuaries are currently authorised to carry on investment business by their professional bodies, which are known as recognised professional bodies, which are themselves recognised and supervised by the FSA under the Financial Services Act. Most of these firms do not carry on significant investment business but have sought precautionary authorisation to avoid committing a criminal offence under that Act. The Financial Services and Markets Act ends self-regulation as a route to authorisation and requires all firms carrying on mainstream regulated activities to be authorised and regulated by the FSA as the single statutory regulator.
However, we are keen to get the balance right between effective consumer protection and the level of regulation. We do not want professional firms to have to seek FSA authorisation on a precautionary basis,—the noble Lord, Lord Kingsland, referred to that in the previous debate—if they are likely to carry on only a limited range of regulated activities, such as arranging or giving business advice, which arise out of or are complementary to their professional services.
Part XX of the Act therefore provides an exemption for professional firms which are not already authorised, or exempt persons, for certain regulated activities. Those are that the carrying on of these activities must be governed by rules made by a
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professional body designated under Section 326 of the Act (a designated professional body); the regulated activities must be carried out in a manner which is incidental to the provision of professional services; the regulated activities must not give rise to the receipt from any person other than the client of a pecuniary reward or other advantage for which the professional does not account to his client; and, finally. the regulated activities must not be excluded by an order made by the Treasury under Section 327(6), the nonexempt activities order.
The designation order specifies the eight professional bodies whose members will be able to carry on exempt regulated activities under Part XX. I am pleased to say that all the professional bodies which are currently recognised under the Financial Services Act have confirmed to us that they will be willing to be designated for the purposes of Part XX.
There are two conditions for designation under Section 326. The first is that the professional body must have rules which would govern the conduct of exempt regulated activities by its members. This is already met by the recognised professional bodies. Secondly, each profession must have some statutorily recognised basis such as regulation under or regulation in statute. This requirement is similar to that which currently applies under the Financial Services and Markets Act and is, again, met by all the existing recognised professional bodies.
Designating these bodies for the purposes of Part XX of the Act will allow the vast majority of professional firms carrying on regulated activities which arise out of or are complementary to their professional services to continue to be supervised and regulated by their professional body. But where professional firms are engaged in mainstream financial services, such as arranging life insurance, personal pensions or managing investment portfolios, they will need to be authorised by the FSA in order to ensure the appropriate level of consumer protection.
In my view the provisions of this order and of the Financial Services and Markets Act 2000 (Professions) (Non-Exempt Activities) Order 2001 are compatible with convention rights within the meaning of the Human Rights Act.
I turn now to the Financial Services and Markets Act 2000 (Professions) (Non-Exempt Activities I Order 2001. Part XX of the Act provides an exemption in defined circumstances for certain incidental activities carried on by firms which are regulated by professional bodies. Those are that the activities must be governed by rules made by the firm's designated professional body; they must be provided in a manner which is incidental to the provision of professional services; and they must not give rise to the receipt from any person other than the client of a pecuniary reward or other advantage for which the professional does not account to his client.
However, we do not intend that professional firms should be able to use the Part)0(exemption to set themselves up as mainstream financial services providers such as banks, insurance companies,

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brokers or fund managers providing their own investment products to their clients, even in circumstances where they are able to show some connection between these products and their professional services. With these activities, there is a risk that the adoption of different tests for professional firms and other firms authorised by the FSA will prejudice the interests of consumers or affect the Government's ability to meet their international obligations. The non-exempt activities order, to be made under Section 327(6) of the Act, is intended to exclude these activities from the exemption under Part XX, and to require individual FSA authorisation for banking, insurance, broking or fund management activities.
The scope of the activities which any particular professional firm will be able to carry on under the Part XX exemption will be set primarily by the rules made by the relevant designated professional body and by the other constraints set out in Section 327 of the Act. The effect of this order is to identify activities which cannot be permitted by the rules of the professional body.
We consulted on the order in October 2000 along with the regulated activities order and received general support for this approach. However, we did receive a number of helpful suggestions, particularly from members of the professions, which we have accepted in this order. I shall deal with a few of them. There are currently arrangements for professional firms to be regulated and authorised to carry on investment business by a professional body recognised under the Financial Services Act. But there are no similar arrangements under the Banking Act or the Insurance Companies Act, and we do not believe that professional firms should be allowed to engage in these activities. In consultation, we received broad support for this policy.
Article 4 of the non-exempt activities order therefore specifies (a) accepting deposits, (b) effecting and carrying out contracts of insurance, and the related activities of (f) acting as a managing agent at Lloyd's, (g) entering a funeral plan contract as provider, and (h) mortgage lending. Many of the existing exemptions under the Banking Act will be replaced by exemptions specified in the exemption order or by exclusions in the regulated activities order. For example, Article 7 of the regulated activities order contains an express exclusion for accepting deposits in the course of a solicitor's profession.
The non-exempt activities order also specifies at Article 4(c) dealing in investments as principal, but not other related activities such as dealing as agent and arranging deals in investments. We are aware that many professional firms and others deal in investments in their capacity as trustees and in other fiduciary capacities. But the regulated activities order already contains appropriate exclusions in relation to persons acting as trustees or in other circumstances relevant to the legitimate commercial dealings of a non-financial services business or profession. We do not believe there is any need for a further exemption.
We recognise that professional firms are frequently asked to arrange deals or act as agent in connection with their professional services. We do not propose to specify those activities.
The main concern expressed in consultation was that insolvency practitioners might in some circumstances find themselves dealing as principals. However, we did not think it was appropriate to address that issue for professionals alone, as some insolvency practitioners will not be members of a designated professional body. We have therefore provided a separate exemption for insolvency practitioners in the exemption order.
Article 5 specifies managing investments, while paragraphs (d) and (e) of Article 4 specify the related activities of establishing a collective investment scheme and establishing a stakeholder pension scheme. The majority of professionals will merely be acting on instructions and so will not be managing their clients' investments. However, we recognise that some professional firms and others may be required to exercise discretion in their capacity as trustee or in another fiduciary capacity.
The regulated activities order already provides exclusions for investment management by attorneys, or when carried on by trustees or personal representatives, unless they hold themselves out as providing a service comprised in that activity or are remunerated separately in relation to that activity.
However, fund management is an area of significant risk for consumers. The exclusion in the regulated activities order does not extend to activities in relation to collective investment schemes or stakeholder pension funds, or to trustees of an occupational pension scheme who have not delegated routine decisions to an authorised person. We do not believe that it is necessary or appropriate to give professional firms an additional exemption to carry on those activities under the Part XX arrangements.
In consultation, some commentators expressed concern about the position of professionals who act as receivers appointed by the Court of Protection in accordance with the advice of an authorised person. The position here is similar to that of attorneys, who will be able to manage assets without authorisation as long as they delegate decisions relating to key investments to an authorised fund manager. That harks back to the last issue raised by the noble Lord, Lord Kingsland.
The activity that generated the largest number of comments in consultation was advice. Article 6 specifies advising on investments where the advice consists of a recommendation to buy or subscribe for a particular security or contractually based investment, or to dispose of a member's rights or interests under a personal pension scheme. Article 7 also specifies advising a person to become a member of a particular Lloyd's syndicate.
There is a risk to consumers whenever an adviser selects investments for his client, whether these are life assurance or pensions products, shares, including investment trusts, loan stock, including junk bonds,

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collective in vestment schemes or derivatives. We are conscious that professional firms provide an important safeguard for clients who might otherwise enter such transactions without proper advice. We believe that appropriate controls over such advice can be exercised by professional bodies, or, where necessary, by the FSA under Sections 328 or 329.
There are already a number of exclusions relevant to the activities of a professional person in the regulated activities order, which address many of those concerns, including advice that is a necessary part of his profession or is given in his capacity as a trustee or in connection with the sale of a body corporate. However, we did not want professional firms to be able to engage in selecting investments for their private clients under the Part XX exemption. We consulted on the basis that advice consisting of a recommendation to buy or subscribe for a security or contractually based investment such as a life assurance or pensions product should require authorisation. We did not propose to specify other advice, such as advice not to buy a particular investment or to dispose of an investment.
In consultation, there was general support for the proposition that professional firms should be able to advise on the merits of investment transactions under the Part XX exemption, but that they should not be able to give advice that amounted to selecting investments on behalf of their clients. Some additional concerns were raised, but I shall spare your Lordships those.
A professional firm will be carrying on the regulated activity of advising on investments only if he is advising his client in his capacity as an investor. That will often not be the case. Such advice would normally be regarded as a necessary part of the services provided by a solicitor or barrister. We do not want to create an exemption for solicitors that could not also be relied on by barristers giving advice in relation to the same matter. For the avoidance of doubt, we have also included a provision in Article 6 to make it clear that we are talking only about recommendations to buy investments from a person whose business is dealing in those investments, including a life insurance company, on a stock market, or in response to an invitation to subscribe for an investment that is, or is to be, traded on a stock market. Professional firms will not be prevented by the regulations from making recommendations in relation to private transactions between family members, between an employer and his employee or between the parties to a dispute.
The order strikes the right balance between allowing professional firms to carry on their professional activities without the need for authorisation by the FSA and ensuring that retail consumers receive a consistent standard of protection in relation to mainstream activities such as banking, insurance, fund management, and the selection of investments. I commend it to the House.
Moved, That the draft order laid before the House on 27th February be approved [10th Report from the Joint Committee].—(Lord McIntosh of Haringey.)
On Question, Motion agreed to.

Financial Services and Markets Act 2000 (Designated Professional Bodies) Order 2001
Lord McIntosh of Haringey: My Lords, I beg to move.
Moved, That the draft order laid before the House on 27th February be approved [10th Report from the Joint Committee].—(Lord McIntosh of Haringey.)
On Question, Motion agreed to.

Open-Ended Investment Companies Regulations 2001
12.7 p.m.
Lord McIntosh of Haringey Lord McIntosh of Haringey rose to move, That the draft regulations laid before the House on 27th February be approved [10th Report. from the Joint Committee].
The noble Lord said: My Lords, the regulations set out the legal framework for the establishment, carrying on and regulation of open-ended investment companies—or OEICs, as they are more commonly known. By way of background, I should explain that an OEIC is a type of company whose business is investment in securities such as shares of other companies. It issues shares to its investors and its capital may go up or down as shares are issued or cancelled. Its investments are managed by a fund manager, who must be authorised by the FSA.
The assets of an OEIC—the investments that it owns—must be held by a depository, who must also be authorised by the FSA. The depository plays a key role, similar to that of the unit trust trustee, and must be legally independent of the directors of the OEIC. That independence requirement is an important feature of the robust framework of protection for investors within which OEICs operate. The investment assets of the OEIC must be well distributed to spread investment risk and the OEIC itself and the key players must be authorised.
Those principles were established in the existing regulations governing OEICs—the Open-Ended Investment Companies (Investment Companies with Variable Capital) Regulations 1996. The regulations before your Lordships today make no major changes. They rationalise and modernise the regulatory structure for OEICs. The provisions of the regulations also represent an important liberalisation. They will pave the way towards extending the range of authorised OEICs available for sale in the UK. It will be for the FSA to determine the categories of funds that may be established as OEICs. For the moment, only those that invest in transferable securities—that is, stocks and shares—can be marketed to the general public.
Providers of funds want to take advantage of the economic and marketing benefits of OEICs for a wider variety of funds—for example, money market funds, which can be used as a convenient and stable way of

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parking investment assets. The Government believe that fund providers should be able to offer as much variety of fund types as is prudent. Many in the investment funds industry are eagerly awaiting this extension in the range of OEICs available.
This is a win-win situation. By opening up the scope for fund providers to offer a wide variety of funds in OEIC form, the regulations will give fund providers an efficiency advantage and customers will have the advantage of more choice with no detriment to investor protection.
A further significant change introduced by the regulations is an extension in the role of the FSA to act as a single point of contact on OEICs. As well as regulating OEICs, it will also be responsible for registering OEICs and maintaining the register. Under existing regulations, the registration is undertaken at Companies House. That is a cumbersome and unnecessary split of responsibilities. The new provisions represent a significant rationalisation, which has been welcomed by the investment funds industry.
The regulations simplify matters by setting out that the provisions for OEICs are broadly the same as those for unit trusts, as set out in the Act. Therefore, there should be no significant divergence in the regulations which govern authorised unit trusts and OEICs. Such a divergence could have caused confusion and potential costs. In addition, a consistent approach by the FSA will benefit providers who choose to offer both unit trusts and OEICs.
To minimise disruption for providers, companies constituted under existing regulations will be treated as formed under these regulations. In recent years, extensive consultation has taken place on the regulation of OEICs, and we are grateful for the detailed work that the respondents have undertaken on these complex regulations.
The OEIC is a modern, flexible and transparent investment product. It has proved popular in the relatively brief period for which it has been available. These regulations will result in greater potential flexibility and choice for investors because of the range of OEICs available. They set a firm foundation from which OEICs can go from strength to strength. I commend them to the House. I beg to move.
Moved, That the draft regulations laid before the House on 27th February be approved [10th Report from the Joint Committee].—(Lord McIntosh of Haringey.)
On Question, Motion agreed to.

Rehabilitation of Offenders Act 1974 (Exceptions) (Amendment) Order 2001
12.11 p.m.
The Parliamentary Under-Secretary of State, Home Office (Lord Bassam of Brighton)The Parliamentary Under-Secretary of State, Home Office (Lord Bassam of Brighton) rose to move, That the draft order laid before the House on 1st March be approved [10th Report from the Joint Committee].
The noble Lord said: My Lords, this is an important order and I am pleased that we have the opportunity to debate it today. It covers three key areas of amendments to the existing 1975 exceptions order. It also represents an important milestone in the progress towards implementation of the Criminal Records Bureau.
First, I should place the order in the context of the policy on rehabilitation of offenders as a whole. It has long been accepted that it is important that those who offend should be able to reform, pick up their lives again after paying the penalty, and have a fresh start. The order does not seek to undermine the principle of punishment. However, if we are not to have an underclass of people who can never work again, some means must be put in place for rehabilitation.
However, it has also been accepted that the need for rehabilitation must be balanced against the risk from the ex-offender to society and, in particular, to its most vulnerable members. That is why, so long as the Rehabilitation of Offenders Act has been in place, there has also been a list of positions in relation to which the offender, even if his conviction under the Act is "spent", cannot escape his past. If asked an excepted question in respect of all past convictions by a person entitled to ask such a question, the offender must answer in respect of all past convictions and not merely in respect of those which are unspent.
It is crucial that that list of positions is compiled correctly. We must protect the vulnerable, and safeguards must be put in place for certain offices and certain aspects of life, such as national security. However, we must not make the list such that an offender who has put his past behind him is disadvantaged where that is not necessary due to the demands of the job.
I turn to the three areas of amendment covered by the present order. They are all amendments to categories which are included in the 1975 exceptions order but which need to be updated. The new provisions would replace those in the existing order in these areas.
The most complicated is that relating to working with children. The main effect of the order is to carry through the policy agreed on the definition of "working with children" contained in the Criminal Justice and Court Services Act 2000. Such positions are regulated, as set out in Part II of the Act. We debated that definition in detail during the passage of the Bill last year.
The positions in question are those from which people who have been disqualified from working with children are banned. They include front-line carers, such as foster carers and teachers, those who supervise such workers, and, crucially, those with power to dismiss them. They also include all workers in certain areas of particular vulnerability, such as children's homes and schools. They include positions of influence, such as social services directors and the "great and the good" in organisations concerned with children, such as charitable trustees. All such positions need to be covered by the exceptions order so that full checks can be made.
This part of the Act came into force on 11th January. We need to bring the policy on the exceptions order into line with the new definition as soon as possible.
I now turn to the subject of healthcare workers—the second group covered by the order. The existing exception applies to all those who provide health services. That, of course, includes newly qualified general practitioners. Each health authority area maintains a list of GPs who are available for work. However, currently there is no provision for further criminal checks to take place when GPs move to a new health authority area and are put on a list for that area. The new order will allow such checks to take place.
The final group is justices' chief executives. Section 87 of the Access to Justice Act 1999 removed the requirement for justices' chief executives to be eligible as justices' clerks—a profession included in the order. Effectively, it removed the requirement for justices' chief executives to be legally qualified as barristers or solicitors—again, professions included in the exceptions order.
There is no reason why JCEs should not be subject to the same provisions as JCs—justices' clerks—and their assistants, who are required to disclose spent convictions. The amendment will ensure that all new appointees, some of whom will not be lawyers, are covered by the exceptions order.
Finally, I make a more general point relating to the order. Noble Lords will notice that for the amendment order we have adopted the wider definition of "work" used in the Criminal Justice and Court Services Act 2000. That includes all work, whether paid or unpaid, in all sectors, including voluntary or volunteering work. I am sure that that is right. Where the nature of the work justifies it, we can no longer properly limit exceptions to areas of formal employment. The risks presented by certain positions are not affected by employment status; nor, therefore, should the exceptions order be so affected.
In conclusion, this is an important order and it represents an important milestone in our work to protect the vulnerable. Therefore, I commend it to the House. I beg to move.
Moved, That the draft order laid before the House on 1st March. be approved [10th Report from the Joint Committee].—(Lord Bassam of Brighton.)
12.17 p.m.
Lord Burnham: My Lords, we are entirely happy with the order as it is set out.
Lord Goodhart: My Lords, I want to raise one or two questions in connection with the order. Obviously, we, too, are entirely happy with the principles involved. However, as I see it, one or two issues need to be clarified.
First, it is plainly of the highest importance that full protection should be provided to prevent unsuitable
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people working with children. Article 4.2 of the order provides that there is an exemption for,
"any question asked by or on behalf of any person. in the course of the duties of his work, in order to assess the suitability of a person to work with children, where … the question relates to the person whose suitability is being assessed".
On that basis, it appears that the exemption from asking a question would apply to someone who was on the staff of an employment agency which was responsible for placing nannies with private families. However, the exemption 'would apply so that such a person could ask the question of a nanny, or a prospective nanny, who wanted to use the services of that agency.
On the other hand, it would not be possible for parents, when interviewing a nanny, to claim the benefit of any exemption from the Rehabilitation of Offenders Act, and the nanny would not be required to disclose to the parents any spent convictions. That appears to be an irrational distinction. I wonder what the rationale behind it is and whether it has been considered. I also wonder whether, in those special circumstances, it would be appropriate to allow parents to ask for an exemption in order to enable them to ask questions of someone who is a prospective carer for their children in their own home. The problem is that, as matters now stand, the parents would not be acting in the course of their work in asking such questions.
The other issue relates to questions asked for the purpose of assessing the suitability of any person to adopt children in general or a child in particular where the question relates to a person aged over 18 living in the same household as the person whose suitability is being assessed. As I understand it, it would be possible for someone under the age of 18—a juvenile—to have a spent conviction. In such circumstances, it appears illogical not to allow questions to be asked relating to such convictions, especially as if that person were over 18 there would be an exemption.
Lord Bassam of Brighton: My Lords, I am grateful to the noble Lord, Lord Burnham, for his unequivocal support for the order, and I am also grateful to the noble Lord, Lord Goodhart, for the careful way in which he read the order and the close attention that he gave to it. I am not sure that I can give him precise answers today, but I shall certainly inquire into the points that he raised.
I am advised that there is a real difficulty in allowing parents to ask excepted questions, as there is no means to control sensitive information in such circumstances. As a parent, I can understand why that may be the case; that is a real area of difficulty. It should. be understood that a parent can make other checks, such as the taking up of references, or may approach art agency to make such checks, so other safeguards may be in place.
The noble Lord, Lord Goodhart, asked about adoption, and set out circumstances in which he felt that a juvenile might somehow escape the effect of the provision because the conviction had occurred before they reached the age of 18. 'That is simply because they

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are the only people that adoption agencies are required to check under the relevant legislation. However, the noble Lord makes an interesting point, on which I shall reflect and write to him, copying it to the noble Lord, Lord Burnham.
I am grateful for the general support that has been given to the order, and I commend it to the House.
On Question, Motion agreed to.

European Parliamentary Elections (Franchise of Relevant Citizens of the Union) Regulations 2001
12.23 p.m.
Lord Bassam of Brighton Lord Bassam of Brighton rose to move, That the draft regulations laid before the House on 26th February be approved [9th Report from the Joint Committee].
The noble Lord said: My Lords, your Lordships will be pleased to know that I can be brief. These regulations are necessary to ensure that the United Kingdom continues to comply with its obligations under European Community Directive 93/109. That directive, with which I am certain your Lordships will be familiar, requires that each member state of the Union has in place provisions to allow resident European Union citizens to vote and stand as candidates in local and European parliamentary elections in their member state of residence.
The United Kingdom gives effect to that directive in relation to European elections by virtue of the European Parliamentary Elections (Changes to the Franchise and Qualifications of Representatives) Regulations 1994. Those regulations are based on an electoral registration system that uses an annual qualifying date. The effect of the Representation of the People Act 2000 is to remove that qualifying date and replace it with a registration system based on a rolling register.
As a result, the law as it stands means that citizens of other members states of the Union resident in the United Kingdom are effectively no longer eligible to register to vote at European parliamentary elections. The regulations before the House will rectify that position by replacing those parts of the 1994 regulations dealing with the franchise to bring them in line with the new registration provisions.
The regulations ensure that citizens of other European member states resident in this country are able to register to vote in European parliamentary elections in the same way as are other citizens. They ensure that we shall once again be fully compliant with our obligations under the relevant EC directive, and for those reasons I commend them to the House.
Moved, That the draft regulations laid before the House on 26th February be approved [9th Report from the Joint Committee].—(Lord Bassam of Brighton.)
Lord Burnham: My Lords, in principle, we are entirely happy with the regulations, but there is one
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problem. I am aware that it is not possible for us to amend the regulations, only to vote them down, and with the packed Benches behind me that may not be so easy. However, I draw to the noble Lord's attention Regulation 3(2), which states:
"A person is not entitled to vote as an elector—
(a) more than once in the same electoral region at any European Parliamentary election, or
(b) in more than one electoral region at a European Parliamentary general election".
I feel that it would be better to change the "or" to "and not", as it would appear to be legal to vote twice and be covered by the "or", as one would not be contravening both. I am happy to let the regulations pass but at some time the noble Lord may want to consider an amendment to clear up the point I mentioned.
Lord Renton: My Lords, perhaps I may ask a slightly different question. Presumably, it is clear that British citizens who are working outside the United Kingdom but in the European Union have the right to vote. They would have to apply to be registered but they have the right to vote. Do British citizens working elsewhere in the world outside the European Union have a vote; and do they have the right to register?
Lord Bassam of Brighton: My Lords, the answer to both of those questions is yes. I do not have the answer to the point raised by the noble Lord, Lord Burnham, but I shall undertake a legislative spell-check or sense-check, as it were, to ensure that we have it absolutely right next time around.
On Question, Motion agreed to.

Channel Tunnel (International Arrangements) (Amendment No. 3) Order 2001
12.27 p.m.
Lord Bassam of Brighton Lord Bassam of Brighton rose to move, That the draft order laid before the House on 28th February be approved [10th Report from the Joint Committee].
The noble Lord said: My Lords, the order permits the establishment of so-called juxtaposed immigration controls at railway stations in France and the United Kingdom served by Eurostar. It is a result of several years of careful negotiation with our French counterparts.
The idea of juxtaposed controls is not new; provision for such controls was made in the 1986 Treaty of Canterbury, which outlined the conditions for the operation of the Channel Tunnel. The treaty allowed for a supplementary protocol to be agreed that would make provision for juxtaposed controls. That occurred in 1991 when the Sangatte protocol was signed. The protocol provided for the establishment of control bureaux by France and the UK on territory of

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the other state. That led to the establishment by France of frontier controls at Cheriton in Kent and by the UK at Coquelles in France. The protocol also regulated the exercise of frontier controls on through trains between the UK and France.
The idea of extending juxtaposed controls to include stations served by the Eurostar emerged about three years ago in response to the growth in illegal immigration through the tunnel. For several years, people trying to enter our country without adequate documentation have been misusing the Eurostar service. In the second half of last year, almost 4,000 passengers arrived at Waterloo without the required documents; many claimed asylum upon arrival. That abuse has been encouraged by the fact that there is no liability under French law for SNCF, the French railway company, to check documents for the Paris to London Eurostar route.
The idea of juxtaposed controls at Eurostar stations was also a direct response to the possibility that carriers' liability charges might otherwise be imposed on train operators. Carriers' liability charges, consisting of a £2,000 penalty on the inbound carrier for every passenger without adequate documentation who is brought to the UK, originally did not include trains. In 1998 these provisions were extended to cover through trains. However, SNCF was excluded from the arrangements as it was not lawful in France for train operators to carry out documentation checks. But under this Government's Immigration and Asylum Act 1999, provisions are made to resolve legal barriers to the imposition of charges on the SNCF. With the present level of undocumented arrivals, SNCF could be faced with potential charges of £1 million every month.
There is provision in the Act for carriers' liability charges not to be applied to train operators. An order can be made under the Act exempting a train operator from carriers' liability charges if there is an agreement in place between the UK and the country concerned that provides for the operation of UK immigration control in that country or for the checking of passports and visas there. When the UK and France have introduced juxtaposed controls, such an agreement will be in place and SNCF may be exempted from carriers' liability penalties.
The implementation of the additional protocol to the Sangatte protocol will enable UK immigration officers to conduct immigration control at the Gare du Nord in Paris, and at other stations in France served by the Eurostar. Our immigration officers will be able to identify passengers without the correct documentation and refuse them leave to enter the UK before they board the train. This agreement has the potential to prevent all inadequately documented passengers from travelling on the Eurostar and abusing that method of entering the United Kingdom.
It is important to implement juxtaposed controls as soon as possible in order to close the loophole that the
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Eurostar currently represents in our immigration control. I am grateful to the House for its early consideration of this order. I beg to move.
Moved, that the draft order laid before the House on 28th February be approved.—[10th Report from the Joint Committee.]—(Lord Bassam of Brighton.)
Lord Burnham: My Lords, I hope that this order will apply to travellers on the Eurostar and not under it. This is an uncontroversial order but it is extremely high profile. Therefore, I have just one question for the noble Lord which I hope he will be able to answer unequivocally. Does he believe that the order will help to ensure that unfounded asylum seekers are stopped by the French authorities on their side of the tunnel?
Lord Bassam of Brighton: My Lords, I believe that to be the case and that it will be very effective in that regard.
Lord Goodhart: My Lords, we too are happy to support the order. However, I make only one comment: this order was included in the list of orders to be dealt with today only at very short notice, which made it difficult to give what is an important order the study it deserves.
Lord Ampthill: My Lords, my memory is a bit hazy and I hope your Lordships will forgive me for that. When I chaired the Select Committee on the Channel Tunnel Bill 11 years ago we strongly recommended that British immigration officers should travel on the train. Has that been implemented? It would seem to be an economical way of dealing with the problem. If people are discovered between Paris and Sangatte, they can be decanted at Sangatte and not go through the rigmarole that is implicit in the order.
Lord Bassam of Brighton: My Lords, I apologise, first, to the noble Lord, Lord Goodhart, for the way in which these matters had to be brought forward. They are widely recognised as being of crucial importance and there is urgency to this order. It follows swiftly on the discussions that took place at Cahors, which led to this happy situation in which the French will work much more closely with us to ensure that immigration control is not abused in the way it has been in the past, and in particular Eurostar itself is not abused.
In relation to the point made by the noble Lord, Lord Ampthill, my understanding is that immigration officials can travel and work on the trains in the way in which the noble Lord suggests. But we need the arrangements under this order in place so that their work and efforts can be that much more effective. We believe that they will be effective and that some of the matters considered by the Select Committee chaired by the noble Lord, Lord Ampthill, are now beginning to fall into place.
On Question, Motion agreed to.

Limited Liability Partnerships Regulations 2001
12.35 p.m.
Lord McIntosh of Haringey Lord McIntosh of Haringey rose to move, That the draft regulations laid before the House on 15th January be approved [3rd Report from the Joint Committee].
The noble Lord said: My Lords, I should start by explaining why we are considering only one set of regulations today when an earlier Order Paper showed that we would also be looking at the fees regulations. Unfortunately there was an error in the regulations and they had to be withdrawn. A new set of regulations was laid on 14th March and will be considered by the Joint Committee on Statutory Instruments next week. I apologise for the confusion.
The Chancellor announced in his Pre-Budget Report that the Limited Liability Partnerships Act 2000 will come into effect on 6th April. It will introduce for the first time in nearly a century a change to business entities in Great Britain. That is the result of over three years of consultation and debate with a wide variety of consultees. Detailed legislative proposals have been in the public domain since 1998, including a draft of what is now the LLP Act and these regulations. The Bill and the regulations were scrutinised shortly afterwards by the Trade and Industry Select Committee. The Bill also received close and thorough scrutiny in the other place and by Members of this House.
Firms that decide to become an LLP will enjoy the organisational flexibility and tax treatment of a partnership with the limited liability of a company. That means that the LLP will be a separate legal entity owned by its members. Therefore the LLP will be able to enter into contracts and hold property.
It is important to strike the right balance between the interests of those who want to carry on business as an LLP and those who will do business with them. I believe that the LLP Act, together with these regulations, achieves that objective. That is why it is important to apply very substantial parts of companies' legislation to LLPs with those modifications necessary to reflect the differences between a company and an LLP. The LLP does not provide a shield behind which the individual negligent professional can hide. Typically a client will have contracted with the LLP itself and will in the first instance therefore usually look to the LLP for redress under contract law. But this does not preclude action in tort against the negligent member who has assumed personal responsibility for his actions.
Let me comment on the legislative structure we have established for LLPs, including these regulations. The LLP Act provides a framework for setting up an LLP. It defines an LLP as a separate legal entity owned by its members; it sets out the mechanics and requirements for incorporation and establishes the relationship that exists between members, and between members and the LLP.
The Act also prescribes the scheme of taxation. The Parliamentary Under-Secretary of State for Competition and Consumer Affairs made a commitment during consideration of the LLP Bill in the other place to make clear the Government's approach to the taxation of LLPs and I will come back to that in a moment.
The aim of these regulations is to ensure that an LLP, as a body corporate, will be subject to similar requirements to those made of companies. But because the internal structure of an LLP is not prescribed like that of a company, it has been necessary to modify existing corporate legislation in its application to LLPs. The modifications we have made to companies legislation is only in relation to LLPs; it is not a fundamental change to company law. That must await the outcome of the independent Company Law Review, which will report to the Government in May.
I should comment on two issues relating to the structure of the legislation which were considered when the LLP Bill was before Parliament. The first is the extent to which it relies on the use of regulations. The worry, with which we disagreed, was that there was too great a reliance placed on secondary legislation. When we first decided on how we were going to regulate LLPs, we began from the principle that an LLP was a body corporate and that there should be an equivalent level of regulation applied to LLPs as there is to companies. That is part of the balance to which I referred earlier. What we have is a sensible structure. The essential characteristics, principles and rules for an LLP are set out in the LLP Act. The detail is left to regulation.
Most importantly, if we had done it any other way we would have had a structure which was unwieldy and difficult to adapt. The underlying requirements of company law, insolvency law and partnership law are all capable of change. I mentioned earlier the fundamental review of company law. At the appropriate time we shall need to adapt and apply many of the changes flowing from that process for LLPs. Also, the Law Commission has recently completed a consultation on a far-reaching reform of partnership law. We shall have to adapt that to LLPs in due course.
Insolvency law does not stand still. The new Insolvency Act 2000 modified the Insolvency Act 1986 and will be applied to LLPs as appropriate by statutory instrument once the secondary legislation has been made. In all three areas of the law, the changes will come before Parliament. Their subsequent application to LLPs then becomes largely a technical job, which is appropriate for secondary legislation.
The second point, which has been made on the structure of the regulations, is that legislation by reference is unhelpful to users. I sympathise with that argument. However, the alternative would have been to produce a set of regulations that run to hundreds of pages, much of which would reproduce existing law. That would have had the approach of completeness. However, the approach we followed highlights, for

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advisers who are familiar with company law, the differences in their application to LLPs. We understand that commercial publishers are likely to produce helpful consolidations of the law as it applies to LLPs.
I do not know how much of the detail your Lordships wish me to go into. Perhaps I may talk about three main strands in the regulations and then say a word about taxation. The first strand relates to accounts and audit. Part II of, and Schedule 1 to, the regulations apply Part VII of the Companies Act 1985 and set out the accounting and audit requirements for LLPs. These are broadly in line with the requirements placed on companies which ensure that LLPs have the same level of financial disclosure.
The second strand is contained in Part II of, and Schedule 2 to, the regulations, which apply the remaining sections of the Companies Act 1985 together with Part II of the Companies Act 1989 and the Company Directors Disqualification Act 1986 with appropriate modifications. That part of the regulations sets up a regime for the running of LLPs which is closely allied to that of a company.
The third strand is contained in Part IV of, and Schedule 3 to, the regulations and applies the first and third groups of parts of the Insolvency Act 1986 to LLPs. Those provide that LLPs are treated similarly to companies on insolvency issues, such as company voluntary arrangements, administration orders, receivership and winding up.
I shall pass over issues relating to financial services and LLPs and default provisions. I can comment on those if necessary. I stated that I would confirm the Government's approach to the taxation of LLPs; LLPs are a new business structure. Their tax treatment is an important factor for the businesses that are contemplating using them. There has been consultation over a long period to ensure that the tax treatment of LLPs balances the desires of business with the need to guard against tax loss. Most recently, in the Budget last week, the Inland Revenue published a Budget Note on the taxation of LLPs.
The LLP Act introduced new sections into tax legislation to the effect that an LLP carrying on a trade, profession or business with a view to profit will be taxed as a partnership. The LLP structure is available to all businesses, as we recognised that it could be attractive to others and not just professional firms. However, it has never been our intention to allow the formation of LLPs to be driven by their tax treatment, or to open up the likelihood of significant loss of tax revenue. The review of tax treatment that was announced during the passage of the LLP Bill identified that the use of LLPs as property investment vehicles opened up significant scope for tax loss. By "property investment", I refer to a business consisting wholly or mainly in the making of investments in land or buildings.
The tax loss would arise if tax-exempt bodies such as pension funds, the pension business of life insurance companies and tax-exempt business of friendly societies were to invest in property via LLPs, instead
1130
of through property investment companies. The proposals concerning property investment out lined in the Pre-Budget Report and confirmed in the Budget Note are to prevent that tax loss and to avoid creating distortions in the investment market. They do not restrict what businesses LLPs may choose to carry on and they will not be relevant to the vast majority of businesses contemplating using LLPs. They will not affect the current arrangements used by pension funds, so there is no question of tax proposals removing a tax break that is currently enjoyed. As primary tax legislation, they will be subject to parliamentary scrutiny.
The regulations undoubtedly add a fair number of pages to the legislation on LLPs, but they follow closely from the drafts we exposed for consultation both before and during the passage of the Bill. They strike a balance between the interests of those wishing to form LLPs and those wishing to have dealings with LLPs. I believe that it is the right balance. I beg to move.
Moved, That the draft regulations laid before the House on 15th January be approved [3rd Report from the Joint Committee].—(Lord McIntosh of Haringey.)
12.45 p.m.
Lord Burnham: My Lords, I thank the Minister for that explanation. Earlier he seemed to be preening himself on the brevity of the regulations but at the end of his comments he seemed to admit that they are not so brief. I make that point because when the Bill, which was a mere 19 clauses, one schedule and 16 pages, left this House, it had several hours at Second Reading, three days in Committee and several more hours on Report and Third Reading in the other place. However, today this draft SI covers 57 pages, 10 regulations and six schedules. It covers the meat of the whole LLP regime, and a substantial part of the regulations which should have been incorporated into primary legislation.
The noble Lord listed the regulations which it is necessary to have at hand for a study of LLPs But it is worse than that. To determine the company law provisions that apply, one must refer not only to Schedules 1 and 2 to which provisions do and do not apply, and which provisions are amended and how, but to Regulation 3 of the regulations which we are discussing today. Regulation 3 states:
"references to other provisions of the 1985 Act and to provisions of the Insolvency Act 1986 shall include references to those provisions as they apply to limited liability partnerships in accordance with Parts III and IV of these Regulations".
We are particularly concerned at the introduction of criminal sanctions in a matter involving commercial affairs by means of secondary legislation. We accept that as a matter of convenience sanctions imposed. by the Companies Act 1985 as amended, which was duly debated in both Houses, could conveniently be included in the regulations if they are merely producing identical provisions to the Companies Act and simply altering the terminology as appropriate. For instance, the word "members" could be substituted for "officers" or "directors".

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However, I should like to draw the attention of the Minister to page 23 and the reference to subsection (5) of Section 391A of the Companies Act. The regulation reads:
"For subsection (5) substitute:
`If a copy of the representations is not sent out as required by subsection (4), then unless subsection (6) applies, the limited liability partnership and any designated member in default commits an offence. A person guilty of an offence under this section is liable on summary conviction to a fine not exceeding level 3".
But subsection (5) of Section 319A merely provides:
"If a copy of any such representations is not sent out as required because it is received too late or because of the company's default, the auditor may (without prejudice to his right to be heard orally) require that the representations be read out at the meeting."
This is the introduction of a fine and a criminal record when no such sanction applies against company directors. When my honourable friend Nick Gibb raised the matter in another place, the Minister said that he understood that it was currently an offence under the Companies Act and that it was a proper function and a duty to make those representations as appropriate. He therefore did not see that it was a new crime, although it was a reference that was not included in earlier publications. So far as we can tell from the section of the Companies Act I have quoted, contrary to what the Minister said in the other place, it is not an offence under that Act.
I am relying on a copy of the relevant section which my noble friend Lady Miller obtained from the Library on Wednesday. Will the Minister explain the discrepancy before he asks us to approve this new criminal offence without primary legislation?
Lord Goodhart: My Lords, these are massive regulations. They include great chunks from both the Companies Act 1985 and the Insolvency Act 1986. Clearly, a consolidated version of both Acts as they apply to LLPs will be required. I hope only that the Minister is right in saying that commercial organisations will produce them. That may well be the case, but in my experience consolidated versions take some months to appear. Therefore, for some time to come it will be necessary to rely on the terms of the regulations—that is, if the LLPs are to be brought into operation in the near future. I should be interested to know the timetable that the Minister has in mind for introducing a state under which the new LLPs can be set up.
I shall be interested to hear the Minister's answers to the questions posed by the noble Lord, Lord Burnham, and I want to raise a number of points of varying importance. I shall begin with the least important. The first, on which I may not have the support of my noble friend Lord Phillips of Sudbury, relates to the impact of the Business Names Act 1985.
An LLP trading under a name other than its corporate name gets the worst of both worlds. Like a company incorporated under the Companies Act, it must include the corporate name on its business stationery. That is fair enough. Like a partnership with
1132
fewer than 20 members, an LLP with fewer than 20 members must include on its stationery the names of those members. Therefore, the stationery must be changed every time a member leaves or joins the LLP. I wonder whether the corporate name would not be sufficient. That requirement hits small LLPs particularly hard and it seems to be raising an unnecessary element of bureaucracy.
Secondly, Sections 288 and 364 of the Companies Act 1985, as modified in relation to LLPs, require details of the usual residential addresses of members to be provided to the registrar. Recent events have shown that in some circumstances it is undesirable that the public should be made aware of home addresses. We have in mind what happened in respect of Huntingdon Life Sciences. A similar problem could arise in some LLPs, particularly solicitors and insolvency practitioners, both professions being likely to make use of LLPs and both often being involved in situations of personal conflict with bankrupts, unhappy opponents of clients or disappointed clients. Those conflict situations could lead to harassment or violence. I wonder therefore whether it would be possible to eliminate the need to deliver the home addresses to the registrar.
The third point relates to the default provisions in Part VI of the regulations. Those are generally welcome, but the list of default provisions does not include any duty on members of an LLP to act in good faith towards each other. It is true that the duty to act in good faith does not appear on the face of the Partnership Act 1890, but it is long established by decisions of the courts to be at the core of the partnership relationship. We believe that it should also be recognised as the core of the relationship between members of LLPs and that can be achieved only by including it in the list of default provisions.
The final and most important defect is complicated and needs some explanation. I raised the matter at the Third Reading of the Bill. Members of LLPs may cease to be members in a number of ways, in particular by death or retirement. When someone ceases to be a member, the question arises of what happens to their interest in the assets of the LLP. In a great majority of cases, that will in practice be covered by the terms of the agreement. But that will not always be the case; there will be some inadequately drafted agreements, informal agreements, which do not provide for that. The question is: what happens if the agreement does not provide for it?
The default provision in the case of partnerships is that the departure of a member causes a dissolution and that the outgoing member is thereupon entitled to his or her share of the assets of the dissolved partnership, leaving the other members of the partnership free to reform the partnership between themselves if they want to. The default provision in the case of a company with share capital is quite different. The member has share capital, remains a member as long as he or she holds those shares but can of course sell them.

1133
It is true that in some cases, particularly in small companies, the shares are in practice unsaleable and in that case the shareholder is locked in. However, if that shareholder is treated in an unprejudicial way, he or she can apply to the court for a remedy under Section 459 of the Companies Act 1985. Therefore, if the company is profitable but the directors distribute all the profits and pay no dividend on the shares, the shareholder can go to the court to ask for an order for his or her shares to be bought out.
However, there is no answer to the question of what happens to the proprietary rights of the outgoing member of an LLP. My view is that the property is the property of the LLP and must remain the property of the LLP after the retirement. In the absence of a right in the agreement to take out the retiring or deceased member's share of the assets, that member has no such right and loses his or her interest in the LLP without any compensation.
We welcome the fact that after some uncertainty about the matter, Section 459 is to be applied to LLPs by the regulations. But Section 459 can be relied on only by current members of an LLP and cannot be the basis of a claim by a former member that he is being treated unfairly by not being paid out any of his asset interests in the LLP.
It is difficult to know what the default provision ought to be. If there is a right to an immediate pay out in default, that may destroy a viable business. If the right to a pay out is deferred until the dissolution of the LLP, the outgoing member may be locked in and unable to get access to the assets for a very long time.
Plainly, the confiscation of a proprietary interest on retirement or death and its transfer to other members cannot be the right answer. The difficulty of finding the best answer does not excuse the Government's failure to provide an answer at all. We suggest that the best answer may be a default provision: first, that the departure from membership does not deprive the outgoing member of the right to his or her share in the assets of the LLP; secondly, that the payment of that share should be made on terms, and at a time, which is just and equitable; and, thirdly, that in the absence of agreement between the parties a county court should have power to decide what is just and equitable. I accept that that solution is itself not free from difficulty because it would mean uncertainty and perhaps an increased need to go to court. Nevertheless, it is plain that something needs to be done on this important issue and that no answer to this undoubtedly very difficult question is contained in the regulations as they now stand.
1 p.m.
Lord Phillips of Sudbury: My Lords, I very much associate myself with the observations of both the noble Lord, Lord Burnham, and my noble friend Lord Goodhart about the length and complexity of the regulations. They are five times as long as the principal Act and several times longer than the Partnership
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Act 1890. Having said that, it would be churlish of me to fail to commend those responsible for this monumental task of micro-surgery. However, I believe that, while logical in one way, the manner in which legislation is currently undertaken, with massive regulatory underpinning, encourages a complexity of law which in the wider cultural context becomes completely self-defeating.
I thank the Minister for complying with his undertaking to me in this House on 6th March by amending Section 351 of the Companies Act to require those LLPs which do not set out in their title the fact that they are limited liability partnerships to do so, albeit in smaller print on their notepaper and so on. Naturally, that leads me not to associate myself with the remarks of my noble friend Lord Goodhart. I understand the excesses of violence which disfigure our times, but I believe that to retreat behind a wall of anonymity—many large LLPs will be magnificently anonymous—is too high a price to pay for what is an extremely rare but real risk to operators of businesses.
I should like to make two points on Part VI which contains the default provisions that will apply to LLPs unless the members otherwise agree. My first point concerns paragraph 7(7) which governs the right of members to access the hooks and records of the limited liability partnership. That is a very important provision. I believe that the vast majority of LLPs will not have comprehensive agreements which cover these matters. There could be an ambiguity here. The first part of paragraph 7(7) states:
"The books and records … are to be made available for inspection at the registered office of the [LLP] or at such other place as the members think fit and every member of the limited liability partnership may when he thinks fit have access to and inspect and copy any of them".
It could be read as indicating that the only books and records to which members of an LLP have right of access to inspect and copy are those books deposited at the registered office. I believe the intent is that a member shall have right of access to inspect and copy partnership books and records wherever they are. If the Minister agrees with that, it would be helpful if he said so.
I turn to paragraph 7(9) which is really an anti-competition provision. Unless he has consent, a member cannot carry on any business which competes with that of the LLP. In normal legal circles the notion of carrying on a business carries a proprietorial connotation and does not cover a situation where one is an employee of a business. I believe that that leaves this provision rather lamely placed, because anyone can circumvent it simply by arranging for his wife or friend to set up a limited company of which he or she becomes an employee. In that way one simply bursts through the provision. That lends support to the point raised by my noble friend Lord Goodhart about the absence of any reference to good faith. I believe that a good faith provision would plug the hole that exists in the current wording of paragraph 7(9). If the Minister is minded to comment on that, I should be grateful.

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Finally, paragraph 10 of Part VII—miscellaneous—deals with subordinate legislation specified in Schedule 6. It stipulates that that schedule,
"shall apply as from time to time in force to limited liability partnerships".
Does the phrase "as from time to time in force" mean "as from time to time in force and as may have been amended"? If it is not too much to ask, clarification from across the Floor of the House would be of considerable help to all concerned.
Lord McIntosh of Haringey: My Lords, I am grateful to all noble Lords for the care that they have taken to scrutinise these regulations and the detail in which they have responded to them. I accept that these are long regulations. I do not believe that I ever preened myself on their brevity, as the noble Lord, Lord Burnham, suggested. In my introduction I explained why the regulations had to be long. I said that since limited liability partnerships were being brought within the context of existing company and partnership law, without changing them more than absolutely essential for the purpose, it had to be done by reference to company and partnership law rather than by incorporating whole chunks of either, or indeed insolvency law, into the regulations.
I was asked by the noble Lord, Lord Goodhart, how soon it would be before we would have a consolidated document. I understand that Butterworths Tolley is well on the way to producing a limited liability partnership handbook which it hopes to publish in late April of this year. I hope that that will ease the problem for those who find this a difficult area. I acknowledge that there are elements of difficulty.
The noble Lord, Lord Burnham, was particularly concerned by the incorporation of criminal offences and penalties by secondary legislation. That was also of concern to the Delegated Powers and Deregulation Committee. It is a fact that offences are covered in the regulations. We intend to apply to members of limited liability partnerships existing criminal offences which are punishable by imprisonment when applied to company directors. At this stage we do not intend to create any new offence for members of limited liability partnerships that do not already exist for officers of a company. The criminal offence created under Section 391A(5), to which the noble Lord, Lord Burnham, referred, is already an offence under the Companies Act. It is not a new crime, although it was not included in the earlier publications.
Many of the comments made by the noble Lord, Lord Goodhart, refer to matters that he disagreed with when we were dealing with the original legislation. Although I enjoyed listening to them again, it is a little abusive of our procedures when we are considering regulations. Of course he is still worried and he is entitled to be, but unless a change of policy is introduced by the regulations it is not entirely appropriate to go over the ground again.
Lord Goodhart: My Lords, I thank the Minister for giving way. The noble Lord is being unfair. I
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acknowledge that I am raising issues that I raised when the Bill was being debated, but what we were talking about at Third Reading was what should go into the default provisions. Now that we have seen the default provisions and certain matters which we regard as omissions from them, it is perfectly legitimate to raise those issues again in this context.
Lord McIntosh of Haringey: My Lords, it is indeed. I did not mean that I was not going to respond to all of the noble Lord's points; I am simply saying that some of them are not to be found in the regulations. I cut out from my opening speech the page or two relating to default provisions. I shall now have to put them back in again.
Before I leave the issue of the new offence under Section 391A(5), perhaps I may say that we have had to make appropriate modifications to companies legislation in its application to LLPs. One of the occasions is Section 391A(5) which deals with effective circulation of an auditor's report on his removal from office. In these circumstances, it will be agreed that whether one is a company or an LLP it is desirable that the members receive a copy of the auditor's report.
Under the company structure, when the directors fail to circulate the report, there is provision for it to be read out at the meeting of the company which considers the removal of the auditor. But LLP legislation is silent on its internal structure, so it was not possible to have a comparable decision. Because it is important that the auditor's representations are made known to the members of the LLP, the regulations require the designated members to circulate the representations and impose an offence if they fail to do so.
Lord Phillips of Sudbury: My Lords, I am obliged to the Minister for giving way. Perhaps I may give solace to the noble Lord, Lord Burnham, on his point. The provision is a toothless tiger in any event because it makes liable to a prosecution only,
"any designated member in default".
Section 8 of the principal Act requires one of these LLPs to have only a single designated member. Indeed, the single designated member could be a limited liability company. Unless the single designated member is also "in default", there will be no one who can be prosecuted under the provisions. The same applies to a great many of the provisions of the Act.
Lord McIntosh of Haringey: My Lords, I cannot accept that. We had a great deal of discussion about a designated member when the Bill was passing through this House. We made very clear our reasons for saying that there must be at least one designated member, because there must be someone who can be held responsible for the formal procedures of the business and for making the returns necessary. So there will always be a designated member. That designated member can be pursued if, as I have just said, he is in

1137
default of, in particular, this obligation to circulate or make available the report of the auditor on his removal from office. That is adequate protection.
Lord Phillips of Sudbury: My Lords, I thank the Minister for giving way again. The answer is whether or not the Minister is right in assuming that if an LLP has a single designated member and there is default in circulation of the auditor's report, that designated member will automatically, and in all circumstances, be deemed responsible under the amendment to Section 391A. I was rather thinking that where it says,
"any designated member in default",
that implied some personal responsibility on behalf of the designated member. If I am wrong, then the Minister is right. None the less, the point remains that only one member of a partnership of 500 could ever be responsible under these criminal provisions, and that member could be a limited company.
1.15 p.m.
Lord McIntosh of Haringey: My Lords, the point is that it is not less than one person. It would be unenforceable if 500 members of a limited liability partnership were all jointly and severally responsible for any default. It must be necessary for there to be one identifiable person as the designated member. It applies to this obligation, as to all the other obligations as in the filing of returns of accounts and so on. It does not make any difference whether that person is a limited liability company or not. That person can still be pursued if' he does not do what is required.
I was asked by the noble Lord, Lord Goodhart, about the commencement of the regulations. I thought that I had made it clear in my opening speech that we have set out 6th April 2001 as being the commencement date. That date has been chosen to enable those wishing to take up LLP status to be aware of any amendments that may be made to the tax treatment of LLPs in the light of the tax review that was carried out last year by the Inland Revenue.
Ministers in another place gave a commitment not to commence the LLP legislation until the outcome of the review was known, so that anyone wishing to become an LLP would be certain of the tax treatment they could expect. That is what is secured by this commencement date.
There was some discussion on the issue of usual residential addresses. There is agreement in this matter between the noble Lords, Lord Goodhart and Lord Phillips. I am not in a position to arbitrate on that matter, except to say that we intend in subsequent regulations to apply to LLPs the provisions of the Criminal Justice and Police Bill which relate to directors' home addresses, assuming that these are agreed by Parliament.
The noble Lord, Lord Goodhart, again raised the issue of a duty of good faith. That issue is not particularly raised by the regulations rather than by the Bill. We considered carefully, and we have listened to all the arguments on this point, whether there should be a statutory duty of good faith between
1138
members. We sought views in our February 2000 consultation document. The responses were evenly divided, with comments for and against. We decided that there was no advantage in imposing a statutory duty.
The elements traditionally thought of as making up a duty of good faith include a duty of honesty and good faith owed to each partner; a requirement for openness; a duty to act in favour of the firm and not against it; the fair treatment by partners of a minority within a firm; and a duty not to compete with the firm or make a profit at the expense of other partners. That matter will be adequately catered for by the default provisions under regulations 7 and 8 and will offer a safety net where there is no agreement between members, either generally or on a specific issue. Even if there is no statutory requirement for a duty of good faith, that will not prevent. members of an LLP from agreeing to owe a duty of good faith to each other if they wish.
I know that will not satisfy the noble Lord, Lord Goodhart. The noble Lord was not satisfied with it before, but it is the way the Bill has been constructed. The regulations simply follow on from that.
We argued at the time that there was no benefit in having the default provisions appearing on the face of the Act rather than in regulations. That would not have given them more certainty or made them more enforceable. The provisions will be variable by agreement between the members. They are not a rigid statutory requirement. If we had them in primary legislation, it would be difficult to amend them if they needed adjustment in circumstances which we did not anticipate. I shall not read out the two pages on default provisions from my original speech because I think that I have answered that point.
The noble Lord, Lord Goodhart, asked what would happen if a person ceased to be a member. Any member's account balance will be repayable. That will be a matter for discussion between the personal representative of a deceased member and the limited liability partnership itself.
Lord Goodhart: My Lords, is that a reference to an account balance on dealings between the member and the LLP or is it an account balance in the sense of the proprietary interest of the member in the LLP itself? If the latter is the case, what provision would ensure payment of it?
Lord McIntosh of Haringey: My Lords, I was just about to come on to that point. Property that is in the name of the LLP will remain the property of the LLP, although an outgoing member may have an equitable claim against the remaining members, depending on what contribution he has made to the LLP. My first answer is about the more limited case of the account balance with the LLP; my second answer is the wider definition.
Perhaps I may move on to the points raised by the noble Lord, Lord Phillips. He asked about the availability of the books and records of a limited

1139
liability partnership. I can confirm that Regulation 7(7) provides the default position that a member of an LLP may have access to the books and records of the LLP. But I can go further than that. Section 222(1) of the Companies Act 1985, which is applied to LLPs, permits the members of an LLP to have access to the accounting records of a company. That is a statutory, not a default, provision.
The noble Lord asked about regulation 7(9) on employees. Regulation 7(9) requires a member of an LLP to account to the LLP for profits made in carrying on any business "of the same nature" as the LLP if he does so without the consent of his fellow members. That would cover the situation where a member of an LLP sets up a competing business or consultancy. It is also arguable that it would cover the situation where a member's wife or husband sets up a company and the member works for it. However, if this issue proves to be a problem in practice, it could be looked at again in the future.
Regulation 7(9) is only a default provision. It derives from the Limited Liability Partnerships Act, which is the subject of the second review.
Lord Phillips of Sudbury: My Lords, I am grateful to the noble Lord for giving way. His answer has not covered my point on the difference between someone with a proprietorial interest in a competing business and someone who is purely an employee of it. Regulation 7 does not cover that.
Lord McIntosh of Haringey: My Lords, I am not sure what the noble Lord, Lord Phillips, wishes to achieve. Is he afraid that employees are not covered, or does he wish to have them not covered?
Lord Phillips of Sudbury: My Lords, I shall say what I would have preferred and what I think would have been more comprehensive. If a member of the limited liability partnership was competing with his partners, whether as a proprietor or as an employee of a competing business, that would be a default provision. The spirit of this point is that someone will not compete against his own partnership. This would be a way of doing that which would not be caught by regulation 7.
Lord McIntosh of Haringey: My Lords, that is why I made the point about a husband or wife setting up another business and the wife or husband working for it, presumably as an employee. Of course, this is part of partnership law, which is the subject of separate review. If any review of partnership law were required, it would be made in due course to apply also to limited liability partnerships. In any case, it is only a default provision, so an LLP can make sure that it covers the point of an employee if it were thought to be necessary.
The noble Lord's final point concerned regulation 10. He asked whether "shall apply as from time to time in force" includes "as and when amended". The answer is yes.
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Perhaps I may briefly return to the point made by the noble Lord, Lord Goodhart, about the account balance. The answer to the first definition is that it is the balance between the member and the LLP and not the proprietary interest. I hope that I made that point clear.
Lord Goodhart: My Lords, before the noble Lord sits down, the suggestion that there should be some kind of unspecified equitable right on an outgoing member to recover the value of his property from the LLP is a very unsatisfactory way of dealing with this problem. It is not at all clear what the basis of that equity would be. I wonder whether, even at this late date, the Government would be prepared to consider introducing further regulations to clarify that point.
Lord McIntosh of Haringey: My Lords, legislation inevitably relies on elements of the common law. I have already said that there is pursuit in tort for certain failings, if I may use a non-legal word. To introduce the common law of equity here would not be unreasonable. If it does not work, we may have to do something else about it. But that is why these are regulations and not primary legislation.
On Question, Motion agreed to.

National Minimum Wage Regulations 1999 (Amendment) Regulations 2001
1.27 p.m.
The Minister for Science, Department of Trade and Industry (Lord Sainsbury of Turville)The Minister for Science, Department of Trade and Industry (Lord Sainsbury of Turville) rose to move, That the draft regulations laid before the House on 26th February be approved [9th Report from the Joint Committee].
The noble Lord said: My Lords, I am grateful to the business managers for allowing two sets of regulations to be considered together. As it appears that the regulations are not matters of burning interest to Members of the House, that is very helpful.
The proposed regulations make necessary changes to the Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000 and the National Minimum Wage Regulations 1999 (Amendment) Regulations 2000. The first will make it easier for employers and workers involved in a dispute over the application of the part-time regulations to reach agreement without resorting to an employment tribunal. The second make a minor point of clarification on who is entitled to the national minimum wage.
If your Lordships are content, the regulations on part-time workers will apply to England, Scotland and Wales, with Northern Ireland introducing its own legislation along similar lines. The national minimum wage regulations apply to the whole of the UK. Both amendments will come into force on 1st May this year and be effective from that date.
Both sets of regulations will improve the operation of the original legislation. They will help to encourage a partnership approach from employers and workers in applying the part-time workers regulations and correct a potential anomaly in the national minimum wage regulations regarding the trainees' exemption.
I shall explain the need for the two sets of regulations. On the part-time workers amendment, the original regulations successfully implemented a European directive designed to end discrimination against part-time workers in their contractual terms and conditions. We implemented them using the Employment Relations Act 1999. The regulations have been broadly welcomed and are already having a positive impact. The amendment we are considering today will give parties involved in a dispute greater capacity to come together to settle their differences without having to go to a tribunal.
Provisions of this type are standard in employment law and apply to virtually all other employment rights, including the right to claim for unfair dismissal and the right to bring a claim for discrimination on the grounds of sex, race or disability. The regulations will increase the chances of settling a dispute in two ways.
First, they will amend Section 18(1) of the Employment Tribunals Act 1996 to increase the ability of ACAS to conciliate in claims brought under regulation 5(1) of the part-time workers regulations. Regulation 5(1) gives part-timers the right to equal treatment in their terms and conditions of employment when compared with similar full-timers. The amendment allows officers appointed by ACAS to conciliate between parties to reach a binding agreement before a claim reaches an employment tribunal. Any conciliation would be entered into on a voluntary basis and the proceedings are generally informal. There is no time limit attached to the conciliation process and no set format. Negotiations can he conducted over the phone or in face-to-face meetings with one or both of the parties. There is no need for either side to take formal legal advice and either party retains the right at all times to revert to a tribunal hearing.
The second element of the part-time amendment amends Section 203 of the Employment Rights Act 1996 to allow workers to contract out of their right to bring claims under the original regulations where an effective compromise agreement has been reached. For an agreement to be effective, the worker must have received advice from an independent adviser. This could be a qualified lawyer, a certified trades union official or an advice centre.
I shall turn now to the national minimum wage amendment. As noble Lords will recall, in July of last year, Parliament approved a number of regulatory changes to the minimum wage, including an increase to the main rate and an exemption for national trainees as recommended in the second report from the independent Low Pay Commission. However, during the debate, a minor technical difficulty with the part of those amending regulations dealing with national trainees came to our attention.
On 14th July 2000, I explained to the House the problem and announced our commitment to return with a slightly amended version of the relevant regulations as soon as possible to clarify the situation once and for all. This was accepted by noble Lords and this amendment to the principal regulations fulfils that commitment.
The detailed point at issue with the national minimum wage amendment is a particularly complex one which results from a potential mismatch between the wider definition of "worker", including "agency worker" used in the National Minimum Wage Act and a reference to a certain type of trainee known as a "national trainee" in the National Minimum Wage Regulations 1999 (Amendment) Regulations 2000, which took effect on 1st October 2000.
The way in which the regulation is drafted means that there could be a situation where a young trainee not employed with a company might count as an agency worker because he had been supplied by a training provider. The provisions in the regulations exempting trainees would not apply, so this particular trainee would be entitled to the national minimum wage, unlike his fellow trainees employed directly by the company. However, I should stress that such a reading of the law would rest on a rather obscure legal technicality and be counter to a common-sense understanding of what the law intends. Since this point did not impinge on the main intention of the new regulations, noble Lords approved them in July of last year.
In summary, the two sets of regulations before the House will contribute to the ability of employers and workers in Great Britain to operate more effectively when dealing with matters of employment law. The part-time amendment gives employers and workers greater scope to settle disputes in a spirit of partnership. The national minimum wage amendment puts right a particularly tricky piece of legal drafting. I hope that my explanation of the need for and the effect of these changes has been helpful to noble Lords. I commend the two regulations to the House.
Moved, That the draft regulations laid before the House on 26th February be approved [9th Report from the Joint Committed].—(Lord Sainsbury of' Turville.)
1.34 p.m.
Lord Burnham: My Lords, I welcome the Minister to the House to present this "mish-mash" of regulations. I hope that the House will excuse me if I suddenly begin to refer to the Channel Tunnel and limited liability at an inappropriate moment. I notice that the Benches behind me are absolutely crowded!
I thank the noble Lord for his explanation of these two orders. We understand why Her Majesty's Government wish to exempt people on government training schemes. That is perfectly acceptable. However, there are one or two matters on the subject of part-time workers which, while being acceptable, need to be looked at.
I believe that this is a demonstration of the gold-plating of regulations to ensure that employers provide to part-time workers who believe that their pay and

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conditions do not match pro rata those offered to comparable full-time staff written statements outlining their reasons. The British Chamber of Commerce has warned that because,
"such statements would be admissible as evidence in any consequent litigation, employers would be forced to seek legal advice, even if they have grounds for justification".
Here again we are putting yet another burden on employers, in particular small employers. The requirement to provide statements will prove costly and time-consuming and is not a requirement of the European directive. It is a blunt instrument that could fall as heavily on firms that offer their part-time staff equal pay and conditions as on those more unscrupulous employers who do not.
Once again, the Government are guilty of gold-plating EU directives and imposing unnecessary burdens that small firms will find it difficult to shoulder. We do not believe that there is widespread unfavourable treatment of part-time workers. Job satisfaction among such workers is higher than among full-time workers. The 1998 Workplace Employee Relations Survey found that,
"part-time employees were much more likely to regard themselves as being fairly treated than were full-time employees—61 per cent compared with 45 per cent".
I appreciate that these may be only minor niggles to be set against the enormous amount of extra legislation and orders which are being imposed. However, having said that, we are happy with the regulations as they stand.
1.37 p.m.
The Earl of Erroll: My Lords, I should like to make three brief comments from these Benches, which I notice are the most crowded. First, I wish to flag up a growing concern that the minimum wage might be extended to apply to people working, for example, as house sitters. They are not working as such, but are doing what they would do at home—watching television and walking the dog. In some cases, such people are glad to have a free roof over their head. They have minimal outgoings. They can bank virtually all the money they receive because their expenses will be limited to buying shampoo and such like. At the end of a week, they may well be able to save a great deal more money than a commuter in a proper job who has to meet the costs of the outgoings in a normal dwelling place.
I read somewhere that it has been proposed that house sitters should be paid the minimum wage for 24 hours a day because they are on site for that time. The wage of £4.10, paid for 24 hours a day over seven days would come to £98.40 a day, which would total a weekly wage of just under£700. That is absolutely ridiculous. Many people are grateful to secure such employment because they are not particularly qualified to do anything else and it is a pleasant existence. I have never employed a house sitter; nor do I intend to do so. I have no direct interest in the matter. However, I know some people who work as house sitters.
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There are similar occupations in which these circumstances apply. I refer to when a person is not undertaking a hard job of toil, but rather is sitting down and watching television. He or she is required simply to be present in the building. To apply the minimum wage to such people prices their services out of the market. It will remove a source of pocket money for a certain group.
In the name of common sense, we must retain exceptions for certain types of personal employment. If we do not do so, we shall simply increase the black economy. I appreciate that this point may not relate strictly to the regulations before us, but I wished to give voice to a matter that is of concern and affects many ordinary people. I do not expect a specific reply.
Secondly, we have encountered problems with the minimum wage. Our personal experience is that suddenly we have had to look at the effectiveness of our workers. Before, you could allow someone to potter around cleaning, not very effectively, or potter around the garden because they enjoyed doing it, and so on. Now, the minimum wage is inflating everything and we are having to look at restaffing because it is too expensive. We now need people who are effective, who know what they are doing, who have a proven track record and so on. I am afraid that that is the reality and that it will happen more and more. So, again, the regulations are removing some people who would love to have an occupation from a place where they could have an occupation.
Thirdly, in regard to part-time rights and all the business of going to tribunals and so on, we have already been done for this. We had someone who was disruptive working in the house. Matters eventually blew up into a major row. She had been switched from one task to another because she did not like carrying out the first, and in trying to accommodate her we ran over the one-year limit. She threatened to take us to the industrial tribunal, and the legal advice that we were given was that it would be cheaper to settle by paying her£3,000.
What will that do to the people who stay behind? They will look at the situation and realise that if they create trouble they will get a quick hand-out of three thousand quid when they leave. It is a quick way of stinging a small employer who cannot afford this kind of thing.
It is entirely unfair and ridiculous, and it is disruptive to the workers who stay behind. All it does is hand a licence to print money to people when they go. I know people who know that their current employees are deliberately doing this at the moment in order to wind them up to ensure that they get a handout when they leave. I know this has happened in other places. I wanted to make that comment about these gold-plated regulations, of which I disapprove.
Lord Sainsbury of Turville: My Lords, I would not want to claim more for these regulations than they touch on. In the case of part-time workers, they simply enable ACAS to attempt conciliation in an informal way rather than going through an employment tribunal. I hope that the House will agree that arriving at an informal settlement is an excellent way of resolving disputes, regardless of how we feel about the part-time regulations. They seem to me to be very sensible; they have been handled well and have reduced the number of queries.
As to the national minimum wage, the regulations concern a specific technicality in regard to trainees. Whatever house sitters are, I do not believe that they come into the category of trainees. They are not even particularly affected by the changes to the national minimum wage that we have introduced; they simply come under the original legislation.
The debates that took place then were about whether or not a national minimum wage would lead to greater unemployment because some jobs would no longer be economic. The reality is that, since the legislation has come in, employment has increased; there is no evidence whatever that it has led to unemployment.
As to the effectiveness of workers, it is desirable that people should always look at the effectiveness of workers to ascertain whether they are being productive. I think that I have answered the questions. I commend the regulations to the House.
Lord Burnham: My Lords, before the noble Lord sits down, perhaps he could answer a personal query. I had extensive experience of ACAS and its conciliation methods—which were extremely helpful but never successful—in the 1980s. Does the Minister feel that these regulations add anything new to what we were doing then?
Lord Sainsbury of Turville: My Lords, they allow conciliation to take place. Above all, they now allow the worker involved to give up the rights that he has under this legislation. He previously did not have those rights, which made matters more difficult. The regulations will make a difference. The process involves ACAS—it is voluntary; no one has to follow it—and these regulations will be helpful to that process.
On Question, Motion agreed to.

Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2001
1.43 p.m.
Lord Sainsbury of Turville: My Lords, I beg to move.
Moved, That the draft regulations laid before the House on 26th February be approved [9th Report from the Joint Committee].—(Lord Sainsbury of Turville.)
On Question, Motion agreed to.

Offshore Combustion Installations (Prevention and Control of Pollution) Regulations 2001
1.43 p.m.
Lord Sainsbury of Turville Lord Sainsbury of Turville rose to move, That the draft regulations laid before the House on 26th February be approved [9th Report from the Joint Committee].
The noble Lord said: The regulations before the House today apply the provisions of EC Directive 96/61 on integrated pollution prevention and control—commonly referred to as the IPPC directive—to offshore oil and gas combustion installations. These regulations follow on from similar regulations last year implementing the IPPC directive for onshore emission sources. Both sets of regulations are made under the Pollution Prevention and Control Act 1999.
The purpose of the directive—and, consequently, of these regulations—is to enhance the protection of the environment as a whole by preventing or reducing emissions of pollutants to air, water and land. While the primary intention of the directive was to introduce controls on onshore sources, there are a number of large offshore oil and gas installations that require their own power generation plant in order to operate. These regulations therefore seek to introduce a similar level of environmental protection for offshore power production plant.
Unlike the onshore regulations, there is no existing system of permits on which to build. The regulations therefore set in place a new permitting system to meet the requirements of the directive. Under the regulations, operators of offshore combustion installations will require permits to be issued by the Secretary of State to cover the emissions from combustion installations; that is, gas turbines and diesels used for generating electricity or to power pumps and similar equipment.
The purpose of permits is to introduce controls that will prevent or reduce pollution to the air, water and land (which, in this case, is the seabed), but mainly to air. Operators will be required to apply the principle of best available techniques, which, of course, takes proper account of the need to make an appropriate assessment of the costs and environmental benefits of introducing such techniques.
In this respect, there are of course factors peculiar to the situation offshore that will have to be considered. not least the harsher operating conditions and the space restrictions on offshore platforms. There is also the fact that the quality of the fuel gas used can vary greatly as offshore platforms make use of the unprocessed gas produced as part of their operation. Such "raw" gas restricts the technology that can be applied to control emissions and the harsher environment and space limitations have an obvious effect on the cost implications for introducing such technology.
Initially, permits will be required only for new combustion installations exceeding a specified thermal threshold—which is 50 megawatts—or for existing combustion installations which undergo substantial change. Existing combustion installations which do not undergo substantial change will not need permits until late in 2007 in accordance with the provisions of the directive.
One of the main comments arising out of the consultations was what constitutes "substantial change". This is defined in the directive—and therefore in the regulations—as a change in operation which may have significant negative effects on human beings or the environment. In considering whether substantial change has taken place, it is necessary to review any changes to emission levels and their consequent impact on the environment. Where the impact is negligible or obviously minor, the substantial change provisions will not be invoked.
The cost of implementing the regulations has been extensively discussed with the United Kingdom Offshore Operators Association and the regulatory impact assessment reflects the best assessment that the Government and the industry could jointly make.
We believe that the regulations, which are a product of extensive consultation, strike a proper balance between protecting the environment and ensuring that the legitimate concerns of the offshore oil and gas industry have been addressed. I commend the regulations to the House. I beg to move.
Moved, That the draft regulations laid before the House on 26th February be approved [9th Report from the Joint Committee].—(Lord Sainsbury of Turville.)
Lord Burnham: My Lords, I thank the Minister for that explanation. When these regulations were debated in another place, a number of queries were raised by my honourable friend Mr Gibb; however, I believe that the Minister, Mr Hain, gave entirely satisfactory answers. Therefore, I have nothing to add. I join the Government in commending the regulations.
Lord Biffen: My Lords, I owe an explanation to the noble Lord, Lord Sainsbury, and to your Lordships generally. My late arrival was occasioned by my having spent four hours this morning in a dialysis chair. None the less, I am pleased to have arrived in time to make a brief observation. I apologise for not giving notice of this to the Minister.
These provisions have been widely discussed within the industry by the offshore operators. To what extent have we kept in step with, and consulted, our partners in Norway—partners in the sense that they share in the offshore exploitation of the North Sea? Do they have broadly similar provisions, so that there is no question of there being a significant difference in the operating regimes in the North Sea between those countries that are members of the European Union and those that are not?
Lord Sainsbury of Turville: My Lords, I thank the noble Lord for raising that point. Norway, too, is concerned to reduce emissions and is pursuing that end through its own measures, independently of the European Union directive. Therefore, I do not see that these provisions will have any effect on competitiveness. I commend the regulations to the House.
On Question, Motion agreed to.
House adjourned at eight minutes before two o'clock.