HL Deb 29 March 2001 vol 624 cc520-34

9.49 p.m.

Lord McIntosh of Haringey

rose to move, That the draft order laid before the House on 16th March be approved [11th Report from the Joint Committee].

The noble Lord said: My Lords, I shall explain the purpose of the order, mention some of its key features and draw the attention of the House to some of the key exemptions. In my view, the provisions of the order are compatible with the convention rights within the meaning of the Human Rights Act 1998.

Section 21 of the Financial Services and Markets Act restricts the promotion of financial services unless they are made or approved by an FSA-authorised person. The order defines which financial services are to be subject to that restriction. That is in Schedule 1 to the order.

The order also defines the circumstances in which promotions are exempt from the restriction. There are 60 different exemptions, in some cases applying to the person making the promotion—for example, a passive communicator of data such as the Post Office—and in others to promotions made to certain persons, such as investment professionals. Whether, and to what extent, many of the exemptions apply depends on whether the promotion has been sought by its recipient; in the language of the order, that depends on whether it is solicited or unsolicited. The immediacy of the promotion—again, in the language of the order—depends on whether it is in real time or non-real time.

First, the order consolidates existing restrictions on financial promotion. There is a single restriction on financial promotion under the Act, and a single set of exemptions under the order. Secondly, the order reflects the pace of legislative and technological development. It focuses on the content of a communication rather than on the medium through which it is made. That means that it will not become outdated as new methods of communication are used to promote financial services. As secondary legislation, the order can be updated relatively easily. However, noble Lords should be clear about the fact that any proposal to extend the financial promotion restriction in circumstances in which it did not previously apply will require a statutory instrument subject to the affirmative resolution procedure. Unlike some of the legislation that it replaces, all the boundaries of the financial promotion restriction will be set by Treasury Ministers, who are accountable to Parliament, rather than by the regulator. Thirdly, the order maintains, broadly speaking, the scope of the existing financial promotion regimes.

Let me turn now to two of the key exemptions under the order. The first of these is our proposed exemption for journalists. That has been the subject of much comment. Let me take this opportunity to consider a couple of its aspects. First, it is, as I have just said, an exemption. What we have done is to exempt promotions by journalists precisely because we do not think that it is the role of financial services legislation to regulate responsible financial journalism. As the beneficiaries of an exemption, journalists will not be subject to the financial promotion restriction. That point has often been lost.

Particular attention has been paid to a condition that we have set for the exemption to apply; namely, that, if a journalist promotes a share in which he or she has an interest, that interest is required to be declared. It is a condition for the exemption to apply. It is not in any way a control on what journalists write. Nor will the condition even impinge on a journalist when he merely writes about a company, even if he has shares in that company. The condition will need to be met only if a journalist makes a promotion; that is, an invitation or inducement to engage in investment activity and he or she is likely to—not just "may"—benefit financially.

The Government's objective in introducing the condition for disclosure of interest by journalists was to ensure that consumers were not misled by promotions by a journalist of shares in which the journalist has an interest. That objective remains. We have also made it clear that we will consult further on how that objective can be achieved; there are other ways of achieving it in addition to the disclosure condition that is in the order. In particular, following consultation with the Press Complaints Commission, the Government are satisfied that new guidance on the PCC's code of practice, which was published on 19th March, will adequately protect consumers from being misled. The order now reflects that view. Having spoken to the noble Lord, Lord Wakeham, earlier this evening, I can confirm that that is the PCC's view. It also disapplies the condition for any publication that has systems and procedures in place to prevent promotions without a disclosure of interest. I should make clear that, in light of our commitment to further consultation, we welcome discussion with other relevant regulatory, or self-regulatory, bodies on that issue. Indeed, discussions have already started.

We have made some important exemptions affecting the territorial scope of the financial promotion restriction. We seek a regulatory framework that does not put in place unnecessary or over-burdensome barriers to cross-border financial promotions. In the EU context, that means a "home state" regime, regulation by the UK of promotions from the UK to overseas but no additional restrictions on promotions from other members states to the UK.

The Government have listened to a large number of representations that moving now to a system of home state regulation, in the absence of moves to do so elsewhere, would be over-burdensome in imposing dual regulation on UK firms. We have therefore provided an exemption for most promotions from the UK to overseas. However, I should make it clear that our commitment to a home state regime remains. We will seek this House's approval of legislation to implement a home state regime as and when that is developed. In particular, we will as necessary seek approval to amend this order to implement the forthcoming e-commerce directive before it comes into force next year.

We will also impose a home state regime if it is clear that that is required for reasons of consumer protection. We would if necessary seek approval to amend this order to require all promotions to a certain country or of a certain type to be approved by an authorised person.

As I said at the outset, there are 60 exemptions to the financial promotion restriction. I do not want to try the patience of the House by describing all of them. I have restricted detailed comments to how we have proceeded in respect of journalists and on territorial scope and I hope that is acceptable to the House. I commend the order to the House.

Moved, that the draft order laid before the House on 16th March be approved [11th Report from the Joint Committee.]—(Lord McIntosh of Haringey.)

10 p.m.

Lord Hodgson of Astley Abbotts

My Lords, I thank the Minister for his explanation of what is a complex and far-reaching order. I begin by declaring an interest. I am a director of the Securities and Futures Authority, one of the self-regulatory authorities that is going to be swept up in the new Financial Services Authority. My term of office ends on 31st March—two days from now—but as of this moment I remain a director.

I have a couple of specific points on which I should like the Minister's clarification. However, in view of the volume of statutory instruments, and particularly the length and complexity of this one relating to the Financial Services and Markets Act, perhaps I may seek his view on just one brief general point.

The regulatory objectives of the Act are set out in Section 2(2) as being, inter alia, the establishment of market confidence and the protection of consumers—both worthwhile objectives. But it lays on the authority a number of other requirements, notably in Section 2(3)(d): The desirability of facilitating innovation in connection with regulated activities". and paragraph (e), the international character of financial services and markets and the desirability of maintaining the competitive position of the United Kingdom". This statutory instrument alone is 74 pages long and we must constantly think how we are reconciling those sets of objectives. I tabled a Question today to the Minister asking him how many statutory instruments we will need to pass through before N2 comes about in October and how far we are through that process.

The volume of legislation now hitting financial services is very great. By and large, I am not concerned about big firms; they can look after themselves. If necessary, they will just decamp and leave London. But I am concerned about small firms; and for a small firm to try to pick the bones out of this legislation, let alone the many other instruments coming through, is a grave task indeed. Smaller firms have been the City's lifeblood. They are the ones which often provide new approaches and new services and, as such, they nip competitively at the heels of their larger, lumbering brethren.

But for the most part regulators do not like smaller firms; they represent risk. Above all, they represent risk to the regulator's career when things go wrong. It is much easier to deal with fewer and larger firms which can be more easily regulated. The general view of regulators is to put up a high barrier and have a bias to say "no". If that means that small firms are put out of business, are not formed, or do not begin, so much the better.

Against the background of this instrument, which is complicated and difficult to understand, and the volume of others coming through, I take the opportunity to urge the Minister to keep the issue of preserving London's competitive, innovative edge, as required by the Act, at the forefront of his mind as the flood of statutory instruments continues and, where possible, to restrict, reduce and eliminate them. I hope that during the course of the next few months the Minister will not mind if I remind him of that from time to time.

I turn to the specific statutory instrument before us. I want to ask the Minister about the cold-calling provisions. Cold-calling is the uninvited or unsolicited attempt to sell securities to individuals. It is a pernicious practice which can permit the greedy and predatory to prey on the innocent and unsophisticated. I am pleased to see that the statutory instrument contains the concept of the certified high net worth individual. That is a welcome flexibility which allows people who know what they are doing in the securities markets to be approached with plenty of opportunities.

I turn to the non-expert individual and refer to article 6(a), which relates to approaching individuals. The market practice tends to operate in the following way. An individual salesman will call a non-expert and invite that person, not to buy securities or any financial instrument, but merely to meet the salesman for a cup of coffee to discuss his financial affairs. The salesman will take the initiative that the meeting never takes place in the individual's house; he will ensure that the individual is asked to come somewhere, so he has made the effort to travel. It is only then, when the individual has made that move that any transactions are entered into or attempts to sell are engaged in. That practice is not dissimilar to some of the pernicious ways in which timeshares were sold.

It is difficult to understand whether invitation or inducement to engage in investment activity in article 6(a) covers cases of that nature. Would it cover the case where a neutral telephone call is made, as a result of which an individual goes to meet a salesman for a cup of coffee and activities selling financial services follow? If not, there is a potential major hole in the statutory instrument.

I refer the Minister to Article 36(b), which relates to activities conducted in other states within the European Community. This relates to telephone calls into the United Kingdom under the host state regulation, to which the Minister referred in his opening remarks. Some of the worst problems of cold-calling in the UK markets have occurred from boilerhouses established in Amsterdam, in which there are batteries of telephones with salesmen operating on innocent people in the United Kingdom. Those have now largely been closed down. However, they have moved elsewhere. There is evidence of similar operations in Athens. I am not clear whether under the host state regulation we shall be able effectively to protect unsophisticated UK investors from practices of that nature coming from within another member state of the European Union.

Finally, I turn to Article 62 which deals with the operation of a lighter regulatory regime on the sale of a company with a small number of shareholders. Article 62(3)(c) refers to the lighter regulatory regime being available where the shareholders include a group of connected individuals. That is defined in Article 62 (4)(a)(i) as including a director or manager of a body corporate. I want to know of the Minister why that definition does not include the word "employee", too. It would then read, a director, manager or employee of a body corporate". In such cases we are now often considering not management buy-outs but employee buy-outs where large numbers of staff participate in the purchase of a firm and in due course want to realise that investment at a profit. The regulations as drawn mean that an employee buy-out, where a large number of employees own the shares, would not be able to take advantage of the lighter regulatory regime offered in Article 62.

I am sorry to have spoken at length and in such detail. I understand that the Minister may want to write to me subsequently because I have raised detailed questions. However, they are important matters for the City of London, for the firms which work there, and, last but not least, for the investors and the clients who use those services.

Lord Taverne

My Lords, the Act is long and complicated and the order is detailed. Fortunately, it is not very controversial. It was not very controversial in the other place and, subject to a number of questions being asked, I trust that it will not be very controversial here.

It seems to me that the Act is being implemented in a sensible way, as one would expect from the FSA in its present form. It is sensible that three sets of regulations should become one. The new exemptions appear to be sensible: the high net-worth investors; the mere conduits; the exemption of communications by content not the medium; and the exemption of journalists.

I have only one question to ask the Minister. It relates to Article 12, the issue of territorial scope. I am not quite clear where we are on the question of mutual recognition. I understand that if there is no mutual recognition, we do not regulate promotions from the UK to overseas in order to avoid a dual burden. I also understand that if there is dual recognition, we do regulate it but we do not regulate promotions from overseas into the United Kingdom. Is mutual recognition a regime which will come into being in total when everyone has the necessary regulation, or will it be introduced gradually? If so, how will it work? How will the regulations be amended?

I am a little puzzled by one comment the Minister made. He said that the Government will also impose a home state regime if it is clear that that is required for reasons of consumer protection. Does he mean that even if the system of mutual recognition is generally in place we shall disregard it because we believe that one of the members of the EU does not have an adequate system of home regulation? Is that what it is about? That seems to be totally contrary to the spirit of mutual recognition as it is envisaged for financial services. I did not understand that phrase in the Minister's speech and I should be grateful if he could explain it.

Lord Kingsland

My Lords, we are pleased to see that the Government have responded positively to a number of suggestions in respect of their earlier draft. However, there remain some outstanding matters which give us cause for concern.

As with the previous orders, my approach will be to propose particular amendments that I would have tabled had the rules of your Lordships' House permitted me to do so. I comfort myself with the knowledge that the Government have allowed themselves enough time to produce a further revised order to accommodate the amendments that I propose.

I turn first to Article 12. We welcome the Government's decision to drop the home state regulation of financial promotion communications where they are received outside the United Kingdom. We also accept the need to place some restriction on unsolicited real time communications, or, more colloquially, cold calls.

However, the exemption for cold calls to overseas recipients still depends on the communicator not carrying on the same business in the United Kingdom. If he does, he is prohibited from making them. We believe it is irrelevant that the communicator carries on the same business in the United Kingdom. If he does so, he is likely to be authorised under the FISMA, in which case the financial promotion restrictions would not apply at all. The importance of widening the exemption is that a financial services firm making a communication from outside the United Kingdom would not be subject to the FSA's financial promotion rules if, as the FSA has indicated, it will not apply those rules to exempted financial promotion communications.

Alternatively, a person may lawfully be carrying on in the United Kingdom a business which involves controlled activities to which the financial promotion restrictions apply, even if he is not authorised under the FISMA. That is because a controlled activity includes not only regulated activities but also activities which would be regulated activities apart from any exemption. Even if an exemption from the need for authorisation applies, the communication may thus, none the less, still be a communication relating to a controlled activity—and so subject to the financial promotion restrictions.

Accordingly, in paragraph (2)(b) of Article 12 the words, and which is not carried on in the United Kingdom", should be deleted.

We also accept that there should be proper procedures to prevent the accidental transmission of exempted communications to non-permitted recipients in the United Kingdom. However, as the prohibition is extended to dealings with close relatives, or group companies, it is important to restrict the prohibition so that it applies only in relation to the communication concerned. For example, a group company may be entitled to make its own communications to the recipient if it was previously a client. Accordingly, in line 3 of Article 12, after the expression, engaging", we propose the insertion of the expression, (as a result directly or indirectly of that communication)". We agree that a communication will still he treated as directed only at persons outside the United Kingdom, even if it is also directed at permitted recipients in the United Kingdom. However, we believe that it would make much more sense to the reader if it is made clear in the order that the permitted recipients are in the United Kingdom. Accordingly, in line 2 of sub-paragraph (a) of paragraph (5) we recommend the deletion of the expression, falling", and the substitution of, who are in the United Kingdom and fall". Similarly, in sub-paragraph (b), after, high net worth persons", we propose the insertion of, in the United Kingdom". The condition that a communication must not be acted upon by persons in the United Kingdom is supposed to be amended by paragraph (6) of Article 12 so as to allow for the fact that permitted recipients in the United Kingdom may none the less act on it. However, sub-paragraph (b), on its true construction, means that the communication must indicate that it cannot be acted upon by persons who are not permitted recipients, even if those persons are outside the United Kingdom. Instead of extending the prohibition to cover non-permitted recipients outside the United Kingdom, the prohibition should apply only to these non-permitted recipients if they are in the United Kingdom.

In other words, the good intentions of paragraph 6(a) are undermined by the unintended drafting effect of paragraph 6(b). As things stand, the paragraph now covers only individuals outside the United Kingdom if they are high net worth persons.

Accordingly, we propose in sub-paragraph (a), line 2 of paragraph 6, after, all persons". to insert, inside the United kingdom", and in sub-paragraph (b) to make the following amendments: (a) in line 2, delete, or by", and substitute, unless they ale"; (b) in line 3, delete, do not"; (c) in line 4, delete, not". I turn now to Article 13. The exemption here applies to communications made by a recipient of an investment service. It should cover corporate venturing—for example, advertising the fact that the communicator has money available to invest in startups. That is something which we know that the Chancellor of the Exchequer wants to promote. If in the Minister's view the exemption is not wide enough to cover corporate venturing, we urge that such an exemption is provided.

So far as concerns Article 15, we do not understand why the exemption for communications consisting of introductions to FISMA-authorised or exempted firms only applies to so-called real-time communications. If the exemption is so restricted, it means that. if someone writes a letter to effect the introduction, he will be committing a criminal offence. The previous draft of the order did not have any such restriction.

I turn to Article 18. It is sensible to provide an exemption to those who merely publish communications written by someone else, such as newspapers and Internet servers. However, the exemption should apply even if the principal purpose of the business carried out by the conduit is not, as presently required, transmitting or receiving material provided by others—for example, a newspaper or Internet server, such as Reuters, communicates both its own news items and information supplied by other persons.

We also believe that two other conditions to this exemption are too restrictive. Clearly, the communication should be mainly devised by someone other than the conduit. However, to say that it must be wholly devised by that other person may mean that the exemption will not apply if the conduit—for example, for reasons of space—changes only one or two words. Moreover, although it is right to provide that the conduit should only exercise control over the contents of a communication in certain specified cases. it must be inappropriate to provide that acting at the request of a regulator should only provide an exemption where the regulator is actually empowered to make the request. That would throw the risk of a regulator acting beyond its powers wholly on the conduit which, surely, the Minister must agree, is unfair.

Accordingly, we ask the Minister to make the following amendments to Article 18: first, in paragraph 2(a), line 1, delete the words after, carried on by him". and, in paragraph (2)(b), delete the words, wholly devised by another person and substitute, mainly devised by another person who is identified in it and the communication clearly identifies that that is the case". Secondly, in paragraph (3)(b), line 1, after "which", we propose the insertion of, that person reasonably thinks". I now turn to Article 30. This is an exemption allowing persons outside the United Kingdom to respond by telephone, or, as they say nowadays, other real time communication, to persons in the United Kingdom who have asked him to contact them. However, as currently written, the exemption does not apply if the overseas communicator carries on the same investment activities from a UK branch. This means that, if he has a UK branch, he cannot carry on a conversation with a person who telephones him from the United Kingdom, even if the financial promotion relates to his non-UK business. We do not understand why somebody who is outside the United Kingdom cannot talk to somebody who is inside the United Kingdom, and who wants to talk to him. merely because he is carrying on the same activity in the United Kingdom.

Accordingly, in the definition of "overseas communicator", we propose to delete everything after "means a person who" and to substitute "makes the communication", and then move down after "communication" the last two lines of paragraph (1).

Your Lordships will be relieved to hear that my final remarks are addressed to Article 48, which concerns high net worth individuals. The exemption for communications to certified high net worth individuals should be expanded to apply to communications to recipients who, the communicator reasonably believes, meet the financial tests for high net worth. This is the only way to ensure that the communicator does not commit a criminal offence when he tries to find out whether the recipient falls within the exemption. If the exemption applies only if he really is a certified high net worth individual, the communicator will be committing a criminal offence if he gets it wrong—because experience shows that most high net worth individuals will not, without knowing what the investment opportunity is all about, want to indicate that they are, indeed, properly certified.

Accordingly, in paragraph (1)(b) of Article 48, we suggest the deletion of the word "certified" and the substitution of, person the communicator reasonably believes to be a", and after "individual" the insertion of, because he falls within paragraph (3)(c)(i) or (ii)". In addition, at the end of paragraph (1)(d), I suggest the insertion of, and (e) results in the recipient engaging in the investment activity referred to in it if he signifies to the communicator that he is a certified high net worth individual". The certificate has now been amended so that it relates to future promotions. However, the change has not been made throughout the certificate. Accordingly, further changes ought to be made to paragraph (2)(b) to that effect. Article 50, which deals with so-called sophisticated investors, ought to be amended to the same effect.

I apologise for inserting so many oral amendments in my remarks, but it is a sad fact that your Lordships are unable to amend orders. In these days of skeleton legislation, often the most important rules appear not in the Acts themselves but in the regulations. I hope that one day your Lordships will think that these matters are sufficiently important to change the rules of the House so as to permit amendments in the circumstances of tonight's order.

10.25 p.m.

Lord McIntosh of Haringey

My Lords, I am grateful to all noble Lords who have taken part in this debate. Perhaps I may begin by saying to the noble Lord, Lord Hodgson, that I very much appreciate and sympathise with the point he made about small firms and the need for them to be given an opportunity to understand the regulations to which they are subject. If I then go on to say that we have already tabled 15 statutory instruments and that there are likely to be a further 50 instruments, I do not think that he will be much reassured.

I am not sure that I agree with him that regulators tend to fear that infringements will be made by small firms. If I think of some of the debacle regulations under the previous regime, I first call to mind BCCI and Barings rather than any small firms which may have committed infringements. That may not give the noble Lord much comfort, but in my view that is the truth of the matter.

The noble Lord asked me about Article 6(1) concerning cold calling. I understood him to say that he was appreciative of the definition of high net worth, although I do not believe that the noble Lord, Lord Kingsland, was appreciative in the same way. He asked me how cold calling would qualify in the case of an invitation to what appeared to be a neutral meeting outside the recipient's premises. According to the definition of when a call is solicited, it is solicited only if it is clear that the meeting has been requested by the customer, who knows that financial promotions are going to be made during the meeting or conversation. That is made clear in Article 8(3)(b) of the order.

The noble Lord also asked about Article 36(b) which concerns the protection of UK investors from other states in the European Economic Area. The article makes it clear that any promotion of that kind has to conform with FSA financial promotion rules which will provide the appropriate safeguards. I do not know the answer to his question about Article 62 as regards whether employees are included. I shall write to the noble Lord on that point.

I am grateful for what was said by the noble Lord, Lord Taverne. Clearly he has picked up one of the most important aspects of this order; namely, the question of the move towards home state from host state regulation. He asked me why I should have said that we would consider introducing home state regulation for the sake of consumer protection. If I understand his thinking, he is right to say that we are considering here a gradual move rather than an all-in-one move towards home state regulation.

On the issue of consumer protection, only when it is clear, for example, with "boiler room" operations from the United Kingdom, would we require these communications to be approved. We are dealing not only with EU member states in this regard, but also with promotions from third countries. The UK may not be able to question the adequacy of a regime set up under a Community instrument. It might want to scrutinise the adequacy of the regime in a third country.

I believe that I have already dealt with the issue of mutual recognition and how it will come in gradually. However, we want to manage the transition in a way which continues to protect UK consumers, to minimise the burden on business of double regulation and. as I said, to take into account the position of non-EU countries.

I shall turn now to the points made by the noble Lord, Lord Kingsland. I must say that, while I have heard of manuscript amendments, I do think that oral amendments go a little further. I think that the noble Lord will understand if I say that, to listen to amendments produced in such a way, does not encourage me to believe that I can understand them as fully as he would wish.

I have to make it clear at the outset that we intend this order to proceed as drafted. The noble Lord's comments and his oral amendments are on record in Hansard; I have no doubt that the appropriate authorities will pay attention to them. I shall try to respond to the points he made, if not to their drafting.

The noble Lord spoke, first, about the need for restrictions on cold calls; on unsolicited real-time communications. He suggested that the exemptions for cold calls to overseas recipients still depend on whether the communicator conducts the same business in the United Kingdom. Where unsolicited real-time communications are by a promoter who does no UK business and the recipient is also not in the UK, then, although the promotion may be, capable of having effect in the UK"— perhaps because it relates to a UK investment—it is indeed exempt.

But where a promotion is made from outside the UK, is not directed at the UK but the promoter does do business in the UK, issues of consumer protection arise. A complete exemption would allow UK firms, or firms which operate in the UK, to avoid UK regulation simply by promoting UK products from a branch in another country. We do not think that that is acceptable. I would not accept the noble Lord's amendments on that basis.

The noble Lord, Lord Kingsland, then said that he hoped that Article 12 would provide that a communication would be treated as directed only at a person outside the United Kingdom even if it were directed at investment professionals and persons of high net worth. I can confirm that a communication can still be regarded as not directed at the United Kingdom even if it is directed at investment professionals and high net worth companies—but not high net worth individuals—in the United Kingdom. I can further confirm that Article 12(6)(b), on which the noble Lord suggested there was some doubt, should not be construed as meaning that promotion to investment professionals and high net worth companies outside the United Kingdom are outside the exemption for promotions to recipients outside the United Kingdom.

The noble Lord queried the drafting of the territorial provisions in rule 3(4) of the FSA rules. Section 145(3) of the Act—which he called skeleton legislation but I do not think anyone who was involved in the legislation last year would call it skeleton legislation—prevents the FSA from making financial promotion rules for authorised persons other than in circumstances in which, if the person were not authorised, he would contravene the financial promotion restriction. If the current draft of the FSA rules do not meet its requirement, they will have to be amended.

As to Article 13 and corporate venturing, I wish to make it clear that Article 13 is not intended to cover corporate venturing. The exemption in the article applies to communications made to one other person only.

Article 15 refers to an exemption for communications which consist of introductions to firms authorised or exempted by the Financial Services and Markets Act applying only to real-time communications. That is because there is a separate exemption in Article 28 for one-off communications, which should cover introductions to firms, which applies to all non-real-time communications.

The noble Lord suggested that the exemption in Article 18 should apply even if the principal purpose of the business carried on by the conduit is not that of transmitting or receiving material provided by others. Those who pass on promotions should exercise some due diligence in ensuring that the promotion is either exempt or has been approved by an authorised person. Organisations such as the Post Office or Freeserve, whose principal purpose is transmitting or receiving material provided by others, cannot he expected to undertake such due diligence for information which they transmit, but that does not apply to companies which, although they do not exercise control, are not merely passive transmitters. We think that it is appropriate that such companies which do not meet the principal purpose test should be required to operate a degree of due diligence or restrict their promotions to those who fall within one of the other exemptions.

The noble Lord suggested that the communication should be devised by someone other than the conduit—in other words devised wholly by the other person. He said that the provision could mean that the exemption could be challenged. What matters is the extent to which the communicator, under the provision in Article 18 in respect of promotion, selects, modifies or otherwise exercises control over its content. This could only be considered on a case by case basis. But if a communicator is more than a passive transmitter of information, then he is not a mere conduit.

The noble Lord suggested that it is inappropriate that in certain cases we provide that acting at the request of a regulator should provide an exemption only when the regulator is empowered to make the request. If the mere conduit acts reasonably in responding to the request of the statutory body but it later turns out that the body did not have the power to make the request, the mere conduit would be able to rely on the defence in Section 25(2)(b) of the Act: that he took all reasonable precautions and exercised all due diligence to avoid committing the offence". The noble Lord then referred to Article 30 and queried why someone who is outside the United Kingdom cannot talk to someone who is in the United Kingdom just because the person outside the United Kingdom is carrying out the same activity within the United Kingdom. Articles 30 to 33 essentially replicate the position for overseas communicators in previous legislation. There is a risk of persons doing business in the UK avoiding UK regulation if they can simply locate their promotional activity in another country. People outside the United Kingdom who are also doing business in the UK can, of course, take advantage of all the other exemptions.

The noble Lord queried in some detail the definition of, certified high net worth individuals in Article 48. The whole point is that it is selfdefinition—that those who have chosen to be certified should receive these promotions, not all high net worth investors. Those who do not want them do not need to have them, because they do not need to go through the certification process. So we propose to retain the requirement that a third party should certify and that certification should be a prior condition for receiving a promotion. The same applies to sophisticated investors.

I hope that that has covered the majority of the detailed points raised by the noble Lord, Lord Kingsland. I do not believe that he has dented the wording of the regulation and I commend it to the House.

On Question, Motion agreed to.

House adjourned at twenty-two minutes before eleven o'clock.