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Lord Lucas moved Amendment No. 130:


Page 16, line 28, leave out ("this section") and insert ("subsections (2) to (4)").

The noble Lord said: I shall speak also to Amendment No. 132. Amendment No. 130 clarifies those subsections of Clause 32 to which trustees must have regard when they are making investment decisions themselves. The specific requirements for those trustees are contained in subsections (2) to (4). The amendment removes the reference to the whole clause and substitutes the relevant subsections.

Amendment No. 132 clarifies who may give proper advice when trustees make or hold investments which are outside the scope of the Financial Services Act 1986. I beg to move.

On Question, amendment agreed to.

[Amendment No. 131 not moved.]

Lord Lucas moved Amendment No. 132:


Page 17, line 12, at end insert ("and to have the appropriate knowledge and experience of the management of the investments of trust schemes").

On Question, amendment agreed to.

Clause 32, as amended, agreed to.

[Amendment No. 133 not moved.]

Baroness Dean of Thornton-le-Fylde moved Amendment No. 133A:


After Clause 32, insert the following new clause:

("Custody of investments

.—(1) Unless the Authority agrees the contrary, the trustees or managers of an occupational pension scheme or a personal pension scheme must secure that investments held for the purposes of the scheme are held in accordance with an agreement, made between the trustees or managers and an approved person ("the custodian"), which contains the provisions mentioned in subsection (2).
(2) Those provisions are—
(a) that the investments are vested in the custodian's name and he maintains adequate records for identifying them as belonging to the scheme and not to himself or any other person,
(b) that the custodian is required to safeguard the investments,

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(c) that all documents of title relating to the investments are kept in the custodian's possession and may not be delivered to any other person except—
(i) in accordance with a request from the trustees or managers which is signified in the prescribed manner, or
(ii) in prescribed circumstances
(d) that all transactions relating to the investments are conducted and recorded in the prescribed manner and within the prescribed period, and, in particular, that any transactions which do not occur in the normal course of the holding of investments generally or of investments of the description in question are immediately reported to the Authority and the trustees or managers by the custodian,
(e) that the custodian is responsible for securing that the trustees and managers are fully informed of all matters relating to the investments within a period which is reasonable having regard to the importance of the information,
(f) that, in any case where the custodian is also a person to whom any discretion to make any decision about investments has been delegated under section 30, the functions exercisable by him as custodian are adequately differentiated from those exercisable by him by virtue of that delegation,
(g) that the custodian must establish and maintain such arrangements as may be prescribed for the purpose of securing so far as practicable that none of his employees or officers has the opportunity to perform any action which would or might result in a breach of the agreements,
(h) that the custodian is liable for any reduction in value in the assets of the scheme arising from any breach of his obligations under the agreement, and
(i) prescribed provisions.
(3) A person is approved for the purposes of this section if—
(a) he satisfies the prescribed requirements, and
(b) subject to subsection (4), he is not connected with the employer.
(4) Paragraph (3) (b) does not apply—
(a) where the employer is an institution authorised under the Banking Act 1987 and the arrangements made under this section comply with such further requirements as may be prescribed, or
(b) in prescribed circumstances.
(5) Where an agreement in relation to the investments held for the purposes of a scheme has been made with a custodian in accordance with this section—
(a) except in prescribed circumstances, the custodian shall not be regarded as a trustee or manager of the scheme by virtue only of complying with such provisions of the agreement as are mentioned in subsection (2), and
(b) the trustees or managers of the scheme are not responsible for any act or default of the custodian in the course of exercising his functions as such if—
(i) they have taken all reasonable steps to satisfy themselves that he is an appropriate person to appoint as custodian, and
(ii) they have continued to satisfy themselves by periodic review that he performs his functions under the agreement competently.
(6) Subject to any restriction imposed by the scheme, an agreement under this section may include provision enabling the custodian to make arrangements with another approved person for him to exercise any of the custodian's functions under the agreement; and where the custodian makes such arrangements this section shall, except in prescribed circumstances, apply in relation to the other person as it applies to the custodian.").

13 Feb 1995 : Column 546

The noble Baroness said: I am somewhat encouraged by the fact that on Second Reading the Minister said that his mind was not closed to this matter. I hope that he is prepared to listen to my argument and perhaps to agree to the amendment.

I have no intention of speaking for as long as it would take me to read the proposed new clause. When one asks the advice of lawyers and parliamentary draftpersons one is presented with a long amendment such as this. Perhaps one may say it is belt and braces, but I assure the Committee that it is necessary.

The Minister also said that while his mind was not closed to this matter it was no guarantee against wrongdoing. He went on to say that we are talking about a package; and this is one element of that.

The proposal is not a new idea; most pension funds have the independent custody of investments. Understandably, they see it as being sensible. Most city fund managers when offering a service to pension funds automatically include this service. It is not expensive and therefore I hope that the Minister will not plead that it is an extra cost and an extra burden. People within the industry to whom I have spoken assure me that the cost is between one-tenth and one-twentieth of 1 per cent. It is a minuscule amount for the security that one would have with the independent lodging of investments.

On Second Reading the Minister also said that he believed that this change would not have helped the Maxwell scheme because the investments were lodged with independent custodians. That is not correct. Where the Maxwell funds were lodged with independent custodians—and many of them were—many of them were secure. However, a large amount of the assets was not held in custody independent of the employer. It is a fact that Maxwell's companies and his tentacles reached far and wide. Where the pension fund investments were not held within the company they were not necessarily independent of the employer. Had they been so, it would have been more difficult, if not impossible, to gain access to them. I do not say that it would have stopped him, but it would have made him think twice. Now many schemes are lodging funds independently. The additional dimension is the fact that much investment is made outside this country in many different parts of the world. We live within a global economy and it is essential that such investments are lodged independently.

The Minister may say that the custodianship of investments is already regulated. However, whereas the Goode Report did not call for that to be a requirement, it stated that there was no direct regulation of custodians. At paragraph 4.10.38 it stated:


    "As stated ... while custodians are normally authorised by a regulatory body for other purposes, custodianship is not as such an activity requiring prior authorisation or, indeed, directly regulated in any way".

Therefore, there is a gap in the regulatory system. At paragraph 4.10.33 Goode went on to state that, plainly, independent custodianship,


    "places some rein on the freedom of action of an intending fraudster, because the possibility of a query about instructions outside the fraudster's authority will reduce the chances of such instructions being given in the first place".

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I hope that the Minister will accept the amendment. It is welcomed generally in the industry. I was interested to read that Prudential Insurance has put out to tender some £400 billion of its assets for independent custodianship. Of course, most insured schemes have independent custodianship of their investments. Therefore, that is something which all good companies are doing. I beg to move.

Baroness Seear: I support the amendment moved by the noble Baroness, Lady Dean. She has direct experience of what can go wrong when custodianship is not properly organised, and I do not believe that I can add very much to what she has said.

Obviously there can be no 100 per cent. safeguard against fraud, but at this stage our obligation is to take all the steps possible to minimise the chances of that happening and to reduce the number of fraudulent cases. This amendment is clearly a practical and sensible way in which to achieve that. As has been said, a number of companies are already following that course. It would surely be wise and appropriate to give that legislative backing in the Bill.


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