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Lord McIntosh of Haringey: We have had some difficulty in understanding these amendments because they are mutually contradictory. Amendment No. 230H deletes subsection (4)(a), which provides that the authority may not give a direction unless it is satisfied that:


But Amendments Nos. 230J and 230K, which would be pre-empted if 230H were carried, add an additional limb to the test. An authority may give a direction if it is satisfied that the purpose for which the rules are made can be achieved in a different manner from those specified in the rules.

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

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

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rule would have on him. This is the purpose of putting in paragraph (a) which it is proposed should be deleted, and which we think should not be deleted.

Moving on to the additional test proposed by the noble Lord, Amendments Nos. 230J and 230K provide that the authority may only grant a waiver or modification where it is satisfied that:


    "the purpose for which the rules were made can be achieved in a different manner than as specified in the rules".

As I have already said, it is unclear whether this is intended as an alternative to the tests already mentioned or to replace them. Either way, I must argue against them. It is not enough to know that the purpose of the rule can be achieved in some other way. The SFA would need to know that as a matter of fact the effect was being achieved by some other means; for example, that the firm was committed to not taking action of a particular kind. It is difficult to see that the authorised person would be unable to demonstrate that the rule was not either unduly burdensome or not achieving the intended effect.

It should be said that while the onus is on the applicant to show that the criteria set out in subsection (4) have been met, the FSA has said in its policy statement, the FSA's approach to giving guidance and waiver to firms in September of last year that:


    "It will apply its general requirements in a way that allows them to be tailored to fit the circumstances of particular firms in accordance with its commitment to a flexible and differentiated risk-based approach".

It should be mentioned that the waiver power in Clause 139 is wider than that in the Financial Services Act 1986 in a number of respects. It covers a wider range of issues, including for the first time cancellation rules and collective investment scheme regulations. The purpose for which the rules were made test is new, a test that will be given proper weight when considering applications for waivers. Therefore, we believe subsection (4) should contain two limbs. These have already been correctly framed in the clause as it stands.

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

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The noble Lord asked whether there should not be a requirement to give guidance in certain cases. In paragraph 246 of its first report the Joint Committee recommended that,


    "a requirement would be an unreasonable burden and a restriction on its freedom of action".

Our response to the noble Lord, following the Joint Committee's report, has to be negative.

6.30 p.m.

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

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

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

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

Lord Jenkin of Roding: Perhaps I may intervene for a moment. When I read Amendment No. 231A, I thought to myself, "That sounds very reasonable". I listened to my noble friend on the Front Bench and it still sounded fairly reasonable. I was reminded of the

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provisions that used to work in the field of what was called surtax or super tax. The taxpayer could apply to the commissioners for a clearance against a direction that he had to distribute so much of his profits, which would then attract taxation in the hands of the shareholders. There started to be an informal procedure whereby the taxpayer could get in touch with the commissioners and could be given a clearance that if he distributed so much the commissioners would not make a surtax direction on him. That eventually became statutory. Happily, it was eventually abolished altogether. It was a very oppressive piece of legislation for private companies.

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

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

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

The rule surely has to take precedence over the authority's interpretation of it. The whole principle on which the Bill is based is the accountability of the authority in many different ways. One of the ways in which it is accountable is in the framing of rules. If it does that wrong, the authority is in trouble. But if it

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can simply interpret rules as it wishes to suit needs, even at the request of an authorised person, one loses the effect of the rule-making powers.


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