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Lord Newby: My Lords, in this group we have three amendments which relate to Clause 322. They seek to deal with a problem which arises for lawyers who give financial advice as a part of their business. There are two categories of such advice: the first category relates to major blocks of investment advice in terms of the management of funds; the second category relates to ancillary financial advice given by solicitors in the course of their day-to-day business.

The fear expressed by a number of legal firms dealing in this area is that the Bill as presently drafted is over-onerous for those firms which give advice purely as an ancillary function, rather than providing, as it were, mainstream investment advice in respect of major funds which they manage on behalf of their clients. These three amendments seek to avoid a double burden of regulation and to make it easier for solicitors to continue to give such ancillary advice without feeling the pressure of over-regulation, with which the Bill as it stands threatens them.

Lord McIntosh of Haringey: My Lords, as we indicated at Committee stage, the Bill was amended at Report stage in another place to incorporate Government proposals under which professional firms which are, among other things, subject to regulation by a designated professional body and which provide financial services as an incidental and complementary part of their professional practice, will not require authorisation by the FSA. These amendments were broadly welcomed by the Law Society and by the Institute of Chartered Accountants.

A member of a designated professional body needs to consider the regime established under Part XX, to which Amendments Nos. 173 to 175 relate, only if he is carrying on activities which fall outside the exclusions which will be contained in the regulated activities order, a draft of which was published for consultation last year. That order will be finalised after the Bill has received its Royal Assent and the Government have taken into account comments made during the consultation process. Of course, the proceedings of your Lordships' House are assumed to be part of that consultation process.

I turn now to Amendments Nos. 173 to 175, which were spoken to by the noble Lord, Lord Newby. Amendment No. 175 proposes the deletion of subsection (7) of Clause 322, with a consequential adjustment to Clause 322(1)(a). This subsection makes it clear that, in order for the Part XX exemption to apply, the financial services activities carried on incidentally by a professional firm must be the only regulated activities carried on by that firm.

In Committee, the noble Lord, Lord Taverne, referred to:


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It is not clear to me that the amendments of the noble Lord, Lord Newby, would make any difference to that situation. Allowing a professional firm to carry on regulated activities other than exempt regulated activities would not remove the FSA's ability to regulate all the regulated activities--both mainstream and non-mainstream--carried on by the firm if the firm was authorised. I am afraid that we cannot accept these amendments.

It is only right and proper that firms carrying on mainstream investment business should require permission from the FSA to carry on those activities. It is a recipe for ineffective regulation to tie the FSA's hands so that it is unable to look at the whole of a firm's financial service business where that is appropriate. It is in the interests of consumers that an authorised firm's overall fitness to conduct financial services be assessed in the light of its activities as a whole. Such oversight by the FSA is what any firm, whether or not a professional firm, has to undergo.

However, as we indicated in Committee, it does not follow that the FSA will or must necessarily apply additional burdens in respect of the non-mainstream business of authorised professional firms. The FSA will, on the contrary, be expected to act in accordance with its statutory duties, including the need to have regard to considerations of proportionality and competition. For example, any restrictions relating to the introduction by authorised firms of clients to independent financial advisers would be a matter for FSA rules--and I understand that there is no intention to make rules to that effect.

We also referred in Committee to the FSA's October 1999 consultation paper on the regulation of professional firms, in which it was made clear that with regard to the provision of non-mainstream activities, in line with the degree of risk attaching to such business, a


    "differentiated and, where appropriate, less burdensome regime"

is proposed.

Amendment No. 174 relates to Clause 322(5). This subsection makes it clear that a professional firm seeking to benefit from the Part XX exemption will need to ensure that it does not carry on, or hold itself out as carrying on, a regulated activity other than one which rules made as a result of Clause 327(3) allow it to carry on. The amendment seeks to delete this provision, amending subsection (5) so that it provides that,


    "The regulated activity is one which rules made as a result of section 327(3) allow him to carry on".

I am afraid that we cannot accept that amendment either.

Where a breach of the Clause 322(5) prohibition occurs, it is important that the offending firm be subject to the authorisation offences set out in Clause 21. We cannot risk professional firms giving the impression that they are free to operate outside the regime for which Part XX of the Bill makes provision. I appreciate that this means that firms who do hold themselves out as carrying on regulated activities which they are not permitted to carry on by the rules

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of the professional body of which they are members will be subject to criminal penalties. But in this regard they are no different from other firms which conduct regulated activities but are not authorised by the SFA.

I understand that the general policy behind Clause 322(5)--namely, that professional firms should keep within their designated professional body's rules subject to criminal sanctions--is broadly supported by the professional bodies currently recognised under the Financial Services Act 1986. The main objection, as I understand it, is that a breach under this subsection would render inoperable a firm's entire exemption from the general prohibition, and therefore mean that all exempt regulated activities undertaken would be illegal, and not just the particular transaction which had breached Clause 322(5).

I understand that the Treasury has recently talked this issue over with various professional bodies and has made it clear that the Government are prepared to look at the issue again. But whatever the outcome of that consideration, it will remain the case that a firm which carries on or holds itself out as carrying on activities which it is not permitted to carry on will commit an offence.

Turning to Amendment No. 218A, to which the noble Lord, Lord Kingsland, has spoken, the only effect of this amendment is to include professional firms benefiting from the Part XX exemption within the "exempt persons" definition in Clause 407 so putting them on the same footing as, for example, recognised investment exchanges and their recognised nominees. However, professional firms benefiting from the Part XX regime are more closely analogous to those members of Lloyd's who currently do not require authorisation by virtue of the provisions of Part XIX of the Bill than they are to the persons which the Bill describes as "exempt persons". In both cases, the FSA has the power to direct that the authorisation requirement should apply. In both cases, it would be misleading to describe the persons who benefit from the regime as "exempt" from the authorisation requirement in any true sense of that word since the Bill expressly contemplates the possibility that the authorisation requirement may be applied to them. Amendment No. 218A is therefore inappropriate and would have a confusing impact.

Amendments Nos. 47A and 47B are drafting amendments. They restructure Clause 17 in a way that makes the clause less clear than it currently is. We do not see the reason for those amendments and we are therefore unable to support them. In any case, Clause 17 is drafted in almost exactly the same terms as Section 3 of the Financial Services Act 1986. The meaning has remained clear for 14 years and there does not appear to be any reason for changing it.

Lord Kingsland: My Lords, I thank the Minister for his reply but I am surprised that he has not been prepared to accept my amendments. Is it not clear--perhaps this will prove to be a rhetorical question; your Lordships will wait and see--that something

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cannot be exempt from something which never applied to it in the first place? That is the effect of Clauses 17 and 36 if they are read together.

Lord McIntosh of Haringey: My Lords, with the leave of the House, if that were the effect, it would still apply even if Amendments Nos. 47A and 47B were added to the Bill. Clause 17 deals with regulated activities and specifically refers in the same terms to "an authorised person" and "an exempt person". If the noble Lord's argument were the case, Amendment No. 47B would restore exempt persons to Clause 17 and would not make anything other than a drafting difference.


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