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Lord McIntosh of Haringey moved Amendments Nos. 111 and 112:



    Leave out Clause 53.

On Question, amendments agreed to.

Clause 55 [Prohibition orders]:

Lord Kingsland moved Amendment No. 112A:


    Page 25, line 11, at end insert--


("(4A) In proceedings for an offence under subsection (4) it is a defence for the accused to show that he took all reasonable precautions and exercised all due diligence to avoid committing the offence.").

The noble Lord said: My Lords, in moving Amendment No. 112A I should like to speak also to Amendments Nos. 112B, 114A and 115D. Clause 55 permits the authority to prohibit an individual from acting in a designated capacity in an authorised firm. Subsection (4) provides that an individual who acts in breach of a prohibition order is guilty of an offence. The purpose of the first amendment in the group is simply to provide the individual with a defence similar to that available in an action for breach of the general prohibition or the restrictions on financial promotion.

Subsection (5) provides that an authorised person must take reasonable care to ensure that none of his functions is performed by a prohibited person. The requirement to take reasonable care was inserted at Committee stage; prior to that, it was an absolute obligation. The amendment provides that where an authorised person contracts with another authorised person, who himself engages a prohibited person, the first authorised person will not be liable in stated circumstances.

I am assured that, in the securities and unit trust industries, it is quite common for an authorised firm to delegate fund management or settlement to another authorised firm. I understand that there is no practicable way in which the first firm can ensure that its authorised contractor observes the requirement.

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Therefore, it is reasonable for the first person to be able to rely on the second, who is also an authorised person, promising to perform the task.

Clause 58(1) requires an authorised person to take reasonable care to ensure that, when necessary, all of his staff are individually approved. Subsection (2) goes further and requires authorised firms to take reasonable care to ensure that all of their contractors' staff are duly authorised when required. Again, "take reasonable care" was inserted in Committee.

This is still a particularly onerous requirement. Firms would find it most helpful to receive some guidance on what is meant by "reasonable care"--hence the amendment. The amendment provides that, where the contracting firm is itself authorised, the duty is discharged where it undertakes in the out-sourcing contract to ensure that those of its staff who require individual approval are indeed approved.

Clause 65 empowers the authority to take disciplinary action against an individual who fails to comply with a statement of principle, or is knowingly concerned in a breach of rules by his employer or similar person. As mentioned already in relation to Clause 60, it would be easy for an individual to breach a principle and thus be guilty of misconduct. The purpose of this amendment is to provide the approved person with a defence that he took all reasonable precautions and exercised due diligence. This is the same defence as is available in relation to a breach of the general prohibition or a breach of the restrictions on financial promotion. I beg to move.

6.15 p.m.

Lord McIntosh of Haringey: My Lords, I am grateful to the noble Lord, Lord Kingsland, for speaking to this group of amendments. I say immediately that some of the amendments cause us problems for one reason or another. However, this debate gives me an opportunity to explain what is required by the relevant provisions of Clauses 55, 58 and 65 which I hope noble Lords will find helpful. I said that some of the amendments were problematic. The noble Lord will be pleased to know that the first one is not one of them. That amendment would give an individual a statutory defence if he performed functions for an authorised or exempt person in contravention of a prohibition order. The wording of the amendment mirrors that in use in certain other statutory defences under the Bill, for example in Clause 21(3). It is important that a person should not be convicted of an offence where he has done what he can to avoid committing it. This amendment has that effect, and its drafting is without fault. I am pleased to accept it.

I turn to Amendments Nos. 112B and 114A which set out certain circumstances in which an authorised person is to be deemed to have taken reasonable care to ensure that persons subject to a prohibition order under Clause 55 do not perform functions on his behalf. I am not attracted to including such express provisions on the face of the Bill. What amounts to "reasonable care" will depend on all the circumstances

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of the case. The test, which is well established and understood, is simple enough and there is no need to define "reasonable care". I believe that it is fair enough to ask authorised persons to exercise such care to ensure that persons who are subject to a prohibition order are not employed by them. In any event, it is not clear to me that the cases set out in the amendments would always amount to the required standard; they might or might not. It would depend on the facts of the case. The extended definitions which would be imported by Amendments Nos. 112B and 114A might well fall short of what constituted reasonable care in any particular case. I do not think that it is right to provide that authorised persons should be able always to delegate their responsibilities in those particular cases in the way that the amendments allow.

Turning to Amendment No. 115D in Clause 65, this deals with breaches of the legislative provisions made by the authority under this part of the Bill. For convenience, I shall refer generally just to rules, but what I say here applies to other legislative instruments made by the FSA, including statements of principle under Clause 63(1). The same logic does not apply to the breach of a rule as it does to the commission of an offence. To be guilty of an offence carries a certain stigma. I do not for one moment condone breaches of the rules, but the reality is that they will occur more frequently and will not necessarily give grounds for criticism or discipline.

One of the underlying purposes of this Bill is to secure that consumers are protected, and that is what the disciplinary provisions under the Bill are designed to achieve. Any disciplining of authorised or approved persons is simply a means of securing that that end is achieved. For example, an authorised person may breach regulatory requirements that apply to him through no fault of his own. An approved person under this part may have been involved in the breach. In certain circumstances, the FSA's response may well be not to take disciplinary action against anyone, but instead it may decide to use its powers to help to rectify the problem. In our view, in a rule breach of that kind, it is immaterial whether the person took steps to avoid committing the rule breach; it happened and remedial action is required.

On the other hand, there will be times when the nature of the breach would suggest some kind of misconduct. I do not believe that it is particularly helpful or meaningful to say that in certain circumstances the breach did not happen, even in cases where the actions of the transgressor were perfectly well-meaning. The important issue in such cases is what would be the consequences of the breach.

The other possible consequence of a rule breach would be disciplinary action. In response to the recommendation of the Joint Committee, the Government have made changes to the Bill to offer protection to persons who have breached FSA requirements, and those amendments are relevant here. The relevant provisions are in Clause 69(2) referring to approved persons; Clause 91(2), referring to the official listing; Clause 120(2), referring to market abuse; and Clause 206(2), on discipline of

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authorised firms. Those provisions require the authority, when issuing a statement about its policy for imposing financial penalties, to take into account a number of relevant factors. In the case of Clause 69(2), the relevant factors are the seriousness of the breach, the extent to which the misconduct was deliberate or--dare I say it?--reckless, and whether the person was an individual.

In our view, there is a presumption that where a person had taken reasonable steps to avoid breaching a requirement, it would often be difficult for the FSA to justify taking disciplinary action. Clearly that would depend on the circumstances of the case. Moreover, even if the FSA proposed to take action, it would find it very difficult to impose a substantial penalty if the rule breach were quite clearly not deliberate and the person's behaviour had not been reckless. That would be all the more true if the person concerned had followed the guidance given by the authority, or indeed if he could show that he had taken legal or other professional advice to ensure that he would stay on the right side of the line.

On that basis, while I see what Amendments Nos. 112B, 114A and 115D are trying to achieve, I think that they could confuse a situation which at the moment is reasonably clear, and which certainly has the kind of effect I believe that the noble Lord seeks to achieve by his amendments.

There is another important point here. If we were to accept Amendments Nos. 112B, 114A and 115D, without doing so in every other relevant instance in the Bill, we would cast doubt over whether the effect of the other equivalent provisions would continue to be as I have just described--and which in our view deliver precisely the policy outcome that the noble Lord, Lord Kingsland, seeks to achieve. In the light of what I have said, I hope that he will appreciate the subtle distinction I have explained between the different cases. I hope that my acceptance of Amendment No. 112A will reassure the noble Lord that we have thought carefully about the effect of the relevant provisions of the Bill.


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