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Lord Eatwell: My Lords, I am grateful to the Minister for his reply. However, he will not be at all surprised to hear that I find it enormously disappointing. In fact, I find it distressing in the sense that he has reiterated the point--in a way he answered the point made by the noble Lord, Lord Newby--that the FSA cannot be, in the words of the noble Lord, Lord Newby, the referee. It cannot determine the rules. However, it is the regular user whom the Government believe to determine what the FSA can say. I find that position very worrying.

The noble Lord has pointed out the difficulties of the approach taken by myself and the noble Lord, Lord Lipsey. I have some sympathy with the strictures

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which he has brought to bear upon our formulation. However, I find his argument that the reasonable regular user and reasonable persons would expect the markets to be free and fair nai ve in the light of behaviour in financial and commodity markets around the world. That is not how markets work. I regret to say that we shall have to return to this matter at Third Reading if by that time the Government have not considered these matters further and taken the steps which will rescue this part of the Bill and allow them to achieve the goal they seek. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Fraser of Carmyllie moved Amendment No. 133AA:


    Page 56, line 18, leave out ("may") and insert ("shall after consultation with all relevant interests").

The noble and learned Lord said: My Lords, we have had such an interesting and important debate that it is something of an unnecessary interlude to interject this amendment. I cannot wait to get back to the next part of our debate, which I promise the Minister will be somewhat shorter than the first part.

The amendment seeks to ensure that the Treasury will consult with all relevant interests before prescribing the markets to which the clause applies. If the Minister's response is, "Of course", that will be more than sufficient for my purposes. I beg to move.

Lord McIntosh of Haringey: My Lords, I do not think that I can quite get away with saying, "Of course", and then sitting down.

As a general point, we did, of course, twice debate in Committee obligations for the Treasury to consult on proposals to make secondary legislation; we did so on 20th March and 30th March 2000. I shall not repeat the detailed explanations that I gave there, but the Treasury will act in accordance with the usual procedures for making secondary legislation. There is a presumption in favour of consultation, and noble Lords will be aware that the Treasury has already consulted on drafts of a number of draft statutory instruments to be made under this Bill.

Specifically on the power to make orders under Clause 115, the Treasury has consulted on the proposed regulations to be made under Clause 115(3). A draft of the order was published in June 1999 in a consultation document entitled Market abuse: prescribed markets. This proposed that the regime should cover the markets run by the six recognised investment exchanges and the investments traded on them.

I should point out that we consulted more widely than would strictly be required by the amendment. As the Treasury has already done what is required by the amendment--and, indeed, gone further--I hope that the noble and learned Lord will consider that I have said the equivalent of "Of course".

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Lord Fraser of Carmyllie: My Lords, I believe that the Minister could have said "Of course". I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Kingsland moved Amendment No. 133B:


    Page 56, line 43, at end insert--


("( ) Behaviour does not amount to market abuse within subsection (2)(b) if the impression given is misleading only because of information which the individual whose behaviour it is does not know about it because it was withheld from him in conformity with control of information rules.").

The noble Lord said: My Lords, in moving Amendment No. 133B, I shall speak also to the other two amendments in the group, Amendments Nos. 133E and 133F.

So far as concerns Amendment No. 133B, the Minister in another place--I think it was the honourable lady Patricia Hewitt--said in Committee that it was important that the FSA rules should be a safe harbour because they would provide for stabilisation and for Chinese walls. I think that this observation is so crucial that it ought to be stated on the face of the Bill. If the Minister were to glance at government Amendments Nos. 202 to 206, he would see that it is so stated--or, rather, that the Government intend it to be so stated--in relation to the criminal offence of market manipulation. All the Government have to do is to follow the logic of that criminal offence into the offence of market abuse.

In this case, exemption should apply where a person makes a statement, promise or forecast without knowing that it is misleading, false or deceptive because the relevant information was withheld from him in compliance with the control of information rules. In addition, the company itself should be treated as not knowing or being reckless if the individual making the statement, promise or forecast was not aware of the relevant information and was not told to make it by someone who was.

Amendment No. 133E complements opposition Amendment No. 132. The Minister will recall that Amendment No. 132 removes from Clause 115(1)(c) the expression,


    "which is likely to be regarded by a regular user of that market who is aware of the behaviour as a failure on the part of the person or persons concerned to observe".

Amendment No. 133E inserts that concept in a separate part of the Bill. The Minister will recall that a similar approach was taken by the Opposition at the Committee stage.

Finally, Amendment No. 133F to Clause 119(2) is designed to bring in another ground on which the authority cannot impose a penalty. It seeks to reintroduce a situation where no penalty can be imposed if the accused did not realise that he could be misinterpreted in what he was saying or doing. The two conditions referred to in the amendment are the market abuse limbs, consisting of misleading or distorting the market. I beg to move.

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10 p.m.

Lord McIntosh of Haringey: My Lords, clearly we have not succeeded in communicating the extent to which we have introduced changes to the Bill to improve protections in this area on top of those made at earlier stages of the Bill's passage through Parliament.

First, Clause 119(8) now provides that behaviour does not amount to market abuse if it conforms with FSA rules which include a provision saying that behaviour does not amount to abuse. That was inserted to remove any uncertainty that compliance with specified rules--for example, those on control of information: "Chinese walls rules" as they are known--and compliance with price stabilisation rules will provide a safe harbour from a charge of market abuse.

Secondly, we improved the protections for those who take reasonable precautions and exercise due diligence to avoid engaging in market abuse, and for those who believe on reasonable grounds that their behaviour does not amount to market abuse. In addition to these safe harbours, the Government in another place provided that behaviour which complies with express provisions of the code of market conduct, which the FSA is required to produce under Clause 116, cannot amount to market abuse.

The amendments do not make any improvements to the safe harbours we have already introduced. Amendment No. 133B would provide that it is not market abuse if an individual gives a misleading impression as a result of not knowing about something because it was withheld from him in conformity with control of information rules. We shall shortly discuss these rules in the context of government Amendment No. 156.

This is a statement of the obvious. While FSA rules on control of information could cover this situation, it is clear that the person concerned would not be breaching expected standards, and indeed that he would have reasonable grounds for believing that his behaviour was not abuse.

There may be some misunderstanding in the area of control of information. The concern is not so much with the position of the individual, who is clearly protected, but his firm. Even if various parts of the firm do not have all the information as a result of Chinese walls, the firm considered as a whole clearly will have all the information. The danger is that if one person in a firm dealing with a client does not have information which another person in the firm knows about, there is a danger that the firm, taken as a whole, will have misled the client.

While we could specify this situation and others in the Bill--for example, behaviour in conformity with price stabilisation rules--we think that the better approach is to leave it to the FSA. The FSA has discretion to make control of information rules and price stabilisation rules. It will do so, and work is in hand. But the legal position is that it does not have to. So putting explicit safe harbours on the face of the Bill rather than leaving it to the FSA to decide when safe

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harbours should apply does not really change the position. In any event we want to provide flexibility here since there may also be other rules which the FSA would want to form a safe harbour from market abuse.

The FSA will, of course, have to consult on all of its rules. In doing so, it may identify the need for further protection or conclude that it does not want to give protection in all circumstances. The unscrupulous are very good at exploiting loopholes.

Amendments Nos. 133E and 133F concern the circumstances in which the FSA can impose a penalty for market abuse or issue a public statement. As I have said, this is an area where we made improvements in Committee.

I am rather surprised by Amendment No. 133F. In Committee, noble Lords opposite tabled an amendment which sought to restrict the protection for "belief", which was present in the previous version of Clause 115, to situations where someone believed "on reasonable grounds" that he had not engaged in market abuse.

We met the substance of this amendment when we included the protections that are found in Clause 119(2). But noble Lords now follow it up with an amendment which would provide a safe harbour for someone who had given a misleading impression or distorted the market if he did not "anticipate" that his behaviour would do this. Where have the "reasonable grounds" gone on which noble Lords were so keen in Committee? Are they now saying that it is all right if someone does not have reasonable grounds for his belief?

If I assert that I really did not anticipate that my behaviour would lead to regular users being given a misleading impression, should that be the end of it, even if I did not have reasonable grounds for that anticipation? If noble Lords are not seeking to remove the "reasonable grounds" element, then this amendment adds nothing to what is already in Clause 119(2). If the noble Lord, Lord Kingsland, is seeking to remove what he previously desired to include in the Bill, I must resist that as strongly as I welcomed the previous position.

Amendment No. 133E would introduce a change which would be at best unnecessary and at worst extremely damaging. It is unnecessary if by the amendment the noble Lord, Lord Kingsland, means that the behaviour satisfies the expected standards of behaviour which a reasonable regular user of the market would expect a person in the alleged abuser's position reasonably to observe. That is already provided for. But if the noble Lord means that behaviour which is widespread can never be market abuse, then it would be a terrible change to make. I am sure that that cannot be the noble Lord's position. There is a big difference between "accepted market practice" and "acceptable market practice".

Perhaps I may give an example. Let us suppose that insider dealing were rife on a market. Would that mean that, just because everyone is "at it", it should fall outside this regime? Clearly it should be capable of being caught. That is what the regime does by

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introducing the concept of the regular market user, a reasonable man who knows right from wrong, and by looking at the expected standards of the market from his perspective. We cannot accept these amendments.


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