Previous Section Back to Table of Contents Lords Hansard Home Page


Lord McIntosh of Haringey: My Lords, it is clear from what the noble Lord, Lord Kingsland, said that we are both trying to do the same thing but we are trying to do it in rather different ways. We are both trying to ensure that there is proper protection for an enforcement of Chinese walls and I was perhaps unwise enough to call the Law Commission report of 1995 into aid in the context of saying how important Chinese walls are. That shows that we agree about that at any rate.

So the noble Lord is now saying that our amendments are unsatisfactory; that they do not make comparable provision with Section 48(2)(h) of the

9 May 2000 : Column 1409

Financial Services Act 1986 and he is asking me what has changed since the Law Commission produced its report in 1995 and since we indicated at the beginning of the consultation process on this Bill that we wished to introduce amendments to give effect to that.

I concentrate on the noble Lord's amendment because it makes the position clear as to why and how things have indeed changed.

Amendment No 157VA proposes that a person who is subject to control of information rules incurs no liability to a person for or with whom he does business in the course of carrying out any regulated activity in the circumstances set out in subsection (1) of the proposed new clause. We do not believe that amendment is necessary because we do not think that a person who has acted in accordance with statutory rules which require him to act in a particular way will be liable to a civil suit.

The Law Commission produced a report in 1995 arguing that there should be an express defence in legislation for any civil liability incurred by an authorised person who has acted in conformity with FSA "Chinese walls" rules. We undertook to address that concern in the consultation document published with the draft Bill to which the noble Lord, Lord Kingsland, referred. On balance, however, the Government believe that express provision for a defence from civil action is not necessary.

Since the Law Commission reported, and, indeed, since the consultation document published with the draft Bill, there have been developments in case law which, although not directly dealing with financial services firms, did address the issue of civil liability and procedures for dealing with conflicts of interest. The most important case here is the 1999 case of Prince Jefri Bolkiah v KPMG.

In the light of the statements of the Judicial Committee of this House in this case, it is the Government's firm belief that the courts would be unlikely to hold that someone could successfully sue an authorised person for breach of fiduciary duties where the authorised person has complied with FSA rules, which, of course, are made under Parliament's delegated statutory powers.

The Law Commission and many in the City Liaison Group, which includes the representatives of several City law firms, tend to agree with us that an explicit defence is not necessary here. In addition, there is concern that express provision could cast doubt on the current position in relation to rules made under the Financial Services Act 1986. Such a defence could also have implications in relation to the effect of compliance in other areas with rules made by the FSA under its statutory powers. The new clause has been recast so that rules will require an authorised firm to do various things.

Where an authorised person has no choice other than to comply with statutory rules, he cannot be subject to civil liability for anything that he does in accordance with those rules. Therefore, we resist the Opposition amendment.

On Question, amendment agreed to.

9 May 2000 : Column 1410

5.30 p.m.

Clause 144 [Modification or waiver of rules]:

The Deputy Chairman of Committees (Viscount Allenby of Megiddo ): My Lords, before calling Amendment No. 157, I must point out that there is an error in the Marshalled List. It should read:


    "Page 70, line 3, at end insert".

Lord McIntosh of Haringey moved Amendment No. 157:


    Page 70, line 3, at end insert--


("( ) control of information rules;").

On Question, amendment agreed to.

Lord Kingsland moved Amendment No. 157KA:


    Page 70, line 16, at end insert ("and must be determined by the Authority before the end of the period of 30 days beginning with the date on which the application is received").

The noble Lord said: Clause 144 allows the authority in particular circumstances to direct that all or any of the rules set out in subsection (1) are not to apply to an authorised person or will apply to an authorised person with such modifications as the authority may direct.

That appears to be a useful provision which provides flexibility for the authority to modify or waive rules. However, subsection (4) reduces that flexibility considerably. In particular, the authority cannot use the power to waive or modify rules unless it is satisfied that compliance with the rules would be unduly burdensome or would not achieve the purposes for which the rules were made.

It seems to us that the circumstances in which the authority will be able to use its power to give directions under this clause will be rare. That is a shame. We were promised a flexible regulation, but being realistic, subsection (4) removes the benefit of flexibility that the clause could have provided. In Committee we tabled amendments with a view to increasing the authority's flexibility, but your Lordships will recall that our amendments were rejected.

The only amendment in this group that attempts to introduce a small element of increased flexibility is Amendment No. 157LA. That amends subsection (4)(a) by adding the words,


    "or would be unlikely to".

Therefore, the authority could give a direction if it were satisfied that compliance with the relevant rules was unlikely to achieve the purposes for which the rules were made.

The other amendments concern the practical operation of the clause. We propose that, first, the authority should be obliged to determine applications under Clause 144 within 30 days; secondly, that the authority should be obliged when considering an application to take into account the nature of the authorised person's business and the person with whom the authorised person carries on or intends to carry on business; thirdly, that the FSA should be obliged to give an explanation of its decision if it

9 May 2000 : Column 1411

decides not to give a direction; and fourthly, that the authority's power to revoke a direction already given should be subject to at least seven days, prior notice to the authorised person concerned unless the interests of consumers require otherwise.

Clause 153 is the important clause as it provides for the giving of guidance by the authority. Amendment No. 157WA deals with a relatively small but nevertheless important point. Under Clause 153(4)(c) the authority may make a charge for the giving of guidance irrespective of who requested the guidance.

We believe that for authorised persons and approved persons who are liable to be disciplined and who are liable to incur penalties if they breach the rules, it is wrong in principle that they should be charged for guidance on the rules. Such persons should be entitled to an explanation without charge.

Amendment No. 157XA would amend Clause 153 by providing that compliance by an authorised person of the FSA's guidance would not be treated as contravening the rules to which the guidance relates. If an authorised person, for example, seeks and obtains from the authority guidance on a particular rule, and acts in compliance with that guidance, he should not be treated as contravening the rule to which the guidance relates.

The Economic Secretary to the Treasury, the honourable Ms Melanie Johnson, in Committee in another place, said that she would be surprised if, in those circumstances, the authority itself would take disciplinary action against the authorised person if it proved to be the case that the authority's guidance was defective in some way or other. It would certainly be reasonable to expect that. However, our concern relates to Clause 146 under which a private person could still take action against the authorised person in the circumstances that I have described. That does not seem to us to be reasonable or to represent good regulation.

If authorised persons act in compliance with guidance, issued by the authority, they must be confident that they will not find themselves subject to actions for damages to private persons. The action for damages available to a private person under Clause 146 is subject to the defences and other incidents applying to actions for breach of statutory duty. Perhaps the Minister can tell the House whether an authorised person who, in good faith, acts in accordance with the authority's guidance would have such a defence. If such a defence is available, there can be no objection to the amount. If such a defence is not available, that confirms the need for the amendment. I beg to move.

Lord McIntosh of Haringey: My Lords, the first five of these amendments relate to Clause 144. I do not believe it was clear from listening to the noble Lord, Lord Kingsland, that Clause 144 is concerned with the power of the authority to waive or modify certain kinds of rules as set out in subsection (1). In other words, this is a clause that brings flexibility and realism

9 May 2000 : Column 1412

to what may otherwise be a more rigid and threatening regime. All the amendments to Clause 144 ought to be seen in that light.

We are not happy with the amendments to Clause 144. On Amendment No. 157KA, the authority may not give a direction under Clause 144 unless it is satisfied that the various factors under subsection (4) have been met as well as the publication criteria under subsection (7).

Meeting all these requirements may involve the authority in a lengthy investigation, especially where the authorised person provides a wide range of financial services. Of course the authority will want to consider each application carefully in order to ensure that it reaches the right decision. For that reason, it cannot be sensible to bind the authority to determine all applications received under Clause 144 within the time-scale proposed in the amendment.

However, the authority has already stated in its September 1999 policy statement, The FSA's approach to giving guidance and waivers to firms, that it will develop,


    "response standards to underpin the efficient operation of the waiver mechanism under the new legislation".

I hope that that will satisfy the noble Lord, Lord Kingsland.

Amendment No. 157LA, to which I believe the noble Lord, Lord Kingsland, attaches more importance, proposes to amend subsection (4)(a) so that the authority may not give a direction unless it is satisfied that compliance by the authorised person with the rules, or with the rules as unmodified, would be unduly burdensome or would not achieve, or would be unlikely to achieve, the purpose for which the rules were made. The "unlikely" element is introduced by the amendment.

We are certainly not keen on this amendment. If all that the authorised person has to do is to demonstrate that compliance with the rule would be unlikely to achieve the purpose for which the rule was made, there is a distinct risk that the authority may issue a waiver or modification where it later turns out that compliance with the rule did in fact achieve the purpose for which the rule was made. At the same time, it is unclear how "unlikely" would work. Who is to judge whether a rule would be unlikely to achieve the purpose for which it was made? Should it be the authority, the applicant, or is it to be judged objectively on the basis of what a reasonable man may think? If that is the case, it is not at all clear from the way in which the amendment has been drafted. I am sorry, but the amendment is defective.

Amendment No. 157MA will oblige the authority to take certain specified matters into account--among other things, an authorised person's clients and business--when it considers whether to issue a waiver or modify a rule. I said in Committee that, while the

9 May 2000 : Column 1413

onus is on the applicant to show that the criteria set out in subsection (4) are met, the authority has already indicated in its policy statement, to which I have already referred, 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".

That is in line with the statutory objectives set out in Part I of the Bill, specifically in Clause 5, under which the authority must have regard to the differing degrees of experience and expertise that different consumers may have in relation to different kinds of regulated activity.

Amendment No. 157NA proposes to impose a requirement on the authority to give reasons in writing to an applicant whose application for a waiver or modification has been rejected. We believe that this would involve excessive bureaucracy. Imposing an absolute obligation of this nature on the authority is counter-productive and may distract the authority from meeting its regulatory objectives.

The same is true of Amendment No. 157PA. The range of circumstances in which revocations may be required will be very different. We would expect that where it can, the authority would give notice of such a revocation in order to allow the firm to arrange its affairs accordingly. As with the amendment to which I have just spoken, we do not want an extra layer of bureaucratic controls that always require the authority to give reasons.

Of course there will be cases where it will be in the interests of consumers that fast action is taken. I see that that has been recognised in new subsection (9B). However, I do not see that we need to legislate about any of this since we shall be simply stating what we would expect to happen in practice anyway. I am afraid that we are not sympathetic to any of the amendments to Clause 144.

Perhaps I may turn to Amendment No. 157XA. That would have the effect, in Clause 153, that where an authorised person acts in compliance with guidance issued by the authority, he shall not be treated as contravening a rule to which such guidance relates,


    "or as thereby contravening rules".

As a claim for breach of statutory duty cannot be brought by a third party unless a rule has been contravened, this will in fact disapply Clause 146 which is concerned with action for damages in cases where guidance has been issued by the authority and relied on by an authorised person.

As regards proceedings brought under the Bill, as long as a person has acted in compliance with current written guidance in circumstances contemplated by the guidance, the authority will not take regulatory action against him. That is confirmed by the FSA in its policy statement, The FSA's approach to giving guidance and waivers to firms. Similarly, with regard to the Bill's criminal sanctions, reliance on FSA guidance will serve as a ground for the due diligence defences under Clauses 22 and 23.

9 May 2000 : Column 1414

However, the Government maintain their belief that reliance on FSA guidance should not be able to block an action for damages for breach of statutory duty, even where the guidance has been published and/or takes the form of general guidance. We must preserve the principle that third parties, in particular private consumers, should not be deprived of the opportunity for redress where they suffer loss at the hands of an authorised person as a result of that person's contravention of the rule. A consumer's potential for loss, we believe, remains unaffected by the publication of the guidance, especially where guidance merely provides an interpretation of the rule, rather than an interpretation of the conduct in relation to the rule.

The Government believe that guidance should continue to have an informal status which reflects what the word "guidance" means. Rendering guidance enforceable will have the effect of giving it the status of rules. The customer of the authorised person would have been deprived of his right of action even though a particular rule had in fact been broken. From that customer's point of view, it looks as though the guidance is given more weight than the law contained in the rule. Going down this track would have important adverse consequences for authorised persons. It would be possible to change the effect of the rule without going through the necessary consultation procedures. Furthermore, it may be that the authority, conscious of the enhanced formal status of guidance which would be conferred by this amendment, may be less inclined to issue guidance. This could impact heavily on authorised persons who may wish to rely on guidance in the authority's proceedings.

However, that is not to say that guidance is not important. A court, in adjudicating a claim for breach of statutory duty, will have regard to the defendant's reliance on general, published FSA guidance--although this will depend heavily on the circumstances of the case--in assessing liability or quantum of damages. It is highly relevant. I hope that that provides the noble Lord, Lord Kingsland, with some comfort and that he will not press the amendment. Perhaps I may also say that we have written to the City Liaison Group about this point.

Amendment No. 157WA proposes a new subsection to follow subsection (4)(c) in Clause 153 which empowers the authority to make a reasonable charge for guidance where that guidance has been given in response to a request made by any person. The amendment provides that subsection (4)(c) does not apply if the request is made by or on behalf of an authorised person or an approved person within the meaning of Clause 63(13).

Frankly, I do not understand this amendment. The subject of fees was raised in Committee in another place where the Opposition proposed the deletion of subsection (4)(c). As the Economic Secretary said at the time, it is clear from the authority's published policy statement, to which I have referred, that,


    "individual guidance will continue to be given on a relatively informal basis and without charge".

I hope that this will persuade noble Lords that the amendment should not be pursued.

9 May 2000 : Column 1415

I regret that I must be so negative about these amendments, but I am afraid that we shall not be able to accept any of them.

5.45 p.m.

Lord Kingsland: My Lords, I found the experience of listening to the words of the Minister on these amendments extremely distressing. I shall look very carefully at the response of the noble Lord to the amendments that we tabled to Clause 144 in the hope that I might glean something positive from what he said.

As far as Clause 153 is concerned, in particular Amendment No. 157XA, it was plain that the Minister's reaction was totally intransigent. This is a matter to which we are certain to return at Third Reading. At that point we shall seriously consider testing the opinion of the House.

The Minister is well aware that, in continuing to ensure that the City remains a creative part of the economy, it is absolutely crucial that the balance between sensible regulation, on the one hand, and a sufficient margin for enterprise on the other, is kept. In our view, the opinions that the Minister has expressed on guidance in relation to providing a safe harbour upset that balance. In those circumstances, it is a matter to which we shall return. In the mean time, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 157LA to 157PA not moved.]

Clause 147 [Limits on effect of contravening rules]:


Next Section Back to Table of Contents Lords Hansard Home Page