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Lord Kingsland: My Lords, I am most grateful to the noble Lord for again responding so fully. In the spirit of his constructive response, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 158EA to 158EC not moved.]

Clause 175 [Acquiring control]:

[Amendments Nos. 158F and 158G not moved.]

Clause 186 [Notification]:

[Amendments Nos. 158H to 158M not moved.]

Clause 187 [Offences under this Part]:

[Amendment No. 158N not moved.]

Clause 188 [Power to change definitions of control etc.]:

Lord McIntosh of Haringey moved Amendment No. 159:



("( ) provide for exemptions from the obligations to notify imposed by sections 174 and 186;").

On Question, amendment agreed to.

Clause 196 [Rescission and variation of requirements]:

Lord Bach moved Amendment No. 160:


    Page 103, line 28, after ("power") insert ("of the Authority on its own initiative").

The noble Lord said: My Lords, on behalf of my noble friend I rise to move Amendment No. 160 and speak to Amendment No. 161. These amendments represent minor drafting changes and remove a degree of overlap between subsections (2) and (3) of Clause 196. At present both subsections deal with the decision of the authority to vary a requirement on its own initiative, but subsection (2) deals also with the decision to rescind. The amendment limits subsection (2) to the situation in which the FSA decides to rescind a requirement on its own initiative. In this case a written notice must be issued specifying the date on which the requirement ceases to have effect. Subsection (3) continues to deal with the variation of a requirement of the FSA's initiative, with the full supervisory procedure under Clause 193 being applied. This is the same procedure as applies to the original decision to impose the requirement. I beg to move.

On Question, amendment agreed to.

Lord Bach moved Amendment No. 161:


    Page 103, line 28, leave out ("or vary").

9 May 2000 : Column 1471

The noble Lord said: My Lords, I beg to move this amendment formally.

On Question, amendment agreed to.

Clause 206: [Statements of policy]:

Lord Kingsland moved Amendment No. 161TA:


    Page 106, line 32, at end insert ("and


(c) the circumstances in which the Authority will take disciplinary measures under this Part.").

The noble Lord said: My Lords, under Clause 206(1) the authority must prepare and issue a statement of policy with respect to (a) the imposition of penalties under Part XIV and (b) the amount of penalties under Part XIV as well. Part XIV is that section of the Bill dealing with the power of the authority to take disciplinary measures against an authorised person who has contravened a requirement imposed on him by or under the Act.

The authority's statement of policy on the imposition of penalties and the amount of penalties themselves is important. We believe the statement should be extended to cover the authority's policy on the circumstances in which it will take disciplinary proceedings. No doubt the authority will have a policy on taking disciplinary proceedings and, in the interests of transparency, we believe that policy should be made public and be made subject to consultation under Clause 207.

Clause 206(2) sets out those matters to which the authority must have regard in the context of its policy on the scale of penalties. Amendment No. 161UA reflects our proposal that the authority's statement of policy should be extended to cover its policy on the circumstances in which it will take disciplinary proceedings. Amendment No. 161VA would add a further matter to which the authority must have regard: namely, whether the person who contravened a requirement brought the matter to the authority's attention.

We believe that this is an important consideration for the authority to have regard to when fixing penalties. On the assumption that those who do bring contraventions to the authority's attention will be eligible for lower penalties, this provision will encourage authorised persons to come forward, rather than hoping that the matter will remain undiscovered.

I now turn to Amendment No. 161WA. Financial institutions in general, and the City in particular, are very concerned, as your Lordships must by now be aware, about the authority's disciplinary powers. I hasten to add that this is not because they are frightened of being disciplined for genuine wrong-doing, but rather because of the almost unlimited circumstances in which they are at risk of being so disciplined.

The reason that firms are so concerned about discipline is the following: first, FSA rules cover virtually every aspect of an authorised person's regulated activities; secondly, the rules are generally drafted in absolute terms which apply to every single transaction. For example, a broker will normally be

9 May 2000 : Column 1472

required to achieve timely execution on every trade, and a financial adviser to give suitable advice on every occasion. Accordingly, a single failure amounts to a rule breach.

Thirdly, there is no de minimus provision, which provides that a small number of failures will not amount to a rule breach. Fourthly, firms are required to keep records of their activities and generally to log rule breaches. Finally, firms are required to notify serious rule breaches to the authority, which in any case carries out routine inspections of firms.

Virtually every authorised firm will therefore be in breach of one or more rules for much of the time and will feel exposed to the risk of disciplinary action. For this reason, understandably enough, firms are concerned to ensure that there should be adequate safeguards built into the disciplinary process.

This amendment seeks to address one particular concern, which is that once the authority has decided to commence disciplinary action, by the issue of a warning notice, there should be ample opportunity for firms, and also approved persons and individuals being disciplined for market abuse, to be able to speak to an independent committee within the authority in order to attempt to settle the matter in advance of a formal tribunal hearing. At present the Bill contains very little about the procedure which is to apply between the issue of the warning notice, dealt with by Clause 203, and the issue of the decision notice, dealt with by Clause 204.

There is provision in Clause 390 that the authority must have a procedure in relation to the giving of warning and decision notices. Subsection (2) states that the procedure must ensure that the decision to give such notice should be taken by someone who is not directly involved in establishing the evidence upon which the decision was based. However, in our submission, this does not go far enough. The proposed new clause after Clause 207 seeks to codify what the authority has recommended in its response to Consultation Paper 17.

Consultation Paper 17, issued in December 1998, sets out the authority's proposals for enforcing the new regime. It attracted, as many noble Lords will doubtless be aware, a significant amount of comment, in particular in relation to ensuring that firms were able to make effective representations to the FSA without needing to go to the trouble and expense of a formal disciplinary hearing.

The authority published its response in July 1999 taking into account various responses received from the financial services industry. Pages 4 to 7 set out the authority's comments on the decision-making process. Paragraph 18 states that the authority is attracted to a disciplinary decision-making process with most of the features now contained in the proposed new clause after Clause 207.

The reason for setting the process out in the Bill rather than hoping that the authority will adopt this procedure and continue to keep it in force is to give confidence and certainty to regulated firms. Without in any way seeking to diminish the importance of

9 May 2000 : Column 1473

observing the rules in the first place, and without denying that in many circumstances disciplinary action is wholly justified, firms are anxious to ensure that, if threatened with such proceedings, they have the assurance of a reasonable opportunity to seek to persuade the authority that it should not so proceed. It could, for example, be because the authority is mistaken as to the facts, has overlooked mitigating circumstances or perhaps is even treating the firm unfairly or inconsistently. I beg to move.

9.30 p.m.

Lord Bach: My Lords, Amendment No. 161VA would add a new factor to which the authority must have regard in its policy on setting penalties: whether the alleged contravenor brought the matter to the FSA's attention.

Everyone would agree that any reasonable public authority is bound to take due account of whether a person drew the authority's attention to a contravention. In another field it would be called good mitigation. The act of "owning up" is clearly a factor that should be taken into account. That is part of establishing an effective collaborative relationship between regulator and regulated.

Indeed, the authority has already made clear that this would be one of the factors that it would take into account in its policy on imposing fines on authorised persons under Part XIV and approved persons under Part V. As has been pointed out, this was factor (g) in a list of factors to be taken into account on page 36 of the authority's Consultation Paper 17, entitled Enforcing the New regime, published in December 1998.

Other factors listed on page 36 of that paper include the degree of co-operation shown in the investigation of a breach, or steps taken to prevent similar problems arising in future, neither of which appears on the face of the Bill.

Similarly, the authority dealt with the factors to be taken into account when deciding to impose financial penalties for market abuse on page 53 of CP17. These include the degree of co-operation with FSA inquiries and steps taken to address the misconduct in question. It is in any case right that we should not include factors here that are not included in the exactly equivalent provisions in relation to the financial penalty powers in, first, Part V, approved persons in Clause 69, secondly, Part VI, official listing in Clause 91, and, thirdly, Part VIII, market abuse in Clause 120.

The point is that we have identified in Clause 206 particular factors which the joint committee said should be given particular weight, but these are not exhaustive. There are clearly other factors that any reasonable public authority should take into account, one of which is whether or not the person owned up.

The FSA is well aware of that and has reflected it in its proposed policy. Indeed, it has reflected it on a wider basis than would be implied by the amendment in isolation. The policy will be carried through to its enforcement manual, which it will publish soon for further consultation.

9 May 2000 : Column 1474

Amendments Nos. 161TA and 161UA seek to expand the scope of the statement of policy to be issued under Clause 206 to include a statement as to the circumstances in which the FSA will take disciplinary measures under Part XIV as opposed to the policy on imposing financial penalties. We submit that that, too, is unnecessary.

Page 35 of CP17 listed criteria which the FSA proposed to take into account in determining whether to take disciplinary action. As with the factors in fining decisions already referred to, these criteria for disciplinary actions received broad support during the process of consultation on CP17. Again, the FSA's draft enforcement manual will specifically cover these criteria, so there will be a further opportunity for consultation on them.

Our point is that we have followed the recommendation of the joint committee in prescribing what must be covered by the statement of policy. That does not mean that the authority should not publish and consult on other aspects of its policy--as indeed it has been doing--but we have not attempted to make this provision exhaustive and we do not think it necessary to do so. It is on that basis that we hope the noble Lord will agree to withdraw his amendment.

The proposed new clause after Clause 207 seeks to legislate for the enforcement committee, the arrangements for which were also set out in CP17. As we have made clear on a number of occasions, including in the Government's response to the Burns committee and in another place, we do not think it appropriate or desirable to set out the administrative arrangements which the FSA must follow in such detail. Instead, we have used the Bill to impose certain important parameters.

Clauses 390 and 391 require the authority to consult on and publish a statement of its procedures. In keeping with the recommendation of the Burns committee that,


    "the FSA should set up an enforcement committee or some equivalent mechanism to separate the functions of investigation and enforcement",

the Government introduced subsection (2) of Clause 390. It requires that, among other things, the published procedures must be designed to secure an appropriate separation between those directly involved in building a disciplinary case and those taking the decision to proceed with the disciplinary action.

Thus the enforcement committee is the means by which the FSA currently proposes to meet that requirement, but the Bill does not prevent these administrative arrangements being developed and improved in future. Deliberately, Clauses 390 and 391 leave the way open to future development of the procedure. That is entirely in keeping with the Burns committee recommendation.

The FSA will allow time for representations to be made following the warning notice. That is already a requirement under Clause 382. The FSA has also announced that representations can be both written and oral. However, we cannot accept that there should be a requirement in the Bill that the enforcement

9 May 2000 : Column 1475

committee should take oral representations from the authorised person, his legal representatives or the authority. In our opinion, that would be going too far in turning the committee into an additional tribunal.

The Government have made clear again and again that we do not believe it is desirable that the authority's internal arrangements should be turned into a rival tribunal to the independent financial services and markets tribunal established under Part IX of the Bill. That tribunal is a fully independent, first-instance tribunal and, as such, is the guarantor of a person's right to a fair hearing. Inserting a prior quasi-tribunal stage would serve only to increase the time and expense involved before the person concerned has access to the proper tribunal.

We believe that the amendment suffers from other problems; for example, the notification required under subsection (10)(a) would duplicate the notice of discontinuance which the authority is required to issue under Clause 384 where it decides not to proceed with an action proposed in a warning notice.

It is also important that we do not fudge the matter of who is taking the action in question. The amendment appears to give that responsibility to the committee, as distinct from the Financial Services Authority, although the powers are the authority's and it must be the authority that is accountable for their use.

By appearing to give the committee separate responsibility for the exercise of the authority's powers, there is a danger that the committee will separately become a competent authority for the purposes of the European directives. We have already amended Part IX of the Bill to avoid precisely that possible, and we believe unwelcome, outcome for the tribunal. It is for those reasons that we invite the noble Lord to withdraw his amendments tonight.


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