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Lord Kingsland: My Lords, as I understand them, these amendments bring the power of the authority to appoint investigators in relation to collective investment schemes into line with the provisions relating to investigations generally, and they seem satisfactory. They give the authority and the Secretary of State the power to enter premises under a warrant; to require an authorised person or an employee to explain what is meant by a document disclosed to the investigator; and to tell the investigator where a missing document is.

I have one suggestion, which I offer with great respect, and it concerns new subsection (9) introduced by Amendment No. 170AK. As we have been made aware by the Minister, this amendment provides for the obligation of confidence to be overridden on the instructions of the investigating authority. In my view, this is so serious that I should like to propose to the Minister that the instruction ought to be given by a senior official not personally involved in the meeting with the authorised person concerned.

Lord McIntosh of Haringey: My Lords, I am grateful for the general welcome. I am interested in what the noble Lord said about Amendment No. 170AK. This amendment inserts the provision for banking confidentiality to be lifted when the investigating authority directs or when the person to whom confidentiality is owed permits. I do not think it would be particularly necessary to have a senior

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officer of the investigating authority required to lift confidentiality when the person to whom confidentiality is owed permits, but I shall think about the requirement for a senior officer of the investigating authority to be called in in other circumstances. If I may, I shall write to the noble Lord on that point.

On Question, amendment agreed to.

Lord McIntosh of Haringey moved Amendments Nos. 170AA to 170AL:

    Page 146, line 40, leave out ("a person") and insert ("one or more competent persons").

    Page 146, line 41, leave out ("and report on") and insert ("on its behalf").

    Page 147, line 7, leave out ("Authority or the Secretary of State") and insert ("investigating authority").

    Page 147, line 30, leave out subsection (4).

    Page 147, line 35, leave out ("the Authority") and insert ("an investigating authority").

    Page 147, line 37, leave out paragraph (b).

    Page 147, line 39, leave out ("cases") and insert ("case").

    Page 147, line 43, after ("Subsections") insert ("(2) to").

    Page 147, line 44, at end insert--

("( ) Subsections (1) to (9) of section 172 apply in relation to a person appointed under subsection (1) as if--
(a) references to an investigator were references to a person so appointed;
(b) references to an information requirement were references to a requirement imposed under section 171 or under subsection (3) by a person so appointed;
(c) the premises mentioned in subsection (3)(a) were the premises of a person whose affairs are the subject of an investigation under this section or of an appointed representative of such a person.").

    Page 147, line 47, after ("unless") insert ("subsection (9) or (10) applies.

(9) This subsection applies if--

(a) the person to whom the obligation of confidence is owed consents to the disclosure or production; or
(b) the imposing on the person concerned of a requirement with respect to information or a document of a kind mentioned in subsection (8) has been specifically authorised by the investigating authority.
(10) This subsection applies if").

    Page 148, line 6, at end insert--

("( ) "Investigating authority" means the Authority or the Secretary of State.").

On Question, amendments agreed to.

Clause 281 [Exemption for recognised investment exchanges and clearing houses]:

Lord McIntosh of Haringey moved Amendment No. 170AM:

    Page 148, line 17, leave out ("and its recognised nominee (if any) are") and insert ("is").

The noble Lord said: My Lords, I am afraid this is an even worse list. In moving Amendment No. 170AM I shall speak also to Amendments Nos. 170AN, 170AP, 170AQ, 170AR, 170AT, 170AU, 170AV, 17OAW, 170AX, 170BA, 170BB, 170BC, 170BF, 170BG, 170BH, 170BJ, 170BK, 170BL and 170U. I think that is the list.

9 May 2000 : Column 1508

These amendments remove the provisions concerning recognised nominees from the Bill. The effect of these provisions would have been to allow a recognised body to apply for exempt status to be given to bodies carrying out certain functions on its behalf.

We introduced this concept into the Bill in another place in order to facilitate the application for recognised status by two or more bodies which together formed an exchange or clearing house but which singly did not do so and might, therefore, have had difficulty in applying for recognition.

The particular case which prompted us was that of ISMA (the International Securities Market Association), which sets the rules for the Eurobond market, and ISMA Limited, a subsidiary which carries out functions on ISMA's behalf. However, following the introduction of the recognised nominee provisions we have reviewed the regime closely with the FSA and have had discussions with the recognised bodies and with ISMA. We have identified a flaw in the way the provisions work which has convinced us that it would not be safe to proceed with them.

Recognised bodies will be subject, as now, to recognition requirements concerning their fitness and properness, financial resources and so on. Where they breach these requirements, the FSA can take action. Under the Bill, this will include a power to direct the recognised body to comply with the requirements as well as, in extremis, to revoke the body's recognition.

The flaw in the recognised nominee arrangements is that it may not be possible for the FSA to take action against a recognised nominee, or indeed a recognised body, where the recognised nominee does something which would have been a breach of the recognition requirements if the recognised body had done the same thing itself--that is, the recognised nominee would not be "standing in the shoes" of the recognised body. This potential problem arises because the recognition requirements do not bite directly on the recognised nominee. This creates a serious shortcoming in the supervision of recognised bodies.

Having looked at the options available to us, we have concluded that the best alternative is to remove the recognised nominee arrangements from the Bill. As far as ISMA is concerned, we intend to address the matter in the regulated activities order. Our intention is broadly to replicate the existing arrangements in the Financial Services Act 1986 under which ISMA is recognised as an international securities self-regulating organisation. I beg to move.

Lord Kingsland: My Lords, as the Minister said, the idea of recognised nominees was conceived in the course of the passage of the Bill through another place and was so inserted. Here we are, several stages on in your Lordships' House and now the Minister has informed us, doubtless for very good reasons, that the concept of recognised nominees is being expunged. The Minister is a well-known expert on English literature. He will recall the name of the author, because I cannot, who claimed to have spent the whole of the morning inserting a comma in his text and the

9 May 2000 : Column 1509

whole of the afternoon deciding on whether or not to take it out. Was it Henry James? I cannot believe that, for once, I have stumped the noble Lord.

Lord McIntosh of Haringey: My Lords, the noble Lord teases me. I am embarrassed. I commend the amendment to the House.

On Question, amendment agreed to.

Lord McIntosh of Haringey moved Amendments Nos. 170AN to 170AR:

    Page 148, line 22, leave out ("or by its recognised nominee on its behalf").

    Page 148, line 24, leave out ("and its recognised nominee (if any) are") and insert ("is").

    Page 148, line 27, leave out ("or by its recognised nominee on its behalf").

    Page 148, line 29, leave out subsection (4).

On Question, amendments agreed to.

Clause 282 [Qualification for recognition]:

Lord Saatchi moved Amendment No. 170AS:

    Page 149, line 11, at end insert--

("(6) Regulations made under subsection (1) must provide as recognition requirements--
(a) a requirement that the investment exchange or clearing house must establish and maintain arrangements for the investigation by a person independent of the investment exchange or clearing house of complaints arising in connection with the activities of the investment exchange or clearing house;
(b) a requirement that the arrangements established by the investment exchange or clearing house for the taking of disciplinary measures in relation to its members comply with the requirements of the European Convention on Human Rights; and
(c) a requirement that the investment exchange or clearing house is subject to restrictions on the disclosure of confidential information obtained from other persons equivalent to the restrictions which apply to the Authority under this Act.").

The noble Lord said: My Lords, Amendment No. 170AS concerns Clause 282 and the Treasury's regulations setting out the requirements which must be satisfied by an investment exchange or a clearing house if it is to qualify as a body in respect of which the FSA may make a recognition order and which, if a recognition order is made, it must continue to satisfy if it is to remain a recognised body.

Such recognised bodies are regulated entities, and regulators themselves in that they regulate the conduct of their members and take disciplinary action against them. To some extent, the role of these quasi-regulators has escaped detailed scrutiny during the passage of the Bill. The purpose of Amendment No. 170AS is to raise a number of issues concerning the criteria which the Treasury will lay down as recognition requirements under Clause 282.

The amendment proposes as recognition requirements matters which already apply to the FSA; notably, an independent complaints investigator, disciplinary measures in relation to members of the recognised body which comply with the requirements of the ECHR, and an obligation not to disclose confidential information obtained from third parties.

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I hope the Minister will be able to confirm that these requirements represent the bare minimum that the Treasury will be setting out in the regulations under Clause 282.

Perhaps the Minister would also confirm that these are indeed the recognition arrangements that will apply to the merged London-Frankfurt recognised exchange.

11.45 p.m.

Lord McIntosh of Haringey: My Lords, when we discussed the Bill's provisions dealing with recognised bodies in Committee, I made it clear that we should deal with the requirements on internal arrangements and the operation of recognised investment exchanges and recognised clearing houses in the recognition requirements that the Treasury will make under the powers of Clause 282(1)--in other words, not on the face of the Bill. We consulted on a draft of these requirements in February last year. So, although I agree with much of the substance of the amendment, I do not think it would be appropriate to place such a provision on the face of the Bill.

The noble Lord, Lord Saatchi, seeks to place on the face of the Bill details of how recognised bodies should operate. The problem with that, and the reason that we decided to do it by secondary legislation in the first place, is that we should not be able to update the requirements as necessary to take account of developments in the industry. We should run the risk of either over-loading the face of the Bill with detail or of missing some important points.

The amendment would do three things. First, paragraph (a) would require each recognised body to appoint an independent complaints investigator. One of the recommendations of the Burns committee was that the recognised body should be required, as a condition of having statutory immunity, to have "an adequate complaints procedure in place". The Government have accepted that recommendation. They have given a commitment that the recognition requirements will provide that all recognised bodies must have independent and fair arrangements for dealing with complaints. I am happy to repeat that commitment. I do not believe the amendment to be necessary.

Paragraph (c) of the amendment provides that recognised bodies must maintain restrictions on the disclosure of confidential information "equivalent" to those imposed on the FSA. I share concern that the recognised bodies should not be able to disclose information that they have received in confidence unless there is a good reason for doing so. They will, of course, be subject to the common law duties of confidentiality as they are now, so they will not be able to disclose confidential information unless the public interest in disclosing it outweighs the public interest in maintaining confidence.

If anything further is required--and I do not think it is--that can be addressed when we come to make the recognition requirements. If anything needs to be done, it should not be done by applying arrangements

9 May 2000 : Column 1511

that are the equivalent, or the same as, those applying to the FSA. The FSA is a different animal from the recognised bodies, having different functions under the Bill.

Paragraph (b) of the amendment would require recognition requirements to be made under which recognised bodies would have to comply with the requirements of the European Convention on Human Rights. In one sense, that is simply unnecessary. The Bill is drafted on the assumption that the recognised bodies will be public authorities for the purpose of the Human Rights Act 1998. But in so far as it is necessary to make provisions to take account of that in the recognition requirements, we should of course do so.

The noble Lord asked whether these criteria would apply to the merged exchange. As I said earlier, that is the expectation, although the exact form of the merged body, and hence the regulatory arrangements, are not yet clear.

Even in the absence of the noble and learned Lord, Lord Donaldson, for the record I should like to refer to a matter that he raised and argued in Committee; namely, that, in order to ensure consistency between the disciplinary arrangements of recognised bodies and the market abuse regime under the Bill, it would be helpful if the tribunal to be established under the Bill were to have a role in relation to the disciplinary decisions of recognised bodies. I said at the time that I was not attracted to the idea, but since then I have talked to the noble and learned Lord and corresponded with him. We have concluded that, given the overlap between the market abuse regime and some of the rules of recognised bodies, there is merit in ensuring that it would be possible for the tribunal to be given a role in such disciplinary cases if that were considered desirable in the future.

We have decided to table amendments to deal with this matter at Third Reading. We intend that the power should take the form of allowing the Treasury to extend the jurisdiction of the tribunal to cover specified types of hearing before the disciplinary proceedings of recognised bodies. Before such power is implemented we shall consult the exchanges and the clearing houses. I am sorry to add that point to my response, but I want to put it on the record for the benefit of the noble and learned Lord, Lord Donaldson. As to the amendment that we are now debating, I hope that I have persuaded the noble Lord not to press it.

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