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Lord Taverne: My Lords, the Act is long and complicated and the order is detailed. Fortunately, it is not very controversial. It was not very controversial in the other place and, subject to a number of questions being asked, I trust that it will not be very controversial here.
It seems to me that the Act is being implemented in a sensible way, as one would expect from the FSA in its present form. It is sensible that three sets of regulations should become one. The new exemptions appear to be sensible: the high net-worth investors; the mere conduits; the exemption of communications by content not the medium; and the exemption of journalists.
I have only one question to ask the Minister. It relates to Article 12, the issue of territorial scope. I am not quite clear where we are on the question of mutual recognition. I understand that if there is no mutual recognition, we do not regulate promotions from the UK to overseas in order to avoid a dual burden. I also understand that if there is dual recognition, we do regulate it but we do not regulate promotions from overseas into the United Kingdom. Is mutual recognition a regime which will come into being in total when everyone has the necessary regulation, or will it be introduced gradually? If so, how will it work? How will the regulations be amended?
I am a little puzzled by one comment the Minister made. He said that the Government will also impose a home state regime if it is clear that that is required for reasons of consumer protection. Does he mean that even if the system of mutual recognition is generally in place we shall disregard it because we believe that one of the members of the EU does not have an adequate system of home regulation? Is that what it is about? That seems to be totally contrary to the spirit of mutual recognition as it is envisaged for financial services. I did not understand that phrase in the Minister's speech and I should be grateful if he could explain it.
Lord Kingsland: My Lords, we are pleased to see that the Government have responded positively to a number of suggestions in respect of their earlier draft. However, there remain some outstanding matters which give us cause for concern.
As with the previous orders, my approach will be to propose particular amendments that I would have tabled had the rules of your Lordships' House permitted me to do so. I comfort myself with the knowledge that the Government have allowed themselves enough time to produce a further revised order to accommodate the amendments that I propose.
I turn first to Article 12. We welcome the Government's decision to drop the home state regulation of financial promotion communications where they are received outside the United Kingdom. We also accept the need to place some restriction on unsolicited real time communications, or, more colloquially, cold calls.
However, the exemption for cold calls to overseas recipients still depends on the communicator not carrying on the same business in the United Kingdom. If he does, he is prohibited from making them. We believe it is irrelevant that the communicator carries on the same business in the United Kingdom. If he does so, he is likely to be authorised under the FISMA, in which case the financial promotion restrictions would not apply at all. The importance of widening the exemption is that a financial services firm making a communication from outside the United Kingdom would not be subject to the FSA's financial promotion rules if, as the FSA has indicated, it will not apply those rules to exempted financial promotion communications.
Alternatively, a person may lawfully be carrying on in the United Kingdom a business which involves controlled activities to which the financial promotion restrictions apply, even if he is not authorised under the FISMA. That is because a controlled activity includes not only regulated activities but also activities which would be regulated activities apart from any exemption. Even if an exemption from the need for authorisation applies, the communication may thus, none the less, still be a communication relating to a controlled activity--and so subject to the financial promotion restrictions.
Accordingly, in paragraph (2)(b) of Article 12 the words,
- "and which is not carried on in the United Kingdom",
We also accept that there should be proper procedures to prevent the accidental transmission of exempted communications to non-permitted recipients in the United Kingdom. However, as the prohibition is extended to dealings with close relatives, or group companies, it is important to restrict the prohibition so that it applies only in relation to the communication concerned. For example, a group company may be entitled to make its own communications to the recipient if it was previously a client. Accordingly, in line 3 of Article 12, after the expression,
- "engaging",
- "(as a result directly or indirectly of that communication)".
We agree that a communication will still be treated as directed only at persons outside the United Kingdom, even if it is also directed at permitted recipients in the United Kingdom. However, we believe that it would make much more sense to the reader if it is made clear in the order that the permitted
recipients are in the United Kingdom. Accordingly, in line 2 of sub-paragraph (a) of paragraph (5) we recommend the deletion of the expression,
- "falling",
- "who are in the United Kingdom and fall".
- "high net worth persons",
- "in the United Kingdom".
The condition that a communication must not be acted upon by persons in the United Kingdom is supposed to be amended by paragraph (6) of Article 12 so as to allow for the fact that permitted recipients in the United Kingdom may none the less act on it. However, sub-paragraph (b), on its true construction, means that the communication must indicate that it cannot be acted upon by persons who are not permitted recipients, even if those persons are outside the United Kingdom. Instead of extending the prohibition to cover non-permitted recipients outside the United Kingdom, the prohibition should apply only to these non-permitted recipients if they are in the United Kingdom.
In other words, the good intentions of paragraph 6(a) are undermined by the unintended drafting effect of paragraph 6(b). As things stand, the paragraph now covers only individuals outside the United Kingdom if they are high net worth persons.
Accordingly, we propose in sub-paragraph (a), line 2 of paragraph 6, after,
- "all persons",
- "inside the United kingdom",
- "or by",
- "unless they are";
- "do not";
- "not".
I turn now to Article 13. The exemption here applies to communications made by a recipient of an investment service. It should cover corporate venturing--for example, advertising the fact that the communicator has money available to invest in start-ups. That is something which we know that the Chancellor of the Exchequer wants to promote. If in the Minister's view the exemption is not wide enough to cover corporate venturing, we urge that such an exemption is provided.
So far as concerns Article 15, we do not understand why the exemption for communications consisting of introductions to FISMA-authorised or exempted firms only applies to so-called real-time communications. If the exemption is so restricted, it means that, if someone writes a letter to effect the
introduction, he will be committing a criminal offence. The previous draft of the order did not have any such restriction.I turn to Article 18. It is sensible to provide an exemption to those who merely publish communications written by someone else, such as newspapers and Internet servers. However, the exemption should apply even if the principal purpose of the business carried out by the conduit is not, as presently required, transmitting or receiving material provided by others--for example, a newspaper or Internet server, such as Reuters, communicates both its own news items and information supplied by other persons.
We also believe that two other conditions to this exemption are too restrictive. Clearly, the communication should be mainly devised by someone other than the conduit. However, to say that it must be wholly devised by that other person may mean that the exemption will not apply if the conduit--for example, for reasons of space--changes only one or two words. Moreover, although it is right to provide that the conduit should only exercise control over the contents of a communication in certain specified cases, it must be inappropriate to provide that acting at the request of a regulator should only provide an exemption where the regulator is actually empowered to make the request. That would throw the risk of a regulator acting beyond its powers wholly on the conduit which, surely, the Minister must agree, is unfair.
Accordingly, we ask the Minister to make the following amendments to Article 18: first, in paragraph 2(a), line 1, delete the words after,
- "carried on by him",
- "wholly devised by another person"
- "mainly devised by another person who is identified in it and the communication clearly identifies that that is the case".
- "that person reasonably thinks".
I now turn to Article 30. This is an exemption allowing persons outside the United Kingdom to respond by telephone, or, as they say nowadays, other real time communication, to persons in the United Kingdom who have asked him to contact them. However, as currently written, the exemption does not apply if the overseas communicator carries on the same investment activities from a UK branch. This means that, if he has a UK branch, he cannot carry on a conversation with a person who telephones him from the United Kingdom, even if the financial promotion relates to his non-UK business. We do not understand why somebody who is outside the United Kingdom cannot talk to somebody who is inside the United Kingdom, and who wants to talk to him, merely because he is carrying on the same activity in the United Kingdom.
Accordingly, in the definition of "overseas communicator", we propose to delete everything after "means a person who" and to substitute "makes the communication", and then move down after "communication" the last two lines of paragraph (1).
Your Lordships will be relieved to hear that my final remarks are addressed to Article 48, which concerns high net worth individuals. The exemption for communications to certified high net worth individuals should be expanded to apply to communications to recipients who, the communicator reasonably believes, meet the financial tests for high net worth. This is the only way to ensure that the communicator does not commit a criminal offence when he tries to find out whether the recipient falls within the exemption. If the exemption applies only if he really is a certified high net worth individual, the communicator will be committing a criminal offence if he gets it wrong--because experience shows that most high net worth individuals will not, without knowing what the investment opportunity is all about, want to indicate that they are, indeed, properly certified.
Accordingly, in paragraph (1)(b) of Article 48, we suggest the deletion of the word "certified" and the substitution of,
- "person the communicator reasonably believes to be a",
- "because he falls within paragraph (3)(c)(i) or (ii)".
- "and (e) results in the recipient engaging in the investment activity referred to in it if he signifies to the communicator that he is a certified high net worth individual".
The certificate has now been amended so that it relates to future promotions. However, the change has not been made throughout the certificate. Accordingly, further changes ought to be made to paragraph (2)(b) to that effect. Article 50, which deals with so-called sophisticated investors, ought to be amended to the same effect.
I apologise for inserting so many oral amendments in my remarks, but it is a sad fact that your Lordships are unable to amend orders. In these days of skeleton legislation, often the most important rules appear not in the Acts themselves but in the regulations. I hope that one day your Lordships will think that these matters are sufficiently important to change the rules of the House so as to permit amendments in the circumstances of tonight's order.
10.25 p.m.
Lord McIntosh of Haringey: My Lords, I am grateful to all noble Lords who have taken part in this debate. Perhaps I may begin by saying to the noble Lord, Lord Hodgson, that I very much appreciate and sympathise with the point he made about small firms and the need for them to be given an opportunity to understand the regulations to which they are subject. If I then go on to say that we have already tabled
15 statutory instruments and that there are likely to be a further 50 instruments, I do not think that he will be much reassured.I am not sure that I agree with him that regulators tend to fear that infringements will be made by small firms. If I think of some of the debacle regulations under the previous regime, I first call to mind BCCI and Barings rather than any small firms which may have committed infringements. That may not give the noble Lord much comfort, but in my view that is the truth of the matter.
The noble Lord asked me about Article 6(1) concerning cold calling. I understood him to say that he was appreciative of the definition of high net worth, although I do not believe that the noble Lord, Lord Kingsland, was appreciative in the same way. He asked me how cold calling would qualify in the case of an invitation to what appeared to be a neutral meeting outside the recipient's premises. According to the definition of when a call is solicited, it is solicited only if it is clear that the meeting has been requested by the customer, who knows that financial promotions are going to be made during the meeting or conversation. That is made clear in Article 8(3)(b) of the order.
The noble Lord also asked about Article 36(b) which concerns the protection of UK investors from other states in the European Economic Area. The article makes it clear that any promotion of that kind has to conform with FSA financial promotion rules which will provide the appropriate safeguards. I do not know the answer to his question about Article 62 as regards whether employees are included. I shall write to the noble Lord on that point.
I am grateful for what was said by the noble Lord, Lord Taverne. Clearly he has picked up one of the most important aspects of this order; namely, the question of the move towards home state from host state regulation. He asked me why I should have said that we would consider introducing home state regulation for the sake of consumer protection. If I understand his thinking, he is right to say that we are considering here a gradual move rather than an all-in-one move towards home state regulation.
On the issue of consumer protection, only when it is clear, for example, with "boiler room" operations from the United Kingdom, would we require these communications to be approved. We are dealing not only with EU member states in this regard, but also with promotions from third countries. The UK may not be able to question the adequacy of a regime set up under a Community instrument. It might want to scrutinise the adequacy of the regime in a third country.
I believe that I have already dealt with the issue of mutual recognition and how it will come in gradually. However, we want to manage the transition in a way which continues to protect UK consumers, to minimise the burden on business of double regulation and, as I said, to take into account the position of non-EU countries.
I shall turn now to the points made by the noble Lord, Lord Kingsland. I must say that, while I have heard of manuscript amendments, I do think that oral amendments go a little further. I think that the noble Lord will understand if I say that, to listen to amendments produced in such a way, does not encourage me to believe that I can understand them as fully as he would wish.
I have to make it clear at the outset that we intend this order to proceed as drafted. The noble Lord's comments and his oral amendments are on record in Hansard; I have no doubt that the appropriate authorities will pay attention to them. I shall try to respond to the points he made, if not to their drafting.
The noble Lord spoke, first, about the need for restrictions on cold calls; on unsolicited real-time communications. He suggested that the exemptions for cold calls to overseas recipients still depend on whether the communicator conducts the same business in the United Kingdom. Where unsolicited real-time communications are by a promoter who does no UK business and the recipient is also not in the UK, then, although the promotion may be,
- "capable of having effect in the UK"--
But where a promotion is made from outside the UK, is not directed at the UK but the promoter does do business in the UK, issues of consumer protection arise. A complete exemption would allow UK firms, or firms which operate in the UK, to avoid UK regulation simply by promoting UK products from a branch in another country. We do not think that that is acceptable. I would not accept the noble Lord's amendments on that basis.
The noble Lord, Lord Kingsland, then said that he hoped that Article 12 would provide that a communication would be treated as directed only at a person outside the United Kingdom even if it were directed at investment professionals and persons of high net worth. I can confirm that a communication can still be regarded as not directed at the United Kingdom even if it is directed at investment professionals and high net worth companies--but not high net worth individuals--in the United Kingdom. I can further confirm that Article 12(6)(b), on which the noble Lord suggested there was some doubt, should not be construed as meaning that promotion to investment professionals and high net worth companies outside the United Kingdom are outside the exemption for promotions to recipients outside the United Kingdom.
The noble Lord queried the drafting of the territorial provisions in rule 3(4) of the FSA rules. Section 145(3) of the Act--which he called skeleton legislation but I do not think anyone who was involved in the legislation last year would call it skeleton legislation--prevents the FSA from making financial promotion rules for authorised persons other than in circumstances in which, if the person were not authorised, he would contravene the financial
promotion restriction. If the current draft of the FSA rules do not meet its requirement, they will have to be amended.As to Article 13 and corporate venturing, I wish to make it clear that Article 13 is not intended to cover corporate venturing. The exemption in the article applies to communications made to one other person only.
Article 15 refers to an exemption for communications which consist of introductions to firms authorised or exempted by the Financial Services and Markets Act applying only to real-time communications. That is because there is a separate exemption in Article 28 for one-off communications, which should cover introductions to firms, which applies to all non-real-time communications.
The noble Lord suggested that the exemption in Article 18 should apply even if the principal purpose of the business carried on by the conduit is not that of transmitting or receiving material provided by others. Those who pass on promotions should exercise some due diligence in ensuring that the promotion is either exempt or has been approved by an authorised person. Organisations such as the Post Office or Freeserve, whose principal purpose is transmitting or receiving material provided by others, cannot be expected to undertake such due diligence for information which they transmit, but that does not apply to companies which, although they do not exercise control, are not merely passive transmitters. We think that it is appropriate that such companies which do not meet the principal purpose test should be required to operate a degree of due diligence or restrict their promotions to those who fall within one of the other exemptions.
The noble Lord suggested that the communication should be devised by someone other than the conduit--in other words devised wholly by the other person. He said that the provision could mean that the exemption could be challenged. What matters is the extent to which the communicator, under the provision in Article 18 in respect of promotion, selects, modifies or otherwise exercises control over its content. This could only be considered on a case by case basis. But if a communicator is more than a passive transmitter of information, then he is not a mere conduit.
The noble Lord suggested that it is inappropriate that in certain cases we provide that acting at the request of a regulator should provide an exemption only when the regulator is empowered to make the request. If the mere conduit acts reasonably in responding to the request of the statutory body but it later turns out that the body did not have the power to make the request, the mere conduit would be able to rely on the defence in Section 25(2)(b) of the Act:
- "that he took all reasonable precautions and exercised all due diligence to avoid committing the offence".
The noble Lord then referred to Article 30 and queried why someone who is outside the United Kingdom cannot talk to someone who is in the United Kingdom just because the person outside the
United Kingdom is carrying out the same activity within the United Kingdom. Articles 30 to 33 essentially replicate the position for overseas communicators in previous legislation. There is a risk of persons doing business in the UK avoiding UK regulation if they can simply locate their promotional activity in another country. People outside the United Kingdom who are also doing business in the UK can, of course, take advantage of all the other exemptions.The noble Lord queried in some detail the definition of,
- "certified high net worth individuals"
I hope that that has covered the majority of the detailed points raised by the noble Lord, Lord Kingsland. I do not believe that he has dented the wording of the regulation and I commend it to the House.
On Question, Motion agreed to.
- House adjourned at twenty-two minutes before eleven o'clock.
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