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Miss Melanie Johnson: I beg to move, That the clause be read a Second time.

Mr. Deputy Speaker: With this it will be convenient to discuss Government amendments Nos. 245 to 248.

Miss Johnson: The central objective behind the unenforceability provisions in clauses 24 to 27 is not to find an additional way to penalise wrong-doers, but to assist the financial markets by removing uncertainty. The clauses start from the same presumption of unenforceability that exists under the general law and section 5 of the Financial Services Act 1986.

The underlying principle is that agreements entered into in the course of, or as a consequence of, illegal activity cannot generally be enforced in the courts. In other words, people should not be able to profit from crime. These provisions confirm that presumption, and also establish clear conditions which, if met, give the courts discretion to enforce agreements if that would be just and equitable. It was thought necessary to include provision along those lines in the 1986 Act. We think that it is equally right and necessary to provide the same level of clarity and certainty in this Bill.

In Committee, the hon. Member for Arundel and South Downs (Mr. Flight) agreed with us that it is a reasonable principle to apply that an authorised person should not be able to enforce an agreement if it was made through an intermediary who should have been authorised but was not. However, the hon. Gentleman argued that it was unfair to penalise the authorised person if they did not know that the agreement resulted from unauthorised activity by some third party. We accepted that argument.

Clause 26 goes beyond the existing test in that it makes an agreement unenforceable if the court considered that, although the authorised person did not know, he had grounds for suspecting. That is not the intention behind these provisions. Government amendment No. 245 will therefore align the test with the 1986 Act, so that the courts can exercise their discretion to enforce when they are satisfied that the service provider did not know that the agreement resulted from illegal activity.

We also undertook in Committee to amend the test for enforcing agreements resulting from illegal financial promotion. As it stands, the tests in clause 27 are

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concerned with the effect of the promotion, rather than the belief or knowledge of the service provider. On reflection, we think that that is inappropriate. The effect of the promotion on the customer can be taken into account as necessary by the court in deciding whether enforcement is just and equitable, but the prior test should be as it is for agreements entered into as a result of unauthorised regulated activity.

If the service provider is also the promoter, the question should be whether he reasonably believed that he was not contravening the prohibition. If the promoter is a third party, the question should be whether the service provider knew that the agreement was a result of an illegal promotion.

Sir Nicholas Lyell: I am mostly encouraged by the Minister's remarks, but I am not entirely happy with part of them. If it is just and equitable that the deposit should not be returned, why is it necessary for the person who will suffer--contrary to justice and equity--to prove that he reasonably believed something?

Miss Johnson: I shall think about that point for a moment, because it is a difficult question. The right hon. and learned Gentleman was one of the main instigators of some of the improvements made in the new clause, as a result of issues that he raised about deposit taking and unenforceability in correspondence with me. Sadly, he was not present when we discussed it in Committee, but I hope that the new clause addresses the point that he made, as well as those raised by the hon. Member for Arundel and South Downs, who rued the absence of the right hon. and learned Gentleman at that point in the Committee's proceedings.

The hon. Gentleman also argued in Committee that clauses 24 and 25 should not exclude illegal deposit taking from the effect of these provisions. In support of that, he put forward the possibility of a person locked into a fixed-term deposit arrangement with an illegal deposit taker. In such a case, he argued that the depositor should be able to demand the return of their deposit immediately. Again, we accept the point.

It would be unsatisfactory if the victims of an illegal deposit taker were disadvantaged, so new clause 12 tackles the point directly. Unless the courts are satisfied both that the deposit taker reasonably believed that he was not breaching the prohibition and that it would be just and equitable to uphold the agreement, the depositor will be able to obtain immediate repayment. I do not know whether that answers the right hon. and learned Gentleman's question. [Interruption.]--I think that he is indicating that he is satisfied by that.

Sir Nicholas Lyell: I was indicating that I would seek to catch your eye, Mr. Deputy Speaker.

Miss Johnson: I have nothing further to say at this point, except to commend the new clause to the House.

Mr. Heathcoat-Amory: The new clause addresses the enforceability of contracts or agreements made by regulated persons in contravention of the rules. As we have heard, and as we discussed in Committee, those are

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generally unenforceable except in certain circumstances. The changes that the Government have brought forward are generally helpful, so we do not complain about them.

I have a slight problem in understanding the distinction between someone who sells and someone who purchases. The authorised person, it is assumed in the Bill, is normally the person who is selling something to a member of the public and is then found to have done so in contravention of the rules. However, the Government now appear to recognise that the authorised person could be buying something because, in Government amendment No. 244, the word "provider" is replaced with the phrase

Following discussion with those who have advised us, we recommended the word "counter-party" as preferable to "provider". It is neutral, and the person thus referred to could be receiving or providing services. That suggestion has not been taken up, although the Government have mostly tried to avoid the word "provider". However, clause 26 will still contain the word "provider", which is now an anomaly. I do not know whether it is an oversight--perhaps the late corrections to the Bill have not picked up all the instances of the use of "provider"--or deliberate. Perhaps the Minister could clarify that point.

Sir Nicholas Lyell: I welcome what the Minister said, as far as it went. However, it did not go far enough and, although the new clause looks innocuous on paper, I fear that it could lead to injustice. If the deposit taker has to have "reasonably believed" that he was not contravening the general prohibition when making the agreement, he may suffer a loss that, but for those words, the court would regard as unjust.

I shall make up an example of what I mean. Let us say that a person gives money to another person who makes investments on his behalf. Normally, the money is given simply to pay for the investments but, in the case that I am describing, some proportion of it is deemed to be held on deposit. If the person doing business fails to pay other debts to the business that makes investments on his behalf, he may claim back the money that is being held on deposit.

In those circumstances, it may be very unfair not to allow the illegal deposit taker to hold on to the money. Indeed, he may be relying on that money so that he can continue to invest on his client's behalf. The Minister's advisers may recall that all my thoughts go back to the case of SCF v. Masri, in which that rule, which is part of the Banking Act 1979, very nearly caused serious injustice. In that case, the investment business was not held to have been an illegal deposit taker, but making that determination can often involve many technical questions.

8.15 pm

The technical circumstances may mean that the business held to be an illegal deposit taker did reasonably believe that it was not contravening the law. To that extent, new clause 12 would be satisfactory. However, it could easily transpire that that belief was not reasonable, and that a silly mistake had been made. Such a mistake could have highly disproportionate consequences if provisions such as those in the new clause were accepted.

I entirely understand where the Government are coming from, and accept that they are thinking about the matter sensibly. However, they have not gone far enough.

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Depositors' automatic entitlement to getting their money back--unless the illegal deposit taker can demonstrate that repayment would not be just and equitable--is sufficient protection for them, but it is not absolute. It means that justice can be done when people have acted in good faith, but not necessarily reasonably.

The structure of the new clause shows that the Government are anxious that the courts should be able to do justice. Proposed new subsection (3)(a) states that the court need not make such an order if it is satisfied that

I think that that is enough, and that there is no need for the provision involving reasonable belief. The same arguments apply to Government amendments No. 245 to 248.

The Economic Secretary may argue that, to some extent, this business of unenforceability is a discipline on providers in the market. However, it can be so unjust that most of the time it would not be necessary: in cases where it was necessary, the court would order the money to be paid, because obviously it would be just to do so.

I hope that I have explained myself adequately, and that the Government will agree to think again on the matter. I am grateful for the distance that they have covered already, but it is not quite far enough.

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