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Mr. Jim Cousins (Newcastle upon Tyne, Central): I am sure that my hon. Friend has followed the exchanges that have taken place between two of our great popular newspapers over the past 10 days. Allegations have been made--it is not necessary to explore the truth of them here--that journalists responsible for giving investment advice themselves had investments in the companies and enterprises that they were tipping. Do the Government intend activities of that kind to be caught by the clause?
If this is a difficult question, I am happy for further thought to be given to it, but we need clarification. The investing public are now very aware of the situation, because of the conflict between the two newspapers.
Mr. Timms:
My hon. Friend presents me with an interesting invitation to engage in the crossfire between two august institutions. I shall resist on this occasion, but he has raised a significant point, on which we may be able to comment before the end of the debate.
Amendment No. 5 deals with the territorial scope of the financial promotion prohibition. We discussed that at length in Committee, and it was also dealt with in the two financial promotion consultation papers. Territorial scope is especially important given the increasing use of the internet, whereby overseas providers can easily target UK investors. We want to encourage use of the internet, which should lower costs to consumers and provide consumer choice. It should also give UK businesses better access to a wider range of consumers. It is, however, important for consumers to have appropriate protection as well.
The financial promotion prohibition has a twofold territorial scope. It applies to promotions issued from the UK to places or persons overseas, and also to inward promotions--promotions issued to the UK from outside it. Amendment No. 5 relates to inward promotions, and proposes that promotions that originate overseas but are
Amendment No. 5 would have a fairly similar effect to that of inserting the "directed at" test--currently in the order--in the Bill. Both the amendment and the clause as currently drafted reflect, to an extent, the principle of so-called host state regulation: regulation in the country in which a promotion is received. We mention in the consultation paper that we have been considering putting the "directed at" test in the Bill, rather as the right hon. Gentleman proposes. We think, however, that it would be inappropriate to make any change along those lines at this stage, for a number of reasons.
First, the consultation has only just ended, and we need to consider it properly. Secondly, we need to view the issue in the light of potential European Union and international developments--and, in particular, a possible move to the "home state" or "country of origin" regulatory principle in respect of financial promotions, if that is provided for in future by EU legislation or other multilateral agreements. We want to ensure that the Bill is future-proof in that respect.
We support the principle of home state regulation that is reflected in the draft European e-commerce directive, although its application is limited in the financial services sector, but we are not currently convinced by the
argument for applying solely the home state regulatory principle to financial promotions in advance of appropriate European legislation. We need to bear in mind the importance of the UK acting consistently with other jurisdictions. If the UK applied, say, only home state regulation, but other European economic area jurisdictions applied only host state regulation, there could be undesirable results and gaps in the system. However, it is an important issue. We have been consulting on it. We prefer not to prejudge the results of that consultation by amending the Bill at this stage. The possibility remains of doing so later. I hope that Conservative Members will take some comfort from that.
I move to amendments Nos. 388 and 404. Amendments that would have had a similar effect were debated in Committee, when my hon. Friend the Economic Secretary to the Treasury recognised that there might be a case for applying the territorial scope of the collective investment scheme marketing prohibition differently from that of the clause 19 prohibition. We will continue to reflect on that in the light of consultation responses to the financial promotion consultation paper; again, reflection on that is not yet concluded.
Amendment No. 185 seeks to provide that oral promotions should not be prohibited, unless they amount to an invitation to engage in investment activity. That is not appropriate. First, it reintroduces the concept of oral and other types of communication to the basic prohibition. We have tried to do away with those concepts in the light of developing technology. For example, why should someone be allowed to promote investments orally, but not over the internet, say, via an internet chat room, which to all intents and purposes has similar features to a conversation, in that a chat room effectively allows informal, immediate on-line "conversations"? The distinction is not as clear cut as it should be to be included.
Secondly, there are numerous ways in which a person might promote investments which do not amount to an outright "invitation." Conceivably, quite a hard sell would be involved, but it might not be an invitation. Under amendment No. 5, such a hard sell could be exempt, but we are not seeking to regulate all forms of communication. Seeking to control conversations of all types is not sensible. That is why we have proposed that communications that are not made in the course of business should not be caught. Therefore, a conversation between friends in the pub or neighbours should not be caught, unless it is made in the course of business.
The draft exemptions order proposes various other exemptions that could apply to oral communications: for example, a widespread exemption for calls that are invited by the recipient of the promotion and that are not made as part of a wider selling campaign.
Amendment No. 389 tracks amendment No. 787, which was tabled by the hon. Member for Arundel and South Downs (Mr. Flight) in Committee. The intention behind the clause is that, if an authorised person cannot issue the promotion, an authorised person cannot approve an unauthorised person issuing it either. Beyond that, it will be for the authority to make rules under clause 118 concerning authorised persons' approval of financial promotions. That is the intention. As the Economic Secretary to the Treasury said, we are still considering how well the drafting achieves that. We will come back
to the matter, if necessary, in due course. We will, of course, reflect again on what the right hon. Member for Wells has said.
Government amendment No. 68 is a drafting amendment to improve the clarity of the wording. I commend it to the House.
Mr. Flight:
As the Minister will recollect, there were 43 pages of debate on the clause in Committee. Numerous concerns about the clause have been raised by a raft of lawyers, by the communication industry, by the financial services industry and indeed by bureaucrats. It is somewhat strange that we should be on Report with the Government effectively saying at last that they recognise quite a lot of the concerns that we have expressed and will look to deal with them. We are left with a crucial clause that is nowhere near complete.
We cannot see why the Government have for so long not taken the points, which are clear and straightforward and which our various amendments highlight. Without repeating all the points that were made by my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory), there are four different territories. One is simple: we are dealing with a criminal offence. People can go to jail for it and there should be some requirement on the prosecution to prove intent; that the communication was to some extent promotional and intended to attract people potentially to invest.
The issue on the net is the most important. The Government seem to be saying that they will change their mind. The draft exemptions go some way towards that, but as the Government will be aware, there is quite a lot of detail that would lead a lot of businesses to fall foul of the order.
It has been made fairly clear that it would be possible to open EU infringement proceedings. Indeed, there is a question as to whether the Government should have cleared draft legislation with the Commission under the transparency directive before introducing it.
It seems that the Government will move in one form or other to the principle that we have suggested. Ridiculously, the wording
Amendment No. 185 deals with the cold-calling and oral issue. The intention is not to exempt oral communications that were self-evidently fraudulent or designed to promote, but unless our amendment is accepted there will be problems with overseas investment firms that do not have branches in the UK and that would be unlikely to know the detailed requirements under the proposed Treasury orders and to remember to send a second document asking for consent to cold calls. Many breaches could arise in relation to the placement of flotations; United States security houses would naturally want to send offerings about the world by not just oral, but
other means of communication. More thought will need to be given if our amendment is not to be accepted in that parameter.
Amendment No. 388 relates to the fact that the Bill prohibits authorised firms from marketing unregulated collective investment schemes. We believe that that prohibition should apply only when the communication is to a person in the UK. Again, there are many instances where schemes may not be regulated. They may be under jurisdictions other than that in the UK; UK firms may be properly promoting in other parts of the world, where there are either no regulations to prohibit them from doing so, or it is normal to do so. As the clause stands, particularly in the venture capital sector, some silliness could result.
"intended to be acted on by a person"--
a UK person--should be caught. The language in the Bill as it stands catches inward promotions that are
"capable of having an effect"
in the UK. I should point out, however, that the draft financial promotion exemptions order, on which we have been consulting, proposes the limitation of that arrangement, so that only communications that are actually directed at the UK will be caught. That may well deal with the concern expressed by the right hon. Member for Wells.
5.15 pm
"capable of having an effect in the United Kingdom"
would ensure that almost any form of communication about the world would be covered by UK regulation. The many communications between a business in Tokyo and one in the United States on the net could have an effect if someone looked them up here. The suggestion that the FSA should regulate cyberspace is impractical and indeed damaging to our reputation.
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