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The impact on how inspections are carried out is the main argument against disclosing the reports. The concern is that if the reports were published, audit firms would take a more defensive and legalistic approach to the disclosure of information to inspectors, and inspectors might feel that they had to be more circumspect in their criticism. The key objective of the inspection system is to improve audit quality through a constructive and collaborative process aimed at best practice rather than minimum standards. That could be undermined if the process became more formal and confrontational. Publication of results could encourage a rules-driven, litigious approach that would have the reverse of the desired effect of an inspection regime that improves audit quality through constructive dialogue.

As noble Lords may be aware, the Professional Oversight Board has consulted over the summer on disclosure by the AIU, and it is likely to report on the results soon. I understand that there was a good response from companies and members of audit committees, as well as from audit firms and professional bodies. The consultation document’s main proposal was that the AIU’s main report would include a section about a named audit firm if that firm had not made sufficient progress in addressing AIU recommendations. I understand that roughly three-quarters of respondents, including audit committee members, favoured either this proposal or no change from the current approach of never naming individual audit firms.

It is very doubtful whether the reports would be available. The arguments for not publishing them are remarkably persuasive. On that basis, I urge the noble Baroness not to press her amendment.

Baroness Noakes: My Lords, I thank all noble Lords who have spoken in this debate. In response to the noble Lord, Lord Grabiner, it is not that audit committees want to avoid criticism for not knowing something; they want to make the right decision and to have auditors about whose quality they are comfortable. That is what drives the amendment.

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I am aware that the Freedom of Information Act may not be the best mechanism, but the Information Commissioner is there to see that its exemptions are used correctly. He has been courageous in standing up to government departments that have sought inappropriately to hide behind exemptions, so I am happy to go with that approach. I wish to test the opinion of the House.

4.44 pm

On Question, Whether the said amendment (No. 954A) shall be agreed to?

Their Lordships divided: Contents, 116; Not-Contents, 104.

Division No. 3


Addington, L.
Anelay of St Johns, B.
Ashcroft, L.
Avebury, L.
Barker, B.
Beaumont of Whitley, L.
Blaker, L.
Bowness, L.
Bradshaw, L.
Bramall, L.
Bridgeman, V.
Brooke of Sutton Mandeville, L.
Brougham and Vaux, L.
Byford, B.
Campbell of Alloway, L.
Chidgey, L.
Colwyn, L.
Cope of Berkeley, L. [Teller]
Cotter, L.
Craigavon, V.
Crathorne, L.
De Mauley, L.
Dean of Harptree, L.
Denham, L.
Dholakia, L.
Dixon-Smith, L.
D'Souza, B.
Dykes, L.
Eccles, V.
Eccles of Moulton, B.
Eden of Winton, L.
Elliott of Morpeth, L.
Elton, L.
Falkland, V.
Finlay of Llandaff, B.
Fookes, B.
Garden, L.
Geddes, L.
Glentoran, L.
Goodhart, L.
Goodlad, L.
Hamilton of Epsom, L.
Hamwee, B.
Hanham, B.
Hannay of Chiswick, L.
Harris of Richmond, B.
Hayhoe, L.
Hodgson of Astley Abbotts, L.
Hooper, B.
Howard of Rising, L.
Howe, E.
Howe of Aberavon, L.
Howe of Idlicote, B.
Hunt of Wirral, L.
Kimball, L.
Kingsland, L.
Laing of Dunphail, L.
Laird, L.
Lang of Monkton, L.
Lee of Trafford, L.
Liverpool, E.
Luke, L.
Lyell of Markyate, L.
McColl of Dulwich, L.
MacGregor of Pulham Market, L.
Mayhew of Twysden, L.
Miller of Hendon, B.
Monson, L.
Montrose, D.
Moore of Lower Marsh, L.
Murton of Lindisfarne, L.
Neuberger, B.
Newby, L.
Newton of Braintree, L.
Noakes, B.
Northbrook, L.
Northover, B.
Norton of Louth, L.
O'Cathain, B.
Oppenheim-Barnes, B.
Park of Monmouth, B.
Patel, L.
Patten, L.
Plummer of St. Marylebone, L.
Rawlings, B.
Razzall, L. [Teller]
Reay, L.
Redesdale, L.
Rennard, L.
Renton of Mount Harry, L.
Roberts of Llandudno, L.
Rogan, L.
Roper, L.
Russell-Johnston, L.
Seccombe, B.
Selsdon, L.
Sharp of Guildford, B.
Shaw of Northstead, L.
Shephard of Northwold, B.
Shutt of Greetland, L.
Skelmersdale, L.
Steel of Aikwood, L.
Stewartby, L.
Taylor of Holbeach, L.
Tebbit, L.
Teverson, L.

2 Nov 2006 : Column 494

Thomas of Walliswood, B.
Thomas of Winchester, B.
Tope, L.
Trimble, L.
Ullswater, V.
Verma, B.
Wakeham, L.
Wallace of Saltaire, L.
Walmsley, B.
Williams of Crosby, B.


Acton, L.
Adams of Craigielea, B.
Adonis, L.
Ahmed, L.
Anderson of Swansea, L.
Andrews, B.
Ashton of Upholland, B.
Bassam of Brighton, L.
Billingham, B.
Bilston, L.
Blackstone, B.
Boyd of Duncansby, L.
Bradley, L.
Bragg, L.
Brooke of Alverthorpe, L.
Brookman, L.
Carter of Coles, L.
Christopher, L.
Clarke of Hampstead, L.
Clinton-Davis, L.
Cohen of Pimlico, B.
Corbett of Castle Vale, L.
Crawley, B.
Davies of Oldham, L. [Teller]
Desai, L.
Donoughue, L.
Dubs, L.
Elder, L.
Evans of Parkside, L.
Evans of Temple Guiting, L.
Farrington of Ribbleton, B.
Faulkner of Worcester, L.
Ford, B.
Foulkes of Cumnock, L.
Gale, B.
Gibson of Market Rasen, B.
Goldsmith, L.
Gordon of Strathblane, L.
Goudie, B.
Gould of Brookwood, L.
Grabiner, L.
Graham of Edmonton, L.
Grocott, L. [Teller]
Harris of Haringey, L.
Harrison, L.
Hart of Chilton, L.
Haskel, L.
Haworth, L.
Henig, B.
Hollis of Heigham, B.
Howarth of Newport, L.
Howells of St. Davids, B.
Howie of Troon, L.
Hughes of Woodside, L.
Hunt of Kings Heath, L.
Janner of Braunstone, L.
Jones of Whitchurch, B.
Kennedy of The Shaws, B.
King of West Bromwich, L.
Lea of Crondall, L.
McDonagh, B.
McIntosh of Haringey, L.
McIntosh of Hudnall, B.
MacKenzie of Culkein, L.
Mackenzie of Framwellgate, L.
McKenzie of Luton, L.
Massey of Darwen, B.
Maxton, L.
Mitchell, L.
Morgan of Drefelin, B.
Morris of Aberavon, L.
Patel of Bradford, L.
Pendry, L.
Pitkeathley, B.
Plant of Highfield, L.
Prosser, B.
Puttnam, L.
Quin, B.
Rendell of Babergh, B.
Rooker, L.
Rosser, L.
Royall of Blaisdon, B.
Sainsbury of Turville, L.
Sawyer, L.
Scotland of Asthal, B.
Simon, V.
Soley, L.
Stone of Blackheath, L.
Strabolgi, L.
Symons of Vernham Dean, B.
Taylor of Blackburn, L.
Taylor of Bolton, B.
Thornton, B.
Tunnicliffe, L.
Turner of Camden, B.
Warner, L.
Watson of Invergowrie, L.
Whitaker, B.
Whitty, L.
Wilkins, B.
Williams of Elvel, L.
Williamson of Horton, L.
Woolmer of Leeds, L.
Young of Norwood Green, L.

Resolved in the affirmative, and amendment agreed to accordingly.

4.55 pm

Lord Sainsbury of Turville: My Lords, I beg to move that the House do agree with the Commons in their Amendments Nos. 955 and 956. I spoke to these amendments with Amendment No. 1.

Moved accordingly, and, on Question, Motion agreed to.

2 Nov 2006 : Column 495

Lord Sainsbury of Turville: My Lords, I beg to move that the House do agree with the Commons in their Amendment No. 957. I spoke to this amendment with Amendment No. 954.

Moved, That the House do agree with the Commons in their Amendment No. 957.—(Lord Sainsbury of Turville.)

moved, as an amendment to the Motion that this House do agree with the Commons in their Amendment 957, leave out “agree” and insert “disagree”.

The noble Baroness said: My Lords, I spoke to this amendment with Amendment No. 954A.

Moved, as an amendment to the Motion that the House do agree with the Commons in their Amendment No. 957, leave out “agree” and insert “disagree”.—(Baroness Noakes.)

On Question, amendment agreed to.

Lord Sainsbury of Turville: My Lords, I beg to move that the House do agree with the Commons in their Amendment No. 958. I spoke to this amendment with Amendment No. 1.

Moved accordingly, and, on Question, Motion agreed to.

Lord Sainsbury of Turville: My Lords, I beg to move that the House do agree with the Commons in their Amendment Nos. 959 to 968.

These amendments fall into two broad categories. Amendments Nos. 959 to 968, 970 to 979 and 1023 to 1025 seek to ensure that the transparency directive is implemented effectively and on time. The transparency directive will help to improve access to capital markets across the EU and ensure that investors have access to better information when they make investment decisions. Amendments Nos. 959 to 968, 971 to 979 and 1023 to 1025 amend the Financial Services and Markets Act to give the FSA the power to implement fully the transparency directive by making transparency rules.

While there is a general rule-making power, some of the particular provisions referred only to “voting” shares and not to obligations applying to other classes of issuers of traded securities required by the transparency directive. It was identified that this use of particular provisions for one class of security could lead to confusion as to how the clauses operate. To avoid any such confusion, these new amendments clarify the relationship between the general and particular provisions and make it clear that the particular provisions apply, as appropriate, to all the classes of issuer required by the directive. There are also some other minor adjustments to ensure that the wording of the clauses reflects clearly other particular provisions from the directive.

Amendment No. 970 deals with transitional arrangements and ensures that the Financial Services Authority consultation on transparency rules meets the requirements for consultations on proposed rules

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set out in Section 155 of the Financial Services and Markets Act. This is necessary to enable the Financial Services Authority to make transparency rules that come into force from the day on which the directive must be implemented into national law— 20 January 2007.

Amendments Nos. 980 to 987 and 1026 deal with liability for false or misleading statements in reports and statements publishedin response to a provision implementing the transparency directive, or otherwise. The background to these amendments is the Government’s decision during the passage of this Bill, strongly supported by a wide range of stakeholder opinion, to introduce a statutory liability regime to cover disclosures required by the transparency directive and narrative reporting by UK companies. This was necessary to remove uncertainty about the liability regime, which risked constraining important disclosures by companies—for instance, in the narrative reports to be included in annual reports—thus reducing both their effectiveness and the accountability of directors. Accordingly, following discussion with stakeholders, liability provisions were introduced at the Report stage in this House.

5 pm

Amendment No. 984 ensures that it is clear what liability regime would apply to potential as well as actual investors with regard to losses arising from reliance on periodic financial information disclosed under the transparency directive.

Amendments Nos. 980 to 983, 985 to 987 and Amendment No. 1026 address issues that were raised with the Government by consultation. It was suggested in another place that the liability regime should be clarified across a wider scope. The Government consulted on this over the summer and specifically asked whether liability should be clarified in respect of disclosures made under the FSA’s disclosure rules, preliminary announcements of results, disclosures made by companies with securities quoted on the alternative investment market, and transparency disclosures by companies admitted to trading on an EEA-regulated market in situations where UK law is applicable.

When considering the issue of extending the liability regime to disclosures made under the FSA disclosure rules, the emerging consensus from consultation was that issuer liability is an extremely complex area in which it is vital that the Government get their policy right. Most responses said that an extension of the statutory regime was, in principle, desirable. However, there was no consensus on what the right policy would look like. Importantly, the consultation raised the point that, while the existing provisions in the Bill are there largely to produce certainty as to issuer liability for documents published in accordance with the transparency directive, these provisions, along with other provisions in the directive requiring disclosure of relevant information in all EEA-regulated markets and other developments in securities law, combined to make the existing common law position on issuer liability for other published financial documents increasingly uncertain.

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The effect would be to restrict severely the content of issuers’ annual reports and other regular publications to the market. Such a development would not be in the interests of a well functioning market. It is also necessary to consider the possible effects for the UK as a whole of any developments in common law that would increase the liability of issuers for any financial publications that they may make. It is necessary that very careful consideration be given to the consequences. This is a very complex area of law and public policy.

Amendments Nos. 987 and 1026 therefore give the Government the power to make further provision about liability for published information. This will enable us to make appropriate provision once further consideration has been given to the shape that such a liability regime should take. We recognise that this is a wide power, but stakeholders consider that it is important that provision should be made, and, subject only to what I am about to say about the review, the Government have already announced that we agree.

This power has also been subject to scrutiny by the Delegated Powers and Regulatory Reform Committee, whose consideration is that the subject matter of the power is sufficiently circumscribed to make the power acceptable in the light of the affirmative procedure provided.

The Government have announced that Professor Paul Davies QC, the Cassel Professor of Commercial Law at the London School of Economics, is to conduct a formal review of the liability of issuers in respect of damage or loss suffered as a consequence of inaccurate, false or misleading information disclosed by issuers or their managements to financial markets, including to their own shareholders or bondholders, or of failure to disclose relevant information. This will take into account both existing regulatory obligations and penalties, including criminal penalties, and the potential for liability in damages under existing common law jurisprudence. The review will also need to look at the position in other EU member states and more widely in the jurisdictions of other substantial financial services markets.

If Professor Davies’s review recommends that the Government either implement a statutory liability regime for financial disclosures or make changes to the regime that we are putting in place to deal with financial publications required by the transparency directive, the Government will hold a full consultation on the Government’s response to the review’s proposals, with a full regulatory impact assessment of these proposals, and legislate for the new regime using the powers proposed.

Of course, it is possible that the review could recommend that no changes at all are required. Most responses to the Government’s consultation also supported an extension of the liability regime to cover a preliminary announcement of results. It was argued that in practice these contain the same information as in annual and other reports required to be published by the transparency directive, and therefore captured by the statutory liability regime.

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It was also argued that excluding the preliminary announcement of results from the scope of the liability regime would cause issuers to cease publishing them. Investors pointed out that they regard preliminary announcement as highly useful. Amendments Nos. 980 and 981 extend the liability regime to preliminary announcement of results. Nevertheless, in the light of the obvious existence of uncertainties surrounding an extension of the liability regime to disclosures made under the FSA disclosure rules, Amendments Nos. 980 and 981 ensure that any extension of the liability regime to preliminary announcements does not extend to all information contained within a document entitled “preliminary announcement”, and is instead restricted to that information in the annual report, which the preliminary announcement properly presages. I should add that the extension is not set in stone. The power I have just discussed will enable the extension of the liability regime to preliminary announcements to be adjusted in the light of the outcome of Professor Davies’s review.

Stakeholders also pointed to some confusion over how the liability regime as currently expressed in the Bill would apply to certain situations where either the issuer or the investor was situated in the EEA but outside the UK. In order to clarify that, Amendments Nos. 982, 983 and 986 change the territorial coverage of the statutory liability regime to ensure that the regime covers securities of all issuers for which the UK is the home member state, as well as to cover those issuers whose securities are traded on a regulated market situated in the UK and for whom the UK is the host member state. UK holders of security of other issuers—that is, those for whom the UK is neither a host nor a home state—will not be able to rely on the rights of action set out.

One further issue that was raised in response to the Government’s consultation was that the wording of the Bill as it stands makes senior officials, not just directors, responsible for issuers’ financial publications. Government policy is for only directors of companies and senior officials of issuers that are not companies to bear liability. Amendment No. 985 clarifies the wording of the Bill in that area.

Moved, That the House do agree with the Commons in their Amendments Nos. 959 to 968.—(Lord Sainsbury of Turville.)

Lord Hodgson of Astley Abbotts: My Lords, within this group I have two amendments, Amendments Nos. 984A and 984B, to disagree with Amendment No. 984 and insert different wording. Amendment No. 984B is not quite as draconian as it appears, because the latter half of the amendment is the same. It just has these words at the beginning,

As I understand it, the Government’s intention in subsection (2) is to confer the benefit of the new statutory compensation regime only on persons who, first, have acquired securities and, secondly, have suffered loss as a result of relying on a publication containing an untrue or misleading statement or omission made knowingly or recklessly.

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Subsection (5) eliminates whatever common law other rights shareholders or any other persons may have, save as is provided for in subsection (7). As a result, subsection (5) will eliminate the rights of a much wider category of persons than will be protected by the new compensation regime in subsection (2). While that may be acceptable looking forward from the date the regime takes effect, it would not be appropriate for it to operate retrospectively so as to eliminate accrued rights of shareholders and other persons. The effect of the amendment is to preserve those accrued rights, including those of existing shareholders whose rights will be eliminated by the new regime. Although it is a principle of statutory construction that a statute should be presumed not to apply retrospectively unless the contrary intention appears, it is preferable to make the position clear in the statute in order to avoid any uncertainty.

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