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Lord Kingsland: My Lords, I do not think that I did say in my speech that competition ought to be an objective. My remarks were limited solely to the question of the three categories of competition being matters that the FSA should take into account.

Lord McIntosh of Haringey: My Lords, I am glad to acknowledge that.

I turn to the speech of my noble friend Lord Eatwell. He made a powerful point about the management of systemic risk and recorded the fact that the Burns committee thought that the object of market confidence should refer to maintaining confidence in the soundness of the financial system. We are concerned with maintaining effective prudential supervision of individual institutions. If we singled out one aspect it could throw doubt on the role of the FSA in this area. The noble Lord, Lord Kingsland, recognised that there were what he termed "discussions" between the FSA, the Bank of England and the Treasury. It is more formal than that: there is a memorandum of understanding between them. We recognise that the various facets of the work of the FSA will require co-operation with a number of other bodies, the composition of which may change over time, but we believe that nothing would be gained, and flexibility would be lost, if we had statutory provision in the Bill. We believe that the Joint Committee's concerns in this area have been met without the need to amend the Bill.

My noble friend Lord Borrie asked why there was a difference in policy between the Utilities Bill and this Bill. That is again a competition issue. The Utilities Bill is essentially concerned with ensuring that those with dominant positions do not exploit them to the disadvantage of consumers. Therefore, it is natural to talk about protecting consumers by promoting competition. But this Bill is about regulating financial services in a way that is compatible with a number of important considerations. As I believe the noble Lord, Lord Kingsland, recognised, there is no inconsistency in government policies; it is just that the context of the two Bills is different. We have no proposals to make significant adjustments to the structure established by Part X, but it is important that the improvements to be made are consistent with the Cruickshank report on competition and banking.

The noble Lord, Lord Taverne, and my noble friend Lord Ahmed referred to financial exclusion, which is a matter of very serious concern. However, this is not something with which we can deal by a separate objective in the Bill. The problem with imposing an objective on the FSA to reduce financial exclusion is

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that it would cut across all the other objectives and detach it from its core role of regulation. We agree with the Burns committee that additional duties would make life unnecessarily difficult for a regulator with responsibility for prudential supervision and would change lines of accountability.

That leads me to the more general issue of accountability. That matter was emphasised most helpfully by the noble Lord, Lord Sharman. The FSA is accountable to Ministers and to those affected by its actions. Accountability has been improved as a result of consultation, but the regulator must be free to regulate. We have no intention to add further to the mechanisms set out in the Bill. Perhaps I may describe for the noble Lord, Lord Blackwell, what accountability consists of. There are transparent objectives set out on the face of the Bill. Next, there are consumer and practitioner panels. There is also the power of the Treasury to order value-for-money reviews. I say to the noble Lord, Lord Kingsland, that we do not believe it is a good idea that those should be triggered on a regular basis. We think that they should be as required. There is also provision for a financial services and markets tribunal and an ombudsman system. Finally, there is the long stop of judicial review. Of course, the panels will be consulted, but whether that is in public is a matter for the panels. That could well be the case.

All of this means that there will be very substantial parliamentary scrutiny of the work of the FSA. Members of the FSA can and, I am sure, will be summoned before Parliament to account for themselves, in addition to the parliamentary scrutiny of the annual report. In those circumstances, we believe that the charge of lack of accountability does not stick. On that basis, I believe that I can assert with a good deal of confidence the need for statutory immunity, which as far as I can see is opposed only by the Conservative Front Bench. I am prepared to elaborate on that in Committee.

I turn briefly to the issue of delegated powers. We have almost no outstanding differences with the committee, as the noble Lord, Lord Alexander, was good enough to recognise. I was also glad to hear his welcome for the cost benefit analysis which will be part of the regime. The noble and learned Lord, Lord Donaldson, made some valuable points in this regard. It is true that, just as the consultation documents have been published, regulations and guidance should be published as soon as possible. The noble and learned Lord is also right to say that it is not our intention to emulate the SEC in having "no action" letters, for very much the reason that he identified.

I was also glad to have the noble and learned Lord's recognition of the fair discipline arrangements in the Bill. We believe that they are compatible with the European Convention on Human Rights and our desire for high standards of fairness. The FSA will be required to operate on the basis of fair and transparent procedures, with those subject to discipline having recourse to a wholly independent tribunal. Some of this is set out in Part I. Like the noble and learned Lord, Lord Donaldson, I emphasise that the FSA will not be

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allowed to have regard to costs when fixing penalties. I add that it will not be allowed to have regard to penalties when fixing fees to authorised bodies.

I turn finally to the large and vexed issue of market abuse and the ECHR. I believe that there is still a degree of misunderstanding about this matter on both sides of the argument. The defects in the existing regime are that the criminal law covers only a limited range of serious crimes but that the regulatory regime covers only a sub-set of the market; that is, regulated persons. The market abuse provisions do not cover just authorised persons but any other participant in very wide definitions of "financial systems" and "investment". We are aware that under the European Convention on Human Rights some cases of market abuse may be considered by European courts, and, after 1st March, UK courts, to be criminal and, therefore, that a different standard of proof may be required. It may well be that the boundaries between criminal and civil offences will be developed. I cannot now give the noble Lord an answer as to what they will be, even if I were legally qualified to do so. There are clear advantages in having market abuse procedures applicable to everybody which do not allow people to fall between the cracks and, as far as possible, are civil rather than criminal.

The noble Lord, Lord Bagri, gave the very graphic example of the difficulty of dealing with the problems of Sumitomo which was not regulated by the London Metal Exchange or anyone else. The noble Lord, Lord Rees, referred to vulnerable activities which were left out--perhaps I use the wrong word--under the existing regime. The whole point is to ensure that no one falls between the cracks and that any offences which are damaging in the way set out on the face of the Bill are not omitted from the market abuse regime. In those circumstances, I am unable to reconcile the views of the noble Lords, Lord Northbrook and Lord Saatchi, with those of my noble friend Lord Eatwell who is anxious to ensure--I very much sympathise with him--that there are no gaps in the provision. Again, it will be not for me but for the courts to define what is meant by bad faith. I am encouraged by the general support of the noble Lord, Lord Burns, for that. I can only say on process that a code has been published after consultation. Your Lordships will be kept up to date as far as possible with future publications.

I turn to a most important issue. The noble Lords, Lord Burns and Lord Eatwell, questioned whether we had gone too far with the regular user test in Clause 109(1)(c). It is critical to my relationship with my noble friend Lord Eatwell; I know that he is very suspicious of the provision. They are concerned with whether the regular user test means that we have lost an objective anchor in the regime and that as a result poor but common behaviour would be acceptable. In order to be market abuse, behaviour has to be of a particular type and has to be something that a reasonable person who is a regular user of the market would be likely to regard as a failure to observe reasonably expected standards--not "accepted" standards but "expected" standards. That is an objective test. The objective

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anchor is the regular user of the market. He is not any person who uses the market regularly but is defined to be a reasonable man.

It is inherent in the concept of the reasonable man that he knows what is right. Just because a large number of the users of a market engage in, say, insider dealing does not mean that a reasonable man who regularly uses the market would conclude that it is the appropriate standard if the written or unwritten rules say that it is wrong. It is important that the objective anchor is the reasonable regular user of the market. If behaviour exists which affects his confidence in the market, then the efficiency and liquidity of the markets will be damaged.

I wanted to respond to the noble and learned Lord, Lord Fraser of Carmyllie, about fraud in Scotland. In view of the time, I shall write to him on that subject.

In conclusion, I hope that throughout consideration of the Bill it will be recognised that we have sought to strike the right balance. Despite his other criticisms, my noble friend Lord Lipsey thought that we had. The noble Lord, Lord Rees--he referred to financial markets going under the harrow--takes a different view. We agree with the noble Lord, Lord Taverne, that the regime must be flexible. It must not prevent innovation and competition and it must not involve excessive costs. We agree with the noble Lord, Lord Hunt, that small firms such as independent financial advisers should be properly treated, although we do not agree that they should be excluded from the provisions of the Bill. After all, we are looking at their customers, and it does not matter to those customers whether they go to a small or large firm.

We stick also to the principle that no public money should be involved; that the financial markets should be responsible for all aspects of regulation.

This has been a worthwhile and complicated debate. I am clear that even if we were not introducing amendments our Committee stage will be complicated and challenging. I look forward to it. I commend the Bill to the House.

On Question, Bill read a second time, and committed to a Committee of the Whole House.

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