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Lord Kingsland: My Lords, of course I recognise that from time to time fraudulent practices take place. It is extremely important to do everything in our power to prevent that happening. On the other hand, the Bill, in the circumstances I described, could prove extremely onerous for those who want to enter into what seems to me to be a straightforward and simple transaction. It is a question of finding the right balance.

When I have the benefit of seeing the Minister's speech in print I shall look carefully at what he has said and shall reflect on whether to return to the issue on Third Reading. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord McIntosh of Haringey moved Amendment No. 131:

(b) is").

On Question, amendment agreed to.

Clause 104 [Banking business transfer scheme]:

[Amendment No. 131A not moved.]

Clause 115 [Market abuse]:

Lord Kingsland moved Amendment No. 132:

    Page 56, line 1, leave out from ("which") to ("the") in line 3 and insert ("falls below").

The noble Lord said: My Lords, the Minister will recall that in Committee this and a number of related amendments formed the basis of a long debate. As I said to the Minister earlier today, it is not my intention to repeat speeches I made in Committee to identical

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amendments I have tabled on Report. I simply wish to remind the Minister of the importance that we ascribe to the definition of "market abuse". I wonder whether he has had an opportunity since our last debate to reflect further on what was said and whether, in the light of that reflection, he has decided to make any changes to this part of the Bill. I beg to move.

Lord Eatwell: My Lords, Amendment No. 113A in my name and that of my noble friend Lord Lipsey is contained within this particular group. However, I intend to speak to it in its position in the Marshalled List and not at this point.

Lord Fraser of Carmyllie: My Lords, the noble Lord takes me slightly by surprise in that approach. I want to make a relatively brief intervention on this matter. I believe that the Minister will understand that my greater interest lies not so much in what is contained within Clause 115 as in a wish to explore at a later stage exactly what is the relationship between market abuse in terms of that clause and what the Financial Services Authority may determine is market abuse in terms of its code.

I believe that there are still some very real difficulties to be resolved before the Bill reaches the statute book. I must indicate to the Minister that, until they are resolved, I am, if one likes, neutral on the question as to whether or not it is desirable to introduce into the Bill the concept of the "regular user" of the market. The noble Lord, Lord Grabiner, made an extremely telling and worthwhile point in Committee. He said that if one examines the Bill properly and looks at what is contained within Clause 115(10), it is clear that one must have regard not only to a "regular user" but to a "reasonable" regular user of the market. That seems to me to be a concept trundled up on an omnibus from Clapham.

In some senses, it may be quite helpful to grasp what we are trying to establish as the test against which one examines conduct in the market. However, I am not quite sure about that because, before I come to a personal view on whether or not that is desirable, I need to know whether we properly understand what the FSA can do within its code in relation to inclusion of examples or indications of what is unacceptable market conduct.

I believe that the importance of the role of the Financial Services Authority can be described as follows. One reason that London has become pre-eminent in the world as a centre for financial services is because over the past 10 or 20 years it has been extraordinarily innovative. It may be that some of the innovation which those who practise financial services in the City would like to introduce is simply unacceptable and should not be allowed to continue. I have difficulty in grasping the idea of the "reasonable regular user" of the market when confronted with a novel, innovative approach to marketing or a financial product. I am concerned about trying to determine whether or not that is market abuse. That "reasonable

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regular user" of the market will simply have to shrug his shoulders and say, "I don't know whether that is the sort of conduct that I expect".

It seems to me that, in the circumstances of that type of innovation, one desirable feature of the FSA would be to place people in a position where they could stand back and examine exactly what is going on. In its code, the FSA could indicate, "We understand that that is innovative; that it is clever and new", and say, "Either that is completely unacceptable and you cannot do that any more without suffering the risk of being prosecuted or convicted for market abuse" or "Yes, that is acceptable, innovative and helpful to the international competitiveness of the City of London". The Minister will understand that that is something of a hobby-horse of mine.

However, I do not understand how one tests the desirability of such a change in the way that the market works if one holds only to the idea of a "regular user" of the market who in the past has never encountered such a product or marketing approach. I shall return to this issue when I come to Amendment No. 133BA.

Earlier today, the Minister indicated, in a slightly tart fashion, that something of our approach has been dilettante and irrational. I would indicate to the Minister at this stage that there seems to be a coherence in the approach that I take to what my noble friend advances, and in the queries I raise with my three amendments.

9.15 p.m.

Lord Newby: My Lords, I suspect that all of us can agree that Clause 115(1)(c) contains some of the most tortuous wording in the Bill. I think that is for a very good reason.

This subsection is seeking to strike a balance between, on the one hand, allowing action to be taken where there is market abuse but, on the other, not providing too tight a framework--a framework which might in people's minds stifle innovation and arrest an activity that would be perfectly legitimate. This is a balancing act. Like many balancing acts, it is slightly inelegant.

This amendment is the result of a process which any of your Lordships who have done much drafting will have been through when grappling with a complex problem. You start with a short statement which seeks to encapsulate it; you then realise that it might not quite work, so you add in a subordinate clause and another phrase. The Government have done a fair bit of that. The Opposition have said that it is now far too complicated and that we should have a much shorter, clearer definition. In the process, the use of the phrase "falls below" introduces a rather vaguer concept than that in the Bill. Everyone has been seeking clarity, but not always feeling that we have found it.

Of the two choices on offer, however, the Bill is certainly clearer to me, as a layman, than what is suggested by the Opposition. We would therefore prefer to leave the Bill as it stands.

Lord McIntosh of Haringey: My Lords, I am sorry that my noble friend Lord Eatwell has chosen to

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separate out his group, because I much prefer to be the pig in the middle. I can always argue that if people are attacking me from both sides, there must be something right about what I am doing--a feeble argument, I know, but good enough for your Lordships after dinner! "Don't annoy them", the Chief Whip is saying!

I am grateful to the noble Lord, Lord Kingsland, for the way in which he has spoken to this amendment and I am grateful to him for what may be seen to be terseness, although I think he has another word for it--"telegraphic", rather.

I say to the noble and learned Lord, Lord Fraser, that I may be tart on occasion, but I have never accused him of being dilettante. I have always taken his arguments extremely seriously.

The effect of Amendment Nos. 132 and 133 would be to delete the reasonable regular user from the test in Clause 115(1)(c) and make the relevant standard for determining whether the abuse had occurred that of the person doing the abuse. This is absolutely critical.

The amendments would change Clause 115(1)(c) so that behaviour which meets the other conditions in Clause 115 would amount to abuse only if it is behaviour--if I may do a Keeling schedule on the noble Lord's amendment--"which falls below the standard of behaviour reasonably expected of the person or persons concerned in his or their position in relation to the market".

If the regular user is deleted from Clause 115(1)(c), I am not clear as to who would then be deciding whether there had been a failure to observe expected standards. I am particularly puzzled, as the noble Lords have chosen to leave the regular user in subsection (2) of Clause 115.

The noble Lord, Lord Kingsland, said in Committee that the reason that he sought to remove the expression "the regular user" was that it imported a subjective element which he wished to exclude. I simply do not understand this. There is no subjective element in the test as it stands. It is an objective test.

The view of the reasonable regular user is the view which an impartial third party who regularly uses the market would take, on an objective and reasonable basis, of the question of whether a particular person's behaviour represented a failure to observe the standard of behaviour reasonably to be expected of someone in that position.

I thought that the noble Lord, Lord Grabiner, made that entirely clear in Committee. He said in relation to Clause 115(1)(c) that,

    "[it] is drafted in entirely objective terms; it is not subjective at all. I emphasise the words in the first line which states:

    'which is likely to be regarded by a regular user'.

    That does not mean that the person who is, so to speak, being charged with market abuse on a particular occasion; it concerns 'a regular user'--the nominal person; the anthropomorphic version of the human being we are concerned with".--[Official Report, 21/3/2000; col. 215.]

Removing the "regular user" from this element of the definition of abuse would, at a stroke, remove much of the certainty which the new test builds in. Most market participants are "reasonable regular

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users" themselves and will know what is okay and what is not. That is the whole point of the test. It is the bad apples who do not observe expected standards--the standards that the markets rely on to work properly--who are the target of the new regime.

The second amendment, Amendment No. 133, does something quite strange. Currently Clause 115(1)(c) refers to the standard of behaviour reasonably expected of a person in the position of the abuser. That person is not the abuser himself, but a hypothetical person. For example, if the alleged abuser is a company, then the person in the position of the abuser for the purposes of this clause is a.n. other company director.

If the behaviour is something which fulfils the other elements of Clause 115--for example it involves a squeeze coming with Clause 115(2)--the question the reasonable regular user is addressing is whether there was a standard of behaviour reasonably expected of any person in the same position in relation to the market as the squeezer. He does not decide whether there is a standard of behaviour reasonably expected of a person in the position of the alleged abuser by looking at the personal characteristics of the alleged abuser. That would be absurd. One would reasonably expect a dishonest person, for example, to commit abuse.

However, that is precisely the effect of Amendment No. 133. I think it should be immediately clear that this would produce a bizarre result. Why should one expect any other standard of behaviour from an abuser than a very poor one? And if that is the case, how could the FSA take action against him? How would market protections be enhanced?

I must say that I am not sure that it would be possible to drive a more damaging coach and horses through the market abuse regime than would be done by these amendments.

The noble and learned Lord, Lord Fraser, referred in advance to the relationship between market abuse and the FSA's code. I understand that he intends to return to that with his later amendments so I shall restrict my remarks to saying that what constitutes market abuse will be determined by the provisions of Clause 115. At the heart of the test set out in the clause is the concept of the reasonable person who regularly uses the market concerned.

I believe that it is within the bounds of the concept of the reasonable man that he can take a view on the acceptability of innovative behaviour, to which the noble and learned Lord, Lord Fraser, was referring, as well as on the acceptability of well-rehearsed behaviour.

The code is not determinative of what market abuse is. However, where a person acts in accordance with the code, he will have a completely safe harbour. A person who acts in contravention of the code will not automatically be found to have engaged in market abuse. But the fact that he has acted in contravention of the code will clearly carry evidential weight. But we can return to that matter on the later amendment.

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I return to Amendments Nos. 132 and 133. They would be extraordinarily damaging if they were to be agreed to and I urge noble Lords not to press them.

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