Financial Services Bill

Public Bill Committee, 12 January 2010.

Written evidence to be reported to the House

Clause 11

Colin Breed (Liberal Democrat, South East Cornwall)

I beg to move amendment 55, in clause 11, page 8, line 33, at end insert ‘; and

(c) the regulatory objectives of the Authority.’.

I welcome you back to the Chair, Mr. Benton, in what is a slightly warmer room than we are used to.

The amendment is small but important.

Mark Hoban (Conservative, Fareham)

The amendment may be small but important, but is the hon. Gentleman not disappointed, as I am, that it is only because of the presence of him and my hon. Friends that the Committee is quorate this morning?

Colin Breed (Liberal Democrat, South East Cornwall)

I was not going to mention that, but I agree that it is a tad disappointing. No doubt the Minister will rustle up a few more of his colleagues in the next few minutes. Otherwise I might sit down and ask for a vote. That would be a more difficult thing.

This is a probing amendment. I want the Minister to explain why we have omitted a particular aspect in the clause. To subsection (3)—

“The rules must secure that any remuneration policy that an authorised person is required by the rules to have is consistent with”—

I seek to add the words:

“the regulatory objectives of the Authority”.

That is one of the key aspects. If we have learned anything from the recent past about the way in which remuneration or compensation packages have operated, it is that they have in many respects driven business both corporately and individually to extremes, causing some of the problems that we have seen. In its monitoring and supervisory role in the past, the FSA might have had a passing glance at the compensation packages or the recommendations of remuneration committees in the individual institutions that it was looking at. It obviously did not get too involved in them, and yet it was a strong driver for the way in which those institutions operated.

Monitoring the performance of banks and other lending institutions must include the fact that the FSA will need to ensure that the remuneration packages, particularly bonuses and such, align with the model that the bank or the institution is undertaking. That is an important role for the FSA. It should have an impact on compensation packages. It should be able to make regulatory rules in respect of the operation of banks and others, which include remuneration and compensation packages. In many respects, the additional measure ought to be the first one, not the third one. The rules of remuneration committees, the impact of their decisions and the way in which bonus contractual arrangements are made are extremely important. The FSA should not only be able to comment but be able to ensure that such packages are commensurate with the appropriate business model that it is monitoring. That it should have at least a role to play when the remuneration rules are set up is a pretty reasonable addition to the subsection.

As I said to the Minister, it is a probing amendment. I am sure there are other ways to do this, but I want to be certain that the way in which the FSA is involved in how banks and others construct performance-related and profit bonuses is appropriate. We have seen much inappropriate use of the bonus systems. I have just come from the Treasury Committee, which is meeting at this very moment; that is perhaps why slightly fewer hon. Members are in Committee. It has been receiving evidence from Mr. Stephen Hester, and already much of this morning’s discussion has related to bonus payments, the packages that were put together at ABN and the contractual package that was offered to Mr. Hester when he took his current job.

As for the likely bonus pot and the distribution of bonuses this year, it has been demonstrated clearly that they will be significant, particularly in respect of the performance of individual banks during last year’s trading. The addition to the clause would be an important way in which the FSA could not only monitor, but ensure that future compensation packages are allied to a sustainable business model that will not lead us into the problems that we have experienced in the past.

Ian Pearson (Labour, Dudley South)

For the record, the Government Benches were reinforced by 10.33 am, after only three minutes of our debate, despite the fact that several colleagues are performing sterling work on the Treasury Committee.

I wish to explain to the Committee why the amendment tabled by the hon. Member for South-East Cornwall is neither necessary nor particularly helpful. As he will be aware, clause 11 places a duty on the Financial Services Authority to make rules setting out the standards to which remuneration policies should adhere, in pursuit of the clear and specific objectives that remuneration policies in banks should not incentivise excessive risk taking, and that regulatory action should be appropriate to ensure that that does not happen. That stems from an established international consensus among the G20 and the Financial Stability Board that remuneration policies in the financial services sector should be subject to control to ensure the avoidance of excessive risk, and we agree strongly with that position.

Clause 11 therefore makes express statutory provision for the implementation of the consensus by placing a duty on the FSA to make the appropriate rules. We need to be clear that the rules will be focused on the vital objective of ensuring that remuneration does not encourage excessive risk taking by key employees of banks. The amendment proposes something different from that, and would add to subjection (3) of proposed new section 139A the additional requirement that the rules that the FSA makes must ensure that remuneration policies are consistent with all the statutory objectives of the authority.

I must say to the hon. Gentleman that requiring the FSA to insist that authorised persons have remuneration policies consistent with a large number of objectives would be difficult from a practical perspective, both for the firms and for the regulator. The rules would need to be extremely detailed and wide-ranging to achieve that. The amendment is therefore likely to detract from the focus of ensuring that remuneration does not incentivise excessive risk taking. It would certainly have the effect of moving the United Kingdom policy on remuneration in a different direction.

A balance must be struck between regulation by public authorities and self-regulation imposed through the normal operation of market discipline. That is very much a live issue at the moment. To say that remuneration policies must be consistent with all the objectives of the authority, including consumer protection, market confidence, tackling financial crime and so on, is not really necessary. The FSA already pursues those objectives through the full suite of available regulatory and enforcement powers. It is not clear that adding an express duty for it to do so through its regulation of remuneration policies would add anything.

Requiring the FSA to subject a limited category of authorised persons to the FSA’s objectives in a small part of their activities would do little to assist consumers or ensure that the FSA’s other objectives were fulfilled. As I have said, the FSA has a full suite of other powers available to it in other areas, and there is a real risk that, if the amendment were accepted, it would detract from the purpose of the provisions and from what we are proposing, which is deliberately focused on avoiding excessive risk taking. I therefore urge the hon. Gentleman to withdraw his amendment.

Colin Breed (Liberal Democrat, South East Cornwall)

The truth of the matter is that banks and financial institutions are different if they are too important to fail, because taxpayers are standing behind them. We know that failure, or the potential to fail, has perhaps been driven as much by remuneration policies as anything else.

I understand it when the Minister says that the measure would have to be detailed, and in general terms we do not want to interfere in the remuneration policies of private companies or get too fixated by the current situation, when there is large taxpayer ownership of a couple of large institutions. Hopefully, this legislation will endure beyond that situation, so we can talk about a more normal situation. Nevertheless, the FSA requires the explicit authority and power to intervene in a remuneration policy.

Will the clause, as it stands without the amendment, allow the FSA to veto or not authorise an institution’s proposed remuneration package or bonus payment system if it feels that the package is not in the institution’s best interests, or because of the systemic risk that would arise if the institution failed as a result of that remuneration package? If the Minister is able to satisfy me that that is the case, and that we do not need to concern ourselves with the issue, I am perfectly happy for the clause to remain as it is. As far as I am concerned, the key aspect is that the FSA should have the ability, if required, to say to a large bank, “We do not believe that your bonus payment system should be used, given your performance, the business model and the potential systemic risk that would arise if you entered into a difficulty. We therefore say that you cannot use it.”

Ian Pearson (Labour, Dudley South)

I am happy to confirm that the focus in clause 11 on avoiding excessive risk taking does exactly what the hon. Gentleman suggests. The FSA also has other powers in other areas to ensure that its other objectives are fulfilled. That is why we do not believe that the powers should be widened in the way that he suggests.

Colin Breed (Liberal Democrat, South East Cornwall)

I think that the Minister is being entirely frank. Our concern was about whether the FSA has that ability. It has had a number of powers for many years that it has failed to use. Perhaps in this particular case, it will focus clearly on its ability to use the clause to ensure that it acts swiftly in future if it becomes concerned, as a result of its supervisory activities, that a remuneration package or bonus payment system may drive an institution in the wrong direction. On that basis, I beg to ask leave to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

I beg to move amendment 54, in clause 11, page 9, line 11, after ‘void’, insert

‘where that agreement was signed after 19 November 2009.’.

Joe Benton (Labour, Bootle)

With this it will be convenient to discuss Government amendment 56.

Mark Hoban (Conservative, Fareham)

Thank you, Mr. Benton. It is a pleasure to serve under your chairmanship this morning. I am pleased to see that although I have blazed a trail with my amendment to proposed new subsection 9, the Minister has ridden in behind and has come up with something else, which may well be the amendment that changes the Bill. I would perhaps take some credit for poking in the right direction, but his amendment gives rise to questions about what it means in practice.

I want to start with some brief remarks on the clause. One of the big debates that has emerged from the financial crisis is about remuneration. There are two strands in that debate. The hon. Member for South-East Cornwall just alluded to one of them, which arose from the questioning of Stephen Hester by the Treasury Committee on quantum and the amount of money involved. It plays into the question of why banks can make such large bonus payments, given that the taxpayer bailed them out. That has rightly triggered fierce debate about that aspect of remuneration.

Also—I shall spend a bit more time discussing this—attention has focused on what the right remuneration structures are for banks. Clause 11 provides the FSA with a framework for introducing rules to that effect. In his report on the FSA’s role in the financial crisis, Lord Turner said that

“within firms, little attention was paid to the implications of incentive structures for risk taking, as against the implications for firm competitiveness in the labour market and for firm profitability. In retrospect this lack of focus, by both firms and regulators, was a mistake. There is a strong prima facie case that inappropriate incentive structures played a role in encouraging behaviour which contributed to the financial crisis.”

In September, Lord Turner said that

“the honest truth is that bad remuneration policies, though relevant, were far less important in the unravelling of the crisis than hopelessly inadequate capital requirements against risky trading strategies”.

The point is that although there is much debate about bonuses, correlating bonus structures to risk and shareholders’ interests is not sufficient in itself to prevent or mitigate the recurrence of a financial crisis. It is a helpful factor, but it is not the silver bullet that people are looking for.

Clause 11 amends the Financial Services and Markets Act 2000 to create new rules about remuneration policy at any and all FSA-regulated firms, not just banks, although that is clearly the principal focus at the moment. Proposed new section 139A(1) says:

“The Authority must exercise its power to make general rules so as to make rules requiring each authorised person (or each authorised person of a specified description) to have, and act in accordance with, a remuneration policy.”

Section 139A(3) goes on to say that

“any remuneration policy that an authorised person is required by the rules to have”

must be

“consistent with—

(a) the effective management of risks”,

which is not defined, and

“(b) the Implementation Standards.”

The implementation standards are in a paper published by the Financial Stability Board in September 2009 setting out how an earlier policy statement, produced by the Financial Stability Forum in April last year, could be implemented.

Will the Minister clarify one point? The FSA’s code of remuneration policy was published the previous month, in August last year. It is not clear from the Bill whether “general rules” refers to the FSA’s August 2009 statement, which predates the implementation standards, or whether, as I think is the intention, more detailed rules will be produced by the FSA to flesh out what was in the code. It is clear from the FSA code produced in August and the implementation standards that the latter, although relatively permissive, are much more specific—for example, on the proportion of a bonus to be deferred—than the FSA’s code, which is more general. Will he explain the interaction between those two documents?

In looking at the FSB’s work programme, a further report on compensation practices will be published in March 2010. It will look at how the implementation standards were implemented across different jurisdictions. I assume that if the March 2010 document argues for a further tightening of the rules, it can be reflected in the FSA’s policies and rules by virtue of subsection (4) of new section 139A, which says:

“When making rules about remuneration policies, the Authority must have regard to any other international standards about the remuneration of individuals working in the financial sector”.

It is clear that work is ongoing. There is not a final international position on this. Further guidance may be issued on the back of the report planned for March. Although the clause is anchored off the back of the FSB’s September 2009 document, I assume that any later documents will also be covered by this.

The changing picture gives rise to my and the Minister’s amendment to subsection (9), which gives the FSA the power to make rules that may

“prohibit persons...from being remunerated in a specified way”.

It may provide that

“any provision of an agreement that contravenes such a prohibition is void”.

When the Minister and I debated the Banking Act 2009, we spoke briefly about the potential power in that Act to tear up directors’ contracts. The Minister was very clear that the power was not there for that purpose, and directors’ contracts would continue in place. It was not clear from the way in which subsection (9) was drafted whether agreement, which pre-dated the publication of the Bill, could be made void, and what protection there was for pre-existing contracts of employment between financial institutions and their employees. Amendment 54 therefore seeks to clarify any contracts entered into prior to 19 November. Hon. Members might wonder why I chose 19 November. That was the date that the Bill was printed. People will know that if their contracts were entered into prior to 19 November, they would not be capable of being made void. However, if the contracts made after 19 November were in breach of international standards, they could be made void. People were given notice at that point about the principles with which the remuneration policy should comply. That is the purpose of my amendment.

Government amendment 56, which applies when the rules are made, is perhaps more generous than mine. It is not clear to me whether the code that the FSA incorporates as part of its rules in August is the same as the rules for this purpose, or whether there is a further set of detailed rules that people would be expected to comply with. Does the code have the same standing as a later set of rules? I am not clear what rules the Minister refers to. Is it the code that was published in August or will more detailed rules be published at a later date, with which people will be expected to comply? Are the contracts that pre-dated those rules still valid? I would like the Minister to clarify that.

Ian Pearson (Labour, Dudley South)

First, in response to the more general points made by the hon. Member for Fareham about the clause, the moving picture of regulation and the further development of international standards, I must say that the current FSA code is a world-leading example of how a supervisor should tackle remuneration that incentivises excessive risk taking. Under the Bill, we are strengthening the FSA’s hands as a regulator to take action against remuneration policies that encourage excessive risk taking and ensuring greater accountability of the FSA to the Government in that area. The hon. Gentleman is right about further international developments. He referred to the work of the Financial Stability Board; it is a matter on which discussions are still taking place. As a result, the FSA will be changing its code to ensure consistency with the G20 agreement. The plan is that it will review its code in 2010 to take account of experience gained in implementing it, and in the light of international developments, which is something that the hon. Gentleman will want to support.

With regard to amendment 54 and Government amendment 56, I recognise that there has been some confusion over the impact and powers given to the FSA under the clause, but I assure the Committee that it was never the Government’s intention that the power should be used by the FSA to invalidate provisions in existing contracts, nor does the clause include a provision giving the FSA retrospective powers. As the Committee is aware, the Joint Committee on Human Rights recently recommended that the lack of retrospective effect should be made clear in the Bill, and the hon. Gentleman has made a noble attempt to do that with the amendment.

However, the specific wording of the hon. Gentleman’s amendment refers to the date on which the Bill was introduced to Parliament and does not fully address the concerns that have been raised. Any rules that the FSA makes and publishes will, of course, be known after that date so amendment 54 would allow some retroactivity by referring to the date when the Bill was introduced into Parliament rather than the date on which the FSA made its rules.

In contrast, Government amendment 56 provides that any rules the FSA makes about remuneration may not render void a provision that was already in an agreement when that rule was made. The hon. Gentleman raised a broader issue and one that we think is appropriate. He asked whether the code was equivalent to rules for the purpose of voiding any contracts. The answer is no. The rules themselves must provide that continuation of a rule will make a clause void. The code does not, and there will be new rules.

Mark Hoban (Conservative, Fareham)

The code is now part of the FSA rulebook, so I am not sure why it is not regarded as rules for the purpose of the clause.

Ian Pearson (Labour, Dudley South)

I accept that the hon. Gentleman is right. I am right, too, given my advice, but if I can provide further clarification during this morning’s debate, I shall certainly do so. The key point is that the Government amendment is broader and more appropriate than amendment 54, and I shall clarify the detail with him shortly.

Mark Hoban (Conservative, Fareham)

I am not quite sure what it is we are broader or more conciliatory to the banking sector about, but there is a problem because we need clarity for contractual purposes. There is also tension because the code, which was introduced in August, is less specific than the implementation standards. For example, the standards define some proportions of remuneration that should be deferred, whereas the code is much more permissive. Greater clarity on that matter would be welcome. If the formulation of the Bill is not sufficiently clear, once the Government amendment is made—assuming that the Committee passes it—will the Government return to the matter on Report? That would ensure that what people are meant to be complying with is crystal clear. People are making formal commitments; for example, the banks have signed up to the Pittsburgh declaration. Many commitments have been made, and we must ensure that we respect contractual obligations. Therefore there needs to be some clarity as to what it is that people are meant to be complying with and what the rules are.

Ian Pearsonindicated assent.

Mark Hoban (Conservative, Fareham)

The Minister nods in assent, so I assume that he will look into that matter again and perhaps table amendments on Report. With his reassurances and explanation on why amendment 56 is superior to 54, I beg to ask leave to withdraw the amendment.

Clause 12

Rob Marris (Labour, Wolverhampton South West)

I beg to move amendment 57, in clause 12, page 11, line 5, at end insert

‘or requiring the authorised person to be broken up into several persons by a date specified by the Authority.’.

It is a pleasure to appear before you again, Mr. Benton. Part of the Bill addresses the world recession and its effects in the UK, and the regulatory regime in the UK faced with a world crisis. My starting point in tabling the amendment is that there will be another crisis in world banking, which will be reflected in the UK. I am not foolish enough to predict when that crisis will be, but as someone whose partial background is as a historian, it is clear from looking at the past and the nature of capitalism, driven by greed and innovation, and its cyclical nature, whether one takes Kondratiev long waves or shorter ones, the high likelihood is that at some point in western capitalism within the next 30 years there will be some kind of banking crisis.

The Bill goes some way towards addressing such issues for the future, including the recovery and resolution plans in clause 12, and the amendment relates to resolution plans. Paragraph 106 of the explanatory notes, states:

“A recovery plan aims to reduce the likelihood of failure of a firm by setting out what the authorised person would do in, or prior to it becoming subject to, stressed circumstances”.

It continues:

“Action described in the plan may include the restructuring, scaling back or sale of certain business lines or assets of the authorised person in question”.

A resolution plan, in contradistinction to a recovery plan, is to do with failure. Paragraph 111 of the explanatory notes, states that it is

“action to be taken in the event of failure of all or any part of the business occurring, and action to be taken by a firm where failure is likely.”

Paragraph 110 also states that resolution plans allow for

“gradual implementation, focusing on the largest, most complex and systemically significant firms in the first instance.”

Proposed new subsection 139C(8), which my amendment would change, states:

“The steps that the Authority may take include requiring the resolution plan to be revised.”

My amendment would add after “to be revised”:

“or requiring the authorised person to be broken up into several persons by a date specified by the Authority.”

It is about the break-up of big banks. As drafted, the Bill says that if the authority does not like a resolution plan—a plan that is to do with failure or its likelihood—it can ask for it to be revised. Well, whoopee-doo. We could have a big bank failing and the FSA saying, “You had better revise your failure plan,” or the “resolution plan”, as it is called in the Bill. That is not adequate. The size of our financial institutions in the United Kingdom is the elephant in the room—to use a hackneyed phrase—in the Bill. They are too big. They need to be broken up. To use the description of the Governor of the Bank of England when he spoke in the Lords in December, banks and financial institutions are “too important to fail”.

I have a lot of time for the Governor of the Bank of England because he is, as my hon. Friend the Minister will know, a fellow Wulfrunian—a Wolverhampton native. For some strange reason, he does not support Wolverhampton Wanderers football club; he supports Aston Villa. Apart from that, Mervyn King is not a bad Wulfrunian—not a bad bloke. He raised the issue of financial institutions in our country that are too important to fail.

My amendment is permissive. It would say:

“The steps that the Authority may take include...requiring the authorised person to be broken up”—

“the authority may take” is permissive. The amendment does not seek to break up big financial institutions in the United Kingdom—at the moment. If a Government had such a power—let alone used it—there is a risk that certain financial institutions would decide to leave the United Kingdom, because of such draconian powers. That is a concern. There is also the issue of breaking up large financial institutions—banks—into retail and investment, or, as the Americans call them, utility and casino banks. That has been canvassed by the hon. Member for Twickenham, who is a member of the Committee but has not yet joined us. Breaking up banks in such a way is simplistic. Hon. members will know my concerns about UK banking in contradistinction to Canadian banks, which are the most stable in the world. They were voted the most stable by the World Economic Forum. They are some of the biggest banks in the world and they do retail and investment, so that is not necessarily the way to break up big financial institutions. Although it would be worth looking at, that alone will not solve it.

Andrew Love (Labour, Edmonton)

I am following my hon. Friend’s argument closely. A concern raised by his amendment is that it places the breaking up of organisations in the Bill. Yet, as I understand it, the stated intent of the Bill is to set a framework and leave it to the living wills to decide policy. What arguments does he deploy to support putting it in the Bill, when the suggestion is that it be left to the discussions between the FSA and the financial organisation itself?

Rob Marris (Labour, Wolverhampton South West)

My amendment is permissive. It does not say that big financial institutions should or must be broken up. It says that the Financial Services Authority may, if there is not an adequate resolution plan, order that a financial institution be broken up. It is merely permissive in that sense. If it were to lead to an exodus of financial institutions from the United Kingdom, I am not sure that would be a bad thing. It would be a bad thing for people who work for them, of course. However, we are faced with the fact that, in our country at the moment, we have spent a huge amount of taxpayers’ money—some of which we might get back, some of which we might not—bailing out failed large financial institutions. We cannot afford to keep doing that. This year, the Government’s borrowing is about £175 billion; it will be of a similar order next year. That is the result of two things: one is the bailing out of financial institutions and the second is that the world recession and the recession in our economy, the effects of which the Government have done very well to lessen, have been hugely costly. The antics of morally corrupt people such as Sir Fred Goodwin or Adam Applegarth of Northern Rock have destabilised our whole system here and similarly across the Atlantic in the United States of America, and the cupboard is bare.

If a big financial institution in the United Kingdom were to go bust in the relatively near future, the taxpayer could not afford to bail it out. To me, it is not a choice between, “Ah well, do we take on a bit more debt in the future to bail out a big financial institution if it goes bust?” or “Do we break it up in the future?”, but a matter of, “We can’t afford to bail out big time somebody in the future, so let’s take some preventive steps now, at least by giving the FSA the power to do it.” I am not saying that it must do so, but just that we should take some preventive steps now to consider breaking up the large financial institutions, as the amendment suggests, because we cannot afford the alternative.

As politicians who are considering the Financial Services Bill and members of society, we need to debate whether the size of the financial institutions relative to the size of our economy is, in fact, too big. I am sure that some hon. Members will agree that at some time in the unspecified future we will again have a financial crisis in the United Kingdom. That is what happens with big financial institutions because capitalism driven by greed and innovation can produce negative as well as beneficial results. If we are to have such a crisis in the future, let us take preventive measures now. Let us talk about it now.

For example, as many of my colleagues on the Government Benches will know, for trade union activists the time to discuss a redundancy policy of the company for which they are working is not when the company is proposing to take redundancies, but when it is not proposing to take redundancies, because that is when a calm debate can take place. At the moment, the signs are that the Government’s heroic actions have stabilised the financial system both in the United Kingdom and more broadly throughout the world, and that things are starting to calm down. So now is the time when we should debate the size of financial institutions in our country and whether there should be a cap on their size, such as on their capitalisation as a percentage of gross domestic product or some such formula. I am not fixed about what. The issue is one on which economists are fairly evenly divided, but there is a big school of thought in the western world among economists that the “too important to fail” issue is being ignored by politicians.

Mark Hoban (Conservative, Fareham)

I welcome you to the chairmanship of the Committee, Mr. Gale.

The hon. Member for Wolverhampton, South-West raised some interesting points in his amendment. I was going to touch on something similar in the stand part debate, and if I may, I would like to make some broader comments about clause 12.

The debate is an important one to have. The hon. Gentleman has done us a service by raising the issues, including the one about banks that are too big to fail, and whether there should be a division between different elements of banking activity—the shorthand is: do we need a British Glass-Steagall? In our white paper on reforming financial regulation we said that there was a strong case for dividing up those activities for a range of reasons. However, we feel that the best way to do so is not by unilateral action, but by international consensus.

Meanwhile, there are measures that we can take to improve regulation to try to tackle some of the issues that have emerged from the size and complexity of such institutions. There are ways in which we are able to impose a higher capital requirement for larger banks, which provides a bigger buffer if they suffer losses and changes the economics of a large bank. If we ensure that there is a closer correlation between the capital requirements and the level of risk that people undertake, we may see a separation of utility-type functions from higher-risk activity.

Technically, I think the hon. Gentleman’s amendment may be deficient, which is a rare statement for me to make—that is a phrase that the hon. Gentleman uses quite often to talk about me. I am not sure that his amendment delivers what he seeks, as the case may be that a group can have a number of authorised persons, and he would not deliver his outcome of a break-up of banks—they would just have more authorised persons within a group. However, I do not wish to be pedantic.

The hon. Gentleman’s amendment illustrates one of the challenges that we saw with Lehman Brothers, which is that a single institution can be very complex, and very difficult to wind up. One will then force a position either to rescue that institution or let it fail. We saw the consequences of allowing Lehman to fail. It triggered a fresh wave of uncertainty in the market and led to a further set of actions to stabilise the banking system. Also, the administration of Lehman Brothers’ operation in the UK will, I suspect, be one of the most expensive administration processes, because of the complexity of the records, the fact that trading on Lehman’s own account was on the same ledger as Lehman’s trading for its clients, and because there were no rules or plan in place to wind up the business in an orderly fashion. I know that the Financial Services Secretary has announced some progress on that.

There are complex issues that we need to think about; we are talking about complicated operations. The hon. Gentleman suggests that we might break up “authorised person” into several persons. There are many different ways in which banks can structure their operations. Some could be heavily subsidiarised, with different activities in different subsidiaries. Others could have all their operations within one subsidiary. What would happen if there was proprietary trading, commercial lending and retail deposits in one institution? There are arrangements in place to protect retail deposits, but it may be difficult to segregate those activities and save them separately from the rest of the banking activity. That is why it is important that we look at the plans set out in clause 12.

The Governor of the Bank of England said in October that

“both the structure and regulation of banking in the UK need reform. Banks increased both the size and leverage of their balance sheets to levels that threatened stability of the system as a whole. They remain extraordinarily dependent on the public sector for support. That was necessary in the immediate crisis, but is not sustainable”

in the long term. There are many different regulatory responses that we can take, and one of them is to have living wills—the resolution and recovery plans that clause 12 allows.

Andrew Bailey, the chief cashier at the Bank of England, talked about the range of responses that there could be to complex institutions, and he identified three elements: regulation, structure and resolution. The recovery and resolution plans fall within the resolution strand of his thought. There is widespread international agreement. We talked about living wills and the need for them in our white paper in July 2009. There is work going on internationally on how they might work in practice. The FSA has summarised some of the issues in an appendix to its discussion paper on the Turner review.

Let me give some detail on what the plans could entail. The recovery plan should include: detailed plans of the businesses and subsidiaries that could be sold to third parties in any contingencies; the extent to which the business could be de-risked in a relatively short space of time; and the ability to withstand the failure of the largest counterparties. How do they safeguard themselves against contagion? One of the untold stories about Lehman Brothers is that its collapse did not lead to the widespread contagion and the lock-down in markets that people might have expected. Recovery is about a business sorting itself out and moving to a more stable position.

The resolution plans tie into the special resolution regime set up at the time of the Banking Act 2009, and they mesh into the responsibilities that the Bank of England and others have as a consequence of that regime. That relates to issues such as liquidation, transferring deposits, introducing a bridge bank, placing banks into temporary public ownership and deposit protection. However, the plans are at an early stage, and there are issues that I want to raise with the Minister.

The discussion paper published last year refers to a pilot project that began at the end of 2009, in which a small number of banks will produce draft resolution plans. Can the Minister confirm that the pilot is under way? Can he tell the Committee which banks are taking part? Pilots are important because they determine the type of information that we need in the plans. We do not know what sort of information will be required. The Bill is drafted broadly to ensure that the FSA has the power to collect the sort of information required. Until we know the outcome of the pilot, it is difficult to know precisely what will be required, what the cost of the plans will be and how much information will be needed. Also, what will the institutions have to do as a consequence of the plans?

That goes back to a slightly different approach to that taken in the amendment tabled by the hon. Member for Wolverhampton, South-West. Some institutions have raised the question of whether the plans will force them to subsidiarise if they are operating as a single entity. Although the hon. Gentleman’s permissive amendment would make that option specific, there are questions. An institution might ask, “Will one of the outcomes of my discussion with the FSA about my plan be a requirement for me to separate out the activities of different subsidiaries and to undo some of the group structures that are in place?” That is a valid question.

One issue that flows from the pilot—this is not addressed in the impact assessment, because we are at an early stage—is the cost of the plans. How voluminous will they be? What will be the level of detail? How expensive will it be not only to draw them up initially but to keep them up to date? There is a potentially significant cost that we need to bear in mind. That affects the competitiveness of banks based in the UK, compared to others in the global market. That is why it is important to think about the international context.

Work is being done internationally to develop the plans, but will the UK lead the way in their implementation? Have we specifically thought through the costs and benefits of that? It is worth pointing out that principle 8 in the Financial Stability Forum’s work on cross-border co-operation and crisis management says:

“authorities will strongly encourage firms to maintain contingency plans and procedures for use in a wind down situation...and regularly review them to ensure that they remain accurate and adequate”.

The first words in that quotation are “authorities will strongly encourage”, but the UK is mandating the preparation of such plans through the clause. There is concern that the UK is moving faster than other jurisdictions and about whether that is appropriate. The British Bankers Association has said:

“It is a matter for concern that the FSA is being placed under a statutory duty to make rules for the production of recovery and resolution plans without there first being agreement on the fundamental objectives behind the initiative. These statutory provisions would front run international agreement on the need for, and contents of, RRPs.”

In its response to the Committee’s debate, the CBI, which supports living wills in principle, has said:

“this clause must be consistent with any international agreement otherwise this clause should be removed from the face of the Bill before it receives Royal Assent. Additionally the CBI does not believe that legislation is required for the FSA to implement these new requirements at the appropriate time.”

Can the Minister give some assurances about the pace of development of such things internationally and about how we are ensuring that the FSA remains in step with international agreements?

We have talked about the coverage of the plans in the context of banks, and the hon. Member for Wolverhampton, South-West, spoke about them in the context of bank break-ups. However, clause 12 is not limited to banks, or even deposit takers. The clause gives the FSA the

“power to make general rules so as to make rules requiring each authorised person (or each authorised person of a specified description) to prepare, and keep up-to-date, a recovery plan.”

Although we have been talking about plans in the context of banks, the provisions could apply to insurers, asset managers, hedge funds, independent financial advisers and the insurance brokers on the high streets in our constituencies. Everyone could be required to have a recovery and resolution plan; there is no barrier in the Bill restricting them purely to banks. I am sure that that is a conscious decision, but we need to understand whether this is the first stage in a process that will require all institutions to have recovery and resolution plans, or whether the intention is simply to restrict them to banks and licensed deposit takers. Clearly, institutions other than banks, such as building societies and credit unions, hold customers’ money, and the special resolution regime also applies to them. It would be helpful to have some clarity on that.

The key issues are uncertainty about what the plans will include, the fact that the FSA appears to be in the lead—that is not necessarily a bad thing, but we need to understand the balance of the risks—and what sectors will need to have resolution and recovery plans.

Roger Gale (Conservative, North Thanet)

Order. Before we proceed, it will not have escaped the notice of the Committee that we have just embarked on a clause stand part debate. The rule is that we can have only one, so we are now entertaining the amendment that has been moved and a clause stand part debate. There will be no separate clause stand part debate on the clause.

There is another point that I would like to make. Before I came to Committee from an Adjournment debate in which I had participated, I received a call from the office of the Chairman of Ways and Means, indicating that there has been a request for a meeting of the Programming Sub-Committee to be held at 1.30 pm. I have agreed to chair it, if it is held. I say to the Committee—and the usual channels, who are present—that if we are going to hold that meeting, it might make sense to do so at 1 o’clock, immediately after this sitting, rather than at 1.30 pm, but I will endeavour to assist, whichever is more convenient to those involved.

Colin Breed (Liberal Democrat, South East Cornwall)

I will include my remarks on clause stand part in the discussion of the amendment. I understand the reasons why it has been tabled. It has helped us to raise the issue, which has to be tackled at some time or another, as the hon. Member for Wolverhampton, South-West said. However, I do not think that that should be done, for a variety of reasons, either in this Committee or in the timing, because international co-operation is vital. Nevertheless, it is quite right that the big question is whether we can afford to have very large banks attached to medium-sized countries, with all the associated risks—of course, we know what has happened in Iceland and elsewhere—and the issue needs to be tackled. I do not think that the difficulties will come down the line to us as quickly as the hon. Gentleman suggested. Nevertheless, that big issue has to be tackled.

I have been rather lukewarm to recovery and resolution plans in clause 12. I am not certain how they will operate, what their effect will be on competition, what the overall costs will be and what value they will have. Often, unexpected and unforeseen—almost impossible to anticipate—events can cause a catastrophe.

All the pre-planning in the world and all the recovery and resolution plans that may be put in place may simply not be able to anticipate exactly what will befall this sector or, indeed, any other sector. We all know that risk plans are almost part of the daily life of practically everything now—in education, science and the police force, for example, we have to make risk assessments, but too often, the assessment as perceived does not cover the precise problem that sometimes arises.

I think that the whole object is the same. We are going to look through general rules at some stage, and that is the interesting part. I look at this in terms of macro and micro. In a macro sense, when we talk about Glass-Steagall, splitting up investment banks and narrowing banking, such macro-type decisions must, by necessity, include a considerable amount of international co- operation. Questions such as how to split up large groups and how to compartmentalise parts of international businesses in those large groups are difficult to answer. Indeed, they will be subject to different regimes, different legal systems and interpretations and different capital requirements. That will be a difficult aspect.

The simplicity that has been referred to and sometimes accepted by my hon. Friend the Member for Twickenham does not take into account the fact that, when Glass-Steagall was set up, the banking system was wholly different from what it is today. The sheer complexities, internationalisation, interconnectivity and scale are of a significantly different proportion. Therefore, some sort of beefed-up Glass-Steagall is not appropriate—we have to look at it completely differently. However, I understand the context of trying to reduce businesses to a size where they can be properly regulated and where they would not cause a systemic risk, which is likely if they are too important to fail.

There is also is the micro part, on which we should concentrate more when talking about recovery and resolution plans. Even in the domestic sense, if we ignore the international parts of large banking groups, there is a major complexity in the interconnectivity of subsidiaries and subsidiaries of subsidiaries. We know that from our evidence session in the Treasury Committee not that long ago, when we invited the chief auditor of a large firm of accountants to explain the domestic arrangements of the various companies within the HSBC group. He was completely unable to do so. That a chief auditor cannot explain the interconnectivity, where the notes to accounts now occupy some 60 pages, as opposed to the accounts themselves occupying about six pages, demonstrates that the real complexity is such that perhaps that in itself needs to be tackled to reduce the whole subsidiary complexity.

Such a system is often used to minimise tax, not to avoid or evade it, and to create a suite of companies capable of assisting the banks and their clients to implement ever-increasingly complex transactions between a variety of the subsidiaries. That ultimately means a significant reduction to the taxman.

Identifying such structures and creating simpler ones could be part of the resolution and recovery plans, so that even understanding the way in which the huge groups have been put together would be more helpful in identifying early the problems that will arise. Such action might even help to refuse certain acquisitions or mergers in the terms in which they are envisaged. Companies are sometimes brought into a group in ways that do not assist the understanding of the relationship between each part of the group. In the micro sense—the domestic sense—some work can be done, which will be helpful, but in the macro sense, it is a more difficult area.

The other aspect that I am worried about is keeping things up to date. We know that keeping things up to date is a constant problem. Yesterday, I was part of the tax law rewrite Bill, a 10-year project to rewrite something that made very little difference to the amount of revenue that we received. Goodness knows how much 10 years of rewriting and updating things costs, but let us imagine the costs of rewriting and updating resolution and recovery plans to respond to the Finance Bill each year and the way in which the legal framework of other countries had undertaken mergers, acquisitions or even sales of businesses. That could be a never-ending process, like the tax law rewrite Bill and become an extraordinary cost to individuals. I just wonder whether we will receive value for the money that will be expended.

In respect of competition and innovation, we do not want to create a homogeneous system, whereby we just have shades of a certain business in different financial groups and there is little to choose between products and how they operate. They are so constricted in the way in which they have to respond to recovery and resolution plans that it does not give them the element of innovation or competition that we want. I have some general concerns such as that, but the clause is right overall. The rules that will result after discussions with the Treasury and the Bank of England will be a key part, and perhaps at that stage and when the international scene is a little clearer, the more macro aspects of the matter could be considered. However, although I cannot support the amendment, it has enabled a valuable contribution to be made to the debate.

John Howell (Conservative, Henley)

I, too, thank the hon. Member for Wolverhampton, South-West for tabling the amendment, which exposes one of the great weaknesses of the clause and, indeed, the Bill. The Minister has said on a number of occasions that the Bill will set up various frameworks, but the difficulty is that those frameworks must be so wide because all the retrofitting, whether against international agreements or against the detailed regulations about how the living wills will work, must be done later.

The problem with such frameworks is that anything can be put into them, and there is no clarity about what is going into them at the moment. I understand fully why the hon. Gentleman wishes to bring more clarity to the Bill. In that general aim, he has a large amount of support. However, some practical issues relating to the break-up of corporate structures have been mentioned. Clearly, that was in the Minister’s mind during the evidence session.

The Minister said that the living wills would be a last resort, but he went on to describe them, colourfully, as a manual for surgery. Surgery involves cutting bits out, rather than patching things up. Medicine is patching things up and making the patient better; surgery is the fun bit, involving taking things out and throwing them away. Unfortunately, he did not speculate how the living wills might be used. That is a great shame. Although we do not need speculation, we need more substantial detail of how they might be used, what they might look like and how they will be judged.

The question of how they will be judged touches on the amendment as well. Subsection (5) of proposed new section 139B says that the plans must be “satisfactory”, but we never understand what “satisfactory” is or how it will be judged. We know whose opinion will be taken into account in judging whether a plan is satisfactory, but there are no rules or benchmarks. There is nothing that one would expect of a corporate entity in terms of measuring what is done.

Despite everything that has happened, it is slightly naive to believe that companies do not undertake their own risk modelling. Indeed, the FSA already requires some contingency planning. We need to understand the difference between what companies already do and the FSA already requires and what the Bill will deliver. To use another phrase that has come out throughout debates on the Bill, I am trying to tease out what additionality the Bill will bring. In relation to the break-up of banks and other financial institutions, that may well be the best solution, but emphasising that with an amendment to the Bill skews it the wrong way.

We also need to recognise that corporate structures are not static. Companies are always evolving their structures for different commercial reasons. A lot of emphasis has been put on the structure of that, for a number of reasons. I saw one thing mentioned once in a fleeting reference that was never picked up again but is incredibly important. In any corporate structuring or restructuring in the financial services sector, reputational risk is an overriding consideration. We talk openly about financial risk, but nobody has mentioned reputational risk and the idea of protecting it.

Any suggestion of insider trading is an easy way to trash one’s reputation. In the recent case of the Australian Securities and Investments Commission v. Citigroup, we saw how the idea of insider trading is being taken to an extreme. Citigroup acted for one company in a takeover battle for another company. There were Chinese walls between the two teams on the takeover and the proprietary trading team at Citigroup, which wanted to trade in the shares of the company being acquired. The issue that raged at that time was whether a general aside between two members of the same firm was sufficient to indicate that the bank’s subsequent sale of the shares on its own behalf was evidence of insider trading.

I do not want to blow the issue out of proportion, but it is important; it is one of the issues that is taken into account in putting together or changing a corporate structure and one of the complex issues mentioned by my hon. Friend the Member for Fareham that need to be taken into account.

The logistics need to be explored in further detail. The Institute of Chartered Accountants has made much of the logistical problem of gathering information and undertaking analysis and of whether the plans will be updated periodically or whether they will be rolling plans, which is what I suspect many of them will turn out to be, because situations change frequently in the light of new acquisitions and the addition of new businesses.

The hon. Member for South-East Cornwall, who speaks for the Liberal Democrats, said that we must ensure that we do not reduce the financial services sector to the lowest common denominator. We do not want uniform business models, which increase risk because there is only one model operating in the market. That forces out innovation, and that is not in the interests of the consumer, the taxpayer or the economy as a whole.

Through living wills, we are trying to model stressed situations. I put that in the plural because people will need to model not just a single stressed situation, but a variety of stressed situations. Those situations may have very different outcomes; some may require the break-up of the bank or parts of it, while others may not. We need to be careful about how we approach the issue so that we achieve proportionality and identity problems and what we are doing to solve them. That would be made clearer if there was far more in the clause about what we are trying to achieve and how we will go about it.

The cost of the proposals is relevant and has been mentioned several times. There is no costing in the impact assessment and, therefore, no comparison of the cost here and in other countries. I am quite surprised by that because banks are already required to provide contingency plans and they already do a lot of their own modelling. It would not have been beyond the wit of the Treasury to have come up with a range of costs, because it loves ranges. The impact assessment for the next clause, on short selling, includes a range of benefits that starts at £106 million and goes up to £1,066 million. The Treasury loves ranges, so it could surely have come up with a range to give some indication of the costs in this case. That is yet another example of how providing only a framework, and a loose framework at that, leads to people asking more questions, rather than moving us towards a regime that leads to a resolution.

The hon. Member for Wolverhampton, South-West is right that the future will hold more banking crises. I cannot remember the exact figure, but the International Monetary Fund produced an assessment early in the last decade pointing out that there were well over 50 banking crises—I think that the figure was nearer 70—in the last 30 years of the last century. Those crises all followed a similar pattern to the recent crisis, and we need to ask more generally—not just in this Committee—why that was not spotted and why the lessons were not learned from previous crises. If living wills help in the future that will be great, but there is such imprecision in the clause that I am not sure that it adds much to our understanding of how they will work in practice.

Ian Pearson (Labour, Dudley South)

Before I reply to the debate on clause 12 and the amendment tabled by my hon. Friend the Member for Wolverhampton, South-West, I would like to expand briefly on my earlier comments about the difference between the FSA’s current code and the general rules that the Bill requires it to make in respect of remuneration. As I said to the hon. Member for Fareham, the current FSA code is part of the FSA rulebook. However, it is not the case that any breach of an FSA rule on remuneration will automatically make a contract void. Breach of a rule will have that effect only if the rule itself provides for that. The present code does not do that, and will need to be supplemented by new rules to be made by the FSA under the authority provided in the Bill, setting out specific prohibitions and expressly stating that contravention of the provisions will make a contract void. I hope that that clarifies any confusion that might have arisen.

At the outset of his contribution, my hon. Friend the Member for Wolverhampton, South-West said that the “too big to fail” issue was being ignored by politicians. I do not believe that to be true as there has been substantial discussion in the UK and internationally. However, there could perhaps be more debate, and my hon. Friend has certainly provided us with the opportunity to do that this morning.

I shall make a few broader comments on clause 12, before responding specifically to the amendment. I shall also pick up on some of the comments made by the hon. Member for South-East Cornwall. I agree that Glass-Steagall-type provisions that date back to the 1930s are not likely to be relevant, even if they are beefed up, as he suggested, for today’s circumstances. There is no easy or simple distinction between what is sometimes called utility banking and investment banking, and sometimes pejoratively referred to as casino banking. Experience of the past two or more years has shown that firms that stay close to their knitting would not be regarded as performing a utility function, and could get into trouble just as investment banks got into trouble. It is well known that the Government do not believe that the case has been made for a Glass-Steagall split between retail and investment banking activities.

Colin Breed (Liberal Democrat, South East Cornwall)

I entirely agree with the Minister. With separation, we need to understand that the banks that were not in the casino sometimes had access to it. Northern Rock was clearly a mortgage bank, but it funded itself by having access to the casino-type aspects, which was the real problem. It is not only large banks that clearly do both—the funding of banking generally has fundamentally changed and includes this aspect of funding, which is difficult to reverse.

Ian Pearson (Labour, Dudley South)

The hon. Gentleman makes a valid point. The issue of being “too big to fail” is of central importance, and I argue strongly that one of the ways in which the Government are responding is through clause 12 and the proposals on recovery and resolution plans, which are sometimes referred to as living wills.

The clause sets out the consultation arrangements between the UK authorities in relation to recovery and resolution plans, provides the FSA with additional enforcement powers relating to the collection of information and requires the FSA to have regard to international developments in making rules for recovery and resolution plans. The point about having regard to international developments explicitly recognises some of the concerns raised by the CBI and others. I will say more about that in a moment.

We made it clear in our White Paper, “Reforming Financial Markets”, that our strategy for dealing with the systemic risk posed by the potential failure of individual financial firms includes a number of strands such as improved market discipline, enhanced prudential regulation and supervision and strengthened market infrastructure. Another key element, which is relevant, is the focus on stronger recovery and resolution arrangements to reduce the likelihood and impact of banks’ failure. Of course, the Banking Act 2009 has already extended significantly the resolution tools available to the authorities, principally in relation to banks and building societies, and firms’ preparation and maintenance of RRPs is intended to build on that more generally.

We see recovery and resolution plans as a key tool for institutions and authorities to mitigate the systemic risk posed by firms and promote long-term financial stability. As a key new part of the supervisory toolkit, RRPs will create regulatory incentives for firms to avoid being systemically risky, because the quality of a firm’s recovery and resolution plan should have a direct bearing on supervisors’ overall assessment of the prudential risk posed by the firm. In short, if a firm’s recovery plan or resolution plan is not good enough, there will be regulatory consequences. The Government and the FSA are clear that recovery and resolution plans and tougher prudential requirements are key elements of a comprehensive policy to deal with the risk to financial stability posed by firms.

Perhaps even more fundamentally, we see RRPs as an important means of reducing the moral hazard arising where firms are perceived as too big to fail and benefit from an implied safety net of public support. We want firms, no matter how big or complex they are, to face up to the potential reality of their failure. Recovery plans will require them to have realistic plans in place for coping with stressed circumstances, and resolution plans will enable the authorities to prepare for the use of their resolution toolkit if recovery is not possible.

Of course, the FSA already has discretion to make general rules on such matters, which will be further underpinned by its new financial stability objective in clause 5. However, clause 12 places an express duty on the FSA to make rules relating to recovery and resolution plans, exemplifying our strong commitment to taking forward the measures.

By setting out in legislation that such rules must cover the firms subject to part 1 of the Banking Act 2009—banks and building societies—we are prioritising the types of firm that have needed most taxpayer support in the past and whose failure has impacted on depositors and on financial stability most severely. The fact that the duty covers all banks and building societies recognises, as demonstrated by events here in the UK during the crisis, that smaller firms can also have a significant impact on national financial stability and that their resolution can present its own difficulties.

John Howell (Conservative, Henley)

The Minister will be aware of the Building Societies Association’s argument that many building societies are small. The BSA questions the proportionality of the measure for such firms. Does he agree that it would be much better to discuss the matter with a cost-benefit analysis covering them?

Ian Pearson (Labour, Dudley South)

I will say something about that in a moment, but I wanted to address the wider issue of scope.

We anticipate that the scope of recovery and resolution plans will be expanded to other types of firm. The Government intend to make an order setting out the timetable after consulting with the Financial Services Authority. By taking that approach, we are enabling the FSA to comply with the duty to make rules in a risk-based and proportionate manner. I will say something more on that in a moment.

The Bill’s provisions do not prescribe the content of recovery and resolution plans. That will be set out in rules, which the FSA will draft based on the evidence gathered from its ongoing pilot project and taking into account the ongoing international work. In response to the point raised by the hon. Member for Fareham, I do not think that it would be appropriate to disclose who is taking part in the pilot project. However, I can say to him that there is a sample of banks, and we expect the outcomes of the pilot work to be known by the third quarter of 2010.

The pilot will contribute to addressing some of the wider policy considerations on the cost of recovery and resolution plans—that point was raised by the hon. Member for Henley—and their potential impact on firms’ business models and profitability, and deal with questions on restructuring. Before making the rules, the FSA will be obliged to consult and publish a full cost-benefit analysis in the normal way. I hope that that reassures the hon. Gentleman.

In this context, I stress that while we are clear that there will be some cost to firms from the preparation and maintenance of such plans, there can be no doubt that, following the events of the last 18 months, firms, particularly those that are systemically significant, must bear a fair share of the cost of increased financial stability, which will include the cost of preparing recovery and resolution plans.

I also want to say a little more about the international dimension. We all understand that our financial services industry operates in a global and inter-connected environment. That is why the Bill explicitly states that in making its rules on recovery and resolution plans the FSA must have regard to international developments in that area. There is a growing international consensus that such plans—be they called recovery and resolution plans, living wills, wind-down plans or even funeral plans, as I have heard in some cases—are a vital tool in dealing with the systemic risk posed by firms, not least large, complex, cross-border firms. The G20’s communiquĂ(c) on 7 November explicitly called for

“the rapid development of internationally consistent, firm-specific recovery and resolution plans and tools by end-2010”.

The work that we are doing in the UK, through the legislation that we are discussing today, needs to be seen in that context.

Through the pilot programme and our close work in international forums such as the Financial Stability Board, we are taking a leading international role. We want to ensure that the financial services sector in the UK is stable and can fulfil its role of supporting the real economy, which is why we have been leading that ambitious pilot programme that will support and inform our own domestic legislation and European and international work streams in that area. I take the point that has been made by the CBI and others that it needs to be seen in an international context. I believe that the Bill makes explicit reference to allow that to happen, and it is certainly our policy intention that that should be the case.

Mark Hoban (Conservative, Fareham)

If by the time we get to the end of 2010 there is no international consensus about living wills and detailed guidance drawn up at a global level, does the Minister believe that the benefits of living wills are such—in terms of the stability that it brings to the UK—that it would be worth proceeding with a variant of those in the absence of an international consensus?

Ian Pearson (Labour, Dudley South)

I do not believe that there will be an absence of an international consensus. Indeed, at a higher level, agreement has already been reached on the usefulness of such tools. What needs to go on now are more detailed discussions about the content of recovery and resolution plans. That is the task for the next few months. Our pilot work is really feeding into the international discussions that will take place on the matter. As was said in the communiquĂ(c), we need some internationally consistent approaches to the implementation of the plans in the future, but I do not anticipate problems in getting a significant level of international agreement that such things are necessary for financial stability and should be introduced.

With regard to the amendment tabled by my hon. Friend the Member for Wolverhampton, South-West, I certainly understand his intention behind it. I do not support the idea of breaking up by a certain deadline. The amendment is not necessary and I shall set out briefly the reasons why. We are not legislating for additional powers for the FSA to force firms to restructure their operations as a result of their recovery and resolution plans. My hon. Friend will be aware that the FSA already has plans, as part of its toolkit of disciplinary measures, to require firm restructuring. The Bill obliges the FSA to take appropriate action if it considers that a recovery or resolution plan fails to make satisfactory provision. The FSA can apply the whole range of its current set of tools, including disciplinary measures, when it considers that a recovery or a resolution plan is inadequate. It can use those tools to achieve significant changes in an authorised firm, which could include structural changes.

The tools at the FSA’s disposal include offsetting measures, such as discretionary capital add-ons or so-called own initiative variation of permission powers, which ultimately can include the withdrawal of part IV permissions. The FSA therefore already has powers that may achieve structural changes. My hon. Friend will also be aware of the international debate on whether additional new powers would be necessary and desirable, and what would be the appropriate body to exercise them. Its pilot work will again be helpful in that regard, as will the progress that is taking place on the international template that has been developed by the Financial Stability Board. We should not be proceeding ahead of clear evidence and international agreement with regard to additional new powers, which could have significant implications for the competitiveness of the UK. It is important that we continue to lead and participate in the international debate about what additional powers might be required for the future. The amendment is not necessary or desirable at this stage, and I hope that I have convinced my hon. Friend of that.

Rob Marris (Labour, Wolverhampton South West)

This has been an interesting debate. We have heard some thoughtful speeches and the discussion has been of a higher level than took place earlier on some of the minutiae. Two main themes have come through, one of which was the international dimension of the size of major banks and so on. The other was the complexity of the structures of many such institutions, with different models not a shared model. Indeed, as the hon. Member for South-East Cornwall said, most people cannot understand the structure of some banks.

I certainly agree that there is a strong international dimension. I take my hat off to the Government for making, through clause 12, the resolution and recovery plans part of the armoury of defence for us in the United Kingdom, and for introducing and discussing them at an international level. I am glad that more international debate is going on than I had realised and, from what my hon. Friend the Minister said, more domestic debate. If banks go down again, they could bring us all down with them because we cannot afford to bail them out, and the evidence is that what I regard as a pretty important issue is not getting through a whole lot to the average politician.

On the recovery and resolution plan, the Minister says that in a sense we do not want to get ahead of ourselves on international discussions. I say to my hon. Friend the Minister, “What if those international discussions lead to a position where internationally they are saying that there should be such powers to break up very large financial institutions?” I suspect that the United States might come to that conclusion. They have already started to do that in some ways in terms of breakdown. My amendment is only permissive.

I get a sense from some of this debate that the recovery and resolution plans in clause 12, which I seek to amend, have an echo of sitting on the Titanic debating how many lifeboats we have, whether the staff are trained in putting people into lifeboats and how good the lookouts are, rather than the fact that the Titanic is a bit too big and should not be putting to sea at all. Despite the assurances about the level of domestic and international debates, I am concerned that we could get into a situation, which has happened before, and it happens to people in their personal lives and in the body politic, that when the pain goes away we do not go to the doctor—particularly true of men, of course—and when things calm down, we collectively take our eye off the ball, both domestically and internationally. I therefore I urge the Treasury to keep its eye on the ball, even with things quietening down.

I am heartened by the fact that the Minister intimated that the FSA’s existing powers could lead to a requirement by the FSA for a financial institution to undertake structural changes, and I take such changes to include in certain extreme circumstances the breaking up of that institution. On that basis, and with that reassurance from the Minister, I beg to ask leave to withdraw the amendment.

Clause 13

Mark Hoban (Conservative, Fareham)

I do not want to say a huge amount about the clause. There was some discussion at the evidence sessions about whether the clause was needed, because similar paths had been taken by the FSA during the financial crisis to tackle some of the issues relating to short selling of certain banks’ shares. It was argued that the FSA took action under its market abuse powers and that that was not appropriate. Indeed, the British Bankers Association said:

“Our members consider that it is inappropriate that the FSA’s current rules on the emergency restriction of short selling sit within the market abuse rules of the FSA handbook. Rather, it would be better for them to be moved to the disclosure rules. The placement of generalised rules on short selling into the market abuse rules wrongly associates all forms of short selling with abuse.”

The CBI echoes that. It says:

“The previous temporary measures adopted by the FSA in respect of short selling were taken under the market abuse regime partly because the FSA believed it had no other power to act.”

We welcome the fact that it is now put on a formal basis, although it still sits within the part of the Financial Services and Markets Act 2000 that relates to market abuse. It has not gone all the way in tackling the concern that the BBA has.

The Minister has defended short selling on a number of occasions on the Floor of the House—once in response to a question by my hon. Friend the Member for Macclesfield (Sir Nicholas Winterton). The Minister is a very clear opponent of that form of trading in markets. Of course, it can give rise to a number of issues. The impact assessment characterises the problems with short selling. It can lead to three aspects of market failure: market abuse, disorderly markets potentially leading to a depositor run, and transparency deficiencies. It was around the issue of disorderly markets that such changes were largely introduced.

We do not, therefore, have an issue with the introduction of part 8A, but I do want to raise a question about the wording of proposed new section 131B(1). My assumption is that the Government are seeking to prevent the short selling of certain financial instruments, such as the shares of Barclays bank, HSBC or the Royal Bank of Scotland. However, it is not entirely clear from subsection (1) whether that is the full limit of their ambitions, because it states:

“The Authority may make rules prohibiting in specified cases persons from engaging in short selling”.

I am not sure whether that means that the Government would like to stop an institution short selling. They might tell a particular hedge fund or investment manager to stop short selling, rather than saying that they want to stop the short selling of a particular financial instrument. Will the Minister clarify that, because it would seem odd for the rules to focus on stopping one institution from engaging in short selling rather than applying across the market? If that is the Government’s intention, they could use powers elsewhere in the Bill instead. I would be grateful for some clarity on that aspect of the rules from the Minister.

John Howell (Conservative, Henley)

I have three issues on the clause. The first is the definition, the second is the clarity of the proposals and the third is the relationship with the international regime.

There has not been a legal definition of short selling to date, so the Bill sets a precedent. The Committee will recall the evidence session at which Simon Gleeson of Clifford Chance said that the Bill provides

“a basis for banning selling. The definition of short selling, as set out in the legislation, is any transaction in which someone might benefit if the value subsequently goes down.”——[Official Report, Financial Services Public Bill Committee, 10 December 2009; c. 105.]

It was commented that the proposals were more akin to banning selling than short selling. That witness session revealed a wish for a more thoughtful definition. There was an acknowledgement that it was difficult to define short selling. The lawyers offered us the opportunity to have a paper providing more evidence regarding what a definition might look like. I am not sure whether anything has yet emerged, but it would be useful to pursue it, because there is concern that, by common consent, the definition in the Bill still needs to be fleshed out. My question, therefore, is how the definition will be taken forward, given the concern about it among such distinguished lawyers.

On the clarity of the proposals, the clause proposes two things—emergency powers to stop short selling, which is largely separate from abuse, although linked to it, and a disclosure regime. To look first at the stopping part of the proposals, my hon. Friend the Member for Fareham made a valid point, which was also made by the British Bankers Association, when he asked what the purpose of the proposals is. Is it to allow the FSA to suspend trading and stop activity in a certain instrument or is it to stop certain firms from undertaking such activity?

The FSA accepts that regulatory intervention is justified where there are identified market failures and it is expected to deliver net benefits to the market, and I see no disagreement about that. However, that means that we need—the CBI has called for this—to know more about the circumstances in which the provisions will be used and how they will be used, given that the Bill is aimed principally not at abuse, but at disorderly markets and transparency deficiencies. It is relevant to link that to the assessment in the discussion paper that the FSA produced on the issue almost a year ago. That paper looked at six options, of which the stopping of the selling only when there was an urgent need was the one that eventually came through into the Bill. However, the circumstances need to be better defined because they were not well defined in the document. Will the Minister comment on the balance that we need between recognising the benefits of short selling—an increased number of sellers, improved liquidity, increasing trade volumes and reducing the transaction costs and overall improvements in efficiency—and the specific problems that occur in disorderly markets where there is an excess of volatility that can lead to contagion.

The FSA document also pointed out that emergency measures themselves may lead to additional volatility just because they have had to be taken and brought into use. Therefore, something about the circumstances that justify the imposition of this measure would help.

Let me repeat again that the FSA accepts that regulatory intervention is justified when there are identified market failures and when it is expected to deliver net benefits to the market. Paragraph 3.17 states:

“It is not clear whether a lack of transparency about the level of short-selling and the identity of short sellers gave rise to a material market failure. Further there is the question whether the benefits of any mandatory disclosure requirements exceed the cost.”

However, what evidence is there that disclosure will be useful in normal market situations and will improve stability in volatile times? The FSA document is principally considering market abuse, but we need to extend beyond that. A process needs to take place in relation to the costs involved. I did not mean to be entirely glowing about the range of benefits that is put in here. A process seems to be under way of bringing the number down. I was struck by the way in which the impact assessment does not take into account opportunity costs because they were unable to be quantified. They may be unable to be quantified, but they are certainly not equal to zero, so a process needs to take place in relation to that.

Another issue that I wanted to raise was the relationship with the international regime. The Treasury has already admitted that the UK currently has a wider definition of market views that many of its European counterparts. Paragraph 5.2 of the FSA documents states:

“We know that market participants have encountered problems and significant costs in having to comply with the variety of different regimes introduced in the relevant jurisdictions.”

There have also been calls for the regime to be applied as widely as possible internationally. In February, the International Organization of Securities Commission and the Committee of European Securities Regulators had working parties on short selling with the aim of trying to produce a draft law by the end of 2009. It will be good to have an update on that. The issue is not consistent across the European Union. David Ereira in his evidence session said that no assurances could be given that what is being proposed in this clause will dovetail into the EU, and that the UK was jumping the gun. He said:

“It will probably work out all right, because the wording is sufficiently wide that in all probability we will be able to come up with appropriate regulations that fit within whatever comes out of the international processes. It just seems to me more appropriate to wait and see what comes out of those international processes”.——[Official Report, Financial Services Public Bill Committee, 12 January 2010; c. 110, Q48.]

If we look at how prominent members of the European Union have dealt with the issue over the past few months, we get a varied pattern. Austria saw it as abuse and linked it to market manipulation and insider trading. Belgium linked it to good order, integrity and transparency and introduced rules that are restrictions on the vending of shares. The Czech Republic took no action. Denmark’s ban applies to short selling in financial companies. Finland went for more supervision. France aimed at short selling of financial sector securities and Germany principally banned naked short selling of specific financial institutions. That is a hugely disparate approach, and one can completely understand where the lawyers who spoke in the evidence-taking sessions were coming from when trying to get to grips with the difficulties that companies face with this, and the need for consistency. I hope that the Minister will provide some clarification on those issues.

Ian Pearson (Labour, Dudley South)

Indeed I will. Let me set out the purpose and thinking behind the clause before addressing the comments made by the hon. Members for Henley and for Fareham. In clause 13, we are trying to give the FSA the power to control all forms of short selling that might threaten financial stability in the future. As has been demonstrated, the FSA already has the power to control short selling, but under its existing powers it can do that only when it considers that short selling amounts to market abuse. Certain short selling activities—which legally cannot and should not be characterised as market abuse—might nevertheless give rise to disorderly markets and create risks to financial stability. That is why new part 8A gives the FSA the power to control short selling, so as to protect the stability of the financial system and maintain confidence in it.

Responses to our public consultation showed overwhelming support for allowing the FSA to place clear and independent restrictions on short selling, and to require the disclosure of short selling. Under certain circumstances, the FSA would be able to ban short selling in certain financial instruments, such as shares in a particular bank. In response to the hon. Member for Fareham, let me take the opportunity to clarify that the powers would not enable the FSA to ban an individual firm from short selling a stock when another firm was able to continue doing so.

The FSA expects to use the power to prohibit short selling infrequently. As is known, it last used this power in a time of extreme market turbulence when there was high and prolonged price volatility and downward pressure on the price of financial stocks. By giving clear, separate, independent powers in legislation other than that relating solely to market abuse, we give clarity to firms about the scope of the FSA’s powers, and why it has those powers—again, I emphasise that it is to protect the stability of the financial system and to maintain confidence in that system.

The FSA will have the power to fine or censure persons who breach short selling rules. That extends to all people who engage in short selling, including those who are not authorised persons under FSMA. Allied to that, the FSA will be able to require the production of information and documents from a person—or persons connected to a person—suspect of having contravened those rules. These are straightforward enforcement powers, and it is not unusual for such powers to extend to unauthorised persons in that way, as is the case with the market abuse regime.

The hon. Gentleman made the point that we are putting short selling powers in the market abuse rules section. I have said this already: we are introducing a new part 8A. Although it will follow part 8 of FSMA, which contains provisions on market abuse, it is entirely separate from it. The new powers given in part 8A will not be dependent on provisions in part 8; part 8A is located after it, but it is entirely separate. Without being too controversial, let me draw an analogy with the measure that allowed us to take action against Iceland. That featured in a Bill with a long title that included the word “terrorism”, even though the actions we took were about protecting consumers. I shall not speak any further on that matter.

The hon. Member for Henley said that there was no proper definition of short selling, and went on to give a number of international examples of where other countries have taken action on short selling. We pretty much know what we mean when we talk about short selling, but the FSA will obviously consult on the definition that is to be included in its rules.

On the point that the hon. Member for Henley made about disclosure, there is a global regulatory consensus that requiring disclosure on short positions is a good thing and will help reduce the potential for abusive behaviour and disorderly markets, so it is important to implement it. He also asked about the relationship to EU rules. The powers given to the FSA in the Bill will enable it to implement any new EU rules on the matter.

It is not possible to specify in detail what future circumstances might require the introduction of an emergency ban. It is essential not to fetter the FSA’s discretion to take action in conditions that might require swift intervention. However, when using the proposed emergency powers, the FSA would need to be satisfied that its rules were necessary to maintain confidence in or protect the stability of the UK financial system. For example, if short selling threatened to destabilise an institution or institutions whose failure could have systemic effects, or if short selling were otherwise leading to a widespread loss of market confidence, it would be appropriate for the FSA to act.

The clause is important. It has been helpful to have this stand part debate in order to put certain matters on the record. I commend the clause to the Committee.

Clause 18

Mark Hoban (Conservative, Fareham)

I beg to move amendment 58, in schedule 9, page 192, leave out line 10 and insert

‘Select Committee for Children, Schools and Families of the House of Commons.’.

As this is the first clause of many dealing with collective proceedings, with your agreement, Mr. Gale, I will preface my remarks with some general comments about collective proceedings to save the need for a separate stand part debate. The amendment flows explicitly from the argument that I will make about the clause.

The genesis of this clause and subsequent clauses on collective proceedings lies in a report produced by the Civil Justice Council, a body that advises the Lord Chancellor. The report, entitled “Improving Access to Justice through Collective Actions”, was published in December 2008. It was the product of a long process of discussion and consultation within the legal community. If you are minded to read it, Mr. Gale, you will see that the report runs to about 550 pages, so it is not an inconsequential document. It sets out some of the benefits of collective proceedings. They are worth rehearsing as a backdrop to this debate.

The report states:

“Existing collective actions are effective in part, but could be improved considerably to promote better enforcement of citizens’ rights, whilst protecting defendants from nonmeritorious litigation...Effective collective actions promote competition and market efficiency, consistent with the Government’s economic principles and objectives, benefiting individual citizens, businesses and society as a whole...Collective claims can benefit defendants in resolving disputes more economically and efficiently, with greater conclusive certainty than can arise through unitary claims...The Court is the most appropriate body to ensure that any new collective procedure is fairly balanced as between claimants and defendants, the latter of which should be properly protected from unmeritorious, vexatious or spurious claims as well as from so-called blackmail claims.”

The report’s findings conclude with the recommendation:

“There should be no presumption as to whether collective claims should be brought on an opt-in or opt-out basis.”

I will refer explicitly to that issue during debate on clause 19, which gives the basis for opt-in or opt-out proceedings, a subject of some controversy among various bodies.

The Civil Justice Council’s report set out the basis for that. However, I want to raise one issue. The Ministry of Justice, in responding to the report, said that it did not see any merit in a general application of collective proceedings but that proceedings should go ahead on a sector-by-sector basis. So why is the financial services sector an appropriate one for the introduction of what is a relatively novel procedure in UK law, notwithstanding the existence of group litigation orders?

I want to deal with three general questions. First, as I have said, why is collective action needed in the financial services sector? Secondly, is there an alternative to legal action? Thirdly, if we believe that collective proceedings are the right course of action, are there appropriate procedural safeguards to balance the interests of defendants and claimants?

Why is collective action needed? The explanatory note to clause 18, which is phenomenally brief given the nature of the clause’s subject matter, says:

“This clause provides that the court can authorise collective proceedings to be brought on behalf of a group of financial services claims that share the same, similar or related issues of fact or law.”

We can think relatively easily of issues in the financial sector that fall into that category, such as mortgage endowment mis-selling and the sale of payment protection insurance. One could also argue that Equitable Life is another example of the type of case that might warrant a collective proceedings order.

Such cases have a common thread; they are not isolated examples. The Civil Justice Council talked about the benefit of bringing these claims collectively, ensuring a more conclusive outcome than where a unitary claim is brought. So we could aggregate these cases, rather than deal with them on case by case. That would give greater consistency and it would result in a speedier response.

A timely example is the bank charges case that was recently heard in the Supreme Court. In parallel with that case, although there was a stay in hearing individual cases, a large number of people were bringing cases through county courts or small claims courts against banks, because of unfair bank charges. The reason why the test case ended up in the Supreme Court was that it was easier to deal with those issues on a collective basis rather than on a case-by-case basis, although there would have been a read-across between the Supreme Court case and resolving the historic claims if the matters had gone in the OFT’s favour.

Clearly there are cases with a common thread which one could see falling within a collective proceedings order, but I suppose that my question is not so much about whether any cases will benefit from this process, as about what it says about the strength of our regulatory system if we feel that legal action is the right step to take. For me, that is the most difficult issue to address, because we are talking about introducing collective proceedings orders in a heavily regulated sector. The FSA rulebook governs the activities of the people who will be defendants in these cases. We already have an alternative disputes resolution procedure in place—the Financial Ombudsman Service. Although the remit of the FOS is to cover individual cases, it has almost filled a vacuum in the current regulatory structure, in that it has also dealt with a series of claims in particular areas. So it was the FOS that dealt with the fallout from mortgage endowment mis-selling, for example; it has dealt with all the cases that have arisen because of that mis-selling.

It strikes me that we are looking at a relatively novel legal process, when there should be a mechanism in the regulatory structure that consumers can rely on, without having to have recourse to the law. In the evidence session, Peter Vicary-Smith said:

“It is certainly the case that the regulator is not doing its job, as we can see from the evidence on payment protection insurance and the persistent mis-selling and lack of action. It created a situation where the Financial Ombudsman Service was overwhelmed by claims, of which some 89 per cent., I think, have been upheld. It is undoubtedly the case that there are problems.”——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 50, Q140.]

What we do not see is the reform to the FSA that allow consumers to say that a proper regulatory mechanism is in place. In debating clause 26, I think that we will talk about the consumer redress route that the Bill also introduces, but the Government need to make a much clearer argument about why this particular route has been chosen, given that a regulatory structure is in place to protect the interest of customers of financial services.

Is there not a reform in the structure of regulation or the powers of the FSA that would render the proposals unnecessary? The Ministry of Justice’s response to the Civil Justice Council report states:

“Rights of action should be introduced only where there is evidence of need and following an assessment of economic and other impacts and consideration of alternative approaches. In particular, regulatory options should be considered before introducing court based options”.

I do not think that the Government have made that case—it is not apparent from last year’s White Paper or the explanatory notes. I hope that the Minister will take the opportunity to explain why this route is preferred and why other regulatory options are not available.

The CBI said in its briefing to the Committee that it believed that

“priority should be to ensure that current regulation does its job, and then greater emphasis placed on other, more effective forms of redress such as alternative dispute resolution.”

To use the Minister’s favourite Titanic metaphor, perhaps we should focus more on prevention than on cure, and think about what we should do to avoid sailing into the iceberg in the first place, rather than on what is going to happen on deck when the ship hits the iceberg. Some consideration should be given to what the regulators are failing to do at the moment that makes the provisions necessary.

Rob Marris (Labour, Wolverhampton South West)

It was I who used the Titanic metaphor. To carry on with that, part of clause 18, without the amendments, is in a sense an attempt to stop or try to dissuade the ship from leaving port in the first place. If a financial institution knows that there could be a collective action, it may be dissuaded from engaging on a course of action that is somewhat risky.

Mark Hoban (Conservative, Fareham)

I am sorry for wrongly attributing the metaphors; we have been awash with metaphors this morning, so we should perhaps move away from talking metaphorically about the issue.

The hon. Gentleman makes an important point. If this were an unregulated sector, his argument would be powerful, because there would clearly be a deterrent. However, there are already a number of measures in place that should provide protection for consumers—there is an FSA rulebook and rules on the conduct of business—and we should not need the clause to act as a deterrent. I am seeing it very much as a clause that facilitates an outcome when something has gone wrong, but the expectation should be that the FSA is dealing with situations as they arise. Some might argue the problem is that the FSA rules are predominantly about the conduct of business rather than the products. From what we have here, it seems that products have given rise to a problem, given that the FSA is looking at product regulation in particular. It has looked at it most recently in the context of mortgages.

The regulator should be aware that there is a problem. Such problems do not suddenly emerge out of nowhere. Payment protection insurance was a problem that built up over time, so there should have been a regulatory response as it was building up rather than a resort to law. Concerns have been expressed about the matter and the analogy drawn by several commentators is that it is equivalent to US class actions. The British Bankers Association responded by saying:

“We are very concerned that proposals on class actions risk introducing a US-style litigation culture to the UK. The US system is “opt-out” and has led to incentives for baseless claims, increased costs (ultimately born by consumers) and a situation where the only real winners are lawyers. The BBA urges that any proposals based on an “opt out” approach should be dropped and instead that the focus of the bill is on creating a more effective system of consumer redress via the FSA and subject to court approval.”

We shall talk about that structure later, but its remarks echo the concerns of the Civil Justice Council, which said that

“The Court is the most appropriate body to ensure that any new collective procedure is fairly balanced as between claimants and defendants, the latter of which should be properly protected from unmeritorious, vexatious or spurious claims as well as from so called blackmail claims”.

It is not only partially an industry point; it is reflected by the considerations that underpinned the report of the Civil Justice Council.

As I said, there has been a significant debate about the measures. Consumer groups, such as Which?, Citizens Advice, Consumer Focus and Help the Aged have written a joint opinion on the provisions. They stated:

“We believe that the provisions in the Bill are an entirely proportionate response to tackle the types of mis-selling issues that have arisen in the financial services industry. By giving the court the power to decide whether a collective action would be opt-in or opt-out as required by the circumstances of the case, they strike the balance between ensuring an opt-out process where necessary but providing judicial supervision to prevent vexatious and unmeritorious cases.

Consumer groups recognise the merits of collective action, but also some of the risks of that, which is why I want to move on to the need for safeguards. A great deal of the work of the Civil Justice Council was about some of the safeguards that are needed.

I want to conclude on the second theme. We also need to deal with the problem with the regulatory system. The regulatory system should deal with such issues and, given that the financial services sector is so heavily regulated, we should not have to depend on individuals enforcing their rights to achieve the right outcome for consumers.

Are there necessary safeguards? The safeguards are the measures set out in the Bill, in secondary legislation and under the rules of the court. The explanatory notes to the clause state:

“Regulations or rules of the court may require the court, when considering whether to authorise the bringing of collective proceedings, to consider matters set out in the regulations or rules.”

Our job in Committee is to debate such issues thoroughly. We should all be able to agree that we do not want a situation in which the only real winners are lawyers. We are not aiming for that. We must therefore make sure that there are adequate safeguards in respect of the judicial option on opt-out proceedings.

The point that we have reached in our thinking is that we must make sure that adequate safeguards are in place in the Bill if we are to go ahead. In its submission to the Committee, the Prudential wrote:

“We agree with the Government that collective proceedings should be used rarely and only for the most significant cases. However, we do not believe that the Bill, as drafted, provides sufficient checks and balances to ensure the system is not abused.”

On a similar point, much of the detail will be filled in by secondary legislation, which has yet to be published in draft, and court rulings. We expected to have more of the detail by now, as the European Justice Forum, which does not speak for the financial sector, intimated in its response. It says:

“EJF is particularly concerned that the Bill would introduce opt-out class actions in the financial sector and that—contrary to government policy stated in July 2009, no framework of rules and safeguards has been produced prior to proposing such a remedy.”

The plan to produce a framework document was set out in the Ministry of Justice response to the original paper by the Civil Justice Council. What stage has that document reached?

My comments on amendments to later clauses will be about ensuring that sufficient safeguards are in place. The amendments that I have tabled are an attempt to ensure that the safeguards in the Civil Justice Council paper are reflected in the Bill not only so that we have a framework for collective proceedings but so that rights and safeguards are in place before the process comes into force.

Subsection (5) states:

“A person may be authorised under subsection (1) to bring proceedings even if the person would not otherwise be regarded as having any interest, or any sufficient interest, in the proceedings.”

That is quite a broad provision. In effect, anyone bringing a claim does not need to have bought a payment protection insurance policy or to have been mis-sold an endowment policy. Such a person could act as a representative of claimants. In a recent case in which a group litigation order was used, the Consumers Association—now Which?—acted as a representative. It was not a financial services case; it involved a price-fixing cartel for football shirts. In that case, it was not an individual customer who bought a football shirt, but Which? that acted as a representative.

One can see why Which?, as a consumer group, would have an interest in acting on behalf of consumers, but other groups could equally act as a representative, given the breadth of subsection (5). We are well aware of the activities of claims management companies. Some clearly act in the interests of potential claimants, but one gets the sense from time to time that others are looking for a cause to fight and see a clear commercial benefit to doing so in terms of the fees that they might generate.

So there needs to be some control over who can bring such cases. Subsection (5) is broadly drafted, and amendment 58 would introduce an additional check so that the representative

“is authorised to act as a representative on an ad hoc basis under the civil Procedure rules, or...is authorised to act as a representative and on such terms as specified by order of the Lord Chancellor, in accordance with criteria to be published by the Lord Chancellor for the purposes of this section.”

That would introduce some coherence and structure and make clear who can bring such claims and act as a representative. It would require the Lord Chancellor to consult the Lord Chief Justice or a judicial office holder nominated by the Lord Chief Justice when authorising an individual to act on an ad hoc basis or issuing criteria or guidelines for who might act as a representative.

The safeguard is set out in the Civil Justice Council’s report and is, from recollection, an extract from the draft Bill that the council prepared. The amendment is the first in a series that would introduce the safeguards set out in the report and ensure that a proper framework was in place for such actions to be brought.

Roger Gale (Conservative, North Thanet)

The Committee will notice that at the top of the selection list are the words

“Chairmen’s provisional selection and grouping of amendments”.

The Chairman does not always get it right. I think I may say without wishing to be patronising that the hon. Gentleman has taken a pragmatic and sound approach to his coverage of this debate. In so doing, he has covered collective proceeding rules, which are in clause 18, and, to a considerable extent, opt-in and opt-out, which is in clause 19. The substance of clause 20 is fairly light, so I will now group the stand part debates for clauses 18, 19 and 20 with the amendment.

If that leaves the hon. Gentleman in a difficult position, Mr. Benton or I will take cognisance of that. Mr. Benton might wish to make further remarks. We are now debating amendment 58, with which it will be convenient to debate clauses 18, 19 and 20 stand part.

Rob Marris (Labour, Wolverhampton South West)

I am surprised by the amendment, as it appears to take power away from the courts, which are independent, and give it to a politician—the Lord Chancellor—who may or may not be elected, although the current Lord Chancellor is. That would be a retrograde step. Pursuant to the other provisions in this grouping—not only clauses 19 and 20 but clauses 21, 22 and onwards—I think that the amendment is misconceived in focusing power in the hands of a politician rather than leaving it with the courts, as clause 18 would do.

Roger Gale (Conservative, North Thanet)

Before we proceed any further, the hon. Member for Wolverhampton, South-West mentioned clauses beyond clause 20. For clarity, may I explain that I drew the line at clause 20 because separate amendments have been tabled to clause 21? It would be unwise to go any further down a tricky road.

Ian Pearson (Labour, Dudley South)

I am considering where to begin—

Roger Gale (Conservative, North Thanet)

Try clause 18.

Ian Pearson —and, more importantly, where to end. I think that I will begin with clause 18, as you suggest, Mr. Gale, and amendment 58. Clause 18 is a new development in the law of the country, and it is entirely right that the hon. Member for Fareham should raise probing questions about the Government’s intentions. I am happy to put a number of matters on the record in the time available this morning and, I suspect, this afternoon.

We believe that there is a clear need for collective proceedings for financial services claims. The hon. Member for Fareham referred to the Civil Justice Council report on improving consumers’ access to justice. It recommended that generic collective proceedings be introduced in the UK. In our response, we said that they should be considered and, where appropriate, introduced in specific sectors where there is a case for doing so. As I have said, we believe that there is a strong case for doing so in relation to financial services.

We do not believe that there is an effective means at the moment for representing consumers as a group in mass financial services cases. There is some provision for collective litigation, but it is so limited that it is rarely used.

Roger Gale (Conservative, North Thanet)

Order. I am advised that the Programming Sub-Committee will not now meet and that this Committee will sit between 8 pm and 10 pm this evening. I can take the Chair, so Mr. Benton will be with you this afternoon and I will be with you this evening. I give an undertaking to see when I leave the room whether there is any way to generate a little heat in this igloo.

Joe Benton (Labour, Bootle)

I remind the Committee that with this we are taking clauses 18, 19 and 20 stand part.

Ian Pearson (Labour, Dudley South)

As I was saying before the Committee rose, existing provisions for collective litigation are rarely used. That is because they are open only to a person who has a claim themselves, and they can represent others only where their claims are the same. Claims that differ, even in minor respects, cannot be represented. Consumers must therefore make individual claims and firms may have to defend thousands of similar actions. For example, complaints about bank overdraft charges generated some 47,000 court cases. It is expensive, time-consuming and inefficient, and there is a risk that the courts will make different and conflicting rulings. As the hon. Member for Fareham acknowledged, the ombudsman service is not a suitable vehicle for dealing with mass claims. For example, the ombudsman cannot make judgments that are binding on both sides, and cannot deal with complex points of law. The ombudsman is not a court, nor should we attempt to convert the service into a court.

Clause 18 provides for the first time a court procedure that will enable financial services claims to be resolved for a group of persons without the need for group members to bring their own claims. A representative may apply to court to bring the collective claim on behalf of the group. The court will then consider whether to authorise collective proceedings.

Before dealing with the amendment, I will say something in relation to the points that the hon. Member for Fareham raised this morning. The Government do not support the introduction of a generic right of collective action. We believe that such rights should be considered for specific sectors. They should be introduced only where needed. It should be a last resort after regulatory options have been considered. That was set out in the Government’s response to the Civil Justice Council report, “Improving Access to Justice through Collective Actions”, which was published in July 2009. That is the approach we are taking here. Financial services have a history of mis-selling and other scandals that throw up mass claims. When regulatory action is not appropriate—because a legal point needs to be settled, for example—collective proceedings will provide an efficient way to deal with claims that would otherwise have to be considered individually.

Colin Breed (Liberal Democrat, South East Cornwall)

I agree entirely with that. However, as the Minister will be aware, the problem—if that is what it is—with bank charges was that a number of people had their claims dealt with and some got their money back and some did not. Then there was the collective action and a decision was made, but that did not include all the people who settled before the collective action. How do the Government propose to deal with that situation so that a substantial number of cases have not already been dealt with before collective action commences?

Ian Pearson (Labour, Dudley South)

The hon. Gentleman raises a good point. We will have to see how it works in practice. Perhaps in some cases there will be individual actions and then collective action will be authorised by the court. It will be for the courts to judge when a collective action is right under the powers that we are providing.

Any case that involves generic issues that affect a number of consumers may be appropriate for collective proceedings. There have been instances of widespread mis-selling, for example, of endowment mortgages and payment protection insurance. As the hon. Gentleman has mentioned, consumers have had to pursue individual complaints. They might have benefited if they had had the ability to launch a collective action.

In the recent bank charges case to which the hon. Gentleman referred, the Supreme Court held that overdraft and similar charges could not be assessed for fairness under the Unfair Terms in Consumer Contracts Regulation on the basis of the adequacy of the price paid as against the service provided. In that case, the possibility of collective proceedings would not have made a substantive difference to the position of consumers.

The two measures that we propose complement each other, and are for use in different circumstances. The FSA will have the option of using a redress scheme when, for example, the law is clear. A large number of consumers will benefit without having to go to court, which might also be most cost-effective for the industry. Alternatively, consumers will be able to proceed collectively where the FSA chooses not to take action. Typically, the FSA will not want to act where the law is unclear. There may be other reasons why it will not want to act. It is important to stress the complementary nature of what we are proposing.

There is an element of choice for consumers and their representatives in determining the best way forward. The representative is free to apply for authorisation of the proceedings.

Mark Hoban (Conservative, Fareham)

My concern is that, as the Minister says, the FSA might not wish to pursue an issue where the law is unclear, and we will be dependent on consumers taking their own legal action to enforce their rights. If the FSA’s rules are unclear, would one not expect it to sort that out and ensure that consumers do not need to take action through the courts? Does the Minister draw a distinction between the FSA’s rules and the broader contractual law?

Ian Pearson (Labour, Dudley South)

It is the hon. Gentleman who draws a distinction. I hope that it is never the case that the law is not clear. If the FSA’s rules are not clear, the direct answer is that I would expect it to make them clear. In general, as the hon. Gentleman will be aware, the court would be reluctant to authorise collective proceedings if litigation would be less efficient than regulatory action. He made a number of points about getting regulatory action right in the first instance.

It is intended that the FSA, the FOS and the OFT will have a right to be heard by the court to explain the possible alternatives. The court will have an opportunity to assess what is likely to be the best course of action. It will be able to require the representative to explain what it has done to work with the regulators, and whether it has pursued alternative dispute resolution.

Regardless of how the FSA performs its functions, consumers might need to bring legal proceedings in a number of circumstances, and it is right that they have that opportunity. I do not accept that the provisions constitute any recognition that the FSA is not doing its job properly. Consumers who enter into legal relations with financial services providers may sometimes need—and want—to bring legal proceedings. The provisions for collective proceedings enable claims to be combined where that is appropriate.

We propose that a representative will be able to act on behalf of a group of consumers where claims contain the same, similar or a related issue of fact or law. As part of that, we do not intend to make changes that move us towards a US-style system. Some have portrayed this provision as doing that. We do not want to see the development of a US-style litigation culture, and there are a number of major differences between the US and UK legal systems which lead me to conclude that that is not likely to happen. In the UK, it is not the case that parties normally bear their own costs. The “loser pays” principle applies in the UK, which is an effective deterrent to spurious claims. There is no provision for US-style punitive awards or treble damages, and the legal system is not used as a sort of private regulator to allow individuals to hold companies to account. There is no burden of extensive up-front disclosure, no provision for lawyers to take a share of the damages, and no jury trials in which juries can make awards that are exceptional.

Mark Hoban (Conservative, Fareham)

The Minister says that there is no provision for lawyers to take a share of the damages, but what about no-win, no-fee cases?

Ian Pearson (Labour, Dudley South)

The hon. Gentleman is right to point to that. What I am trying to explain is that the system here is very different from the one in the United States. We are certainly not signalling in the collective proceedings proposals that we should move in that direction, but we believe that the proposals will be a useful addition and will give consumers more power.

Rob Marris (Labour, Wolverhampton South West)

In non-contentious cases, it is true that lawyers can take a share of the damages, but the cases that we are discussing will all be contentious. In contentious cases, if the successful party is acting under a no-win, no-fee agreement, the lawyer charges what is called a success fee. This Government introduced recoverable success fees so that additional costs are paid by the losing party and do not come out of the damages.

Ian Pearson (Labour, Dudley South)

I welcome my hon. Friend’s contribution. He clearly knows a great deal about legal proceedings. I am not legally qualified and am happy to rely on his words of wisdom.

I want to make it clear that significant safeguards are built into our proposals, and that nuisance or speculative claims will not be acceptable. The safeguards are, first, that the clauses are designed to stand alongside clause 26, which confers a new power on the FSA to provide for consumer redress schemes so that only cases that cannot be settled by the regulator will proceed to the courts. Secondly, a group action is a serious matter, and the “loser pays” principle applies. A representative will need to be able to attract adequate funding. I therefore expect only the strongest cases to be taken forward. Thirdly, there must be strict threshold criteria for authorising a class action. They will be set out in court rules, as I have said. However, as I mentioned, I have also asked for a backstop power to enable the Treasury to set out additional criteria that can be tailored to financial services.

I can see the case for restricting the types of body that can bring claims. We will consult on the nature of any restrictions and, for example, the position of claims management companies and other professional representatives. I do not want to pre-empt the outcome of that consultation, but I am prepared to consider restricting representatives to public interest bodies, consumer groups and those who will not earn a fee for their services.

The first part of amendment 58 calls for the eligibility criteria for authorising a representative to be spelled out in court rules. The Government believe that that is unnecessary. Clause 24(2) states that the court rules will contain the requirements applicable to the representative. I understand that the rules are already being drafted by the civil procedure rules sub-committee in England and Wales, and it is expected that the rules committee will consult on them later this year.

The second part of the amendment creates a designation procedure so that a representative can apply to be authorised before applying to bring an action. I draw the Committee’s attention to the fact that the court itself will be able to approve a representative in accordance with the rules, so an additional designation procedure seems unduly bureaucratic. If collective proceedings are to work properly, the court will always need to appoint an appropriate representative to represent the group. The suitability of a representative will vary from case to case, so a standardised form of prior approval may be counter-productive.

I agree with the hon. Member for Fareham that it is vital that only suitably qualified persons of appropriate standing should be allowed to bring a class action, and I believe that that should be set out principally in court rules. Subsection (2) of clause 24 gives detailed examples of the kinds of rule that can be made—notably to govern the procedure and content of an application to bring a group action and the criteria for the court to apply in deciding whether to grant it.

I expect the minimum criteria to be either that a representative has a claim or that they are considered by the court to be an appropriate person to act as a representative. The representative will need to satisfy the court that they are suitably qualified. That means that they will probably need to have a litigation plan, which is to say that they will need to have a plan for effectively managing the case and communicating with claimants. We expect that there will need to be strong governance and consultation arrangements that match the size and nature of the class of complainants. Those are the sort of issues that are currently being considered by the Rules Committee and will be consulted on in due course.

In addition, as I hope to set out in more detail when we debate clause 22, the Treasury will have powers to set more detailed eligibility criteria. I expect them to limit eligibility only to appropriate individuals or bodies that have a direct claim of their own, and to bodies of a prescribed type that do not themselves have a direct claim. The Government intend to consult on the nature of any restrictions and, for example, the position of claims management companies and other professional representatives.

I wish to move on and refer briefly to the other clauses that have been grouped with clause 18. The Committee will be aware that the clause, together with clauses 19 to 25, introduces a new form of group action into United Kingdom law. We believe that it is an efficient way to deal with mass claims that currently have to be dealt with individually by the Financial Ombudsman Service and the courts. Many good claims are currently not being dealt with at all because consumers regard complaints and litigation as too difficult. There is a real risk of a multitude of cases being pursued individually, which is why we are dealing with matters under legislation.

Clause 19 creates two bases for collective proceedings, a matter raised by the hon. Member for Fareham. After making a collective proceedings order, the court must decide whether proceedings should be on an opt-in basis or an opt-out basis. In an opt-in case, the claimants who want to take part must identify themselves and agree to be represented. In an opt-out case, all those with an eligible claim will be included automatically without the need to identify themselves. They will be able to opt out of the group within a certain period.

It is important to recognise that financial services cases can differ enormously, for example in their size and complexity and in the legal basis for the claim. That is why it is essential that the court has wide case management powers to deal with claims in a way that suits the particular circumstances of the claims. That includes allowing the court to determine whether collective proceedings should take place and, if so, on what basis—whether it is an opt-in case or an opt-out case. That is why clause 19 makes provision for both opt-in and opt-out proceedings and gives the court the responsibility of deciding the most appropriate, which is the right way to operate.

Clause 20 is more technical. It provides that, when giving a judgment or making an order in collective proceedings, the court must direct whether or not to bind some or all represented persons. For the proposed collective proceedings procedure to work efficiently and fairly, it is necessary that judgments or orders can bind group members. Otherwise, group members will be able to bring individual proceedings even though the judgment in the collective proceedings has gone against them.

If someone has opted in to collective proceedings or has failed to opt out of the proceedings, it is only right that they should be prepared to accept the consequences of the actions of the representative in the proceedings. If collective proceedings are to be an effective tool for resolving cases—as we want them to be—involving large numbers of claims, it is essential for the court to decide that judgments or orders are binding on some or all represented persons or representatives, as appropriate.

Clauses 18, 19 and 20, together with the other clauses that we shall be debating soon, introduce a new form of group action into UK law. It is an efficient way of dealing with mass claims that currently have to be dealt with individually. It will help to improve access to justice; many good claims are currently not dealt with at all.

Mark Hoban (Conservative, Fareham)

I start with the general argument that the Minister made about why collective proceedings orders are necessary. The starting point was the Ministry of Justice response to the Civil Justice Council report about collective actions. The Ministry’s response was that such actions should be used only in particular sectors. I can see a clear argument why the financial services sector, given the number of mis-selling claims in recent years, is appropriate, with a group of cases with similar threads running through them.

The Minister said that, in reality, such actions should be used only when the law was unclear. I thought that an interesting argument, because the law may be unclear in many areas of consumer activity. To pick on that sector spoiled his argument, which supported a more generic right rather than one tailored to the sector, particularly given the degree of regulation involved. I am not sure that he made the most robust case for why the sector should be the one highlighted as the guinea pig.

The same theme came out in the Ministry report. The legislation exists, but we are some way off the detailed rules that will provide the safeguards for which industry is looking. The Minister said that work on them would conclude towards the end of the year, when they will be consulted upon. Later clauses, such as clause 22, give the Treasury regulation-making powers, but we have not seen the draft regulations. The Government have used the Bill—as the Treasury so often does—as enabling legislation, leaving everyone to trust in secondary legislation that will be brought forward. That position is not satisfactory. The Minister has not given the warmest of reassurances to those who pay attention to our proceedings.

The Minister said that where the law is clear, the consumer redress provisions should be used. I shall talk about the subject when we come to clause 26, but that is not the impression that the general counsel for the Financial Services Authority gave in his evidence to us before Christmas. He indicated that the power could be used in cases in which the law was unclear. There needs to be a safeguard to reflect that, but I shall deal with that point at another time.

The Minister is setting out in the clause, and in other clauses in the group dealing with collective proceedings orders, a framework that will be filled in at a later stage, through either secondary legislation or court rules. I suspect we shall hear that refrain a lot as I talk through the amendments I have tabled. I hope he will go further than saying simply, “It has been consulted upon”, because there is a lot of concern about the measures, arising from the lack of detailed information about the rules.

The hon. Member for Wolverhampton, South-West suggested that he was surprised I was giving some responsibility to a politician—in this case, the Lord Chancellor. My amendment 58 follows the proposals set out by the Civil Justice Council, which produced a draft Bill, and this is one of its clauses. That point was reached by a group of lawyers—some judges and some practising barristers and solicitors—who had thought through the matter clearly. I assumed that the Government would be rather keener than the Minister has suggested to adopt something of the nature that the group had put forward.

Before I make more substantive comments on clause 19, I take note of the Minister’s comments about the implications of clause 20. One of the challenges in such cases is to create certainty of treatment. That issue was in the minds of many people when the bank charges case was going through court. How do we ensure certainty for both claimants and defendants? It is right that measures are in place to fix that, so people know exactly what their position is.

As the Minister said, clause 19 gives some flexibility in choosing between opt-in and opt-out. Arguments have been made in favour of both a pure opt-in and a pure opt-out system; there is no universal consensus. Under an opt-in scheme, consumers would have to identify themselves to a representative bringing a claim; under opt-out, they would be considered automatically unless they said otherwise. The court has responsibility for directing whether proceedings will be brought on an opt-in or opt-out basis.

Such flexibility is reflected in the Civil Justice Council’s conclusions where the Government choose to follow its thoughts. Lord Woolf wrote in 1996:

“The court should have power to progress”

a multi-party situation

“on an ‘opt-out’ or ‘opt-in’ basis, whichever contributes best to the effective and efficient disposition of the case.”

That is an important point.

The Civil Justice Council wrote in its report that

“a large number of small claims arising out of a common contractual dispute, holiday claims etc., may be better suited to resolution via an opt-out collective action. If however a consumer claim appears to be inherently suited to individualised litigation that is case managed as a collective action of unitary actions (because, say, the size of the class is very small, and each class member has indicated a wish to sue individually and would probably opt-out to do so, were the proceedings to be brought under an opt-out model), then the certification court could appropriately order that the action be certified as a GLO”,

or group litigation order.

In essence, the Civil Justice Council is arguing that if the loss is likely to be the same for all claimants, opt-out is the most appropriate mechanism to deliver justice for those claimants, but if the loss, although subject to common factors, is likely to be highly differentiated among claimants, an opt-in arrangement is more appropriate.

We have heard a number of examples of cases in which that argument might be applied. Equitable Life policyholders have been subject to the same regulatory administrative failures, but the circumstances and nature of each individual’s losses are different. Anyone who reads Sir John Chadwick’s interim report can see how the different groups might be affected. An opt-out case brought for Equitable Life might not result in an efficient and effective disposition of the case, given the varied interests involved. However, I suspect that the mis-selling of payment protection insurance products would lend itself well to an opt-out system due to the nature of the products and the scale of the loss.

Colin Breed (Liberal Democrat, South East Cornwall)

I am listening carefully, because that is an interesting aspect that I had not considered. Does the hon. Gentleman consider that there might be multiple collective actions representing different complaints or series of complaints against the same company? In other words, different class actions could go on at the same time in the context of the same complaint, because different complainants would be treated differently.

Mark Hoban (Conservative, Fareham)

Yes, I think that that is right. It is always dangerous to use examples, as they never quite fit the precise circumstances, but in the case of Equitable Life, there are different groups of policyholders. Some people were late joiners. Their complaint against Equitable Life or the regulator would be different from that of the trapped annuitants, who could not leave Equitable Life voluntarily.

In that case, a collective action covering all Equitable Life policyholders would not seem to be the right process, even though they were all subject to problems with Equitable Life and regulatory failure. We can see that an event might trigger not one case but a multitude of cases, whether that is because the policyholders’ circumstances are different, because they are affected in particular ways, or because the problem has a differential impact on different groups. Therefore, a series of smaller collective actions might be a better way to proceed, rather than a single action that covered all policyholders. That is one of the issues on which we need flexibility on whether to opt in or out. Recognising that need for flexibility, the Civil Justice Council concluded that

“This approach is one that does not therefore recommend the introduction of any form of presumption as to whether a collective action should operate on an opt-in or opt-out basis. It is an approach which places the responsibility for designation with the court at the certification stage.”

That is, we should leave it to the court to decide whether that is appropriate.

However, the prospect of opt-out triggered concerns among lawyers and others, who felt that it could lead to US-style litigation. Slaughter and May said:

“This development heralds the arrival on UK shores of a procedure for consumer litigation, which is in some respects similar, at least in its ‘opt-out’ form, to the US ‘class action’ procedure. The result would likely be that large numbers of relatively small claims which individual consumers might currently be unlikely to pursue on an individual basis could be aggregated and brought through collective proceedings.”

That is the concern that some have about the opt-out process. However, it is not a universal concern, because the four consumer groups said in their submission:

“We do not believe industry concerns that an opt-out process will lead to the development of a US-style class action culture are justified. Opt-out is also a feature of collective redress systems in Portugal and Scandinavia but these countries have not experienced the same problems as the US.”

They went on to echo a point that the Minister has made:

“It is the particular features of the American legal system, rather than the nature of the opt-out system per se, that have led to the class action culture. In contrast to the US, our legal system is characterised by close judicial supervision and the Bill rightly builds on this tradition by ensuring judicial checks and balances.”

Industry’s concern is that if the checks and balances are meant to ensure that the opt-out system does not become a US class action process, it would like to see what those checks and balances are more clearly.

On the one hand, consumer groups say that opt-out is necessary and not something to be feared, while on the other hand, industry claims the opposite. So what is the case for a purely opt-out situation? Those who argue in favour of the opt-out must make the case for moving away from the flexibility.

One criticism of restricting the measures to opt-in is that it does not move us very far from the existing set-up. There is already provision to bring a group litigation order; to the minds of some, that is already an opt-in procedure. The Courts Service says:

“A group litigation order can be made in any claim where there are multiple parties or claimants to the same cause of action. The order will provide for the case management of claims which give rise to common or related issues of fact or law.”

Indeed, it was a group litigation order that Which? used to initiate proceedings against JJB for the price-fixing of football shirts. That gives rise to a further possible argument: in such cases, the amount lost per customer is so minimal as to discourage any complainant from actively becoming involved, and that allows the company to escape justice. The loss per person might be relatively small, although a large number of people are involved. In situations where it is not worth pursuing the case, organisations such as JJB would escape justice. Provided that the authorised person is properly approved, is there any reason why they could not draft more complainants in on an opt-out basis?

Similarly, there are reasons other than the monetary amount that discourage people from involving themselves on an opt-in basis, such as fear of the legal system or simple human inertia. The Association of British Insurers said:

“if these reasons act as a disincentive for a consumer to opt-in to joining a CCR action, why should the same consumer with the same social and psychological issues be forced by default to participate in litigation on an opt-out basis?”

For the ABI, clearly one of the arguments on opting in is that it makes sure that everyone possible is involved in the measure. One of the criticisms of opting in is that it requires people to overcome their inertia and reluctance to engage. If people are automatically assumed to be part of a class action, will they really volunteer to opt out? It is almost the reverse of the nudge argument.

We want the default position to be right for the person, so that it gets them to do what is instinctively right. I sense that one of the reasons for an opt-out process is that it automatically assumes that the individual would like to be part of litigation and to pursue their case, and that they should therefore be in a position to pursue that litigation, even if they are not actively engaged. That assumes that the right safeguards are in place in cases where opt-out is appropriate. It is a strong argument for universal application of an opt-out. In the evidence sessions, Jane Vass from Age Concern and Help the Aged said:

“We particularly welcome the proposal for collective proceedings with an opt-out procedure, which will redress a great imbalance for older people, who often are not in a position to make a complaint themselves if they are socially isolated, if they do not have support, if they are immobile, or if they just do not have access to the available forms of information.”——[Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 50, Q140.]

The ABI suggested that an opt-out system would be a dramatic shift in the process of law in the United Kingdom that raised serious constitutional and human rights issues. In the first instance, it felt that the impact of opt-out systems on the due process rules, as enshrined in the European convention on human rights, was unclear. It felt that individuals should not be made to be claimants without their knowledge or explicit consent. It also said that defendants have a fundamental right to know who is accusing them of unlawful conduct, so the creation of an opt-out consumer collective redress is likely to give rise to fundamental reconsiderations of the philosophical basis for European legal traditions. I suspect that that fundamental reconsideration is outside the scope of the Committee, but the ABI’s response demonstrates our concern about making significant moves to change the legal framework for bringing such actions in a narrow sector, when there are wider considerations to be thought about. It is also a reminder of why we are worried about the lack of evidence on what safeguards will be in place.

If there is to be such a fundamental change, we need to move with caution and ensure that there are adequate safeguards. If the fears about US-style litigious culture are well founded, we must make sure that proper safeguards are in place. The European Justice Forum, which I spoke about this morning, said in its representation on the subject:

“Class actions are an exceptionally powerful and potentially dangerous instrument, as evidenced by the experience of other countries. If they are to be used at all they must be contained within carefully designed provisions that will avoid abusive claims and ill founded litigation.”

My conclusion is that while there are some strong arguments for a pure opt-out, there are valid concerns about why it would be inappropriate to allow only opt-outs, given our legal system and the safeguards. The Civil Justice Council has got it about right: it says that there should some flexibility, and that that flexibility should be determined by the court, based on the circumstances of each individual case.

By rehearsing the arguments on whether there should be an opt-in or an opt-out system, we have demonstrated some of the tensions underlying the introduction of such actions, and reinforced the need for further safeguards. That was the point of amendment 58.

The Minister says that the issue will be part of the consultation on the court rules, and I welcome that. However, there is a lack of transparency about the process at the moment, although the Minister has shed some light on it. It would be helpful if more information were shared with the Committee on how the legislation will go forward and how the details will be filled in. That would be helpful, and might provide reassurance to those who take an interest in such matters.

Ian Pearson (Labour, Dudley South)

In the course of debate in Committee, we shall provide additional detail, which may help those who follow our proceedings. However, as I said a few moments ago, there will be court rules, which will be consulted on. That is important.

I want to go back to two points made by the hon. Member for Fareham. First, I want to make it clear that financial services is a sector in which there has been a history of mis-selling and other scandals, and that is why the Government think the sector appropriate for collective proceedings. Consumer complaints, for instance, have risen from 31,000 in 2001 to 128,000 in the year to March 2009. It is intended that collective proceedings will be appropriate not just where the law is unclear, although obviously, where the law is unclear, collective proceedings will definitely be relevant.

Mark Hoban (Conservative, Fareham)

Where the law is clear, should we not expect the regulator to take action and not require consumers to go through the court process?

Ian Pearson (Labour, Dudley South)

The hon. Gentleman talked about defaults, and the default position is that we have effective regulation, which should sort out problems. However, in real life, in some areas individuals will always have complaints, which they may feel have not been adequately addressed. We should not circumscribe the rights of individuals who want to take legal action. In the Bill, we are helping the action to take place on a collective rather than an individual basis.

The hon. Gentleman made a number of points on both sides of the argument. He gave the views of the consumer advocacy groups, which are strongly in favour; and mentioned some of the concerns felt by people in the industry about how the system might operate. I think that he came down on the side of saying that we ought to have the provisions in the Bill. It is important that we have both opt-in and opt-out. I want to emphasise that there is no necessary, once-and-for-all division between having an opt-in case and an opt-out case; cases may need elements of either procedure. The hon. Gentleman gave some examples of why different approaches might be necessary. Certainly, clause 19 provides for the court to be able to change the basis from opt-out to opt-in as issues and circumstances arise.

For example, after the generic issues have been determined, it might be helpful if the court could require group members to opt in. The court could then deal with individual distinctions and issues for the purposes of making different awards and categories. We can all foresee instances in which cases might continue on one basis, but we can also envisage situations in which one might need to switch during the course of the case. Having the flexibility to do so is important, and giving that power to the court is the right thing to do. I think that that answers the broad thrust of the last of the hon. Gentleman’s arguments, and I hope that the Committee can agree to clauses 18, 19 and 20.

Mr. Hobanrose—

Ian Pearson (Labour, Dudley South)

I think that the hon. Gentleman was about to withdraw his amendment.

Mark Hoban (Conservative, Fareham)

As the Minister helpfully prompts from a sedentary position, I think I was about to withdraw my amendment.

I do not expect the Minister to respond on this point, because we have a difference of view on the subject, but my concern is still that the regulator should be in a position to take action where the law is clear and where a regulatory matter has given rise to the concerns. There is a danger that the regulators will be able to push to one side their responsibility for consumer redress and for ensuring that the consumer problem is resolved by saying, “It’s okay; if they are that concerned, they can take it to court.” That is not the position that we should be in.

That highlights a gap that has emerged since the introduction of FSMA. The Financial Ombudsman Service, which is the alternative dispute resolution mechanism and point of contact for individual consumers seeking to resolve a dispute that they have with a provider, has filled a vacuum. In large group actions where there is widespread evidence of mis-selling, whether of mortgages or of PPI, the FOS seems to be taking on a role in resolving those complaints, which, in a way, is outside its remit. However, if it had not filled that vacuum, I am not sure what would have happened. There would certainly have been a pressing need for a collective action order.

There is a weakness in the regulatory structure. That issue might be addressed when we discuss consumer redress under clause 26, but it remains my nagging doubt that we still have not tackled it properly. The Ministry of Justice said that we need to look at individual sectors, and the Civil Justice Council said that we must look at the alternative procedures. I do not think that we have properly looked at alternative procedures that would improve the regulatory system and ensure that consumers did not need to have recourse to law to resolve their rights. Having made that point again, I beg to ask leave to withdraw the amendment.

Clause 21

Mark Hoban (Conservative, Fareham)

I beg to move amendment 59, in clause 21, page 24, line 14, at end insert ‘, and

‘(c) is brought by or on behalf of (and is limited to) persons who are consumers;’.

Joe Benton (Labour, Bootle)

With this it will be convenient to discuss amendment 60, in clause 21, page 25, line 15, at end add—

‘(8) In this section “consumer” means any natural person, who in the matters to which the claim relates, is acting for purposes which are outside his trade, business or profession.’.

Mark Hoban (Conservative, Fareham)

Clause 21 sets out the definition of a financial services claim in the context of who the defendant might be. It mentions an

“Authorised person; authorised person who is an investment firm or credit institution; person acting as an appointed representative; payment service provider; a person carrying on a business of a kind mentioned in section 226A(3) of FSMA”.

I want to ensure that the redress or collective proceedings process covers not only people who are authorised by the FSA, but those who have undertaken consumer credit action. We know that those who are provided with consumer credit fall outside the remit of the FSA. However, we do not have a definition of who brings the complaint—the claimant—in this process. Amendment 59 would introduce a new paragraph (c), while new subsection (8) defines a consumer.

That creates further clarity regarding who is bringing the complaint and what the process is. Without defining who has suffered the loss, it is difficult to say what a complaint actually is. We need symmetry. We have identified the defendants, but should we not identify who is in a position to make claims? It is a relatively straightforward amendment.

Ian Pearson (Labour, Dudley South)

The effect of the amendments is to exclude small and large businesses by virtue of the definition of “consumer” given by the hon. Member for Fareham in amendment 60. I will explain why we believe it right to include in the scope of class actions businesses, especially small businesses, as well as charities, the self-employed and individuals acting in a professional capacity.

The definition of those whose claims can be represented is related closely to the definition of “consumer” in the Financial Services and Markets Act 2000. I consider it important to maintain the relationship between those who may benefit from regulation and those who may benefit from collective proceedings. It is advisable and desirable to avoid a situation in which a firm and an individual are protected by the same regulation, but the individual has access to greater or better routes of redress. I also do not see any reason why court proceedings brought by large businesses should not benefit from the more effective group litigation procedures, although for small businesses, charities and the self-employed, the scope to act in that way is clearly highly important.

The collective proceedings procedure does not create new liabilities or claims; it is simply a more efficient way of dealing with a number of similar claims. If a group of firms or professionals have valid claims, it seems to me that they should be able to apply for a class action if that is the most efficient way of handling those claims. For their claim to be valid, businesses will have to show that they have cases with generic issues that can be dealt with on a group basis by a representative. The court will be able to authorise the action only if that is the most appropriate way of disposing of the issues. To my mind and the Government’s, the same logic applies to businesses and to individuals.

Perhaps the hon. Gentleman is concerned that the clause would allow commercial creditors to apply for a class action against a financial services provider. I draw the Committee’s attention to the definition in clause 21(1) of what types of claim they might be able to make through a class action. It is limited to cases in which they could show that their claim was connected with carrying on a regulated activity or dealing with the authorised person in the course of a regulated activity.

Ultimately, of course, it is for the court to decide the most appropriate way to manage a large number of claims. I believe that our approach is preferable to excluding a whole category of potential claimants, as the hon. Gentleman’s amendment would. I hope that I have persuaded him not to press his amendment.

Mark Hoban (Conservative, Fareham)

It is an interesting interpretation of my amendment. I would not say that it prevented a plumbing company that took part in a regulated transaction, for example, from pursuing a claim. I certainly expect that it would prevent a bank from suing another bank or a group of professional investors from suing another institution. I do not think that it would stop most businesses from taking part in a class action.

My amendment is targeted predominantly at consumers: ordinary people in the street who buy financial services products. My impression was that it aims not to enable a string of corporates to take part in actions but to help people who might feel that they were not properly represented or could not afford to bring an action. The Minister’s explanation seems to have widened the scope of who could bring an action beyond what I think most people reading the Bill would assume.

I tabled the amendment to tease out who the Government expect to benefit from the provisions. It seems that anyone, whether they are wholly unfamiliar with the legal system or a large multinational, can use them. They are presented as a measure to help consumers rather than corporates, so the Minister’s response indicates how wide the group of claimants can be. It is much wider than I think people assumed before he responded.

Although I will withdraw the amendment, tabling it has clarified who the Government expect to take part in the process. I beg to ask leave to withdraw the amendment.

Clause 22

Mark Hoban (Conservative, Fareham)

I beg to move amendment 61, in clause 22, page 25, line 19, leave out from ‘Authority’ to ‘are’ in line 20 and insert

‘and the Office of Fair Trading’.

The purpose of the amendment is to tease out the rationale behind the inclusion of the financial ombudsman in the list of parties in subsection (2)(a) that are entitled to be heard on an application for a collective proceedings order. Given that the Bill applies to transactions regulated by either the FSA or the Office for Fair Trading, it is clear why they have the right to be heard on an application, but the ombudsman is not a regulator; the ombudsman is an alternative dispute resolution body.

The purpose of including the ombudsman is not clear. Is it now deemed to be a quasi-regulator? I know that some people in the industry see it as such. Is it because the ombudsman is in a position to collect data through the number of claims that it receives? The Minister gave us figures earlier about how many complaints it receives. Is it because the ombudsman can identify when large numbers of claims are being made about a particular firm, product or service? Is it there to provide insight into the development or generation of a claim made to the courts? It would be helpful if the Minister explained the purpose of including the ombudsman.

Rob Marris (Labour, Wolverhampton South West)

The hon. Gentleman might be reading the clause slightly differently from me. It does not give the ombudsman the right to be heard in the claim itself; it gives the ombudsman the right to be heard on an application for a collective proceedings order, which is rather different.

Mark Hoban (Conservative, Fareham)

Yes, but my point remains. Why is the ombudsman there, given that the two other bodies are regulators and the ombudsman is a way of resolving disputes? What standing has the ombudsman been given in the process?

Ian Pearson (Labour, Dudley South)

Let me clarify the Government’s intentions. I will say at the outset that it is always preferable to find a regulatory solution, and the changes that we are making to the FSA’s redress powers in clause 26 are designed to make it more likely that a regulatory solution will happen. However, that will not always be possible. It will be for the court to determine in the light of evidence from the OFT, the FSA and the Financial Ombudsman Service, as appropriate, whether collective proceedings are the most suitable means of dealing with the case.

The amendment invites debate about why the financial ombudsman should be included, given its different status. Clearly, the FSA and OFT have variable information. I note that the hon. Gentleman does not dispute that they should be heard when the court is deciding whether such proceedings should take place.

Admittedly, the Financial Ombudsman Service is in a somewhat different position. The ombudsman cannot offer a collective alternative to collective proceedings and can only hear cases on an individual basis, and its determinations are not automatically binding on the consumer. However, the Financial Ombudsman Service will be able to make representations to the court about such things as the suitability of the ombudsman to deal with the cases. It may also tell the court about the volume of complaints that it has received and what it plans to do with them. It will also be important for the court to know whether the ombudsman has resolved any cases.

Such information should assist the court in making its decision. For example, the court will need to decide whether the ombudsman and the county courts would offer a better solution. The court would also need to decide whether collective proceedings and complaints to the ombudsman can continue in tandem. Finally, the court will need to know whether the ombudsman is planning to dismiss the cases and whether that is dependent on a collective proceedings order being made. It is to be expected that in many cases the ombudsman may well be preferred over collective proceedings, because it may be able to offer a cheap and informal solution for all or for a significant number of the claims. For such reasons, we believe that it is important that the voice of the ombudsman is heard and that the information it is able to provide can be made available to the courts. I hope that provides helpful clarification to the hon. Member for Fareham.

Rob Marris (Labour, Wolverhampton South West)

I certainly agree with the Minister. If the court is to be assisted, potentially, why is the court not to be given the power to require such bodies to attend? The provision simply says words to the effect, in lay terms, that they can come along if they want to. If they are to be of so much assistance to the court, which I agree they would be, why does the Bill not say that the court can require them to come along?

Ian Pearson (Labour, Dudley South)

I cannot answer my hon. Friend immediately about the legal drafting of the clause, but I can tell him about the policy effect. We want the FSA, the Office of Fair Trading and the Financial Ombudsman Service to be able to provide information to the courts that enables them to make decisions. I do not think that there will be any reluctance to do so. That is clearly the policy intention, which I believe the legislation before us is effective in achieving, but if there are any drafting points, I shall go back to my officials and make sure that the legislation does what we want it to do in policy terms.

Mark Hoban (Conservative, Fareham)

I am grateful to the Minister for his response. He clarifies ably the purpose of having the Financial Ombudsman Service here—it is not because it is a regulator, but because it will have access to information that will help the court decide whether such a case may proceed. I am sure that the ombudsman’s work will help inform some of the conclusions that a court may wish to reach about the best process for resolving such matters.

In recent years the ombudsman has become more involved in the resolution of multiple claims with a single cause, moving away from its position of simply looking at individual, isolated cases. For the court to be able to use that knowledge in determining how a case should be managed is right. I suspect that there would be no need to compel the ombudsman or the others to take part in such proceedings, because regulators should be jealous of their role in trying to resolve the issues—they would see a court solution as a welcome one. They would all want a resolution, even through the ombudsman’s alternative dispute resolution vehicle, while the OFT or FSA would want to demonstrate to the court what they can do to resolve the matter. Otherwise, increasingly, questions would be asked about the effectiveness of the regulators, so they would want to be in the court to say what they have done and how they can resolve it. Compelling those bodies to attend the court would probably not add much to the process. Having heard the Minister’s explanation, I beg to ask leave to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

I beg to move amendment 62, clause 22, page 25, leave out lines 22 to 29.

Clause 22 sets out the Treasury’s regulation-making power in the Bill, in connection with collective proceedings. There is an issue about who should determine the ground rules for such cases. I expect the hon. Member for Wolverhampton, South-West fully to support the amendment, on the basis of his comments on amendment 58, where he accused me of giving power to politicians. In this case, I want to take power away from politicians by restricting the Treasury’s right to make regulations in three areas. Those areas are: what matters the court should have regard to; the circumstances under which the court may make an order; and in paragraph (d), I do not believe that the regulations should provide for what collective proceedings may or may not include. I argue that that should be done by court rules rather than by regulation-making powers. The risk is that the Treasury will get too involved in the detail of what happens in court and the way that the cases are handled, and I am not sure that that would be entirely appropriate.

Rob Marris (Labour, Wolverhampton South West)

I do not anticipate supporting the amendments, and I say to the hon. Member for Fareham that they are different from amendment 58. Amendment 58 set up a politician, the Lord Chancellor, as a gatekeeper regarding who would have access to exercise their legal rights. The subsections that the hon. Gentleman seeks to delete do not set up a politician as a gatekeeper in individual cases.

Ian Pearson (Labour, Dudley South)

It might be helpful to the Committee if I explained what we seek to do in the lines that the hon. Member for Fareham proposes to delete with his amendment. The idea is to have a reserve power to make regulations that set out extra criteria for the court to take into account. I will explain why we feel that reserve power to be necessary. First, I agree with the hon. Gentleman in that I expect the main criteria to be in the court rules. Those will be generic in nature, and are intended to apply to class actions generally. It may be necessary to tailor the effect of the court rules—once they have been finished—to the characteristics of financial services. That might mean adding supplementary requirements to those set out in the court rules, which is why a reserve power may be necessary.

I am confident that the court rules will be comprehensive and contain the necessary safeguards to prevent nuisance claims. The rules will also seek to eliminate any possibility of the new process being open to abuse. However, if any additional safeguards are needed for financial services, the clause allows the Treasury to supply them. For example, we expect that the court rules will have tests to ensure that litigation is a last resort, that costs are addressed, that the representative is appropriate and that a class action is the most appropriate way to resolve the issues that claimants have in common. Looking beyond that, it may be necessary or desirable to put into Treasury regulations a requirement for the court to examine the merits of a case before authorising it; or for the court to have regard to any particular action being taken by the regulator.

Another area that may be addressed by the Treasury via the power is the criteria for eligibility to bring an action. For example, the Treasury might wish to use the power to restrict the category of persons who can act as representatives, something that we touched on earlier when we said that we would want to consult. We will want to consider carefully whether representatives should be restricted to public interest bodies or those who would not earn a fee for their services, a point that we have also mentioned before.

I appreciate the point made by the hon. Member for Fareham when he said that the court rules are not yet in existence and that we are talking about a framework. The rules committee is expected to consult on the draft rules in due course, so it is not possible to say exactly what the Treasury might want to specify in our regulations as we first want to look at the court rules to see whether they provide sufficient safeguards and then consider whether further or different provision is needed for class actions relating specifically to financial services. It is prudent that we have a reserve power, and accepting the amendment would reduce the flexibility of the Treasury to tailor collective proceedings to the particular features of financial services. Both consumer groups and the industry would want to make sure that our approach is properly tailored.

As is the normal procedure, we would, of course, consult on the regulations if we decide that it is necessary for them to be introduced to ensure that they work well in conjunction with the court rules. Because the amendment will remove potentially needed flexibility, I hope that the hon. Member for Fareham will withdraw it.

Mark Hoban (Conservative, Fareham)

I have to say that, as the debate continues, I have become more wary and perhaps uneasy about the measures. That is not necessarily because I disagree with their principle, but because no one is actually sure where they will end up. The Minister referred to the powers as reserve powers to tighten up the rules made by the court, but I am interested to know whether reserve powers will be needed because the rules committee has not come up with the draft rules yet and, because we do not have them, we cannot have draft regulations. It sounds as though we are in a territory where the Government want as much power as possible just in case the court does not do what they expect it to do.

The hon. Gentleman talked about tightening up the eligibility criteria or changing the rules governing who can be a representative, but if the Treasury believes that it needs to override the rules committee, are there adequate safeguards to ensure that there is proper parliamentary scrutiny of the Treasury’s ability to take such action? Under subsection (6) of clause 22, the regulatory-making powers are subject to the negative resolution procedure. If the power is a reserve power to tackle what the Government regard as being inappropriately loose rules drawn up by a court, why should they be able to interfere with those rules simply by issuing an order that goes through the negative resolution procedure?

There should be much greater safeguards governing the exercise of the use of what are apparently reserve powers under the Bill than is currently set out in the clause. There is nothing in the provisions that tells me that the powers are secondary to the court rules. There could be circumstances in which the Government say that the powers take precedence over court rules. What provisions in the Bill will ensure that the powers are reserve powers, to which the Minister referred? Nothing tells me that that is the case. There is a weakness in the drafting of the clause as it seems to give the main power to the Treasury, not the court. We should receive greater clarification of the matter in the Bill. However, as that proposal does not relate to my amendment, which would delete paragraphs (b), (c) and (d), I cannot press it further. I beg to ask leave to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

I beg to move amendment 63, in clause 22, page 25, line 30, leave out paragraph (e) and insert—

‘(e) suspend any limitation provision applicable to members of a class represented within the collective proceedings,’.

Joe Benton (Labour, Bootle)

With this it will be convenient to discuss amendment 64, in clause 22, page 25, line 35, leave out subsection (3) and insert—

‘(3) Regulations made by virtue of subsection (2)(e)—

(a) shall provide that any applicable limitation period will be suspended in favour of a class member on a specified date and will resume running against the class member on the occurrence of specified events, and

(b) may make similar provision with respect to the period within which any appeal in collective proceedings is being finally determined.

No provision may be made about periods before the commencement of collective proceedings.’.

Mark Hoban (Conservative, Fareham)

The amendments continue the theme in clause 22 on the apparently reserved powers that the Government have sought. It relates to limitation, and in clause 22(2)(e) the Treasury has the power to

“modify the effect of any limitation provision”.

Amendment 63 takes out paragraph (e) and inserts

“suspend any limitation provision applicable to members of a class represented within the collective proceedings.”

Amendment 64 gives more detail about what the regulations might be able to cover. The origin of the two amendments goes back to the recommendations of the Civil Justice Council. They probe why the Government seem to have strayed from the CJC’s recommendations on collective proceedings. We have here the power to change the effect of limitation provision. The explanatory note tells us that the powers could be used

“to stop time running in respect of claims made in respect of collective proceedings”.

Paragraph (e) currently allows the Treasury to

“modify the effect of any limitation provision”.

Subsection (3) gives some detail on what the modifications might entail. They can prescribe cases where no account is taken of any limitation provision and, among other things, enable the court to take no account of any specified period.

The Civil Justice Council outlined the principle on limitation provisions in its report. It says:

“It is recommended that limitation should be suspended when a putative representative party issues a claim which seeks certification as an opt-out collective action. At that point all the members of the represented class are potentially before the court by way of representation and have therefore potentially issued a claim by representation. The suspension of limitation should be lifted and time should start running for the class members where certification is refused or they opt-out of the action.”

In a sense, it says that, while the action is taking place, while cases are being heard within the collective action, the limitation should stop. The time should not tick on the clock. However, if a party decides for some reason to opt out during the case, or the certification is refused, the limitation should continue to run. The recommendations continue:

“Equally, the suspension should be lifted if the claim once certified is then at a future stage decertified or if on certification the court draws the boundaries of the class on a narrower basis than the representative party had originally drawn them in the claim as issued or the class member for some other reason ceases to be part of the class.”

It is therefore looking for more detailed guidance about the circumstances in which the limitation can be suspended. When that suspension stops, it looks at examples from overseas and gives an example from the Australian federal collective action scheme, which reads:

“Suspension of limitation periods

(1) Upon the commencement of a representative proceeding, the running of any limitation period that applies to the claim of a group member to which the proceeding relates is suspended.

(2) The limitation period does not begin to run again unless either the member opts out of the proceeding under section 33J or the proceeding, and any appeals arising from the proceeding, are determined without finally disposing of the group member’s claim.”

The breadth of the drafting in the Bill gives the Treasury the discretion to depart from the principles. My amendments take the Bill closer to the safeguards set out by the Civil Justice Council. It would appear that the council’s recommended safeguards reflect best practice elsewhere, so I am keen to understand why the Government have sought to move away from them.

Ian Pearson (Labour, Dudley South)

First, on amendment 63, I am not sure that it is necessary to clarify that the provision applies to members of a class action, as that is self-evident. I think that the main bone of contention is amendment 64. I am glad that the hon. Gentleman recognises that it might be necessary to preserve an individual’s right of action if their claim would be timed out before a group action concludes. That is one reason why subsection (2)(e) is needed. It will deal with claimants who began their individual claim before a class action began. They should not be exposed to hitting a time bar while a class action proceeds, and they might need a grace period before resuming action on their claims.

There might be other circumstances not reflected in the proposed amendments in which it is appropriate to suspend limitation: for example, when a class action ends before a final judgment. Separate claims represented may then be brought in their own right. Limitation could be suspended for a period to allow represented claims to begin separately in their own right. Again, they might need a grace period before resuming action.

The amendments do not cover all the possible circumstances in which limitation might need to be varied for strictly technical purposes. Instead of specifying a list of circumstances in which limitation may be varied, it seems more effective and flexible to have a general provision. That is what we propose. It is clear on the face of the Bill. If we were to specify in the Bill the circumstances in which limitation can be modified, we might find in future circumstances in which it is appropriate to suspend limitation that we cannot do so. That is why I am reluctant to put more detail into the Bill, although I recognise the hon. Gentleman’s points.

However, I reassure the Committee that the power can be used only in connection with collective proceedings. It cannot be used to disregard periods of limitation for any other purpose than securing an effective and fair consideration of a collective proceeding. For those reasons, I believe that the amendments are not necessary, and I urge the hon. Gentleman not to press them.

Mark Hoban (Conservative, Fareham)

Part of the problem is that the Government, in trying to maximise their flexibility and avoid too much constraint, are deploying that flexibility at the expense of greater clarity and certainty. It is a dull point to return to, but if the process had been further along the track before the Bill came along, it might have clarified a number of doubts about the operation of the provisions. The timing is not great, frankly. We are introducing legislative proposals that create huge uncertainty while the safeguards are not yet in such a state that people can refer to and gain comfort and reassurance from them. That is part of the challenge with which we are dealing. Some are demanding greater certainty and clarity about the use of the powers than is available in the Bill. That is what the amendments aim to tease out from the Minister.

I will not press amendments 63 and 64, but there is a challenge here that must be addressed. The clauses are creating debate and concern because the process is taking place in a vacuum and we do not have sight of draft rules or regulations. That is the problem that we are going to have. The Minister’s remarks might be sufficient to satisfy people outside the House, but we will have to consider the provisions again on Report or during proceedings in the other place. I beg to ask leave to withdraw the amendment.

Clause 23

Mark Hoban (Conservative, Fareham)

I beg to move amendment 65, in clause 23, page 26, line 20, leave out paragraph (a) and insert—

‘(a) to make a single award of damages in respect of all or some of those claims if the aggregate of the defendant’s liability to some or all class members can be determined by a reasonably accurate assessment and without proof by individual class members,’.

Joe Benton (Labour, Bootle)

With this it will be convenient to discuss amendment 66, in clause 23, page 26, line 25, at end insert—

‘(3A) The regulations must require the court, before making an order under subsection (3), to provide the defendant with an opportunity to make submissions to the court in respect of any matter relating to a proposed aggregate damages award.’.

Mark Hoban (Conservative, Fareham)

The amendments are to clause 23, which gives the Treasury the power to make regulations concerning damages. I am not clear about the interaction between the regulation-making power and the court rules, whether the powers are reserve powers, or whether we will see regulations that will drive the court rule process. Perhaps the Minister can provide some clarification on that. In clause 22(2)(f), the Treasury is enabled to make regulations about the award of damages, and clause 23 sets out the scope of the regulations in more detail. The key part is subsection (2), which says:

“The regulations may enable the court to make an award of damages without undertaking an assessment of the amount of damages recoverable in respect of each claim comprised in the proceedings.”

With collective proceedings, what happens when we get to the end of the case? What sort of ruling does the court make on the damages that are to be awarded against the defendant, and how does that reflect the experiences of each claimant? That method will be useful in dealing with a lot of claims all at once, and it would be particularly helpful in dealing with opt-out proceedings.

There are two approaches in clause 23. Subsection (3)(a) says that the court can make a total estimate of damages, based on the damages likely to be awarded to individual complainants. It can think about the loss that each individual claimant might have made, and use that as the basis for calculating the total estimate of damages. If the court knows that everybody lost £5 as a consequence of a policy being mis-sold, it would be relatively straightforward to determine the total estimate of losses. Alternatively, in subsection (3)(b) a formula specified by the court is used to calculate the level of damages.

Another issue is the departure from the principles laid down by the CJC. In its recommendations, the CJC called for the Lord Chancellor to conduct a wider policy debate on the issues, given the interaction of this law with substantive law. Will the Minister tell the Committee whether that wider policy debate has taken place and what its outcome was? Has that recommendation been ignored, and if so, why?

On the proposals, the CJC endorses something along the lines of what is written in subsection (3)(a), which is a principle known as damage aggregation. Damage aggregation is characterised by

“a computation of damages that does not depend upon the summation of the class members’ actual loss and damage. It is a means of quantifying and proving loss not by reference to an individual claimant but by treating the entire class as a unitary entity and assessing the global damage suffered by the entire class. In that respect, an aggregate assessment can practically occur by either a global or lump sum awarded against the defendant, or it may be achieved by a formula applied on a class-wide basis that determines individual class members’ entitlements. Once the aggregate award is made then it is either for the court to assess individual class members’ entitlement to a share of the global sum or it is for the individual class members to prove their entitlement to a share.”

We can see an attempt at the damage aggregation principle in subsection (3), but the wording is different from that used by the CJC, which says that the principle

“does not depend on the summation of the class members’ actual loss”,

and is a means of calculating the loss

“not by reference to an individual claimant”.

There is divergence here: subsection (3)(a) seems to be a summation rather than an aggregation, whereas the principle set out in the Civil Justice Council paper was an aggregation. I am interested to know why the Government have decided to go down the summation route rather than the aggregation route.

The issue about aggregation is not just about a claimant’s perspective but about the defendant’s perspective. The Civil Justice Council made the point about providing greater certainty for defendants:

“Damage aggregation...ensures that the defendant has certainty and finality in terms of their liability to all claimants who have suffered detriment, especially where class members who have not yet joined the beneficiaries have an opportunity to opt-in to the award or court approved settlement; the award ensures that each claimant will get fair compensation predicated on the totality of harm caused both by the defendant per se and to each claimant on an individual basis; it thus serves to ensure that claimants are properly compensated and that defendants are not left in possession of any financial benefit derived from their unjust conduct; it thus through its primarily compensatory basis serves to assist and complement public regulatory action.”

In such a case, the defendants will know the total amount that they have to pay, and the money is then allocated to each claimant on the basis determined by the court. Subsection (3)(a) suggests simply totalling up the losses that each individual has suffered. We have tabled amendments 65 and 66 to move away from summation to the aggregation approach proposed by the Civil Justice Council.

Ian Pearson (Labour, Dudley South)

The amendments relate to a Treasury power to make regulations about damages. I think that the hon. Gentleman accepts the necessity of enabling the court to award damages without undertaking an assessment of each individual claim. Instead, the court may make an estimate of the damages for the whole group of claimants, or set out a formula for assessing the damages for each claimant. That will enable the courts to deal quickly and efficiently with cases involving detriment to large numbers of consumers. It is an essential component of the ability to manage a class action.

The clause sets out some illustrative examples of what the regulations may cover. The list is not exhaustive. The proposed amendments clarify that a court may make an award to all or some claimants, provided that liability can be assessed reasonably accurately and without proof from individual members. The language in the example in the clause does not exclude a power for the Treasury to permit aggregated damages for a subgroup of persons. The clause refers to an award in respect of different kinds of claims in a class action. As I say, the list is illustrative. It would be consistent if an award could be made to a subgroup of cases. Clause 24, which we shall come on to, envisages subgroups being formed.

The amendments would also give defendants the right to make submissions to the court about an aggregate damages award. Providing a specific right for the defendant to make submissions is not necessary, because defendants have a right to be heard throughout the proceedings. However, I agree with the hon. Member for Fareham that a court should be able to make an award to some and not all claimants, if that is the right thing to do, but there is a danger of the amendments straying on to territory covered by generic court rules.

I fear that the hon. Gentleman will not be satisfied with the response that the issue will be covered in the rules, but my general point, which I have made in previous debates on such matters, is that the measures will not come into force until the court rules and the Treasury regulations have been consulted on and put in place. There will be ample opportunity for the industry, consumer groups and others to make representations on them. The court rules are highly likely to provide for the management of subclasses of claimants and may provide for a specific right to make submissions about damages to the court.

I assure the hon. Gentleman that his concerns, as set out in the amendments, will be taken on board when developing the rules. As he is aware, we have set out our sectoral approach to collective proceedings, and we will consult on the regulations. Our response to the CJC recommendations has been to say that further work will be done on damages by the Lord Chancellor. We have worked closely with the Ministry of Justice and will continue to do so to co-ordinate policy on aggregated damages. We have sought to ensure broad consistency with Civil Justice Council thinking on such issues, and there will be opportunity for individuals, the industry and consumer groups to comment on the detail of the regulations. It is for those reasons that I do not believe that the amendments are necessary, and I urge the hon. Gentleman to withdraw them.

Mark Hoban (Conservative, Fareham)

I am grateful to the Minister for his response, in which he gently reminded me that I had not spoken much at all about amendment 66, which is about the right for the defendant to be heard before an award is made for aggregated damages. I am pleased by his reassurance that the defendant will have a right to be heard throughout the case, including on the important issue that we are discussing.

In a way, the debate is taking place in a vacuum. We have had the opportunity in this and previous debates to identify some of the issues to do with safeguards in the Bill that are causing people concern. Knowing that the rules committee will examine the matter is helpful. It will be a challenge to ensure that the Bill makes clear the relationship between the court rules and the regulations, and makes it clear that the powers are reserve powers, a matter to which I shall return on Report. However, I beg to ask leave to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

I beg to move amendment 67, in clause 23, page 26, line 38, leave out from ‘applied’ to end of line 39 and insert—

‘in a manner that may reasonably be expected to benefit class members.’.

The amendment deals with a further aspect of the clause and relates to matters arising from an opt-out basis. What happens when the court produces the award of damages and not everyone comes forward to claim their share of the damages? We have an opt-out court process, but how do we know that the final award will be distributed to all the potential claimants? Some balance might be left at the end. Under subsection (5)(b), there is

“provision about the purposes for which any money not paid to represented persons is to be applied”.

My amendment would modify the wording that follows in brackets. It would remove

“(which may include charitable or other purposes)”

and make the provision more specific, inserting

“in a manner that may reasonably be expected to benefit class members”,

because there is concern about what purpose the residual money will be used for. Should we try to find a way to use any unclaimed money to benefit the people who have been part of the collective proceedings order?

The vagueness of “other purposes” causes concern. There is also a legal principle at issue involving the pursuit of something called a cy-près distribution, where aggregate damages result in unpaid moneys remaining when all payment has been satisfied. What will happen to the excess?

The Civil Justice Council says:

“Where collective actions are pursued on an opt-out basis experience shows that there is the likelihood that there will remain an unclaimed residue of the judgment damages award, especially where damage aggregation occurs, or the settlement award.”

The question then is: what is a fair and just use for such money? Which? says:

“A ‘cy-près’ distribution of damages is needed: This ensures any money left over from damages paid out to eligible consumers can be used in a way specifically related to the claim, for example to fund financial education or some other specific consumer-based project, rather than returned to the defendant.”

That means that the court can determine what damages the defendant should pay to reflect the gravity of the case, and that the defendant should not benefit if money is left over at the end of the day, but should pay the full price to the subject of the claim.

The Civil Justice Council recommended that

“a trustee be appointed to administer any judgment or settlement award or alternatively that the representative party hold such a sum as trustee for the class, and that where after a proper period of time with proper and proportionate notice given to the class an unclaimed residue remains that residue be applied by the trustee according to general trust law principles. In appropriate cases, this unclaimed residue could on this basis be distributed to a Foundation or Trust.”

My amendment draws the uses to which the unclaimed residue could be put rather more tightly than the Bill does; the Bill says:

“(which may include charitable or other purposes)”.

Amendment 67 would tweak the rules back, so that the process was closer to that which the Civil Justice Council thought ought to take place when it published its report in 2008.

Ian Pearson (Labour, Dudley South)

The amendment provides that any undistributed surplus from a damages award should be applied in a way that benefits class members. I understand and appreciate the sentiment, but the hon. Gentleman’s amendment would create practical difficulties if approved. Suggesting that a surplus can be applied only in the interests of class members could cause problems, depending on who those class members might be.

Let us say, for instance, that the class members are policyholders of an insurance company, customers of a bank or a group of bondholders. The demographics of such a group are likely to be extremely varied, so it could be hard to pin down a suitable purpose that benefits them and not non-class members.

“A manner...expected to benefit class members”

might therefore be too vague and could create a huge amount of uncertainty as to which body should benefit. That could create an unnecessary amount of lobbying and time-consuming decision making, and could lead to the drawing of fine distinctions between deserving claimants. An independent court might also find it difficult to make those decisions.

No decision has been taken on how an undistributed surplus should be spent, but it is possible that there should be a defined destination or body with suitable purposes, which is why the Treasury needs to retain the discretion to provide for that. For example, a surplus, or part of it, could be handed back to the defendants, but it could also go to a charity, to an organisation such as the proposed consumer financial education body, or to the social fund to improve access to affordable credit for those on low incomes. It seems premature to the Government to close off options at this stage, and the best course is to consult widely on how an undistributed surplus should be dealt with. The Government certainly intend to do that, and I hope that my clarification will reassure those who are following our proceedings.

Given the practical difficulties with the hon. Gentleman’s amendment, I hope that he will withdraw it, while recognising the policy intention behind our proposals.

Mark Hoban (Conservative, Fareham)

There clearly needs to be consultation. People need to be comfortable that the mechanism for identifying the cause or purpose will be sensible and that the right checks and balances are in place. On that basis, I beg to ask leave to withdraw the amendment.

Clause 24

Mark Hoban (Conservative, Fareham)

I beg to move amendment 68, in clause 24, page 27, line 19, after ‘about’, insert ‘disclosure and’.

Joe Benton (Labour, Bootle)

With this it will be convenient to discuss amendment 69, in clause 24, page 28, line 12, at end add—

‘(8) Rules under subsection (2)(a) must require the court only to make a collective proceedings order if it is satisfied that—

(a) collective proceedings are the most appropriate means for the fair and efficient resolution of the common issues of fact or law;

(b) there is a person, certified or authorised body suitable to be authorised to bring collective proceedings as representative claimant; and

(c) the collective proceedings have a real prospect of success.

(9) Rules under subsection (2)(d) and (e) must require the court, when considering the suitability of any proposed representative, to be satisfied that such person—

(a) would fairly and adequately represent the interests of the class;

(b) does not have an interest that is in conflict with the interests of class members;

(c) has prepared a plan for the collective proceedings that sets out a method to the satisfaction of the court for bringing the proceedings on behalf of the class and for notifying class members of the fact and progress of the proceedings;

(d) has in place adequate resources for the conduct of the collective proceedings, which shall include adequate resources for the conduct of the collective proceedings (including any adverse costs awards).

(10) Rules under subsection (2)(j) shall provide—

(a) that the representative shall be liable for the claimants’ costs, except—

(i) where the court authorises a sub-class representative, who shall be liable for the costs associated with the determination of the issues common to the sub-class;

(ii) the costs of the determination of class members’ own individual claims, for which individual class members shall be liable;

(b) that the general rule shall be that the unsuccessful party shall pay the costs of the successful party, although the court may make a different order;

(c) that security for costs shall be available against a claimant who is acting as a representative if there is reason to believe that he will be unable to pay the defendant’s costs if so ordered to do.

(11) Rules under subsection (2)(h) must provide that a party to collective proceedings may obtain disclosure of documents in the possession of class members other than the representative with the permission of the court.

(12) Rules under subsection (2)(i) must provide that—

(a) a settlement of collective proceedings shall not take effect unless the court conducts a hearing as to the fairness of the proposed settlement, upon notice to the parties prescribed under the rules, and approves the contents of the settlement agreement on terms which it considers to be appropriate; and

(b) when approved, a settlement—

(i) binds every class member who has not opted out of or been excluded from collective proceedings;

(ii) binds every class member who has opted into collective proceedings; and

(iii) does not bind a party to the collective proceedings in any subsequent proceeding between the party and a person who opted out of, had been excluded from or who has failed to opt into collective proceedings.

(13) The rules may not permit a person to substitute as a representative in proceedings brought on an “opt-out” basis unless such person is a body exercising public functions and is authorised to act as representative by the Lord Chancellor under section 18(7)(b).’.

Mark Hoban (Conservative, Fareham)

Amendment 68 leads into the proposed new subsections that would be added by amendment 69, which is a lengthy amendment.

Clause 24 concerns the rules of court. In previous debates, we have discussed what those rules should be, their importance, and the way in which they will have primacy over the regulations that are referred to in clause 22. It would be welcome if there were a number of safeguards in the Bill to help to give further structure to those court rules.

The rules give the court the power to make provision on, among other things, collective proceedings orders, the determination of whether a person is treated as having opted in or out, and arrangements for authorised persons. Again, it appears that the cautious approach of the Civil Justice Council has been ignored, as the Bill departs from that significantly. Let me be clear, however, that the council endorses the approach of using rules of court. Its report says:

“The majority of the proposed procedural reforms could be introduced by Rules of Court...developing existing procedure and principles laid down in case law.”

When doing that, however, it is important that there are adequate safeguards, but they are conspicuous in their absence from the Bill’s provisions on rules of court. Amendments 68 and 69 would insert additional safeguards into the Bill.

Amendment 68 would ensure that the rules of court would make provision about not only evidence, but the proper disclosure of that evidence. Additionally, proposed new subsection (8), which is in amendment 69, would add safeguards on the approval of a collective proceedings orders, while proposed new subsection (8)(a) would ensure that that was used as a last resort. The Minister made the point earlier that it should be a last resort, and that the other regulatory routes—either the FSA or the Financial Ombudsman Service—should be exhausted first. Solutions driven by regulators or firms will always be preferable to using the courts. That is the intent behind proposed subsection (8)(a).

Proposed subsection (8)(b) is to ensure that there is a suitable representative waiting to take up the case. Proposed subsection (8)(c) is to ensure that there is a real point behind the collective proceeding and that there is a prospect of success. They reflect the recommendations of the Civil Justice Council. It wrote in its report:

“It is apparent from a comparative analysis that a certification stage is an essential element of any mature collective action mechanism. Certification ensures that the court, consistently with the requirement to manage actively cases consistently with the overriding objective, is able to assess and decide on the most appropriate mechanism through which a claim should progress i.e., as an opt-in, opt-out, traditional unitary action, or through a group litigation order. It enables the court to ensure that any claim progresses in a fashion which best facilitates effective use of court resources and best facilitates effective access to justice for both claimants and defendants alike.”

Proposed new subsection (9) adds safeguards to the representative person provisions, stipulating in particular that they have a proper plan, no conflicts of interest and that they are adequately resourced to carry the process through. It reflects one of the concerns mentioned in the council’s report, to ensure that the process was not used for non-meritorious, vexatious or spurious claims. By ensuring that it is built into the court rules, it gives added protection about the use to which the new process will be put.

Proposed new subsection (10) introduces some rules around costs. It adds safeguards that the representative is responsible for the claimants’ costs and enshrines the “loser pays” principle. The Civil Justice Council had this to say about “loser pays” or so-called “cost shifting”:

“Cost-shifting is a deterrent against speculative or so-called blackmail litigation, unless the claimants are impecunious, in which case the court’s existing powers to award security for cost should provide protection for defendants against such blackmail claims. Where the court determines that there should be full or substantial part cost-shifting, parties will need to demonstrate to the court that they are good for the money, or are adequately insured.”

Again, it is a further safeguard to ensure that sensible claims are brought. It also ensures there is a balance so that claimants who do not have sufficient financial resources are covered in some way.

Proposed new subsection (11) ensures that there is proper disclosure of documents to include those held by individual claimants, not just the representative. Proposed new subsection (12) allows the court to conduct a hearing into a settlement of collective proceedings to ensure that it is fair. On this the Civil Justice Council said:

“Where a settlement is proposed and achieved, and experience in other jurisdictions strongly supports the conclusion, it is recommended that such a settlement should not be valid and binding unless it is approved by the court following a ‘fairness hearing’. The court’s approval is necessary in order to protect the interests of the absent claimants, who will be bound by the settlement. The fairness hearing should not simply review the terms of the settlement for fairness but also determine how absent claimants should opt in to the settlement, what reasonable steps should be taken to advertise for absent claimants to notify them of the settlement,, what evidence is required to claim a share of the settlement, what the limitation period should be set to claim a share and to determine who should administer the judgment.”

That reflects the situation where there is an opt-out proceeding where the court might award the damages on an aggregate damages basis, but we then need to ensure that the right mechanism is in place to facilitate the claims being made by people whose circumstances are covered by the case. Clearly, on an opt-in basis, we will know who the individuals are, and the allocation of damages can therefore be much more straightforward.

Proposed new subsection (13) is about who can act as a representative. It states:

“The rules may not permit a person to substitute as a representative in proceedings brought on an ‘opt-out’ basis unless such person is a body exercising public functions and is authorised to act as representative by the Lord Chancellor under section 18(7)(b).”

That is to say that some bodies will have a legitimate public interest in bringing such cases. Again, to return to the JJB Sports group litigation order, Which? was seen as a body that had a legitimate public interest. What we are trying to tackle is how claims management companies may hijack that process for their commercial interest, and not have a public interest in acting as a representative. In a discussion on an earlier set of amendments, the Minister referred to the way in which the rules would be developed to deal with who can be a representative.

Amendments 68 and 69 are to provide some safeguards around what will be in the court rules to tackle some of the concerns that have been raised by bodies interested in such proposals. They are also to ensure that one of the concerns of the Civil Justice Council—that the measure should not be used to encourage vexatious, spurious or indeed blackmail claims—is reflected in the detail of the rules.

Joe Benton (Labour, Bootle)

Just to clarify for the Committee, I should say that we are taking amendments 68 and 69 together. Amendment 68 becomes the lead amendment, which has been duly proposed.

Rob Marris (Labour, Wolverhampton South West)

On amendment 69, let me say briefly to the hon. Member for Fareham that I am not sure who his scriptwriter is—but I suggest that he gets a new one, in spite of his reference to the Civil Justice Council. Almost all amendment 69 is covered either by existing rules of the court, whether in a county court or in the High Court, or by equity.

For example, in proposed new subsection (8)(a) in amendment 69, it is pretty obvious whether a judge would allow representative proceedings if they were not satisfied with the most appropriate means—of course the judge would not. The amendment goes on like that, and I urge the hon. Gentleman to withdraw it because someone has led him up the garden path.

Ian Pearson (Labour, Dudley South)

We are making excellent progress this afternoon, and I am happy to give the Government’s response to amendments 68 and 69 together. The hon. Member for Fareham spoke mostly about the latter, but let me first cover the former, which adds to the list of points that may be covered in civil procedure rules.

The rules about disclosure and inspection of documents are in the civil procedure rules. Disclosure is an ordinary part of any trial process. The parties will disclose the documents that they have or have had in their possession in accordance with court directions. Disclosure is intended to ensure that all relevant evidence can be put before the court. The question is whether the power to make court rules will be used to modify the rules on disclosure for the purposes of collective proceedings. For example, there might be a need to ensure that class members are deemed to be parties to the action for the purposes of disclosure.

However, there are already sufficient rules in the existing civil procedure rules. Disclosure orders can be made against third parties, and if more rules are needed, there is already a power in primary legislation to make them in this context. The amendment is therefore unnecessary.

Amendment 69, as the hon. Gentleman explained, sets out some detail, practice and procedure for court rules. It contains a sensible set of options, including many provisions of the kind that the rule committee of England and Wales will consider. Indeed, some of them are already common, as my hon. Friend the Member for Wolverhampton, South-West pointed out. No doubt the rule-making bodies in Scotland and Northern Ireland will also work through such safeguards. They will need to consider carefully how they should be expressed and whether there are any unintended consequences.

I do not take issue with the need for many of the procedures in amendment 69. However, I do not agree with hardening requirements for court rules in primary legislation in a way that could cut across the careful work of the rule-making bodies. That is why we have illustrated in clause 24 what the rules can cover without putting that into the Bill. We have done so for three reasons.

First, Parliament has already set out the procedure for making court rules in the Civil Procedure Acts and appointed a committee of experts, the civil procedure rule committee of England and Wales, to make the court rules and lay the legislation before Parliament. A sub-group of the committee contains eminent specialists in that area of law, including members of the judiciary, senior practitioners and academics, and they are well placed to draft appropriate rules. The court rules will have to work in Scotland and Northern Ireland as well. They must therefore be drafted in the normal way by the Court of Session in Scotland and the Rules Committee of the Supreme Court in Northern Ireland.

Secondly, the bodies are considering generic rules for collective proceedings. The Financial Services Bill should not be used to predetermine the content of generic rules. That would inevitably lead to two sets of rules, one applying to financial services and another to all other proceedings, creating inefficiency and inconsistency, which I do not think we should support. Although I appreciate the hon. Gentleman’s hard work and his desire to do the work of the civil procedure rule committee, they are the best people to decide and determine those rules.

Mark Hoban (Conservative, Fareham)

That is exactly the problem. The Government have introduced a process on a sectoral basis; the Ministry of Justice said that it would not introduce a generic process. The Minister justified the process that we are legislating for with a sectoral response, but the sector does not know the rules by which it will operate. The sector requires clarity.

Given that the Ministry of Justice has rejected a generic application and that this is the first sector where the rules will be applied, it is reasonable for people to expect that there will be rules reflecting the concerns of the sector being used as a guinea pig for the new process.

Ian Pearson (Labour, Dudley South)

Again, let me explain what we are trying to achieve. I take issue with what the hon. Gentleman said. Previously, he argued in favour of removing some of the Treasury’s powers of discretion to make regulations. I have been at pains to stress that the rules that the various bodies are working on, including the civil procedure rule committee, are generic, but that we are taking a sector approach to implementation. That is why we needed powers to tailor rules and ensure that they have regard to specific circumstances: when we discussed previous clauses, I made it plain that the Treasury needed those powers.

In many cases, when we are talking about legislation in this House, we are talking about the balance between what is contained in primary legislation and what appears in secondary legislation. A lot of legislation is about providing an overall legislative framework as a structure into which contents are put. A lot of the detail that sometimes needs to be changed and updated in the light of circumstances is rightly there in secondary legislation, because it is a lot easier and more appropriate to alter.

That is essentially the situation. We have a high-powered committee that is looking at and drafting appropriate rules in this area. The civil procedure rules committee is required by Parliament to consult on the draft rules, which is the third point that I want to make. Having rules in the Bill would mean that the consultation that is already envisaged and is contained in the Civil Procedure Act 1997 cannot take place. Having said that, I fully recognise that this is a new procedure, and that there is a need to consult on the rules and to get them right. There is a particular requirement to ensure that the rules are not only right generically, but that they are appropriately tailored to the circumstances of the financial services sector. Inevitably, the rules will need to be updated in the light of experience under the procedure set out in the Civil Procedure Act and in accordance with the various procedures in Scotland and Northern Ireland. That is why it is right that the rules should not be in the Bill.

The Bill includes a backstop power to enable the Treasury to set out supplementary criteria that can be tailored to the financial services. At the risk of labouring the point, it is important that the Committee recognises that. The Government intend to consult fully on the regulations, including discussions with experts on civil procedure, so that such issues receive the fullest possible debate. I realise that there is a natural desire to want to know the detail of everything immediately, but that is not how most legislation works. We have the right balance between what is in the Bill and what is coming down the track in terms of further work at a more detailed level, explaining how things will operate on a more technical basis.

Mark Hoban (Conservative, Fareham)

We can debate on the proper process for consultation, but in most situations one would expect there to have been wider consultation about a radical measure such as this with the sector directly concerned, than has been the case to date. Returning to the generic rules, when the Minister spoke earlier, he did not refer to the fact that the rules were generic for collective proceedings matters. The challenge is that the Ministry of Justice has rejected a generic collective proceedings law, and it will be applied on a sector basis. From what the Minister said, my assumption was that the rules to be developed would be specific to the financial services sector, which would then be tweaked by the reserve powers. That was the impression that the Minister gave me earlier because he did not use the phrase “generic rules” but rather talked about rules relating to the proceedings. He spoke about generic rules during the discussion on the amendments. Is he saying that the Treasury’s reserve powers will take the generic rules and tailor them specifically for the financial services sector? Will those rules under the auspices of the Ministry of Justice be generic rules that can be applied in any circumstances where the Government choose to use collective proceedings?

Ian Pearson (Labour, Dudley South)

That is exactly what I am saying. I am sorry that the hon. Gentleman did not appreciate what I said earlier and I apologise to the Committee if I was not sufficiently clear. The work that is being done by the civil procedure rules committee centres on rules that will be generic, and it will consult on them. I kept making the point that the Treasury has a backstop power to set out supplementary criteria. That is explicitly because these are generic rules that will apply to other sectors where collective proceedings orders might be introduced. We want to make sure that the rules that relate to the financial services sector are tailored and specific, which is why we need the powers.

That is why amendments 68 and 69 should be resisted. They would distort the development of more comprehensive rules, and the rules need to be developed in more detail by those appointed and best placed to do so. I emphasise that the rules will be subject to the fullest possible consultation and debate before they are finalised. There will be ample opportunity for the industry and others to make their views known. It would also be inappropriate for them to be set in primary legislation, because that would mean that they could not be updated quickly in the light of changing experience and circumstances. I therefore fundamentally believe that the hon. Gentleman’s amendment is misplaced. However, if this debate has helped clarify matters for the Committee and for those who follow these proceedings, it has been helpful.

Mark Hoban (Conservative, Fareham)

I may be having trouble understanding, but I believe there is a wider problem regarding the lack of transparency in relation to the process and how we are going to progress from the Bill to a workable set of rules. I assume that, where the Bill contains rules that stem from a requirement to introduce collective proceedings orders for the financial services sector, they will be specific to the sector and not generic. The Minister has referred to backstop powers, which are clearly more important than I previously understood them to be, given that the rules will be generic rather than specific to the financial services sector. We should also bear in mind that the Government actually rejected the process of generic collective proceedings rules. That adds to our confusion that the committee that the Minister referred to is developing generic rules when only one sector is actually implementing the process. It would be useful to know how widespread the Government expect the use of those powers to be.

On the consultation process that the Minister outlined and the time scale, we have not discussed the timetable for the implementation of the provisions. Will the consultation process on the court rules include representatives from the financial services sector as well as the people that the Ministry of Justice generally consults on such things? Does the Minister expect the consultation on the Treasury regulations to happen in parallel with that on the court rules or will it happen subsequent to the introduction of court rules? When does he think the industry will be in a position to see both the draft rules and draft regulation?

Ian Pearson (Labour, Dudley South)

Let me have another go and respond to the specific points made by the hon. Gentleman. I hope that he now realises why the Government want to resist his amendments and accepts that they are not appropriate in such circumstances.

There is no intellectual difficulty with saying that, as a Government, we have decided not to move forward with collective proceedings generically, across all sectors, but saying that in sectors where we think there is a case for proceeding there should be some generic rules, to ensure consistency. That seems sensible, as does saying at the same time that there might be some sector-specific circumstances to which courts will need to have regard, so there is a requirement to build on to the generic rules established. That is what we are proposing.

I want to assure the hon. Gentleman and others that there will be full consultation on the matter. We want to consult as widely as possible, including financial stakeholders. Clearly the Treasury consultation will be informed by the consultation on court rules, so although there can be some parallel processing it is right to consult on the court rules first. We would seek to gain the views of the financial services industry on those rules and take them into account when designing the Treasury rules as well. I expect the Treasury rules to follow on from the consultation on the court rules.

The intention is to consult on the court rules later this year, with a view to seeing implementation in 2011—that is my understanding of the time scale at the moment—but I stress that there will be ample opportunity for interested parties to contribute to the consultation exercise. We want to make sure that we get this right and recognise that it is a new departure and, therefore, it is right that we spend a significant amount of time talking to stakeholders and other interested parties to make sure that their views are properly taken into account when it comes to developing the new provisions.

Mark Hoban (Conservative, Fareham)

I am grateful to the Minister for that explanation, and of the process in particular, which will reassure people that the proper time will be given to consider the proposals. Given that the court rules are generic to the process, rather than specific to the financial services sector, I beg to ask leave to withdraw the amendment.

Rob Marris (Labour, Wolverhampton South West)

I want a quick run around the block with the Minister on counter-claims—the concept is slightly strange, but I can understand how it might happen—and, more specifically, on the costs of counter-claims. I am referring here to paragraphs (i), (j) and (f) of subsection (2).

The issue involves the opt-out procedure. If someone fails to opt out, they are party to the action and are a claimant. If the defendant successfully counter-claims, there will be a costs order in the usual manner against the claimants. We now have someone who never went near the action but who did not read the blurb and did not opt out, so they are part of the claim; there is a successful counter-claim against them and, lo and behold, someone comes knocking on their door asking for costs. Could the Minister elucidate that a little because, were that to be the case, it would not go down well with our constituents? In spite of the considerable detail in clause 24, that is not covered as far as I can tell.

The obverse of that is that under 24(2)(f) there can be a representative counter-claim on an opt-out basis. There is a representative counter-claim on an opt-out basis against a bunch of claimants. The counter-claim fails, so the claimants who have successfully resisted that counter-claim in the normal course of events, seek their costs against those who made the counter-claim. Those who made the counter-claim included those people who failed to opt-out because it is not now a counter-claim, and therefore are part of that unsuccessful counter-claim. Because of counter-claims, they could end up with a costs bill for a case they never went near. Will the Minister at some point address the issues raised by those examples? Perhaps not today, because these are complex issues and that is the difficulty with putting complex issues in the Bill. I am concerned about people who did not opt-out potentially ending up with a cost bill against them, especially in a counter-claim situation.

Ian Pearson (Labour, Dudley South)

If I understand my hon. Friend correctly, I would be likely to have similar concerns. My understanding is that the normal rules on costs will apply, as they do in proceedings. He cited clause 24(2)(i). As he will be aware, that is one of an illustrative list of issues that will be considered when determining the rules—the point that I was making to the hon. Member for Fareham. Again, as I said earlier, there will be a full consultation on the rules, so there will be ample opportunity to take account of the views of my hon. Friend and of others concerned about these particular issues. In passing clause 24 today, we are not committing to anything other than providing an illustrative list, which will be considered as part of regulations that will be drawn up, debated and discussed in the normal way. I hope that provides him with assurances that his views can be taken into consideration.

Tom Watson (Labour, West Bromwich East)

Does my hon. Friend agree that my hon. Friend the Member for Wolverhampton, South-West is an utter genius and may have spotted a flaw in the Bill? In that unlikely scenario, would the Minister commit to get his officials to look at it and perhaps come back on Report to make sure that his fears can be allayed?

Ian Pearson (Labour, Dudley South)

I am happy to acknowledge the contribution that my hon. Friend the Member for Wolverhampton, South-West makes to the Committee and to the House in general. He is widely recognised as an expert on many matters. His views are always of great interest. Ministers and officials always take what he says with the utmost seriousness. On this particular point, the comments I have made that these matters will be considered in the future as part of the process of determining the rules, should provide him with assurances that his expert views will be taken into consideration by some very eminent people, whom we have put in charge of drawing up the rules. I hope that provides sufficient assurances.

Clause 25

Ian Pearson (Labour, Dudley South)

I beg to move amendment 85, in clause 25, page 28, line 34, at end insert—

‘(8) The Treasury may by order amend subsection (2)(b) so that, in Scotland, the definition of “the court” is extended to include the sheriff.

(9) An order under subsection (8) is subject to negative resolution procedure.’.

Joe Benton (Labour, Bootle)

Before the Committee breaks up, I point out that for both sittings on Thursday we have Committee Room 11, so we should all be a little warmer.