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Companies Bill [HL]

My Lords, I beg to move that the House do agree with the Commons in their Amendment Nos. 959 to 968. These amendments fall into two broad categories. Amendments Nos. 959 to 968, 970 to 979 and 1,023 to 1,025 seek to ensure that the transparency directive is implemented effectively and on time. The transparency directive will help to improve access to capital markets across the EU and ensure that investors have access to better information when they make investment decisions. Amendments Nos. 959 to 968, 971 to 979 and 1,023 to 1,025 amend the Financial Services and Markets Act to give the FSA the power to implement fully the transparency directive by making transparency rules. While there is a general rule-making power, some of the particular provisions referred only to ““voting”” shares and not to obligations applying to other classes of issuers of traded securities required by the transparency directive. It was identified that this use of particular provisions for one class of security could lead to confusion as to how the clauses operate. To avoid any such confusion, these new amendments clarify the relationship between the general and particular provisions and make it clear that the particular provisions apply, as appropriate, to all the classes of issuer required by the directive. There are also some other minor adjustments to ensure that the wording of the clauses reflects clearly other particular provisions from the directive. Amendment No. 970 deals with transitional arrangements and ensures that the Financial Services Authority consultation on transparency rules meets the requirements for consultations on proposed rules set out in Section 155 of the Financial Services and Markets Act. This is necessary to enable the Financial Services Authority to make transparency rulesthat come into force from the day on which the directive must be implemented into national law—20 January 2007. I now turn to Amendments Nos. 980 to 987 and 1,026, which deal with liability for false or misleading statements in reports and statements publishedin response to a provision implementing the transparency directive, or otherwise. The background to these amendments is the Government’s decision during the passage of this Bill, strongly supported by a wide range of stakeholder opinion, to introduce a statutory liability regime to cover disclosures required by the transparency directive and narrative reporting by UK companies. This was necessary to remove uncertainty about the liability regime, which risked constraining important disclosures by companies—for instance, in the narrative reports to be included in annual reports—thus reducing both their effectiveness and the accountability of directors. Accordingly, following discussion with stakeholders, liability provisions were introduced at the Report stage in this House. Amendment No. 984 ensures that it is clear what liability regime would apply to potential as well as actual investors with regard to losses arising from reliance on periodic financial information disclosed under the transparency directive. Amendments Nos. 980 to 983, 985 to 987 and Amendment No. 1026 address issues that were raised with the Government by consultation. It was suggested in another place that the liability regime should be clarified across a wider scope. The Government consulted on this over the summer and specifically asked whether liability should be clarified in respect of disclosures made under the FSA’s disclosure rules, preliminary announcements of results, disclosures made by companies with securities quoted on the alternative investment market, and transparency disclosures by companies admitted to trading on an EEA-regulated market in situations where UK law is applicable. When considering the issue of extending the liability regime to disclosures made under the FSA disclosure rules, the emerging consensus from consultation was that issuer liability is an extremely complex area in which it is vital that the Government get their policy right. Most responses said that an extension of the statutory regime was, in principle, desirable. However, there was no consensus on what the right policy would look like. Importantly, the consultation raised the point that, while the existing provisions in the Bill are there largely to produce certainty as to issuer liability for documents published in accordance with the transparency directive, these provisions, along with other provisions in the directive requiring disclosure of relevant information in all EEA-regulated markets and other developments in securities law, combined to make the existing common law position on issuer liability for other published financial documents increasingly uncertain. The effect would be to restrict severely the content of issuers’ annual reports and other regular publications to the market. Such a development would not be in the interests of a well functioning market. It is also necessary to consider the possible effects for the UK as a whole of any developments in common law that would increase the liability of issuers for any financial publications that they may make. It is necessary that very careful consideration be given to the consequences. This is a very complex area of law and public policy. Amendments Nos. 987 and 1026 therefore give the Government the power to make further provision about liability for published information. This will enable us to make appropriate provision once further consideration has been given to the shape that such a liability regime should take. We recognise that this is a wide power, but stakeholders consider that it is important that provision should be made, and, subject only to what I am about to say about the review, the Government have already announced that we agree. This power has also been subject to scrutiny by the Delegated Powers and Regulatory Reform Committee, whose consideration is that the subject matter of the power is sufficiently circumscribed to make the power acceptable in the light of the affirmative procedure provided. The Government have announced that Professor Paul Davies QC, the Cassel Professor of Commercial Law at the London School of Economics, is to conduct a formal review of the liability of issuers in respect of damage or loss suffered as a consequence of inaccurate, false or misleading information disclosed by issuers or their managements to financial markets, including to their own shareholders or bondholders, or of failure to disclose relevant information. This will take into account both existing regulatory obligations and penalties, including criminal penalties, and the potential for liability in damages under existing common law jurisprudence. The review will also need to look at the position in other EU member states and more widely in the jurisdictions of other substantial financial services markets. If Professor Davies’ review recommends that the Government either implement a statutory liability regime for financial disclosures or make changes to the regime that we are putting in place to deal with financial publications required by the transparency directive, the Government will hold a full consultation on the Government’s response to the review’s proposals, with a full regulatory impact assessment of these proposals, and legislate for the new regime using the powers proposed. Of course, it is possible that the review could recommend that no changes at all are required. Most responses to the Government’s consultation also supported an extension of the liability regime to cover a preliminary announcement of results. It was argued that in practice these contain the same information as in annual and other reports required to be published by the transparency directive, and therefore captured by the statutory liability regime. It was also argued that excluding the preliminary announcement of results from the scope of the liability regime would cause issuers to cease publishing them. Investors pointed out that they regard preliminary announcement as highly useful. Amendments Nos. 980 and 981 extend the liability regime to preliminary announcement of results. Nevertheless, in the light of the obvious existence of uncertainties surrounding an extension of the liability regime to disclosures made under the FSA disclosure rules, Amendments Nos. 980 and 981 ensure that any extension of the liability regime to preliminary announcements does not extend to all information contained within a document entitled ““preliminary announcement””, and is instead restricted to that information in the annual report, which the preliminary announcement properly presages. I should add that the extension is not set in stone. The power I have just discussed will enable the extension of the liability regime to preliminary announcements to be adjusted in the light of the outcome of Professor Davies’s review. Stakeholders also pointed to some confusion over how the liability regime as currently expressed in the Bill would apply to certain situations where either the issuer or the investor was situated in the EEA but outside the UK. In order to clarify that, Amendments Nos. 982, 983 and 986 change the territorial coverage of the statutory liability regime to ensure that the regime covers securities of all issuers for which the UK is the home member state, as well as to cover those issuers whose securities are traded on a regulated market situated in the UK and for whom the UK is the host member state. UK holders of security of other issuers—that is, those for whom the UK is neither a host nor a home state—will not be able to rely on the rights of action set out. One further issue that was raised in response to the Government’s consultation was that the wording of the Bill as it stands makes senior officials, not just directors, responsible for issuers’ financial publications. Government policy is for only directors of companies and senior officials of issuers that are not companies to bear liability. Amendment No. 985 clarifies the wording of the Bill in that area. Moved, That the House do agree with the Commons in their amendments 959 to 968.—(Lord Sainsbury of Turville.)