asked Her Majesty's Government:

Whether any restrictions or conditions apply to the sale of home-made cakes, jams and similar products at local events, such as church fetes.

My Lords, the sale of such foods in the way described is not restricted, although the Food Safety Act 1990, which exists to protect public health, requires that they should not be unfit or unsafe for human consumption.

My Lords, I am delighted by that Answer. I have not heard an Answer that has pleased me so much, as the continuing tradition of home-made cakes is something that I want to see. Does the Minister believe that there is a certain merit in a purely voluntary labelling of cakes? I cite my recent visit to Australia. Often the vendor is not the person who made the cake. In Australia, people may say whether butter or margarine has been used, although they do not have to do so—and, in particular, whether the cake contains any nuts. Does the Minister believe that a voluntary scheme of that type might be useful in this country?

My Lords, I am delighted that the noble Baroness is so pleased with the Answer, and I am entirely in agreement with her on the merits of home-made cakes. I have experience of going to fetes over the years. One knows a lot about the cakes and their makers—the Women's Institute is particularly good in that regard—although we have not yet got to the situation in Australia. However, the Food Safety Act, which governs the general provision, means that the descriptions should never be misleading. One should never label something as having been made with butter when it was made with margarine, for example.

In terms of nuts, we are extending labelling on pre-packed foods, so that from next January we will have labels for allergens. In fact, there is some voluntary labelling already, so we are making good progress.

My Lords, 22 years ago, I introduced a brief Bill into your Lordships' House about the Women's Institute and the fact that its kitchens were at that time being inspected. I gather that they are no longer inspected—I presume that that remains the case.

My Lords, the noble Baroness has had a very long and distinguished history in terms of jam yesterday—and, I sincerely hope, jam tomorrow as well.

Oh!

My Lords, I had to say that before somebody else did.

Yes, I can assure the noble Baroness that those regulations have stood the test of time and that nothing has changed as regards the kitchens of the Women's Institute. They are still exempt from the key regulations.

My Lords, effectively, is the Minister reassuring us that unless jams and/or preserves start killing people in large quantities, we shall not have any more restrictions, and that that is the position for the foreseeable future?

My Lords, indeed, that is the position. Jam is not normally lethal, and our regulations are quite appropriate. What the Government aim to do with their food safety legislation is just that—ensure that public health is protected, but that the burdens on producers are not onerous or over-bureaucratic.

My Lords, nuts.

Oh!

My Lords, when I was buying things from the Women's Institute many years ago, the subject of nuts being dangerous never arose. Has there been an increase in allergies to foods containing nuts?

My Lords, I am no expert on the incidence of allergies. However, it is my impression that we have become much more aware of allergies, and they do indeed seem to be multiplying. Nut allergies are very serious for some people, and parents are very alert to what their children are eating, especially in terms of nuts. At the moment, the Food Standards Agency is conducting a consultation with stakeholders—as we call them—as to whether we should extend the requirement for allergen labelling to non-pre-packed food to ensure that there is an even greater degree of safety.

My Lords, I wonder whether my noble friend is aware that my youngest granddaughter is five years of age tomorrow. My wife has been spending all morning making a considerable number of cakes for the party. Does the Minister feel that there is any danger in that?

My Lords, I am sure that every grandparent in the House will rejoice at the news that we have just heard. Home-made cakes are by and large extremely safe, although kitchens can be dangerous and one has to watch for cross-contamination. I am absolutely certain that the cakes that will be served tomorrow will be as safe as they can possibly be.

My Lords, I am the son of what used to be called a domestic science teacher who trained young people to cook. There is a decline in the number of home-made cakes at these events and it is necessary that they be healthy and the people well trained. Why have the Government not made enough effort to put domestic science on to the national curriculum to ensure that in future there will be a supply of healthy cakes to eat?

My Lords, I can assure the noble Lord that food technology taught at key stage 3 includes a range of simple cooking. He is right that we would all like to see young people cooking more. One of the elements of the Food in Schools programme that is now in place is to develop cookery clubs and to encourage young people to explore and enjoy cooking.

My Lords, does the Minister agree that it is slightly pointless putting on a jar a list of what it contains when one cannot get into the jar? Does she agree that many jars are now impossible even for tough men to get into? Little old ladies must find it very difficult.

My Lords, I am told by colleagues that children can open any jar. But there is a serious point here because many people who have slight disabilities in their hands need extra help. Such help is available. Another issue is that of understanding the list of contents when one has got into the jar because the labelling is illegible.

My Lords, there have been two recent cases where county councils have taken steps to ban home-made cakes from summer fêtes and school assemblies. Will the Minister decry with me the statement by a spokesman for Wiltshire County Council that schools should avoid selling home-made products as they cannot be completely sure about the conditions in which the food items were prepared or stored?

My Lords, the county council in question did not ban cakes. What actually happened was that the school sought the advice of the county council and was advised that some products were riskier than others. These products included cream in cakes. That is proper and proportionate advice supported by the Food Standards Agency. Every school in the country is free to use its discretion about how it follows that advice.

asked Her Majesty's Government:

What contribution the position paper by the Department for International Development on sexual and reproductive health and rights will make in combating HIV/AIDS.

My Lords, the Department for International Development position paper provides the basis for continuing action and investment to promote reproductive health and rights. It highlights the crucial links between sexual and reproductive health and rights and efforts to prevent HIV and AIDS. This will also be reflected in the forthcoming HIV and AIDS strategy.

My Lords, I am grateful for that helpful Answer. Does the Minister accept that when her colleague the Secretary of State launched the document yesterday the language he used, and the language of the document, was extremely welcome and showed DfID's renewed emphasis on this subject? Does she accept that if most of the millennium development goals are to be reached we need a significant input from reproductive health? Does she agree that, where appropriate, reproductive health services should be integrated with HIV/AIDS services?

My Lords, the noble Viscount is quite right. My right honourable friend the Secretary of State for International Development talked about the importance of the link and made the point that by taking action on sexual and reproductive health we know that we are also helping to tackle HIV/AIDS. This is the continuing emphasis of the work of the department.

With respect to the issue of the millennium development goals, sexual and reproductive health contributes to progress on those goals relating to maternal mortality, child mortality, HIV/AIDS, gender equality and poverty reduction.

My Lords, does my noble friend agree that one of the serious obstacles to achieving sexual and reproductive health, and even more to combating AIDS, is the lack of ability in women and girls to insist on safe sex or even, if they want, no sex? How can DfID help their societies to foster that power?

My Lords, my noble friend is quite right. We need to ensure that women and girls are informed. We also need to ensure that the governments in those countries take this issue seriously and that there is leadership from the top. Research by the World Health Organization shows the importance of informing girls and women. Sex education often delays the age at which young people start having sex and increases safer sexual practices.

My Lords, I strongly welcome the efforts that the Government are making on HIV/AIDS, particularly in Africa. Does the Minister recognise that to have full authority to lead they need to be doing their utmost at home as well? Is she aware that at the moment many health workers in this country feel that the efforts being made in the UK to combat HIV/AIDS and sexual health problems generally are seriously inadequate?

My Lords, I agree with the noble Lord, Lord Fowler, that we need to take action on the domestic agenda as well. We have seen that the number of individuals infected through heterosexual sex has been increasing steadily although gay and bisexual men remain the group most at risk. The noble Lord will know that since 1996–97 the Department of Health has funded the Terence Higgins Trust for national HIV health promotion for gay men delivered through the community. We are also looking at the implications for those groups coming into the country. The noble Lord will know that the size of the group of those people coming into the country already infected with HIV/AIDS is larger than that of those infected here in the UK. We need to look at both, which is precisely what the Government are doing.

My Lords, does the Minister agree that the group most affected by lack of reproductive health services is newborn babies? Three million newborn babies die every year. Will the Minister inform us of what is being done to improve clinical services in developing countries for mothers in childbirth and newborn babies in order for them to have better survival? Better survival of babies would mean that parents are more likely to reduce the size of their families.

My Lords, the noble Lord, Lord Chan, raises a very important issue. Of course we are looking at the issue of mother-to-child transmission. However, we also need to look at building the health systems and structures in the developing countries themselves. There has been a great deal of focus on prevention and treatment. However, in addition to that, if we do not have adequate health structures in the developing countries to enable treatment to work or our prevention strategies to be understood, we will face a much greater problem.

My Lords, will the noble Baroness please congratulate the authors of this excellent report on, among other issues, tackling head on the problem of unsafe abortions? I hope that the Government will be as brave in international fora on that. Following the question of the noble Baroness, Lady Whitaker, I wonder whether DfID is going to produce a paper on how best to take forward the promotion of the rights of women and girls. If we are to combat high maternal mortality and the higher incidence of AIDS among women, surely that is the key.

My Lords, the noble Baroness may be aware that this report complements other reports. We will be doing another report on HIV/AIDS which will come out in July, and we have already done reports on health and on maternal mortality. So the papers will complement each other. I thank the noble Baroness for the points that she makes on the link that the report makes to unsafe abortions. The Government are absolutely clear: we do not want to see women having to go down that road. But where women do opt for abortion, they need to be safe.

My Lords, what can be done about the traditional medicine men's advice to men with HIV that they should have intercourse with a young virgin in order to cure themselves?

My Lords, we have to ensure that there is proper information sharing. We need to look at countries such as Uganda where they have managed to reduce the prevalence by leadership not only from the top, from the president, but throughout communities, where people do not feel afraid to talk about these issues. That is the only way in which we can deal with the myths and stereotypes that abound around HIV/AIDS.

My Lords, following the remarks of the noble Baroness, Lady Northover, on the very good report which the Secretary of State has produced, and which I support, the current number of AIDS orphans in the world is 14 million and growing. Future projections claim that this number could reach 40 million. What resources are Her Majesty's Government setting aside to help to provide these orphans with the resources and support that they will need?

My Lords, the noble Baroness may be aware that we have been incorporating our concerns about orphans and vulnerable children into our country programmes. In Malawi, for example, we have been working to ensure that social protection measures for families affected by HIV/AIDS are integrated into the poverty reduction strategy. We will address this issue also in the forthcoming AIDS strategy.

My Lords—

My Lords—

This side!

My Lords, I think the simplest way to resolve this is to say, "We are now in the 18th minute. Next Question!".

asked Her Majesty's Government:

Whether it is their policy to encourage the use of the euro; and, if so, when euros will be accepted by government offices and at the Palace of Westminster.

My Lords, it is a commercial decision for UK organisations to determine whether they wish to accept the euro or any other foreign currency. The Inland Revenue and Customs and Excise have since 1999 accepted euros in payment of tax, converting the payments to sterling at no charge to the payee. The Government have no control over financial transactions in the Palace of Westminster.

My Lords, I am grateful for the Minister's positive reply. As the Government's overall philosophy is now to enhance choice when that is in the general interest, should they not be applying that principle by providing the option to British citizens and foreign visitors to use the euro in the UK for public and private business? Do the Government agree that, once that becomes routine—including in the Palace of Westminster—there should soon be a smooth entry of the UK into the euro-zone, much as Ireland smoothly entered the euro-zone after its experiences of using two currencies, the punt and the pound, over many years? I declare an interest as a visiting professor in Delft, and sometimes I have some euros in my pocket.

Yes, of course, my Lords; encouragement is what we can provide and encourage is what we do—every six months, we publish a new report on euro preparations—but I do not think, as far as commercial organisations are concerned, that we ought to go further than encouragement. I am glad to be able to tell my noble friend that the position he described in Ireland is still the case, in the sense that about 30 per cent of trade in Newry in Northern Ireland, which is close to the border, is conducted in the euro. One city-centre cash machine has over 5,000 euro-note transactions a week.

My Lords, is the Minister aware—there is no reason why he should be—that the man who runs the local furniture stall at the market in Vic-Fézensac, in Gascony, still insists on quoting his prices in francs? That aside, can he inform us when the Government's long awaited and indeed long overdue next assessment of whether the celebrated five tests have been met will be announced? We are all agog.

My Lords, my builder in France still quotes in old francs, which have been gone for 50 years. The second question of the noble Lord, Lord Lawson, is wide of the Question on the Order Paper.

My Lords, the use of the euro by members of the public will largely be decided by the market. But the euro is becoming an increasingly important reserve currency. What is the Treasury's policy towards the relative holding of dollars and euros?

My Lords, the Treasury does not have policies for other institutions, individuals or commercial organisations on which currency they should hold their reserves in.

My Lords, will my noble friend encourage major visitor attractions to use the euro thereby providing a service to foreign visitors as well as making more money because, as I understood the position when I last asked, the National Trust and the British Museum, both of which, I believe, are supported by government money, were failing to do so?

My Lords, the National Trust is not supported by government funds. I take the point that tourist attractions should be encouraged to take euros. I have too short a list of those who do. It comprises: Historic Scotland, CADW (the Welsh historic environment agency), and Dover District Council, which, I suppose, is closest to the euro-zone. Dover District Council accepts euros in its museum, tourist information centre and area offices. As I say, it is too short a list.

My Lords, does the Minister recall that in 1998 the Economic Secretary to the Treasury predicted that once people went on holiday in the euro-zone they would come home and demand to know what the Government were doing to prepare for euro entry? Does he accept that that was one prediction which the Government got 100 per cent wrong?

No, my Lords. People demand to use the euro and many organisations do so, not particularly, I have to say, government organisations, but you can certainly shop with the euro in Marks & Spencer. The telephone box outside my department in Cockspur Street takes euros.

My Lords—

My Lords—

My Lords, perhaps we can hear from the Liberal Democrat Benches and then these Benches.

My Lords, will the Minister congratulate the traders and shopkeepers of the town of Llangollen who take euros during the international eisteddfod, which is taking place this week?

My Lords, I am delighted to hear it. The same is true in England at Cheltenham during Gold Cup week when bookies and businesses take euros but they do not necessarily give euros back.

My Lords, as someone who would certainly have joined the European monetary system much earlier and would sign on the dotted line today, I ask whether there is not one problem. No firm in its right mind would reject ready money, although our country seems to have quite a few firms that are not in their right mind. Is not the problem the behaviour of our banks who still charge excessive sums for converting euros into sterling when the shopkeeper brings them in? That is something on which the Government could at least say a word or two in public, is it not?

My Lords, it is not just a case of excessive sums but also, in my view, excessive delays. The Government and the Bank of England have expressed their disapproval of that behaviour on many occasions.

My Lords, will the Government bear in mind that if we joined the euro our Government would no longer be free to cure inflation or deflation in our own country simply by adjusting the value of our own currency, as has been done a number of times—three or four times—in the past 70 years?

My Lords, I am sorely tempted to answer that question but it is wide of the Question on the Order Paper.

My Lords, does my noble friend agree that for all the countries in the euro-zone the euro is a single currency, but that for all the countries outside the euro-zone, each of which has its own exchange rate against the euro, it is a common currency? Does he also agree that so far as the UK is concerned the euro has all the flexibility of a common currency but not the rigidity of a single currency? Have we got the best of both worlds?

My Lords, I am defeated by my noble friend's semantics. I shall have to think about the question that he raises.

asked Her Majesty's Government:

Whether they intend to reduce the number of Scottish regiments.

My Lords, the defence White Paper published last December established the policy context for shaping the future structure of our Armed Forces. For the Army, it outlined the vision of a more balanced force that is flexible, rapidly deployable and sustainable for the variety of missions that we envisage it undertaking.

Against this policy guidance, we have been working through the detailed implications for the Army's force structure. We anticipate being in a position to make announcements about the conclusions of this work shortly.

My Lords, in thanking the Minister for his reply, is he aware of the fury that would be aroused if the UK regiments were disbanded? Is he also aware that for our overstretched soldiers serving abroad and doing wonderfully well it would be a disgraceful reward to be disbanded when they come home? Finally, is he aware that most Scottish regiments, particularly the Highlanders, will be up to strength in the autumn despite the cancellation of recruiting by the Government?

My Lords, there has been no cancellation of recruiting by the Government. There is no ban, no freeze and no cap on Army recruitment. The Army has an enlistment figure of 11,318 for the current financial year and since 1 April more than 1,500 recruits have enlisted. Of course, I know the strong feelings that are held on this matter. As I say, I am not in a position to make any announcement today. I can say, though, that the history of our Armed Forces is, of course, one of evolution. Our priority has to be to ensure continued and future operational success by responding to the changed strategic environment. Therefore, we have to modify and adapt our Armed Forces to be relevant, flexible and usable in this changed environment.

My Lords, will the Minister confirm or deny that the Army Board ordered Lieutenant General Sir Alistair Irwin to bring down the numbers in the Army to 102,000 men to meet financial constraints because the Army cannot afford any more than 102,000 men even though the nominal figure at the moment is 107,000 men—5,000 undermanned? Will he confirm that that constraint rather than any other factor is preventing the Scottish regiments recruiting and coming up to strength?

My Lords, the Liberal Democrats have it completely wrong. As a result of the Army's recruiting and retention success in recent years it has been necessary to take steps to manage strength within agreed targets and agreed budgets, as any large organisation would do. We have to do that in order to maintain balance in Army manpower numbers. As I said, the Army is progressing well towards its enlistment target of 11,318 for this year, and since April more than 1,500 have joined up. Recruitment has never been better.

My Lords, does the Minister not at least agree that with the Army so manifestly overstretched and the future so utterly unpredictable it would be absolute madness and highly irresponsible to reduce the number of infantrymen and units available for sustained operational deployment now and in the future?

My Lords, I take great note of what the noble and gallant Lord says but I have to say to him that experience demonstrates that our current light forces cannot provide the combat power required by some of the more demanding types of operation where rapid deployment is needed. At the same time our world-class heavy forces are comparatively slow to deploy and demanding to sustain. That means we have to shift from the current mix of light and heavy forces to a more graduated and balanced structure of light, medium and heavy forces together with a greater emphasis on enabling capabilities such as engineers, logistics and intelligence. We have to evolve.

My Lords, does the Minister agree that conflict prevention and post-conflict reconstruction stabilisation operations are the way that we are going forward—we are going to have more of them—and that the British forces are unparalleled in their ability to carry them out? If the noble Lord agrees with that, does he not see that there is a need for numbers as well as equipment, and will he assure us that he will try to get the establishment of the Army up to where it should be, and should have been for some years?

My Lords, I largely agree with what the noble Lord says. That is one of the prime roles of the British Armed Forces at the present time and will continue to be so. As I said, Army recruitment has never been higher.

My Lords, does the noble Lord recall the successful Save the Argylls Campaign in the 1960s and 1970s in which I admit to having played a part? That campaign assisted other regiments to survive or merge which were threatened at the time. Would it not be unwise to repeat such threats?

My Lords, I remember the campaign and I know the strength of feeling that there is now. The noble Lord, Lord Monro, expressed that very clearly. However, I shall quote the words of the Chief of Defence Staff to the House of Commons Defence Committee in April this year. He said:

"What I think both of us, and I think most of our senior generals … believe is that regimental fighting spirit is what makes the British Army what it is. Now the way by which you achieve that has many different courses of action which you could follow. It does not have … to be exactly as it is today for the future, nor is it today what it was 15 years ago. You have to modernise the regimental structure that we have to make sure that it is relevant to what we are doing, that it meets what defence policy requires of us and it does provide the regimental fighting spirit. I see no difficulty or tensions between those things".

I commend what he said to the House.

My Lords, where does provision come from for necessary home defence—but hardly normal defence—such as covering for the firemen? Will there be a special unit for that, or will we have to redeploy people who are already fully committed in other ways to do that from time to time, whenever the fancy takes the firemen?

My Lords, I hope very much that there will be no need for the Armed Forces to come again to the aid of the country in the way in which they had to last year—but if they have to, they will.

asked Her Majesty's Government:

Whether they consider the statements by the Association of Southeast Asian Nations' foreign ministers on developments in Burma, made during preparations for the Asia-Europe summit meeting in September, to be sufficiently robust.

My Lords, the communiqué issued after the ASEAN ministerial meeting in Jakarta underlined the need for all strata of Burmese society to be involved in the continuing national convention, and encouraged all parties in Burma to continue their efforts to effect a smooth transition to democracy. It also emphasised the continuing relevance of last year's ASEAN communiqué, which called for the release of Aung San Suu Kyi. Those are all essential steps for the progress to democracy in Burma that the EU supports.

My Lords, I thank the Minister for that reply. Does she accept that, at a point where relations between the United States and its major allies are going through a very difficult patch, it is important that there be an Asia-Europe summit this year? Could she specifically rebut what I have heard from officials in some continental foreign ministries—that the British are not enormously bothered about whether ASEAN takes place? Does she nevertheless recognise that the participation of Burma in the ASEAN summit raises real difficulties for us all, and that we have to press the ASEAN governments to increase the pressure on Burma to introduce conditions under which it will move towards being a less authoritarian society?

My Lords, I appreciate the importance of the ASEAN summit, at which the United Kingdom will be represented by my right honourable friends the Deputy Prime Minister and the Foreign Secretary. However, the noble Lord has put his finger on the problem that the summit will have to face, which is whether the ASEAN countries will stick with all three of their candidates to join ASEAN, including Burma. They have put the point to us that if that is not acceptable to the EU, it is not acceptable to them to accept all 10 new members of the European Union. That is the dilemma that we face. We shall of course continue to press the ASEAN countries on the points about democracy, Aung San Suu Kyi, and full participation in the convention.

My Lords, is my noble friend aware that the communiqué that foreign ministers published at the end of the ASEAN conference last week contained a declaration which said that they were in favour of the elimination of violence against women, and in favour of women having an important and highly respected place in south-east Asian societies? Does she not find it extraordinary that the communiqué failed to make any reference whatever to the continued detention of Aung San Suu Kyi or the involvement of the National League for Democracy in the future of Burma's democracy?

My Lords, in my Answer I was perhaps very diplomatic, but I think that the paragraphs that deal with Burma in the statement are not written in the forthright terms that British Ministers use in relation to Burma. However, the crucial point is that that paragraph is there. Do not let us forget that, only last year, that paragraph was inserted for the first time in the communiqué. I welcome the fact that there is such a paragraph again this year, but we would have expressed that paragraph more robustly.

My Lords, does the noble Baroness agree with the reply that was given by Mr Xavier Solana, the EU high representative for foreign and security policy, to a question about the ASEAN summit, which was that to have the summit we must have some movement? Would she therefore not think it necessary that we should spell out exactly what movement is required for the summit to take place? For instance, does it include the release of Aung San Suu Kyi and the revision of the constitutional process so as to allow all political parties and ethnic groups to participate?

My Lords, the question is not about those specific points in relation to holding the summit, but about those points in relation to Burma being part of the ASEAN delegation to the summit. We have been very clear in setting out three developments that we want: first, the permanent release of Aung San Suu Kyi; secondly, a genuinely open and representative national convention; and thirdly, the NLD and other opposition parties being allowed to participate in it. If those conditions are fulfilled, there is no problem about Burma; if they are not, I suggest that there will be a great deal of hard arguing about it.

My Lords, is the EU official pronouncement, which is posted on the Internet, correct that if Burma attends the forthcoming meeting the EU will not do so? Is it also correct that Cambodia has said that if Burma does not attend the meeting, it and Laos, which are attending for the first time, will not attend? Is there not a danger that, if those positions are taken up, we will end up breaking off the dialogue between Europe and the ASEAN countries? As they are the growth countries in the global economic system, it would not be a very brilliant idea to do that.

Indeed, my Lords, it would not be a very brilliant idea, which is why I tried to couch my answers in fairly conditional terms about what is likely to happen. That is why I said to the noble Lord, Lord Wallace of Saltaire, that there was a real dilemma. If we are being threatened and have to give way on the questions of the release of Aung San Suu Kyi and of democratic representation in Burma and allow Burma to join anyway, there would be a great deal of unrest and unhappiness about our taking such a position. However, if we jeopardise the whole of the summit process—the noble Lord, Lord Wallace of Saltaire, rightly reminded us that it was enormously important in today's highly volatile international situation—that is a difficulty, too. I suggest that we are patient, continue with what we have set our hand to do in arguing for Burma to fulfil those conditions, and do our best to argue for the best possible position before the summit.

moved Amendment No. 1:

Page 3, line 35, leave out "Part 4" and insert "Part 6"

The noble Lord said: My Lords, I hope that this group of amendments will not detain us long. Its purpose is to tidy up some drafting points and make a couple of changes that we agreed to consider in Committee.

The amendment to Clause 2 corrects an inaccurate reference to the Financial Services and Markets Act 2000. The amendment to proposed new Section 389A(5) in Clause 8 fulfils our commitment to spell out more clearly to whom "the person concerned" is intended to refer. The amendment to Clause 11 tidies up a minor inconsistency by amending the reference to "statute", to be consistent with a reference to "statutory provision" at line 24 on page 14 of the Bill.

During Committee stage we agreed to give further consideration to an amendment tabled to Clause 13 by the noble Lord, Lord Hodgson, to remove the Secretary of State's ability to make supplementary and incidental provisions in the order specifying a body to prepare reporting standards principally for the proposed operating and financial review. We have found no convincing examples of when such a power might be needed and have therefore brought forward an amendment to remove that provision.

The amendment to Clause 41 is modelled on that tabled by the noble Lord, Lord Phillips, at Committee, which we agreed to consider. The amendment will ensure, in those cases where it is not already apparent, that the remedy the regulator is seeking when bringing legal proceedings on behalf of a community interest company is made clear.

The amendment to Clause 57 also tidies up the drafting of the Bill. We have noticed that Clause 57 is slightly inconsistent with Clauses 58 and 59, which refer to "this Part" without adding "of this Act". Therefore we have made a small correction in this respect. I beg to move.

My Lords, as we begin the Report stage, I am tempted to burst into song, if that is not unparliamentary. The Minister might recall the song called "American Pie" by Don McLean. which begins:

"A long, long time ago

I can still remember how"

it used to be.

It is now six months minus one day since Second Reading and since that time much water has passed under many bridges, although the Government do not quite seem to have grasped the issue of limited liability. I see that it has been floated again in the Times today in an article by Patience Wheatcroft entitled, "If the auditor's cap fits … "—but in the end it never arrived. We welcome these amendments, particularly the two that we were keen to insert in Grand Committee, which made the words "those concerned" more explicit and removing surplus verbiage—supplementary and incidental words in the later clause. We are content with the amendments.

moved Amendment No. 2:

Page 3, leave out lines 37 and 38.

The noble Lord said: My Lords, there has been some confusion over this amendment. With the leave of the House, I shall also speak to Amendment No. 3A, which has not been grouped. Both amendments deal with precisely the same issue. We grouped them in Committee and I am sorry that we have not managed to have them grouped together on this occasion.

We are returning to these amendments to Clause 2 to seek further clarification over the definition of a phrase within the Bill. We believe that there is still a need for further clarification of the meaning of "public interest" cases under proposed new paragraph 19(2)(b) to Schedule 11 to the Companies Act 1989. There is a similar issue regarding new paragraph 20, which is concerned with independent monitoring and investigation. We sought to raise those issues in Committee and we wish to probe the meaning of the two adjectives in the proposed new paragraphs.

The amendment seeks further explanation of the details of the definition of "major audit" in proposed new paragraph 19(2)(b) to Schedule 11 to the 1989 Act. It defines "major" as a,

"company in whose financial condition there is a major public interest".

Amendment No. 3A seeks further explanation of what "important" means in the context of the definition of "public interest cases" that are defined in proposed new paragraph 20(2) to the schedule.

We are grateful to the Minister for explaining in Committee that the definition of "public interest cases" in proposed new paragraph 20 is relevant only to that new provision and not to proposed new paragraph 19. However, as that failed to define "major public interest", we are none the wiser about its meaning.

We recognise that the Minister did try to explain that in Grand Committee, when he said:

"We expect that public interest disciplinary cases would cover cases about the conduct or quality of audit work in respect of listed companies and other major companies. These are the most likely to raise important issues affecting the public interest".—[Official Report, 16/3/04; col. GC 29.]

The words "important" and "major" appeared without further qualification or explanation. Furthermore, the explanation provokes more questions. As there has been time for reflection, I hope that the Minister, having consulted with his officials, can answer with greater precision. For example, who will decide if a particular case has significant "public interest"? How will that be done and how will the importance of the issues raised be measured? What right to appeal against any decision will there be?

The Minister tried to answer some of those questions in Committee when he said that,

"whether particular cases fall within the scope of the arrangements will be a matter for the arrangements to determine, having regard to all the circumstances".—[Official Report, 16/3/04; col. GC 39.]

That hardly clarifies matters. What does that verbiage really mean? Will the Minister give a fuller explanation, or. better still, some examples of which companies will be considered to be of major public interest and what are considered to be important issues that affect the public interest? I beg to move.

My Lords, in bringing forward new requirements about audit monitoring in Clauses 1 and 2, our intention was that the independent arrangements should focus their attention on those audits where an audit failure would be likely to have the most significant adverse impact. As the review of the regulatory regime of the accountancy profession recognised, this is an important element in maintaining confidence in financial information and so supporting effective markets.

I do not consider that the sole determinant of whether an audit is a "major audit" should be whether a company is listed. There are other companies which are not listed but whose importance is such that their audits must also be considered as major. I believe that it would be wrong to exclude companies with large-scale operations just because they are not listed. A company, although not listed, could be of significant public interest for a number of reasons—for example, the volume of its turnover or its impact in a particular area, such as charities or pension funds.

The amendment would mean that the audit of, for example, Equitable Life could not be considered as major audit and, accordingly, would not be included in the minimum scope of audits covered by independent monitoring arrangements. I do not believe that that would be right.

I should emphasise that the purpose of the new arrangements for independent monitoring is to support the credibility of the monitoring process by increasing its independence from the profession. The new requirements would not impose additional burdens on either companies or auditors. Therefore, I do not believe that it is appropriate to limit the minimum scope of the arrangements in the way proposed by the amendment.

My Lords, I am grateful to the Minister, but we have not made much progress. We obtained one example from him, which was helpful, but we have probably obtained all of the juice out of this particular orange. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The noble Lord said: My Lords, the amendment returns to a discussion concerning proposed new paragraph 20 of Schedule 11 to the 1989 Act (as set out in Clause 2) and the arrangements for independent investigation of public interest cases for disciplinary purposes. The amendment seeks to include the provision that all defendants should be properly represented. We believe, despite the Minister's arguments in Committee persuasive that this provision should be remedied.

The Minister insisted that a disciplinary scheme for defendants already existed under the Accountancy Investigation and Discipline Board. But is it sensible to just assume that the AIDB disciplinary scheme will cover the costs of a defendant's legal representation? The AIDB is not a statutory body, so there is no statutory certainty that all defendants will be properly represented. This is not a matter on which the Government could fall back on the guarantees of the AIDB. It is commendable for the AIDB to provide a demonstrably fair, independent and expert system, but there is no legal certainty that it will be continued for as long as this Act remains in force.

My Lords, as we have heard, this amendment was previously debated in Grand Committee, when we clearly failed to convince the noble Lord, Lord Hodgson, that such a provision was not necessary. I now propose to try again.

The person who exercises the recognition function will need to consider all aspects of disciplinary arrangements in order to come to a view on whether or not they are "appropriate" arrangements for the purposes of new paragraph 20.

One issue that will have to be considered is the representation of defendants. It is of course entirely right that defendants should have the opportunity to be represented. As we said in Grand Committee, if the disciplinary arrangements did not make any provision in respect of representation and that caused procedural unfairness, it could call into question whether the disciplinary arrangements were "appropriate". Therefore, it would not be open to the disciplinary arrangements just to ignore this issue altogether.

A number of the recognised supervisory bodies have already signed up to the disciplinary scheme of the Accountancy Investigation and Discipline Board of the FRC. The disciplinary scheme and supporting regulations, which are publicly available on the FRC's website, provide a framework for the operation of disciplinary hearings held under the scheme. The framework includes the right to representation throughout disciplinary hearings and prior investigations. The scheme also provides that a disciplinary tribunal can require the AIDB to pay a defendant's legal costs where he is unable to do so himself.

In Grand Committee, the noble Lord, Lord Hodgson, expressed concern about the lack of statutory certainty that the AIDB's arrangements for carrying out cases would necessarily continue into the future. He has repeated that concern today. I note that any changes to the AIDB's scheme would also need to be agreed by the participating accountancy bodies—the AIDB could not make unilateral changes to the scheme. As I mentioned, the person exercising the recognition function will have to look at all relevant matters relating to the functioning of the disciplinary arrangements in deciding whether or not they are "appropriate". That will include matters such as the right to representation and the right of appeal. I consider it unlikely that the supervisory bodies would agree to any watering down of the AIDB's disciplinary scheme that would risk a decision that the scheme was no longer appropriate and that the supervisory bodies no longer fulfilled the statutory requirements for recognition. The same considerations would apply if the disciplinary arrangements under consideration were not those of the AIDB.

Therefore, we consider that sufficient safeguards are already in place to ensure that supervisory bodies can satisfy the requirements for recognition only by participating in appropriate disciplinary arrangements. The question of the circumstances in which representation should be provided to defendants, along with the myriad of other details concerning the functioning of the arrangements, is best left to be determined under the disciplinary arrangements themselves, rather than being prescribed in legislation. I hope that the noble Lord, Lord Hodgson, will accept the explanation that I have given.

My Lords, I am grateful to the noble Lord, Lord Evans, for his explanation, and I think that he does persuade me. If I heard aright, he said that Article 6(1) of the ECHR will be an implicit requirement for recognition, without which the disciplinary procedures will not meet the requirements for the recognition of the body concerned. If that is the case—I notice the noble Lord nodding—I am satisfied with that reply and am happy to beg leave to withdraw the amendment.

moved Amendment No. 4:

Page 4, line 30, leave out from "body" to end of line 33 and insert—

"(a) will have no involvement in the appointment or selection of any of the persons who are to be responsible for doing the thing or things in question, and

(b) will not otherwise be involved in the doing of that thing or those things."

The noble Lord said: My Lords, during Grand Committee a number of noble Lords stressed the importance of the regulator continuing to work in partnership with the accountancy profession in order to ensure effective and well informed regulation. I entirely agree. The partnership approach is a fundamental aspect of a regulatory regime that works well. That is why the Review of the Regulatory Regime of the Accountancy Profession recommended strengthening the independence of aspects of the regime and not tearing it up and starting with a different model. One concrete sign of this partnership approach is that the chairman of the Consultative Committee of Accountancy Bodies is a member of the Financial Reporting Council and sits on the board of directors, along with the president of the CBI, a senior member of the investment community and the independent chair and deputy chair. The purpose of the amendment is to ensure that the definition of "independence" at new paragraph 21 does not preclude this arrangement.

The amendment makes clear that an audit supervisory body must not be involved in appointing the people who do the things mentioned at paragraphs 17(b), 18(b), 19(1)(b) or 20(1)(e) or in the actual doing of those things. In other words, the body must not be involved in appointing the people who determine technical standards or standards relating to professional integrity and independence, or who carry out monitoring and inspection of audits of listed or other major companies, or who carry out investigations, hold disciplinary hearings or take disciplinary decisions; nor must the body be involved in doing any of those things.

The FRC and the board of directors have a role in setting the overall strategy of the FRC and in setting budgets and managing performance for the boards. That role is separate from the doing of the things that I described, and it is not intended that paragraph 21(2) should preclude the chairman of the CCAB from participating in that role. The amendment seeks to make that clear. I beg to move.

My Lords, we are grateful that the Government have taken on board the concerns expressed in Grand Committee and, indeed, that the noble Lord, Lord Evans, has emphasised the importance of a collaborative regime going forward. I hope that he will not think me unreasonable if I raise a slight reservation about subsection (b) of the amendment, which reads that the accountancy bodies,

"will not otherwise be involved in the doing of that thing or those things".

I believe that the intention here is to allow consultation between the bodies and the Audit Inspection Unit, while the bodies are restricted from any involvement in the carrying out of the RU's functions. But the fact that that consultation is permitted is not absolutely clear. I should be grateful if the Minister could confirm that the amendment permits consultation between the accountancy bodies and the RU.

Can he also confirm that the restrictions on the involvement in the doing of that thing or those things should not prevent: first, the exchange of information and risk assessment from desktop monitoring; secondly, the provision of specialist expertise by QAD staff to assist the AIU in the course of AIU inspections; or, thirdly, liaison between the RU and the QAD in the preparation of their respective reports to the audit regulatory committee to ensure that the combined coverage is comprehensive and meets the committee's needs? If the amendment does, indeed, permit consultation, as we argued in Grand Committee, it would be entirely sensible and balanced. We should be grateful if the Minister could give that further explanation before we wave the matter goodbye.

My Lords, I am sure that the noble Lord, Lord Hodgson, will be delighted to hear that the answer to every question that he asked is "yes".

On Question, amendment agreed to.

Clause 8 [Auditors' rights to information]:

moved Amendment No. 5:

Page 10, line 22, at end insert "who is working in Great Britain"

The noble Lord said: My Lords, in Committee we proposed an amendment that would remove from the Bill the want of symmetry in the Bill between overseas and UK subsidiaries of UK parent companies—that is, overseas incorporated and UK incorporated subsidiaries of UK parent companies. That involved various changes to proposed Section 389A about auditors' rights to information. We sought to bring within the regulatory ring-fence all subsidiaries of UK incorporated parent companies, no matter where they had been incorporated.

The noble Lord, Lord Sainsbury, gave two reasons for rejecting the amendment. The first was, in his words, that:

"In practice, it would be very difficult to enforce the obligations that could arise as a result of the amendment".

The second was, again in his words, that,

"to claim jurisdiction … risks undermining our position in resisting claims by foreign states to exercise jurisdiction in the UK".—[Official Report, 17/3/04; col. GC 86.]

Having consulted expert outsiders about the Minister's view, we find difficulty with both of those reasons. On the first reason, that,

"it would be very difficult to enforce the obligations that could arise as a result of the amendment",

the alleged difficulty is no different from a case in which the subsidiary is a UK subsidiary that carries on business overseas. In such a case, the individuals or persons sought to be made criminally liable would not necessarily be present within the UK or amenable to the UK criminal process. Conversely, imposing a duty on a person, and making that person criminally liable for non-performance of the duty by reason of a connection with a non-UK incorporated subsidiary of a UK company does not involve any practical difficulty, where the relevant subsidiary was carrying on business in the UK and the person concerned was present in the UK. In truth, the place of incorporation of the subsidiary, as we have said several times, is immaterial. What matters is the place where the person concerned is to be found.

As to the second reason—that it would become difficult to resist other foreign states exercising jurisdiction in UK—the Bill in its present form will seek to operate extraterritorially. A non-UK resident who has a relevant connection with a UK incorporated subsidiary, wherever that company is carrying on business, is subject to the duty and liability to be imposed by the Bill, whether or not he is a UK citizen. To include persons connected with non-UK incorporated subsidiaries will hardly be a large extension to that, given that by necessity the subsidiary has to be a subsidiary of a company which is subject to Part XI, Chapter V, of the Companies Act 1985.

I hope that these reasons will explain why the Minister's response in Committee failed to convince me that establishing a level playing field between UK and overseas subsidiaries is undesirable. We believe that a level playing field will be best achieved if the problems concerning extraterritoriality are dismissed by restricting auditors' direct rights to information to employees solely working in the UK for UK incorporated companies. That is achieved by Amendments Nos. 5 and 6.

Amendment No. 5 limits auditors' rights to information to employees of UK incorporated companies who are working in the UK. Amendment No. 6 ensures that where a parent company has a subsidiary company that is UK incorporated, with officers or employees located outside the country, the auditor will have to require the parent company to obtain the necessary information. This will place such officers and employees on a level playing field with those covered in Clause 8(3) of the Bill; for example, those who work for a subsidiary company that is not UK incorporated. Therefore, the auditor would not have any direct rights to information from employees of parent or subsidiary companies which are not UK incorporated.

These amendments would achieve the level playing field that the Bill lacks at present; for example, consider a person who works physically in the offices of a French incorporated subsidiary of a UK incorporated parent company, but who is actually employed by another UK incorporated subsidiary. He could be a French citizen and he could be arrested and brought back to the UK for trial, while his fellow workers, who work for the French incorporated subsidiary, cannot be touched. The individual in question might well be quite unaware of the additional risks he runs by the chance of the country of incorporation of his employer. I beg to move.

My Lords, on the notion that this provision should apply extraterritorially and across a level playing field, we do not have to be ashamed, in any way, or worried about extraterritoriality. To those of us in business who face up to the wonderful Sarbanes-Oxley Act every day, this is the greatest piece of extraterritoriality ever seen. Why on earth should UK public companies have their chief executives and chief financial officers subject to fairly draconian criminal penalties in the US, merely because they have a listing there? They do not even have to trade there. We have to have a level playing field.

I have to confess that I was a little confused by the amendments of the noble Lord, Lord Hodgson, because I am not sure where they get us. We must have the ability to compel—I hesitate to use that word— every element of a global company to provide necessary information to auditors and that must be on a level playing field.

My Lords, I appreciate the concern expressed by the noble Lord in Committee and again today about Clause 8 and the different legal position that may apply to two people operating out of the same overseas office, one of whom works for a British subsidiary of a British parent and the other who works for a foreign subsidiary of the same British parent. It is an interesting issue. We recognise the need to strike the right balance between the rights of auditors and the burdens placed on employees. However, we do not believe that the way to do this is to restrict auditors' rights to information in the manner proposed by the amendments.

Clause 8 already provides important protections for those who will be required to provide information to auditors. A person does not commit an offence by innocently giving information that turns out to be false, or by failing to give information when it was not practicable to do so. That is not what happens and that is not our intention. We do, however, wish to catch those who deliberately choose to mislead.

In order for an offence of giving false information to be committed, the information must be false in a material particular, and the person must have either known that the statement was false or been reckless as to whether it was false. It is a defence for a person charged with an offence under Section 389B of not providing information to show that it was not reasonably practicable to provide it. An overseas employee of a British subsidiary would, in any event, not commit an offence if what he or she either did, or failed to do, was outside territorial jurisdiction, although there may be enforceable civil obligations on him.

We do not consider that the scope of an auditor's rights to information should be determined by where a person works, despite what the noble Lord, Lord Hodgson, says. It is right that where a person is an officer, employee or auditor of a British company, then he should be required to provide information directly to the auditor regardless of where he happens to work. Where a person is an officer, employee or auditor of an overseas company, the situation is different. We take account of that in the way that we have drafted the clause and we believe that it is right to do so.

My Lords, I am grateful to the Minister for having returned to the issues that we raised in Committee and for kindly discussing them with us during a briefing.

I understand the argument about deliberately choosing to move overseas to try to escape the provisions of this legislation. I accept that argument. However, we are trying to achieve a level playing field. The Government have not accepted that argument. We need to find a way to ensure that in each case employees, who may not know the place of incorporation of their employer, are treated in a fair way. I do not believe that the Government have managed to achieve that and I do not believe that they have shown sufficient readiness to meet the objective that we are seeking, as expressed by the noble Lord, Lord Sharman. I would like to test the opinion of the House. 3.59 p.m.

On Question, Whether the said amendment (No. 5) shall be agreed to?

Their Lordships divided: Contents, 71; Not-Contents, 125.

moved Amendment No. 7:

Page 10, leave out line 40 and insert "person within subsection (4) from whom the auditor has required the company to obtain the information or explanations."

moved Amendment No. 8:

Page 11, leave out lines 1 to 4.

The noble Lord said: My Lords, this is a new amendment, which comes about because of conversations that we have had with the Institute of Chartered Accountants in England and Wales. The fear is that if this clause is not amended as proposed there may be unintended consequences. It is argued that it may upset the status quo under which auditors currently obtain the information that they need to perform their audit. It is something that I doubt the Government would intend at a time when the whole thrust of the Bill is to strengthen the quality of audit so as to underpin the operation of markets in the public interest. As I understand it, there is an established way by which relations between lawyers and auditors are managed at present in order to ensure that shareholders receive sufficient information about a company's financial affairs.

This relationship has been developed over a number of years and works well. It is based on an agreed statement of guidance, statement 903, between the Council of the Law Society and the Institute of Chartered Accountants, which was supplemented by Audit 2/95 issued by the Audit Faculty of the Institute of Chartered Accountants, and more recently developed in international standards for audit, ISA 501. The purpose of these instruments is to ensure that, taking account of legal professional privilege, auditors and lawyers can have conversations about matters that are material to an audit, such as pending litigation. Those discussions can result in an agreed file note, which the auditor would then consider as sufficient file evidence to support the related disclosures in the financial statements. There is now a concern that Section 389A(7) could upset this balance.

Clearly, the directors have the primary responsibility to ensure that the accounts present a true and fair view, and the Act rightly provides no exception to that regarding legal privilege. However, the auditor may then need further information about the underlying circumstances in order to judge whether the amounts and disclosures in the accounts give a true and fair view. If this exclusion for privileged information is introduced, lawyers will no longer be able to co-operate without expressly receiving a waiver of privilege from the directors, who may instead decide to protect their own position. Auditors would then be left to make a judgment on the disclosures without having access to the necessary information, which in turn is likely to increase the likelihood of auditors needing to qualify the scope of their reports or the reports themselves, and result in shareholders not receiving a true and fair view of the company's affairs.

There is also a concern that this exclusion would create a loophole that would allow an unscrupulous management to hide its dealings from auditors and therefore, ultimately, from shareholders. Indeed, in Europe's largest accounting scandal, the Parmalat scandal, a "legal factory" firm of New York lawyers with only one client is alleged to have been one of the main tools used to mislead the auditors.

We understand and agree that there is a need for privilege. We suggest that the best way forward is to rely on existing instruments that govern the relations between lawyers and accountants on these matters. That would mean deleting Section 389A(7) from Clause 8 to continue to allow privileged information to be made available to auditors under existing arrangements. Alternatively, the legislation could be amended to make clear that such privileged information should not be passed any further by the auditors. This is an important issue that needs to be clarified. I beg to move.

My Lords, as I said in the debate that we had on this issue in Committee, it was not our intention that Clause 8 should change the position in respect of legal professional privilege. However, Clause 8 makes a number of other changes to the existing position, most notably by inserting a new criminal offence of failing to provide information or explanations to an auditor when required to do so. We therefore considered that in order to avoid any uncertainty the Bill should make the position in respect to legal professional privilege absolutely clear.

Disclosure to the auditors could involve an infringement of legal professional privilege. For example, in circumstances where privileged information calls into question the truth and fairness of the accounts, I consider that disclosure to the auditors might lead to disclosure to the public in the auditors' opinion. It is therefore unlikely that auditors would currently have the power to require the production of such information. Subsection (7) therefore reflects that position.

As I said in Committee, I consider that directors would rather waive their right to legal professional privilege and disclose the information to the auditor than protect the privileged information and risk the adverse consequence of qualified accounts. Even if the qualification is framed in terms of the auditors not being able to form an opinion on the accounts, that would send a strong message about the accounts to those outside the company.

I also draw noble Lords' attention to the 10th Report of the 2003–04 Session of the Joint Committee on Human Rights. In considering the Bill, the Committee looked at Clause 8. They recognised that it would allow auditors access to a wide range of material and would require many people to provide information to the auditors. However, the committee considered that the protection of information that is subject to legal professional privilege,

"seems to us to provide adequate protection to meet the requirements of ECHR Article 8.2".

For those reasons, I cannot agree to this amendment.

My Lords, I think that I am reassured by what the Minister said. He said that there was no plan to change the existing position. I accept the argument that qualification of the accounts will be a discipline to the directors. The complexity of the issues of professional privilege is such that I will not delve any further into it at this stage. I am grateful to the Minister for the explanation and for making those points. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

moved Amendment No. 9:

Leave out Clause 9 and insert the following new Clause—

moved, as an amendment to Amendment No. 9, Amendment No. 10:

Line 17, after "no" insert "material"

The noble Lord said: My Lords, we are extremely grateful to the Minister for the redrafting of this clause. The obligations of the directors are now much better focused and defined. The issue concerning the directors' relationship with the auditor and what the auditor does not know, but that the directors ought to know he does not know, has been grasped. The "joint and several" issue has also been addressed. That is all very worthwhile.

I took careful note of the Minister's pre-emptive barrage about Amendment No. 10, but I should still like to have a go at persuading him to go a step further. In Committee, we said that we wanted to,

"reassure directors, executive or non-executive, that they cannot be hung on … a small event".—[Official Report, 17/3/04; col. GC 122.]

I am not sure that subsection (3), to which the Minister referred, meets that. Therefore, we continue to stick to the line of inserting the word "material". The Minister has come a long way to meeting our requirements, but inserting the word "material" would be helpful.

As we have discussed, there is now a qualification to the importance of the audit information that the directors must disclose. When the Bill is amended, it will read that the director has to be aware that,

"there is no relevant audit information of which the company's auditors are unaware".

But that qualification refers to "relevant" information rather than "material" information.

Confusingly, the importance of the word material has been consistently endorsed by the Government in the DTI's consultative document, entitled, Draft Regulations on the Operating and Financial Review and Directors' Report of May 2004, for example. That document contains the Government's proposals to make operating and financial reviews for quoted companies compulsory through statutory provisions as an addition to the directors' report. Paragraph 3.24 of the document states:

"The Company Law Review envisaged that certain topics should always be covered in an OFR because they will always be 'material', while others should be included whenever directors consider them 'material' to an understanding of the business. The Government supports this approach".

While I understand that the OFR and directors' report are quite different, there are clearly similarities in that both involve disclosure from directors on financial and other such matters concerning their companies.

The Government have tried to square the circle in paragraphs 3.25 and 3.26 of that document where explanations are given about why the Government see it unnecessary to use the term "material". It goes little further than to divulge that information being included

"to the extent necessary for an understanding of the business"

is a more desirable phrase from the point of view of the Modernisation Directive—a European Parliament directive dated 18 June 2003—than the word "material", which, apparently, the Government believe can be confusing in this context.

Indeed, "materiality" is a word that is used in the Institute of Chartered Accountants in England and Wales handbook to give guidance to accountants about the levels of information that they should receive from directors. The ICAEW handbook, issued in August 1970—34 years ago—states:

"In connection with the preparation and audit of our accounts for the year ended … the directors have made estimates to the amounts of the ultimate liabilities (including costs) which might be incurred, and are regarded as material, in relation to the following matters on which you have been consulted. We should be obliged if you would confirm that in your opinion these estimates are reasonable".

In those circumstances—this has been the case for more than 34 years—"material" is and has been the qualification against which the auditors themselves measure the significance of the information provided by the directors. It is now slightly mystifying that since this is the prerequisite for information from the viewpoint of the auditors, it is not mirrored as the prerequisite for information from the viewpoint of the directors.

"Material" also appears frequently in previous Companies Acts and it is prevalent throughout the Sarbanes-Oxley Act, of which we heard a great deal in Committee. Rule 203, Section 303–5, is headed, "Representations and conduct in connection with the preparation of required reports and documents". That is a very similar section to new Section 234ZA in this Bill. The section begins:

"No director or officer of an issuer shall, directly or indirectly:

(1) Make or cause to be made a materially false or misleading statement to an accountant in connection with; or

(2) Omit to state, or cause another person to omit to state any material fact necessary in order to make statements made, in light of the circumstances under which such statements were made, not misleading".

"Material" is one of the most frequently recurring words in this section. I need not remind noble Lords that the Government have frequently said that the strategic purpose behind this Bill is as a step—mirroring the Sarbanes-Oxley Act—to help to restore investor confidence in companies and financial markets following recent major corporate failures.

"Materiality" is clearly a much valued word in the American legal system and up to now has fitted comfortably within the British legal system. Its ubiquity among consultative documents, Acts, directors, auditors' handbooks and the Sarbanes-Oxley Act itself vouches for its importance. I believe that the Government should consider again inserting it into this Bill. I beg to move.

My Lords, earlier in these discussions, the noble Lord, Lord Hodgson, made reference to the song, "American Pie". I am bound to say that when I read this amendment, I was moved to quote the "Halleluja Chorus" because the Government have done a remarkably good job of responding to our concerns. Having responded to the concerns expressed in Committee so well, is this also an appropriate time for the Minister to respond to the other commitments made at the time, to provide a statement on directors' and auditors' liability? That is my first question.

Amendments Nos. 10 and 11, up are amendments to Amendment No. 9. We really are struggling with definitions here. Subsection (3) refers to the substance of an amendment I proposed in Committee, using the phrase,

"information needed by the company's auditors in connection with preparing their report".

A number of defined terms and phrases are bandied about. As the noble Lord, Lord Hodgson, pointed out, "materiality" is one of them, while "significant" is another. The term "trivial" is a new one that has been introduced into accounting parlance of late.

The issue here is that, in general, "materiality" in the context of an audit is expressed as a financial amount. Audit committees these days will discuss with their auditors the concept of "materiality" which, in broad terms, means the degree of accuracy in auditing that is applied to a set of financial statements. Therefore, although I understand why the noble Lord, Lord Hodgson, is anxious to define this matter better, it would be wrong to include "materiality" at this stage. We need a term that encompasses more than "materiality" because, to be frank, in some circumstances the word "materiality" could result in information that is significant or relevant not being made available to the auditors. For that reason, the term "relevant" is probably better. We need to look at this matter carefully so as to ensure that the auditor gets what he needs. That, I think, is the substance of the matter.

I have a problem with the word "materiality". "Significant" might be better, while something that is clearly not "trivial" might be even better than that.

My Lords, I apologise to the noble Lord, Lord Hodgson, for pre-empting his comments. I do not have much to add to what I said before except to reiterate the point that subsection (3) of new Section 234ZA defines relevant audit information for the purpose of the statement as,

"information needed by the company's auditors in connection with preparing their report".

That definition quite clearly captures the concept of materiality since information that is not material to the auditor's report would not be needed by the auditors in connection with preparing the report. The noble Lord, Lord Sharman, asked the question clearly and sensibly: does the auditor get what he needs? We believe that our definition ensures that he would.

I turn to the question of directors' and auditors' liability. I am not totally surprised that the issue was raised during this debate. There was considerable interest in the consultation on directors' and auditors' liability. The responses reflected a wide range of views, many of which were vigorously expressed and noble Lords will have seen from today's press that divergent views continue to be put forward on these issues. I do not think that the Government are in any doubt about the importance business attaches to these matters. We want high quality candidates from all backgrounds to come forward to serve as directors, and we want as wide a range of auditors as possible. We also want companies to hold to account negligent or badly performing directors and auditors.

At Second Reading I indicated that the Government would want to consider all the responses carefully, and that is what we are doing. Because of the importance of ensuring competition in the audit market, we have recently sought the advice of the OFT on whether reforms of the law on auditors' liability to be limited by means of a negotiated cap would significantly enhance competition in the GB audit market and, if so, how. I should make it clear to noble Lords that this does not mean we have taken a decision to introduce such a measure. We are considering all the options and the implications that will arise from each. That, of course, may also include the option of doing nothing.

My Lords, we have considered this hard enough and for long enough. I accept the arguments about the word "significant" and that there are better terms. I accept also that the amendment provides a hugely improved framework for the clause, for which we are grateful. I think that I had better take 90 per cent of the cake and forget about the last 10 per cent. I beg leave to withdraw the amendment.

Amendment No. 10, as an amendment to Amendment No. 9, by leave, withdrawn.

moved Amendment No. 12:

Page 13, line 18, leave out "statute" and insert "any statutory provision"

On Question, amendment agreed to.

moved Amendment No. 13:

Page 17, line 38, leave out "and other supplementary and incidental"

On Question, amendment agreed to.

Clause 14 [Supervision of periodic accounts and reports of issuers of listed securities]:

moved Amendment No. 14:

Page 18, line 39, leave out "is to" and insert "may"

The noble Lord said: My Lords, subsection (7) of Clause 14, with which this amendment is concerned, enables the FSA forcibly, so to speak, to refer certain cases that do not fall within its remit to the Financial Reporting Review Panel. We understand that the Government want to build on the success of the FRRP by expanding its remit into new areas, but the question I want to put to the Minister is whether it is sensible to do that so inflexibly and without limit.

The provisions in the Bill will add to an already dramatic increase in the workload of the FRRP, an issue we discussed during our debates in Grand Committee. The expansion of the workload began in the early part of 2003 when, as part of a review of accountancy regulations, the DTI demanded that the FRRP should adopt a proactive approach to its scrutiny of annual reports. As I have said, it is understandable that the Government wish to further the success of the FRRP by expanding its remit and, in general terms, we support that expansion.

At present the panel must look only at annual reports of Companies Act companies following a complaint or press report. However, this Bill will enable the panel to review interim statements and the accounts of other issuers such as overseas groups with primary listings in London as well as other companies such as UK building societies. As we discussed, the Bill will also allow the Inland Revenue to pass information about suspect accounts to the FRRP and permit the panel to apply for a court order to release documents relating to a company's accounts.

All this adds up to a significant increase in the potential workload of the FRRP. Under the clause, there is the potential for the FSA to require the FRRP to investigate cases even if the panel does not believe them to be justifiable. Given the additional complications of cost, we believe that there is a strong argument for an amendment which enables the FRRP to refuse a referral from the FSA if the panel believes the case to be unjustified, if it is overburdened with work or if cost sharing cannot be agreed. The amendment would change "is to" to "may", thus enabling the FRRP to maintain a degree of flexibility while not preventing it from using its expertise to help with cases referred by the FSA. I beg to move.

My Lords, as the noble Lord said, this is our second time around this particular track. The effect of the amendment would be to allow the panel to choose whether to take a case referred to it by the FSA in the particular and exceptional circumstances provided for in subsection (7) of the clause.

I think it would be helpful to refresh our memories as to why we need subsection (7) in the first place. It may be that the noble Lord's concern is misplaced and I hope that if I set out exactly how we envisage this close working relationship between the FSA and the FRRP is to operate in practice, he will be reassured on the points he has mentioned.

Clause 14 allows the Secretary of State to appoint the panel to review the interim and annual accounts of some or all of the total population of issuers and to report back to the FSA on them. The FRRP already reviews the annual accounts of Companies Act companies. The point of the clause is to enable the Secretary of State also to give it a role in reviewing two new classes of document which are closely related to its existing work: first, interim accounts as well as annual accounts and, secondly, accounts of entities which list their securities but are not Companies Act companies.

We have left open the precise scope of the new FRRP remit. This is because there are a significant number of fairly obscure or exotic issuers on the list which it would not make sense for the FRRP to get involved in. I am referring to overseas companies with specialist debt, such as Eurobonds. Keeping their accounts under review will remain solely the function of the FSA. But overseas companies with primary listings in London, for example, would fall within the new FRRP remit. They are clearly of greater interest to the general public and that is where the resource of the FRRP should focus in taking forward its proactive work.

We recognise that it is never going to be an exact science to determine which types of entity might be found to have some accounting problem. If the FSA thinks it has detected such a problem, we want it to be able to call on the expertise of the FRRP, notwithstanding the fact that the entity is not in the FRRP's core remit. It is of course the FRRP itself which, in its report to the co-ordinating group on audit and accounting issues at the end of 2002, proposed both the move to proactivity and the extension of its remit.

Noble Lords will agree that it is important to ensure that there are no gaps, not least in order to provide market reassurance. That is why subsection (7) makes provision for unexpected or exceptional cases to none the less be referred to the FRRP. It does not hinder flexibility—quite the opposite; it ensures that all bases are covered. I hope therefore that the noble Lord can agree that there is no need to change the wording.

My Lords, as the Minister said, this is the second time round on this issue. I think I am reassured by his words. One of the issues we have to consider is that of cost and how the FSA and FRRP will sort out what might be the considerable costs involved in an investigation. Presumably the issue will be left for them to fight over in due course. I understand that we do not want gaps in the regulatory cover through which issues may fall. Given that, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 16 [Grants to bodies concerned with accounting standards etc.]:

moved Amendment No. 15:

Page 20, line 14, after "with" insert "any of the"

The noble Lord said: My Lords, this group of amendments is long but I shall try to summarise them briefly.

A strong and effective regulator is critical to the success of the new independent regulatory regime that we are putting in place through the Bill and through other non-legislative measures. It is important that the regulator can act decisively and courageously without being threatened with legal action. Not only must it act courageously, it must be seen to be able to do so if it is to be credible with those it regulates and with the markets and regulators in the United States and elsewhere. It must be able to attract and retain top quality people who are credible with business, the profession and the investment community.

We do not want the regulator to be afraid of legal action so that it collects more information than it would otherwise need, or takes longer to make decisions than would otherwise be the case. Over-regulation and excessive caution benefit no one.

For those reasons, after very careful consideration, we have concluded that it would be right to provide an exemption from liability for the regulator and its people, provided that they act in good faith and do not breach Section 6(1) of the Human Rights Act. We are mindful of the fact that, in the very unlikely event of the regulator getting things wrong, an injured party would be deprived of the right to claim damages. But we consider that the public interest in effective and robust regulation outweighs this consideration. The decisions of the regulator will, of course, remain open to judicial review.

The exemption is to apply only to the regulatory activities of the regulator; it will not apply to any other activities that the regulator might undertake. In practice, as noble Lords are aware, we expect that the regulator will be the FRC and its subsidiary boards. Most of the regulatory activities that we think it right to cover are listed at Clause 16(2), the grant-making power. It is necessary, however, to add four activities to the list, and this is the purpose of Amendment No. 19.

The first three activities relate to the work of the Accountancy Investigation and Discipline Board in investigating and disciplining accountants who are not auditors. The AIDB's activities in relation to auditors are already covered under Clause 16(2)(f). The last activity relates to the work of the Professional Oversight Board for Accountancy in overseeing the self-regulatory activities of the major accountancy bodies. The POBA's other activities are covered under Clause 16(2)(f) and (g). Thus the exemption will cover the regulatory activities of the FRC, its subsidiaries, its various boards and disciplinary tribunals, as well as the individuals involved in carrying out those activities.

The exemption itself is contained in the new clause which we are proposing should be introduced into the Bill. This new clause provides that when a body is funded under the grant-making power in Clause 16, then for a period of 12 months following the most recent payment of grant, the body, its subsidiaries and their people are not liable in damages for anything done or not done in connection with any of the activities listed in Clause 16(2). I beg to move.

My Lords, we are in general agreement with these numerous amendments which, as the Minister explained, extend the role of the FRC and, among other things, deal with protection against liability for damages for a period of 12 months, beginning on the date on which the grant is paid. Our Amendments Nos. 29 and 30 seek to increase the exemption period from 12 months to 36 months. I should emphasise that we have tabled the amendments in order to probe the Government on why a 12 month period has been chosen and why it is not a permanent exemption.

Surely the central reason for the Government's amendments, as explained by the noble Lord, Lord Sainsbury, is to protect the FRC from the consequences of litigation at all times. If annual grants are to be given to the FRC, the logic in the chosen timeframe of 12 months is understandable but ill-founded. As it currently stands, the government amendment achieves the aim of exempting the FRC from liability but gives very little room for manoeuvre.

In an earlier life, I was a member of the disciplinary panel of the Securities and Futures Authority, a recognised supervisory body under the Securities and Investments Board. We had the same statutory immunity as is proposed here, given under the Financial Services Act 1986. As the Minister has made clear, without it none of us would have been prepared to serve on such a panel.

But two practical issues are relevant to our discussions on this proposal and need to be answered. In the SFA—as I am sure will be the case under these proposals—a good many disciplinary cases went on for more than a year. So, if immunity is withdrawn, what will be the position in regard to cases in progress? Obviously determination will not have been reached; will people find that the immunity has died away?

I was involved in the investigation of the Barings case, which was highly contested. It went on for a very long time—certainly for more than 12 months—and it would have been very difficult had the members of the disciplinary committee lost their statutory immunity in midstream. Secondly, what will happen in the future if it is decided, for whatever reason, that the tripartite approach envisaged in the Explanatory Notes—but not written into the Bill—should be brought to an end? Inter alia, linking statutory indemnity to the payment of a government grant effectively hands the Government an enormously powerful, if at present hidden, control mechanism. An exemption period of 36 months—although, admittedly, an arbitrary figure—would leave room to breathe; it would give time for negotiations and adjustments, if needed.

My Lords, the amendments have been tabled to extend the exemption period from 12 months to 36 months. I understand the reasons for the amendments, but I do not think that they are necessary.

If an action is performed within the exemption period, it will be covered by the exemption in perpetuity. Let me explain why. The new clause provides that there will be exemption from liability to pay damages in respect of acts or omissions arising during the 12 months beginning with the payment of grant. It does not say that the exemption from liability will last for only those 12 months.

The purpose of the 12-month exemption period is to ensure that if the Secretary of State decides to stop paying grant to a body, perhaps because she considers another body to be better placed to carry out the functions or she is concerned about the way in which the body is performing its functions, then the exemption does not continue indefinitely. The body will continue to be exempt for a period of 12 months from the most recent grant payment, so covering it for activities that it may need to carry out in order to withdraw from the grant-funded activities. I do not believe that it is necessary or desirable to extend this winding-up period to three years.

Under the clause, a body or individual enjoying exemption for a thing that it does or fails to do during the exemption period remains exempt in perpetuity. There is no retrospective liability; it cannot be held liable for damages for that action simply because the exemption period has expired. That is why I do not believe that these amendments are appropriate.

On Question, amendment agreed to.

moved Amendments Nos. 16 to 19:

Page 20, line 18, after "by" insert "auditors or"

Page 20, line 20, at end insert "or any requirements of directly applicable Community legislation relating to company accounts"

Page 20, line 25, leave out "and maintaining" and insert ", maintaining or carrying out"

Page 20, line 27, at end insert—

carrying out investigations into public interest cases arising in connection with the performance of accountancy functions by members of professional accountancy bodies;

holding disciplinary hearings relating to members of such bodies following the conclusion of such investigations;

(gc) deciding whether (and, if so, what) disciplinary action should be taken against members of such bodies to whom such hearings related;

(gd) supervising the exercise by such bodies of regulatory functions in relation to their members;"

On Question, amendments agreed to.

moved Amendment No. 20:

Page 20, line 30, at end insert—

"() Any body to which the Secretary of State makes a grant under this section shall produce an annual report which shall be laid before both Houses of Parliament."

The noble Lord said: My Lords, Clause 16 allows the Secretary of State to make grants to all the bodies concerned with the making and enforcing of accounting standards. It is not clear to us, from the face of the Bill, how these grants are to be recorded and reported. It would therefore seem appropriate for the Financial Reporting Council to prepare an annual report and lay it before Parliament, detailing the grants received and the work carried out. Since the FRC supervises all the relevant bodies and it is a reporting council, the omission seems conspicuous. Why should the FRC not be required to lay an annual report before Parliament?

When the Minister replies, perhaps he could answer one other question, which I probably should have raised before. I took the trouble to print off the latest FRC annual report from its website—85 pages long, and very thorough it is, too—but nowhere can I find any mention of to whom it is responsible. Where does the FRC sit in the chain of command? Perhaps the Minister could give further details of how the Financial Reporting Council is to fulfil its task of reporting and to whom it is technically responsible. I beg to move.

My Lords, Section 729 of the Companies Act 1985 requires the Secretary of State to prepare and lay before Parliament a general annual report of matters within the Companies Acts. In addition, Schedule 13 to the Companies Act 1989 requires a body that is exercising the Secretary of State's delegated statutory functions in respect of auditors to make a report to the Secretary of State which is then laid before Parliament. Once the statutory functions are delegated to the Professional Oversight Board for Accountancy of the FRC, the POBA's report to the Secretary of State will be laid before Parliament.

However, I do not believe that it would be appropriate to make all the activities of the FRC the subject of a statutory reporting requirement. In the first place, the majority of the activities undertaken by the FRC and its boards are not statutory ones. Examples include the POBA's oversight of the regulatory activities of the major professional accountancy bodies and the AIDB's role in respect of disciplinary cases for accountants.

Similarly, the FRC is not obliged under statute to provide independent arrangements for audit standard setting, monitoring of audits or the investigation and discipline of auditors. The Bill requires the supervisory bodies for auditing to participate in independent arrangements in order to meet the new recognition criteria. It does not require the bodies to participate in particular named arrangements, although in practice we anticipate that they will comply with the Bill's requirements by following the FRC's standard setting, monitoring and disciplinary arrangements. In these circumstances, I believe it is right that the supervisory bodies, rather than the FRC, should be obliged to report on the arrangements in which they are participating.

It is right that a body that receives public funding should be publicly accountable. The FRC publishes an annual report on the exercise of its functions, and it will continue to do so. Indeed, it is required by its Articles of Association to publish an annual report,

"for the purposes of assessing and reviewing the contribution of persons concerned with"

the regulatory functions of the FRC. The FRC's annual report will, of course, continue to be publicly available on its website.

As I have explained, there are already provisions for reports on Companies Acts matters to be laid before Parliament. I do not believe that there should be yet another. The Secretary of State will—in her own report under Section 729 of the 1985 Act—make reference, where appropriate, to the FRC report. In the unlikely event that there was a matter falling within Clause 16 which should be reported on but was not covered in the FRC's report, this would be covered in the Section 729 report.

The noble Lord, Lord Hodgson, asked two questions which I hope I can answer. He asked how the FRC is accountable if it is not required to report. That was not exactly his question, but it was the intent behind it. As I have said, the FRC publishes an annual report in the exercise of its functions, and will continue to do so. Indeed, it is required by its Articles of Association to publish an annual report,

"for the purposes of assessing and reviewing the contribution of persons concerned with"

the regulatory functions of the FRC. The FRC's annual report will, as I have said, continue to be publicly available on its website. The POBA will be required to report to the Secretary of State on the exercise of any delegated statutory functions, and this report will be laid before Parliament.

The FRC and its boards have developed aims and objectives, and the boards have also developed detailed work programmes. These are published documents, against which the performance of the FRC and its boards can be assessed. In addition, the FRC will be holding annual open meetings for stakeholders. The FRC is also considering publishing in advance agendas of meetings, and notes of discussions at Council meetings, and the meetings of its individual boards, where this is appropriate. For some boards—such as the Accountancy Investigation and Discipline Board and the POBA—confidentiality considerations will, of course, preclude making notes of meetings public. The noble Lord, Lord Hodgson, also asked to whom the FRC is accountable. As I have said, the Secretary of State is responsible for matters contained in the Companies Acts. In particular, the POBA will be required to report to her on the exercise of any delegated statutory functions, and this report will be laid before Parliament.

I hope that I have managed to answer the noble Lord's questions and that he will feel able to withdraw his amendment.

My Lords, once again, I am grateful to the Minister for his barrage of information. I certainly would not wish to create a duplication of arrangements that already exist. The Minister covered the points that I was trying to make and there will be opportunities for both Houses to consider the matters of relevance in this important area. So far as responsibility for the FRC is concerned, it is split several ways: in part, it lies with the Secretary of State; in part, it lies elsewhere. I am not sure how satisfactory that is, but it has nothing to do with the annual report which my amendment concerned. I therefore beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

moved Amendments Nos. 21 to 24:

Page 20, line 35, after "established" insert "under its constitution or"

Page 20, line 37, at end insert—

""accountancy functions" means functions performed as an accountant, whether in the capacity of auditor or otherwise;

"company" means a company within the meaning of the Companies Act 1985 (c. 6);"

Page 20, line 40, at end insert—

""professional accountancy body" means—

(a) a supervisory body which is recognised for the purposes of Part 2 of the Companies Act 1989 (c. 40), or

(b) a qualifying body, as defined by section 32 of that Act, which enforces rules as to the performance of accountancy functions by its members,

and references to the members of professional accountancy bodies include persons who, although not members of such bodies, are subject to their rules in performing accountancy functions;"

"public interest cases" means matters which raise or appear to raise important issues affecting the public interest;

"regulatory functions", in relation to professional accountancy bodies, means any of the following functions—

(a) investigatory or disciplinary functions exercised by such bodies in relation to the performance by their members of accountancy functions,

(b)the setting by such bodies of standards in relation to the performance by their members of accountancy functions, and

(c) the determining by such bodies of requirements in relation to the education and training of their members;"

Page 20, line 42, at end insert—

"(5A) In their application to Scotland—

(a) subsection (2)(a) is to be read as referring only to accounting standards applying in relation to the accounts of companies or bodies (other than companies) established for the purpose of carrying on any kind of business, whether or not for profit;

(b) subsection (2)(ga) to (gc) are to be read as referring only to accountancy functions performed in relation to companies or such bodies, and

(c) subsection (2)(gd) is to be read as referring only to regulatory functions exercised in relation to the performance of such accountancy functions;

and in paragraph (a) above "business" includes the provision of benefits to members of the body concerned."

On Question, amendments agreed to.

Clause 17 [Levy to pay expenses of bodies concerned with accounting standards etc.]:

moved Amendment No. 25:

Page 21, line 34, leave out "accounts" and insert "records"

The noble Lord said: My Lords, Amendments Nos. 25, 26 and 27 are new and controversial. Clause 17 gives the Secretary of State the power to impose a levy on listed companies and members of the consultative committee of accountancy bodies to ensure that the FRC has security of funding. The Institute of Chartered Accountants has brought to our attention the potentially confusing terminology in subsections (7) and (8). They specify that the recipients must keep accounts of the amounts of levy received and prepare statements of such amounts, which must be certified by the persons appointed by the Secretary of State. The institute is concerned about the use of the word "accounts" in this context. It feels that it could be construed too narrowly and be understood to imply that proper recording in some kind of levy receipt ledger is necessary, whereas the Bill seems really to require a report that the body has kept proper records of the levy received and that a statement has been accurately extracted from those records in a way that complies with the regulations. The institute argues that the term "records" might better reflect the objectives of Clause 17(7) and (8). I beg to move.

My Lords, as the House will know, I share the desire for transparency and accountability on the part of the regulator. I am not persuaded, however, that the amendments are necessary to achieve that aim.

The purpose of Clause 17(7) and (8) is to ensure that the recipient of the levy, if we have to impose one—noble Lords will recall that we very much hope that this will not be necessary—must account openly for the sums received and the use to which those sums are put. That seems right and proper. The precise form and content of this information will be set out in the regulations imposing the levy and the House will have an opportunity to debate the content of those regulations. The amendments would alter the scope of the information that the specified recipient of the levy is obliged to provide. They would remove the requirement for the recipient to keep and prepare proper accounts in relation to the levy. Instead, the recipient would be required to keep proper records and prepare a statement, but not a statement of account. I do not consider that to be necessary or desirable. It is important that the recipient keeps and prepares accounts in relation to any sum received through the levy.

My noble friend Lord Evans has already described the extensive arrangements that the FRC is putting in place to report publicly on its activities. I shall not repeat that now, but I remind noble Lords that the FRC will need to report through the Secretary of State to Parliament on the exercise of statutory functions in relation to the recognition of audit supervisory bodies. The FRC's annual report will be available on its website. Those arrangements, together with the requirements set out in Clause 17(7) and (8), are sufficient to ensure that there is transparency about the use to which any levy is put and the value for money that that represents. I should be very reluctant to impose additional reporting requirements on the regulator. After all, we want it to spend its time regulating, not writing endless similar reports.

My Lords, as I said when I was moving the amendment, the matter was raised with us by the Institute of Chartered Accountants. Far be it from me, as a non-accountant, to try to argue the difference between accounts and records. I thank the Minister for his reply and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 26 and 27 not moved.]

moved Amendment No. 28:

After Clause 17, insert the following new clause—

moved Amendment No. 31:

Page 22, line 24, at end insert—

"() Any information or documents under subsection (3) must relate to the company specified by the Secretary of State under subsection (1)."

The noble Lord said: My Lords, we now come to investigation powers. The reply that was given by the noble Lord, Lord Sainsbury, to our earlier Amendment No. 91 in Grand Committee was unsatisfactory. He said that as a result of the Secretary of State's power to appoint investigators having to be "in relation to a company",

"any information or documents requested by the investigators will need to be relevant to the concern which prompted the Secretary of State to appoint investigators".

Our expert evidence suggests that the problem with that supposed limit is that no one in practice will ever know whether the information or documents being requested from him fall within the permitted scope. That is because the Secretary of State is not required to publish, and, in actual cases, does not publish, the concerns which have prompted the appointment of the investigators, but the reality is that the language of proposed Section 447 contains no limit or control over the information or documents which investigators, once appointed, may request.

The noble Lord, Lord Sainsbury, gave two examples of cases in which he believed that the proposed amendment would unduly limit the power to obtain information and documents. He said:

"For example, it might be necessary to investigate a company operating a franchise arrangement which has made false claims about the franchises that it has sold. The investigator will want to be able to require documents and information from franchisees, to discover whether the company's sale forecast or the claims that it is making are correct. We doubt that such information could be said to relate to the company under investigation, though it would clearly be highly relevant to the investigation of the company.

"Another example might be business plans or objections drawn up before a company was formed, identifying the thinking of the company's promoters. In examples such as these, we were not convinced that a test such as that proposed would be wide enough to give investigators access to all the relevant information".—[Official Report, 22/3/04; GC 251–52.]

Our legal advice is that each of those cases would fall within the power as information would relate to the relevant company. It seems entirely balanced and justified that, when requiring documents and information from a person, the Secretary of State's power should be limited to information that relates to the company in question. It is otherwise unjustifiably open-ended. I look forward to hearing from the Minister on why the Government believe that the Secretary of State's power should be so unrestricted in those circumstances, given the practical examples of the way in which the system currently operates. I beg to move.

My Lords, as we have now moved to the investigations section of the Bill, I think it might be helpful if I briefly set the debate in context.

Every year, the DTI's Companies Investigation Branch carries out around 350 investigations. The number of companies affected represents less than 0.04 per cent of registered companies, but investigations have uncovered some pretty deplorable practices, as well as some that are simply inept or fall below statutory requirements. The consequences of these practices can have a damaging effect on those who come into contact with them, often inflicting real hardship.

The restrictions on disclosure of information prevent me from giving noble Lords details of specific investigations, but the categories of misconduct uncovered can include fraudulent trading and illegal pyramid-selling schemes. Noble Lords will be familiar with the kind of thing from descriptions given on the letters pages and in consumer columns in newspapers. It is probably illustrative enough for me to say that in 2002–03, following DTI investigations, 80 companies were wound up by the courts, 17 directors were disqualified, and seven individuals were convicted of offences, receiving penalties including custodial sentences, community punishment orders and fines. That does not include cases reported by DTI to the Serious Fraud Office, the police and other prosecuting authorities.

Noble Lords will appreciate from those figures that the activities of some companies fall well below the standards that one would expect. It is those companies which will be the prime focus for the DTI's attention—not the 99.9 per cent of companies which are carrying on business in a well run fashion. I am sure the noble Lord will agree with me that it is crucial that we have investigators who can effectively target the more deplorable practices and protect consumers and legitimate businesses.

The noble Lord's amendment is concerned with the range of documents and information that an investigator will be able to require under new Section 447. As I explained in Grand Committee, new Section 447(1) already ensures that any information or documents requested by investigators will need to be relevant to the concern which prompted the Secretary of State to appoint them. It seems right to us to set the parameters of what may be required by reference to the parameters of the investigation itself. However, the noble Lord, Lord Hodgson, wants to restrict the investigator to being able to require only information or documents which "relate to the company". That leaves considerable room for argument about what that might cover and offers potential for delay by companies and others who are determined to be unco-operative. In addition, we do not believe that this phrase would be wide enough to capture everything that is relevant to an investigation.

In the modern business environment, few companies operate in isolation and it can be the case that complex trading relationships between different types of organisation are used as a deliberate smokescreen to disguise misconduct. It is vital, therefore, that the investigator can examine the company's relationships with others and we are unconvinced that some of the information sought could always be said to "relate to the company". For example, we can envisage circumstances in which it might be necessary to require information about the functions performed by agents marketing a company's products, or by bodies carrying out administration and banking functions for those agents.

It may also sometimes be the case that relevant information includes papers that are internal to firms of auditors or lawyers and that are not covered by legal professional privilege. However, I do not see why this should be regarded as unreasonable. Legally privileged material will continue to be protected from disclosure, so I struggle to see why auditors or lawyers should find it difficult to provide information which may assist in uncovering misconduct. I therefore ask the noble Lord to withdraw this amendment.

My Lords, I am disappointed with the Minister's response. Of course, we understand about the deplorable behaviour of certain companies, but that is not the objective behind the amendment, which would narrow the Secretary of State's powers.

After the examples that the Minister gave in Grand Committee of why the provision was needed, we have now produced arguments and evidence as to why his arguments were not right. I hasten to add that those arguments and evidence have come from legal experts, not from me. It would have been possible to collect all the documentary evidence required to catch the malefactors, even with our amendment included in the Bill.

I am not at all sure that we are not allowing the Secretary of State to have a shotgun approach. I understand the principle of the rifle, and am quite keen on it. But the provisions give the Secretary of State the potential to spray the bullets around and hope that a target is hit somewhere.

I should like to read again what the Minister says, but the provision seems to give too much power to investigators. I am not in any way saying that we should not get after the villains and the consumer press to which he referred. I accept all those arguments. I am not sure that we have got the balance quite right but, in the mean time, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

moved Amendment No. 32:

Page 23, line 21, leave out ",(4)"

The noble Lord said: My Lords, it will be remembered that in Grand Committee the noble Lord, Lord Hodgson, raised the question of treatment of documents or information covered by legal professional privilege. I assured him that, although we are replacing Section 447 of the Act, our intention is to preserve, and indeed to expand, the existing principle. This is that neither the Secretary of State nor investigators can use the powers in that section to compel the disclosure of documents which could be withheld in civil proceedings on grounds of legal professional privilege.

I assure him again now that we are not changing that principle with this technical amendment to Clause 19. We have simply reached the conclusion that new Section 448A(4) has no effect and is technically redundant because of new Section 448A(2)(b). Clause 19 provides immunity from liability for breach of confidence for anyone who, in breach of a contractual or other duty of confidence, provides relevant information to the Secretary of State in specific circumstances. New Section 448A(2)(b) has the effect that this immunity is not conferred where a person discloses information which he or she would be entitled to withhold in an investigation.

As a person would, in an investigation, be entitled to withhold legally privileged information under new Section 452(1) or (2), it follows that no immunity would be conferred in any event if a person disclosed legally privileged information to the Secretary of State under new Section 448A. In other words, legal professional privilege is already fully protected under new Section 448A(2)(b), and subsection (4) achieves nothing. Subsection (4) should therefore be deleted, as should the reference to it in subsection (2)(e). It is a barnacle that we are removing. I beg to move.

On Question, amendment agreed to.

moved Amendment No. 33:

Page 23, leave out lines 24 to 30.

moved Amendment No. 34:

Page 24, line 7, leave out "thinks" and insert "reasonably believes"

The noble Lord said: My Lords, the amendment takes us back to the exercise of power by investigators. It relates to the power to enter and remain on premises, which is quite draconian. Amendments Nos. 34 and 37 would replace the expression "thinks" with "reasonably believes". That is to say, an inspector or investigator may act if,

"he thinks that to do so will materially assist him".

He may also remain on premises if he thinks it necessary. We want to replace the word "thinks" with "reasonably believes".

In Grand Committee, the Minister commented that the power to require access would not be available if,

"no reasonable person in the inspector's or investigator's position could think that to require access to the premises in question will advance the investigation".—[Official Report, 22/03/04; col. GC 258.]

He seemed to be suggesting, very politely, that the amendment would be pointless, as "thinks" means the same as "reasonably believes".

Our legal advice is, with the greatest possible respect, that the Minister is wrong in that conclusion. It can be doubted whether the two expressions have the same meaning. It is one thing to show that no reasonable person could believe access to be necessary; it is a different thing to show that any reasonable person would believe access to be necessary.

The existing formulation of words using the expression "thinks" would permit access provided that some reasonable person could think access to be necessary, possibly even that one person could think access to be necessary. The amended formulation that we would like to see inserted in the Bill would permit the court to test the requirement for access by a higher test, considering not only whether it was wholly unreasonable to require access but of positively having to consider whether the requirement was reasonable. We believe that this further test is necessary, as the power to enter and remain on an individual's premises is sufficiently intrusive to merit the need for a fuller test to gain access. I beg to move.

My Lords, these amendments concern the power to enter and remain on premises and the basis on which an inspector or investigator may choose to use the power. We have used the word "thinks" so that an inspector or investigator may act if he thinks that to do so will materially assist him in the exercise of his functions. The noble Lord, Lord Hodgson, prefers the phrase "reasonably believes".

We see no difference in substance between "thinks" and "reasonably believes" and see no advantage to the phrase "reasonably believes". Using the word "thinks" does not give an investigator or inspector carte blanche in using the power. He will be able to act only if a reasonable person would share his view that it would materially assist the investigation. He must have reasonable grounds for what he thinks. Moreover, he will have to have been specifically authorised to use the power by the Secretary of State. Having exercised the power to enter premises, the investigator or inspector will be able to remain there only for as long as a reasonable person would consider necessary. He must have reasonable grounds for his view about how long the necessary period is. In this context, I do not see what additional protection would be afforded to the occupier by using the phrase "reasonably believes" as opposed to "thinks". I hope noble Lords will agree that we should prefer drafting which uses plain language and avoids unnecessary words. We are being consistent on this, we are using one word instead of two throughout and noble Lords will have to live with that. In my view, the use of the word "thinks" is very much to be preferred to the use of "reasonably believes". There are a number of potential variations on the latter; for example, "believes on reasonable grounds", "has reasonable grounds to believe" or "reasonably considers". Effectively they all mean the same thing and "thinks" encapsulates them all. I ask the noble Lord to withdraw the amendment.

My Lords, I think that I am right in saying that the previous formulation of words in the Companies Act used "reasonably believes" in respect of these matters. We have shifted from what was "reasonably believes" to "thinks". I do not have the sections of the Act in front of me, but I think that that is the case. I believe that the phrase "reasonably believes" is hallowed by past use.

I think that this is a serious matter. It is all very well us calmly standing here on a late afternoon in July but we are talking about the power to enter and remain on premises. This is not an issue to be passed over lightly. The external advice that we have received is that we ought to test the requirement for access by a higher test—a test not only of whether it is wholly unreasonable to require access but positively of having to consider whether the requirement was reasonable. We have had one crack at this part of the Bill in the earlier set of amendments that we withdrew. We shall come in a minute to another set of amendments about hours. I wish to test the opinion of the House on this issue. 5.24 p.m.

On Question, Whether the said amendment (No. 34) shall be agreed to?

Their Lordships divided: Contents, 77; Not-Contents, 160.