House of Commons Hansard Debates for 26 Oct 1989

New Clause 51

Amendment of Financial Services Act 1986

In Chapter V of part 1 of the Financial Services Act 1986 (conduct of investment business) after section 48(2)(1) insert

"(m) requiring a person to whom the rules apply to register in a specified manner all individuals employed by him, or by his appointed representative, carrying on or holding themselves out as carrying on investment business of a kind specified

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in the rules;

(n) establishing conditions for entry of an individual in a register established in pursuance of subsection (m) above and in particular specified tests of competence or educational qualification."-- [Sir William Clark.]

Brought up, and read the First time.

12.30 am

Sir William Clark (Croydon, South) : I beg to move, That the clause be read a Second time.

I shall not detain the House for long. The new clause has two objectives. It seeks first that the Securities and Investments Board should have the power to maintain a register of all those in the financial advising world, and secondly, that the SIB should be able to lay down conditions as to how and when those names should be placed on the register. That could be by a competence test or by educational qualification. The SIB may be inhibited from taking the lead, so I suggest that we should alter the Companies Bill to remind the SIB that it can take such a lead and then it will probably do so.

The background to the new clause, as my hon. Friend will recollect, is that during the early stages of the Financial Services Bill, the SIB and the Marketing of Investments Board organising committee petitioned the Government to include a competence test, but that was refused. Now that FIMBRA is embarking on competence tests and the SIB is also considering its position, the time has come to provide the powers which could be used to set a standard. The designated rules could be used a a vehicle for requiring all appropriate self-regulatory organisations and registered professional bodies to introduce registers and tests. If the Minister cannot give us a categorical assurance tonight, or if the wording of the new clause is somehow defective, I hope that he will give the new clause sympathetic consideration.

Mr. Redwood : I have listened with interest to the arguments presented by my hon. Friend the Member for Croydon, South (Sir W. Clark) in presenting new clause 51, but I believe that the Bill has enough safeguards for investors already in place. The House should remember the substantial degree of control over individuals employed in investment business by the existing powers in the Financial Services Act.

Authorised firms have a clear and direct responsibility for ensuring that their employees are properly selected, trained and supervised. They are also responsible for ensuring that their employees comply with the full panoply of conduct of business rules or risk loss of authorisation or other sanctions. Large firms in which staff tend to specialise or which undertake a variety of activities have to ensure that the only members of their staff who advise the public on investments are those who are fully competent to do so.

The Act provides two other powers. First is the power to obtain information from authorised businesses, self-regulatory organisations and other recognised bodies. That enables the SIB to obtain such information on individuals and other matters as it deems neccessary for investor protection. The recognised bodies are able to obtain information from their members under similar provisions in their own rule books.

The second relevant power is contained in section 59 of the Financial Services Act 1986, under which the SIB can seek an order banning an individual from being employed

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in connection with investment business. A list can therefore be kept of all individuals who appear not to be fit and proper persons to engage in such business.

Given the weight that the Act places on the authorisation of businesses and not individuals, and given the array of powers available to ensure that those businesses employ only individuals who are properly selected and trained, I cannot see the advantage to be gained from requiring specific tests of competence.

Passing such a test would never guarantee that an individual was incompetent at that time or in the future any more than the absence of a qualification could be held to disqualify someone with a lifetime's experience who had been giving good service.

I am afraid that I am not convinced that the limited benefits of the additional powers proposed by my hon. Friend would outweigh the burdens that they would place on business.

In the light of that, I hope that my hon. Friend will withdraw new clause 51.

Questions put and negatived.

Clause 177

Statements of Principle

Mr. Redwood : I beg to move amendment No. 249, in page 180, line 17, after not' insert of itself'.

The amendment clarifies the rights of action of investors in the event that the breach of a principle promulgated by the SIB also involves a breach of the common law.

It is clear that some matters that may be coverred by principles might already have legal consequences under the common law, such as actions for negligence or breach of trust. However, the principles stated in new section 47A(3) are not to give rise to any right of action on the part of an investor or other person affected, nor to invalidate any transaction. It has been pointed out that the clause as currently drafted might be held to extinguish such rights as already existed. That was not the intention, so the amendment makes it clear that any rights that an investor might have at common law in respect of matters covered by these principles are not extinguished. Amendment agreed to.

ic Sir William Clark : I beg to move amendment No. 289, in, page 181, line 2, after any person' insert,

subject to the approval of the Secretary of State'.

Mr. Deputy Speaker (Sir Paul Dean) : With this, it will be convenient to consider amendment No. 290, in page 181, line 13 after authority', insert

and the Secretary of State'.

Sir William Clark : It is essential that recognised professional bodies avoid any charge of second-class regulation. The misguided attempt to relieve RPBs of the responsibility of complying with the core rules laid down by the SIB give weight to that charge. I know that RPBs are bound by statute and royal charters, but they must use their best endeavours to comply with the standards sensibly laid down and adopted by self-regulating organisations, and the amendments aim to achieve that.

We must take care, because it would be illogical if some financial advisers were subject to some rules while others were subject to other rules. I hope that my hon. Friend the

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Minister will consider the amendments sympathetically, because I believe that the Government should do something about this.

Mr. Redwood : I recognise the genuine concerns that have persuaded my hon. Friend to move the amendments, but I hope to be able to convince him that the action that we propose will meet his concerns. New section 47A of the Financial Services Act 1986 will give the Secretary of State a power, which it is intended should be transferred to the SIB, to promulgate statements of principle on the conduct required of investment businesses. A breach of such a statement of principle could lead to disciplinary action. New section 47B gives the SIB and SROs a limited power to waive the application of the principles in a particular case if its application would be unduly onerous and if it could be waived without undue risk to investors.

The purpose of the clause is to provide more flexibility in the operation of the Financial Services Act by allowing regulators scope to make provision, the legal effect of which is appropriate for the mischief that they are seeking to control. The clause does not set out the level of detail for which the statements of principle should provide. Under this power, it would be possible for the SIB to make statements of principle which deal in some detail with matters that are currently dealt with in rules under section 48.

If the powers were to be used in that way, I am sure that my hon. Friend would agree that there should be appropriate flexibility to provide for waivers in the closely defined circumstances set out in the clause. However, the board has said that it does not, for the foreseeable future, propose to use the power in this way. It proposes to use it to promulgate up to 12 general principles which are of such a fundamental nature that the use of the waiver would not be appropriate in any circumstances. In the light of that, the Government have decided not to commence new section 47B while the principles take that form.

I hope that my hon. Friend agrees that this is a satisfactory way of dealing with the important problem which he has raised. I understand that the SIB is content with this approach, which is important. I should be grateful if my hon. Friend would withdraw his amendment.

Sir William Clark : Given that reply, for which I am grateful, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 178

Restriction of right to bring action for contravention of rules, regulations, &c.

Mr. Redwood : I beg to move amendment No. 251, in page 182, line 38, leave out from body),' to end of line 39 and insert

after "paragraphs 2 to 25" insert "(except paragraph 22AA)".'.

Mr. Deputy Speaker (Sir Paul Dean) : With this, it will be convenient to take amendment No. 254, in schedule 21, page 300, line 43, after 22' insert

(and after the paragraph inserted by section 178(3))'.

Mr. Redwood : The amendments are purely technical. I commend them to the House.

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Amendment agreed to.

Clause 179

Application of designated rules and regulations to members of self-regulating organisations

Mr. Redwood : I beg to move amendment No. 215A, in page 183, line 14, at end insert--

(3A) It may be provided that, to such extent as may be specified, the designated rules or regulations may not be modified or waived (under section 63B below or section 50) in relation to a member of a recognised self-regulating organisation.

Where such provision is made any modification or waiver previously granted shall cease to have effect, subject to any transitional provision or saving contained in the rules or regulations.'.

Mr. Deputy Speaker : With this it will be convenient to take amendment No. 255, in schedule 21, page 301, line 7, at end insert-- (3A) It may be provided that, to such extent as may be specified, the designated rules or regulations may not be modified or waived (under paragraph 22B below or section 50) in relation to a member society.

Where such provision is made any modification or waiver previously granted shall cease to have effect, subject to any transitional provision or saving contained in the rules or regulations.'.

Mr Redwood : The amendments are concerned with the extent to which rules which have been designated by the SIB under new section 63A may be waived or modified by an SRO. The Government think that there should be a mechanism by which the majority of these rules may be waived or modified for individual members of the SROs. These rules would be very different from the statements of principle made under new section 47A.

Without the flexibility represented by the power to waive or modify, it would be difficult to make effective use of the power to draft rules which might be designated. It may be appropriate at this stage to stress the important role that the SROs play and will continue to play in the structure established by the Financial Services Act. It is only these organisations that have the experience necessary to make the detailed rules appropriate to their members and to monitor and enforce compliance with those rules.

It is also clear, however, that the unconstrained use of waivers might have the potential to undermine the intention behind this new power, which is to provide a common core of rules which apply essentialy to all SRO members.

I believe that the SROs can be relied upon to use their power to waive or modify designated rules in a responsible way, but I am also conscious that there are likely to be some designated rules to which any modification or waiver might be inappropriate in principle. The amendments recognise that distinction by providing the SIB with the power to specify that certain rules designated under new section 63A may not be waived or modified by an SRO in any circumstances or only in circumstances set out in the rules or regulations.

I stress that I and, I understand, the SIB see this very much as a reserve power. I would expect that, provided SROs exercised their power to waive designated rules with

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moderation, there would be no need for the SIB to exercise the power that the amendment gives it. On that basis, I commend the amendment to the House.

Mr. John Garrett : In Committee, we in general opposed the power to waive rules given to SROs, and the amendments seem to reverse the Government's position. They provide that to such an extent as may be specified, presumably by the SIB, the designated rules or regulations may not be modified or waived in relation to a member of a recognised self- regulating profession. Interestingly, we understood from the SIB that the power of waive provisions came as a surprise to it. It was not particularly keen on them. We would like the Minister to say whether what I have described is true and that this is a significant change of position by the Government, in which case it is welcome.

Mr. Tim Smith : I received a note from the Securities Association about the amendment. It was worried that the amendment would introduce an unfortunate degree of inflexibility into the system. Will my hon. Friend the Minister confirm that this is a reserve power which will be used only in cases of abuse by SROs ? That reassurance will probably meet the association's concerns.

12.45 am

Mr. Cousins : What proposals do the Government have for monitoring these proposals ? There is now the possibility of some choice of regulatory system. The creditability of the mixed economy regulation that the Minister is proposing depends on there not being regulatory arbitrage. The proposals may go some way to undermine the clarity of the system. That may be acceptable, but does the Minister propose to put in place a monitoring of the system by the SIB, some other agency or even the Department, to ensure that abuses do not grow up from the ability to choose the regulatory mechanism under which one operates ?

Mr. Redwood : I have explained the purposes behind the amendments. They reflect the debate in Committee and the response to the consultations that my officials have undertaken during the past few months. I hope that the hon. Member for Norwich, South (Mr. Garrett) welcomes it on the basis that I have described.

I must tell my hon. Friend the Member for Beaconsfield (Mr. Smith) that I spelled it out carefully, and it is on the basis which I described that it goes forward for those special circumstances which I outlined.

The hon. Member for Newcastle upon Tyne, Central (Mr. Cousins) asked about the monitoring changes and whether there could be choice between regulators in a way which could reduce the protection to investors and other users of these financial markets. I do not think that that is possible, because all these SROs and practitioner bodies have to meet the adequacy test. That is the underlying guarantee concerning the protection offered.

Amendment agreed to.

Clause 188

Standard of protection for investors

Mr. Tim Smith : I beg to move amendment No. 308, in page 190, line 31, at end insert

such rules taken together with the general professional rules of the body which apply to all kinds of business undertaken

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by its members must provide their clients with no less effective protection than that provided for the same purposes by the rules of self-regulating organisations under this Act.'.

The core rules are not to apply to the recognised professional bodies. We discussed this issue in Committee, where I proposed an amendment similar to, but not the same as, this one. The amendment tries to ensure that, even though the core rules are not to apply, investors who deal with members of recognised professional bodies will get no less effective protection than that afforded to those who invest through members of SROs.

In response to the amendment that I proposed in Committee, my hon. Friend the Minister's predecessor said :

"There is a difficulty with amendment (a). It risks locking the recognition tests for professional bodies to their investment business rules. That is unnecessary because in some respects--for example, solicitors and clients' money--adequate protection can be achieved by relying on the general rules of the body."-- [Official Report, Standing Committee D, 29 June 1989 ; c. 643.]

I have redrafted my amendment to take his point into account. The amendment now refers not just to the investment business rules of the recognised professional body, but to the general rules that apply to all the business that the member of an RPB undertakes. For a solicitor who is a member of the Law Society, there are client account rules which apply to all his business. Now that I have modified my amendment to take account of the objection of my hon. Friend's predecessor, I hope that it will be acceptable.

Mr Redwood : I am grateful to my hon. Friend the Member for Beaconsfield (Mr Smith) for recasting his amendment, but I am afraid that I still have problems with it. I hope to convince him that the effect that he hopes to achieve can already be achieved by the Bill. The Government have often made it clear that it is not intended that regulation of our recognised professional bodies should or could be regarded as a soft option. That is why, in the Bill, as in the original Act, the test that self-regulating organisations and professional bodies have to satisfy is, when it comes to the protection provided to investors, identical--which is what I said in response to the previous debate. When these new provisions come into force, SROs and RPBs will have to satisfy the SIB that their rules provide an adequate level of investor protection. They will not all achieve that level of investor protection in exactly the same way. It is one of the main strengths of a practitioner-based system that, within the overall requirement of providing adequate protection for investors--which is what the debate is about--it is for the regulator concerned to devise the best way of regulating its members. There is no compromise on the level of investor protection. In every case, the SIB will have to be satisfied that it is adequate. My hon. Friend's amendment could turn out to be not only unnecessary, but harmful.

Mr. Tim Smith : Is there a parity between all RPBs and the SROs in terms of admission to the body concerned and, therefore, competence to give investment advice? That was a point raised in Committee.

Mr. Redwood : As I have just explained, the bottom line is what kind of protection is offered to investors. The adequacy test is the same for both categories. There are different routes to achieve that.

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The amendment could be difficult. My hon. Friend will recall that one reason why we are amending the recognition test for the SROs and RPBs is that the original equivalence test was widely interpreted as requiring a close textual comparison of different sets of rules, rather than a comparison of their effects and we should be interested in the effects, I fear that, by reintroducing a formal comparison between the rules of an SRO and the rules of an RPB, the amendment would lead to a similar approach being adopted in the future. I urge the House to reject the amendment.

Mr. Tim Smith : I am disappointed, and it is noticeable that the Government have changed their ground. I sought to cater for the objection put up to my original amendment, yet we now have a completely different objection, which was not even mentioned in Committee. As three months have passed since that debate, I thought that I would ask a few of the RPBs whether they would mind if the core rules were applied to them. The other day, I went to the Insurance Brokers Registration Council, about which I was fairly critical in Committee. The council members are clearly not the people who are responsible for this failure of the core rules to apply to the RPBs. The council, which is an RPB, told me that it would be happy for the core rules to apply to its members. Will my hon. Friend the Minister tell me who objects?

Amendment negatived.

Clause 191

Consequential amendments and delegation of functions on commencement

Mr. Redwood : I beg to move Government amendment No. 253, in page 193, line 16, leave out subsection (4) and insert--

(4) References in the Financial Services Act 1986 to a delegation order made under section 114 of that Act or to a transfer order made under paragraph 28 of Schedule 11 to that Act include an order made containing any such provision as is authorised by subsection (2) or (3).'.

The amendment makes a technical change, ensuring that the consequences of the delegation to the SIB of the new powers introduced by the Bill may be dealt with in the same way as under the Financial Services Act 1986. I commend it to the House.

Amendment agreed to.

Schedule 21

Consequential Amendments of the Financial Services Act 1986

Mr. Redwood : I beg to move amendment No. 307, in page 298, line 6, leave out paragraph 28 and insert--

28.--(1) Paragraph 4 (requirements for recognition of self-regulating organisation for friendly societies) is amended as follows.

(2) In sub-paragraph (4)--

((a) in paragraph (a) for "22" substitute "22C", and

(b) omit paragraph (b).

(3) In sub-paragraph (5) for "22" substitute "22C".'.

This is another purely technical amendment which amends an erroneous cross- reference in the schedule.

Amendment agreed to.

Amendments made: No. 254, in page 300, line 43, after 22' insert (and after the paragraph inserted by section 178(3))'.

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No. 255, in page 301, line 7, at end insert --

(3A) It may be provided that, to such extent as may be specified, the designated rules or regulations may not be modified or waived (under paragraph 22B below or section 50) in relation to a member society.

Where such provision is made any modification or waiver previouly granted shall cease to have effect, subject to any transitional provision or saving contained in the rules or regulations.'.-- [Mr. Redwood.]

New Clause 43

Provisions extending to Northern Ireland

.--(1) The provisions of this Act extend to Northern Ireland so far as they amend, or provide for the amendment of, an enactment which so extends.

(2) So far as any provision of this Act amends the Companies Act 1985 or the Insolvency Act 1986, its application to companies registered or incorporated in Northern Ireland is subject to section 745(1) of the Companies Act 1985 or section 441(2) of the Insolvency Act 1986, as the case may be.

(3) In Part III (investigations and powers to obtain information), sections 78 to 87 (powers exercisable to assist overseas regulatory authorities) extend to Northern Ireland.

(4) Part VI (mergers and related matters) extends to Northern Ireland.

(5) In Part VII (financial markets and insolvency) the following provisions extend to Northern Ireland--

(a) sections 144 and 145 (introductory provisions and definition of "market contract"),

(b) section 146 and Schedule 20 (additional requirements for recognition of investment exchange or clearing house),

(c) sections 147, 150, 152, ( Powers of Secretary of State to give directions), (Application to determine whether default proceedings to be taken), 157 and 158 (provisions relating to recognised investment exchanges and clearing houses),

(d) sections 159, ( Certain money market institutions) and (Settlement arrangements provided by the Bank of England) (power to extend provisions to other financial markets),

(e) section 171 (indemnity for certain acts), and

(f) sections (Power to make further provision by regulations), 172, (Construction of references to parties to market contracts) and 173 to 176 (supplementary provisions).

(6) Part VIII (amendments of the Financial Services Act 1986) extends to Northern Ireland.

Part IX (transfer of securities) extends to Northern Ireland. "Subject to any Order made after the passing of this Act by virtue of section 3(1)(a) of the Northern Ireland Constitution Act 1973, the transfer of securities shall not be a transferred matter for the purposes of that Act but shall for the purposes of section 3(2) be treated as specified in Schedule 3 to that Act.".

(8) In Part X (miscellaneous and general provisions), this section, section ( Making of corresponding provision for Northern Ireland ), 201 and 202 (general provisions) extend to Northern Ireland. (9) Except as mentioned above, the provisions of this Act do not extend to Northern Ireland.'.-- [Mr. Redwood.]

Brought up, and read the First time.

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