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where an activity in terms of the directive is carried out ? For example, is a money-lending activity carried out where the agreement is made or where the money is passed over ?Those matters may be crucial in the event of a dispute. How will the regulators know what they still need to regulate, for example, where an EC institution provides commodities futures business ? Importantly, do the United Kingdom regulators have the resources to look after those problems ? Although the Bank of England has had many successes, we know that it has had problems with BCCI. We also know that there are problems with the SIB's self-regulatory organisation. I doubt, for instance, that the Financial Intermediaries, Managers and Brokers Regulatory Association could possibly cope with those new obligations because it is already struggling. Is the Minister confident that this country, let alone other EC member states, has sufficient powers to deal with the problems facing us ?
How will prudential supervision be exercised with head offices in one state but much of the business in another ? The Minister said that the structure exists to deal with that, but what will happen in practice ? Is not that where the whole ethos of self-regulation breaks down ? Self-regulation depends on people knowing the business and when to blow the whistle. It is difficult enough to do that in one city, let alone several EC countries. The idea that the industry will know what is going on in every corner of Europe and be able to give a nod to the regulator is patently ludicrous.
The scope for abuse--for another BCCI, another home income plan failure or pension scandal--is immense unless there is active, efficient regulation within the United Kingdom and the EC. There is a substantial risk that the supervisory systems will be harmonised down to the most basic level, not up the highest level. If I am wrong, the Minister will tell us what he intends to do to ensure that that does not happen.
The question of compensation is important. I am glad to hear that the deposit protection directive is under way, but sorry to hear that the investor protection measures are some way down the line. Schemes throughout the EC differ greatly. Here our investor compensation scheme under the Financial Services Act 1986 is not working well. Again, I cite the home income plan problem. However, if self-regulation is to continue, it is important that the compensation schemes work, because compensation is one of the best ways to ensure that self-regulation works.
We shall continue to see banks and institutions with British names owned elsewhere in the EC. I hope that we shall see the same thing happening with British firms owning EC institutions. It is all to the good, provided that they are properly regulated. Legislation to set up a regulatory system with teeth is good for the consumer, efficient for the industry, and vital for the good name of the City. Good regulation is a good selling point and will ensure the sale of good quality products.
We have a justifiable lead in providing banking and financial services and it is vital that the directive does not tempt a lowering of standards in the name of harmonisation. I cannot say that I am optimistic. Although the Minister is tempted to throw in the towel about the argument at home, I hope that the Government have the stomach to continue the fight for high standards in Europe. Above all, we need a clear statement of what the Government intend to do at the next stage to ensure that the framework in the directive is built upon, so that
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the interests of investors and depositors, and the reputation of those institutions, are maintained at a high standard.7.48 pm
Mr. Terence L. Higgins (Worthing) : I shall not detain the House for more than a few moments. We have a massive document before us and I could raise many points arising from its wording. However, there would be little point in doing so, because we must either take it or leave it. We have no way to amend the vast amount of wording, although much of it relates to other legislation to which the House has paid considerable attention in the past. That is not a satisfactory position. As we do not have time to examine the document in detail, I shall simply make one or two technical points. On page five the basis on which the regulations are made is said to be the fact that
"the Treasury are a government department designated (a) for the purposes of section 2(2) of the European Communities Act 1972". I greatly welcome the fact that my hon. Friend the Minister has taken over responsibility for financial matters, because I always thought that the split between the Department of Trade and Industry and the Treasury was not a happy one. Various matters tend to fall, if I may use the expression, between the two stools.
The regulations cover several matters relating to the Insurance Companies Act 1982 which I understand have not been transferred from the Department of Trade and Industry to my hon. Friend the Minister. The basis on which the order is made refers to the Treasury. I have forgotten why that Act refers to the Treasury when all other cases refer to the Secretary of State being a designated Minister. Suddenly, when we get to page 58 we find that, like the smile on the face of the Cheshire cat after it has departed, there is reference to a Secretary of State having power to deal with such matters. It is not clear why that does not appear at the beginning of the authority for making such regulations. Generally speaking, it does not seem to be a satisfactory way to proceed.
My second point is that we are renowned for regularly implementing European Community directives by producing such regulations. One feels bound to say that other countries seem to be much slower at implementing directives. That can have a serious adverse affect on British companies in the interim period. I think that we should have a set rule that, whenever we have a specific directive to implement, we should be told in the clearest terms the extent to which other countries in the EC have already taken such action. Perhaps my hon. Friend can explain the position. In many instances I think that we go ahead of the game, which has an adverse effect on British companies. Given what I have said about the inability to amend such documents, I am worried that there is a tendency for regulations of this sort, which implement a particular directive, to be used to extend legislation on other matters beyond the strict scope of the directive. If that is so, it is done without our having the ability to amend it. I have a suspicion--I put it no higher than that--that some of the regulations are being used to make changes to our law which, on the strict interpretation of the directive, are not necessary, but which would otherwise need to be put before the House in a form of amendable legislation.
Those are technical issues. None the less, in terms of the House getting a grip on what is happening, not merely in
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the European legislation, but in the powers that go beyond the requirements of European directives, the issues are important. I take the opportunity to bring those matters to the attention of the House. Perhaps the various bodies in the House could give further consideration to whether possible abuses of this sort--I am not saying that it is so in this case ; my hon. Friend will tell me whether it is so--can be avoided.7.54 pm
Mr. A. J. Beith (Berwick-upon-Tweed) : The final remark of the right hon. Member for Worthing (Mr. Higgins) echoed a theme which the Prime Minister took up on other aspects of Community legislation relating to the environment and health. Certainly, from my experience, it seems that there are times when those in the United Kingdom who should be implementing the regulations seem to use them to ride other hobby horses which go far beyond the original intention. It would be welcomed if the Government examined the matter generally. The Government should do something to put the genuine activities of the Community and the Commission, such as the single market, in their proper context and see them for what they are, not cause them to be complained about because of other things that have subsequently been added to them. That is a sensible suggestion which the Government may care to examine.
Many people will be disappointed to learn that the second banking directive is not a directive to British banks to pass on interest rate reductions to their customers, to have a sensible long-term policy towards small business and to stop imposing charges on customers without telling them in advance that they are doing so. We must break the sad news to our constituents that the second banking directive is of a different character. Nevertheless, it is important to them because it is necessary to ensure that we have adequate banking supervision in the future and that banking and financial institutions and financial services can take advantage of the single market. Indeed, it is a field in which we would expect the United Kingdom to do well, with its considerable experience and expertise in financial services.
The recent experience of the Bank of Credit and Commerce International case must cause us to examine with great care banking supervision and the dangers that might lie in a bank being supervised from a country that could not manage that supervision well. It is not a chauvinistic or nationalistic point. In that context, it must be said that the Bingham report revealed that the Bank of England showed many deficiencies in its supervision of BCCI. Therefore, we are not holding Britain up as an example of a country which has perfect banking supervision.
The BCCI case also showed that Luxembourg was clearly nowhere near adequate to the task of being the lead regulator of the BCCI. The Luxembourg authorities became conscious of that fact, and drew the attention of other countries' regulators to it. At one stage the Luxembourg authorities would have welcomed the Bank of England, where so much more BCCI business was being done, taking on the responsibility of the regulator.
The Minister dealt carefully with many aspects of the matter in his thoughtful and lucid remarks. He gave some
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reassurance, not least that the matter was actively in his mind and that he was seeking in various other ways to extend the available protection and improve banking supervision, which is deficient. I do not want to go into the details of the BCCI case because more discussions about it will take place. The Treasury Select Committee still has the matter in its sights and will have further discussions about it. The Committee has issued reports that bear on the matters which we are discussing tonight. The Committee expressed concern about the second banking directive in its fourth report, to which reference has already been made. The Committee also expressed anxiety about the assessment of regulations--how we will know that we can rely on the capacity of other countries as lead regulator and how they will know that they can rely on us.The absence of any real system to assess supervisory standards was the focus of specific comment by the Committee. The Committee said that there was clearly a need for some mechanism to assess supervisory standards. At present, all we have is the Basle committee. The matter is not the responsibility of that committee. It does not have that sort of locus, any formal machinery or any standing to judge the supervisory standards in member countries, let alone non-member countries. It is a matter of continuing concern which I hope the Government will keep actively in mind.
The issue has been raised by other hon. Members, and I think that perhaps sufficient has been said to alert Ministers to the widespread concern. The report raises a question of how we will organise banking supervision in the United Kingdom in the future. The BCCI case has focused attention on banking supervision, and caused many of us to believe firmly that there is a case for separating banking supervision from the work of the Bank of England as monetary authority. I believe that the Bank should have independent responsibility in the conduct of monetary policy. In some ways that makes a much stronger case for separating those two areas. If anything, the United Kingdom has it the wrong way round. Perhaps the Bank should have been more accountable for its supervision of the banking system and less subject to accountability for monetary policy.
I hope that the Government will continue to examine the arguments for a system such as the German one in which a separate institution has responsibility for banking supervision, but which draws on the experience and knowledge of the Bundesbank.
There can be no effective system of monitoring and supervision that does not draw on the expertise which the central bank is bound to have. But there is a strong case for a separate focus of responsibility. Also, there is obviously a clear case, so long as the system remains in its present form, for a substantial reorganisation of the Bank of England, such as it has already begun. I must add that I remain concerned that there appears to have been no disciplinary action and no resignation and no one has moved jobs within the Bank of England following the BCCI case.
I see the directive as an appropriate part of the moves towards a single market. But before the Commission becomes too excited about its successes in moving towards a single market, it should look at other matters on which progress seems to be slow. The hon. Member for Edinburgh, Central (Mr. Darling) mentioned the insurance market. I understand that the pensions fund
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directive has not yet been fully agreed. That is another area of financial services in which uncertainty remains and sufficient progress has not been made.The more that we move towards the single market, the more apparent it will become that it is difficult to operate a single market in financial services without a single currency. It will also become more apparent that the movement of capital, which is inherent in a free market in financial services, will make it difficult for national currencies to maintain their position.
If institutions increasingly operate across national boundaries with free movement of capital and if that movement is further enhanced by the freedom of customers in each of the member countries to place their deposits with, or take their loans from, banks in other countries, the amount of capital flow across frontiers will become ever larger and will increasingly dwarf the reserves available to central banks to defend individual currencies. That reinforces my view that we must move to a single currency if we wish to operate a free market--which I do.
I know from the speeches that the Minister made before he took up his ministerial post that I shall receive a sympathetic hearing from him. I do not wish to embarrass him unduly, but I hope that he is fighting his corner on the issue in government. The capital movements that are implicit in the single market in financial services, along with the effects that we have already seen of the removal of restrictions on capital movement, will become incompatible with the maintenance of national currencies at differentiated levels by traditional means.
Increasing capital movements will make it that much more imperative that we stop talking about opting out of the single currency and dedicate ourselves to achieving the convergence conditions. I cannot understand why anyone is against the convergence conditions. They are supposed to be good for the economy in any case, so we should hardly argue about them.
I see the directive as part of the process of development in Europe, which it is difficult for Britain not to be part of, still less stop. However, that does not stop me wishing to express anxieties about whether, when combined with other regulations under discussion, the directive will be sufficiently effective in protecting bank customers from experiences such as that which BCCI customers faced. There will never be another fraud like BCCI. It is a mistake to design one's system to suit the last fraud. But it certainly will not be the last banking fraud. Our system must be strong enough to be alert to and deal with potential fraud.
8.3 pm
Mr. John Butterfill (Bournemouth, West) : I congratulate my hon. Friend the Minister on the action that he has taken in bringing the directive before the House. It is true to say that the regulations amend some important legislation that we passed in the House after lengthy debate. I participated in scrutinising some of that legislation, such as the Banking Act 1987 and the Financial Services Act 1986.
We must recognise that the financial services sector is important for the United Kingdom. The ability of our financial institutions to operate freely throughout the European Community is of vital national interest to us. There are immense opportunities for British business in that sector.
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I pay tribute to the work done by the Minister and his colleagues in the Treasury in securing the directive. It is true that the restraints and controls in many other European countries are not so strong as in Britain, but I am reassured by the fact that those who operate in the United Kingdom under the terms of the directive will come under the control and supervision of the relevant supervisory authorities in the United Kingdom.The hon. Member for Edinburgh, Central (Mr. Darling) complained about investor compensation. He should remember that the United Kingdom is the only EC country which has in place an effective compensation scheme. The reason why we have not reached a conclusion on that is largely the inadequacy of the provisions in other member countries. The hon. Gentleman would be right to say that we must not drop our standards : we must try to persuade other countries to conform to them. However, to denigrate our standards when by and large the Financial Services Act has worked well is an unfortunate line to take.
Mr. Darling : The hon. Gentleman is wrong. There are investor compensation schemes in other EC countries. Admittedly, some of them are not very good--that was my point. I accept that we have such a scheme in Britain, but I am sure that the hon. Gentleman will accept that it is not without justifiable criticisms.
Mr. Butterfill : I accept that our schemes are not yet perfect. They are being developed. They are self-regulatory regimes. That is infinitely preferable to a statutory form of regulation, which the Labour party views with some enthusiasm. Countries which have such regimes do not view them with quite the same enthusiasm. They look at ours with envy. Nevertheless, our schemes could be improved. I hope that the Personal Investment Authority will be established and will do its work in a much more efficient way than the present components of what will be the PIA. I have some doubts about whether that can be achieved without further legislation.
It will probably be necessary to give the Securities and Investments Board the power to direct people into a particular self-regulatory organisation and get rid of the SIB's own regulatory organisation--which is an unfortunate development. Not many of us anticipated the development of that organisation when we debated the Financial Services Act 1986.
On balance, we can feel some satisfaction with the system that we have set in place in Britain. It is infinitely superior to that which exists elsewhere in the Community and in the world. Our byword must be to improve consistently on it, not simply to run it down. Therefore, I congratulate the Minister on the work that he has done on the directive. I wish him success in future discussions on other aspects of financial services.
8.7 pm
Mr. Nelson : With the leave of the House, I should like to respond to the debate. I thank all hon. Members for their contributions to the debate. It is an important subject, as all who spoke recognised. It directly affects the prospects, employment and profitability of the services offered by our banking and financial services community and industry in Europe. Several of the points that have been made in the debate are extremely cogent. They will
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certainly be taken on board by the Government. They are helpful to me in scrutinising future legislation and the implementation of other directives.The hon. Member for Edinburgh, Central (Mr. Darling) started and finished by talking about the separate but related issue of financial services regulation and supervision. He suggested that I had thrown in the towel at an early stage in my ministerial career on that issue. I hasten to assure him that the principles which lay behind many of the representations that I made as a Back-Bencher are alive and well in the Treasury. I am seeking as best I can, as I did then, to improve depositor and investor protection in Britain. However, given the collective wisdom of fellow Ministers, it is not always as easy to say or do certain things as it was on the Back Benches. I hope that I shall not "go native" too fast, because the matters involved are important, and not subjects of partisan difference. I think that I agreed with what I thought the hon. Gentleman was saying. I do not want to abandon the existing legislative structure ; I see no great advantage in embarking on early, hasty and wholesale reform of our supervision of financial services. After all, such reform visits great uncertainty and great costs on the industry. Unless there is consensus on what is to replace the current arrangements, and a clear way forward which will deliver higher standards of investor protection, it is a foolhardy Government who embark on such a course without lengthy consideration and consultation.
As I have suggested outside the House--I hope that we shall have further opportunities to debate these critical issues inside it--I believe that much can be done within the existing structure to beef up the system of supervision and regulation within the Financial Services Act. It would not be wise to toss aside legislation passed by the House of Commons, to undermine the authority of those who are trying to do a good job, and to embark on an uncertain course. Mr. Darling rose --
Mr. Nelson : Let me make a point that relates to what the hon. Gentleman and others have said about compensation. There is a growing feeling in financial services and banking that there is a trade-off between the costs of supervision and regulation on the one hand, and the costs of paying compensation on the other. Many people would be content to pay for a high standard of supervision and regulation if they did not expect to have to pay increasing amounts of compensation, which this year has amounted to some £50 million.
Mr. Darling : I wholeheartedly agree with what the Economic Secretary has said about compensation and the need for tough regulation. I also appreciate that, as a member of the Government, he is not an entirely free agent : as long as the Chancellor remains his boss, he may find that he is constrained. Does he accept, however, that--while there is much to be said for legislating in broad agreement with all the people who will be affected--unless the Government say that they are prepared to step in and take a lead, many people who do not want change and are happy for the present mess to continue will see what he has said as a sign that that can go on for much longer, perhaps for years, before the Government are driven to act? I urge
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the Economic Secretary to get a grip on the situation now, rather than waiting until another crisis turns up on our doorstep.Mr. Nelson : I hear what the hon. Gentleman says, but imperatives of a different order are also at work. There is, for instance, the liability that institutions and SROs are having to incur to raise the money among their authorised firms to pay for new orders of compensation : that in itself is driving the case for reforms. It is not really a question whether the Government are forthright or reluctant to bring about change : change is being forced on the system in any event. The City wanted self- regulation, and it now has a high degree of self-regulation ; so it must now self-regulate. In the process of consultation over PIA, I look to the SROs and the firms involved to find a positive way forward. I am limited in what I can and should say about such matters at this stage, but that strikes me as a way forward that is on offer--a way that takes account of the representations that have been made, and the latest response to the consultation process. That reponse has pointed to a number of important changes that should give confidence to potential participants. I hope that a positive, constructive approach to the PIA proposals will be adopted.
The hon. Member for Edinburgh, Central said that it was not enough for supervisors to have the powers : they must exercise those powers. That point was echoed by the right hon. Member for Berwick-upon-Tweed (Mr. Beith), and I think that it was the most critical observation of all. Even if we have the best possible system of supervision, if we do not have the right people and the willingness to exercise the powers concerned the system will be wasted. Similarly, a deficient system may work if good people are operating it. A perfect system can never be arrived at, but any system will involve problems. We can do much to improve resources, in terms of ability, numbers and the financial resources available to supervisors and regulators ; we can build on the excellent work that has already been done.
The hon. Member for Edinburgh, Central spoke of the duty placed on auditors to report. That duty was announced in response to Sir Thomas Bingham's report on BCCI. Rightly, it will be subject to consultation with the professional bodies ; it is important that we get it right. The bodies concerned are adopting an extremely constructive approach, for which I am grateful. I also appreciate what the hon. Gentleman said about the common approach of hon. Members on both sides of the House to the need for a duty on auditors to report.
The hon. Gentleman asked about notices on doors ; he wanted to know whether people would be aware that a European institution was different from an authorised bank, and would know what sort of country was supervising that institution. Registers will be issued by the Bank of England and other institutions clearly stating the identity of the home country and the home supervisor. There will be procedures to ensure that misleading names are not used by companies passporting their services into other countries.
It is not possible to go too far down that line, however : at the end of the day, we are aiming for a common market for these services. We are not trying to differentiate ; the central objective must be common supervisory standards, and a universal reliance on the common application of
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those standards throughout member states. We would not want people to have to choose--but there should be no need to choose the bank with which one deposits money according to the identity of its home supervisor.The hon. Gentleman asked whether there were gaps in supervision. I can tell him that memoranda of understanding are being drawn up between the various member states to ensure that no such gaps exist. He also asked what was happening about the investment services directive, on which common agreement has virtually been reached after a protracted negotiation period. Both the investment services directive and the capital adequacy directive-- technical as they are--represent major strides for Britain in Europe. I believe that they will protect our main interests at home and in other member states, while ensuring common standards of protection for those who use the services involved. They will also give major opportunities to British firms that are moving into the rest of the European Community.
We would have liked the investment services directive to come into force at the same time as the banking directives, as was originally planned, to give investment firms more generally the passport at the same time as the banks ; but we saw no benefit in agreeing, at an early stage, an investment services directive that would restrict activities and damage markets. The United Kingdom and her allies were right to hold out in negotiations for the liberalising directive agreed by the EC Finance Ministers on 23 November.
Many of the larger UK-based investment firms in competition with EC banks are already established in the member states in which they wish to operate. These firms may not need the ISD passport to continue to compete effectively. United Kingdom markets will in turn continue to be as open to EC and overseas investment firms as they are at present.
The ISD will come into force on 1 January 1996. Although we might have preferred an earlier date, this is realistic, as implementation of the rules to underpin the directive will require considerable work by United Kingdom regulators and firms.
The hon. Gentleman asked how new members of the European Community will comply with the regulations. Phased provisions enable countries acceding to the Community to adopt and translate their laws to comply with the Community's. This, like many other directives, will be an essential part of that process. We must not be prepared to extend the passport to countries that do not comply with the standards of supervision and the regulations.
The hon. Gentleman asked whether we have enough resources. I think that we have adequate resources but could probably do with some more in the banking and investment sectors. I hope that we shall achieve consensus on the proposals for the financial services and banking sectors.
The hon. Gentleman and others dwelt on the importance of adequate compensation. The Commission has proposed a working party on the depositor protection directive, which contains important, sensitive and costly issues for the banks to consider.
My right hon. Friend the Member for Worthing (Mr. Higgins) made some extremely interesting points. However hard one tries, one can never prepare for all the questions that one is asked, and his point fell into that category. He said that it was not satisfactory that we could
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not amend the regulations. I understand that, but, as I said earlier, they could have been subject to the negative resolution procedure. We brought them before the House for debate because we wanted to take on board the views expressed and to take account of them in implementing the regulations.As my right hon. Friend will know, the Treasury and the Department of Trade and Industry issued a consultation document on this matter. He asked why the Treasury is responsible for insurance, whereas the name of the Secretary of State appears later in the regulations. The European Communities Act 1972 gives the Treasury power to make provision in relation to credit institutions. The amendments to the Insurance Companies Act 1982 fall within that designation. The Secretary of State retains his responsibilities under that Act and, as my right hon. Friend pointed out, the regulations reflect that. My right hon. Friend asked an important question about what other member states are doing to implement the directive. I asked the same question of my officials, and the answer is that other member states are implementing it in the same way at about the same time. My right hon. Friend asked an interesting question about the changes in law beyond the scope of the directive that are unamendable. I hope that I can assure him that the scope of the regulations does not extend beyond what is provided for in the directive. That shows the value of bringing measures before the House and of giving hon. Members an opportunity to question whether what is being proposed is beyond the scope of the directive. The House must have the opportunity to revise, amend and vote on such measures. The right hon. Member for Berwick-upon-Tweed asked how we can rely on other supervisors. As I said in opening, this is the key question. Other supervisors will have to implement the same standards. As my right hon. Friend the Chancellor announced in response to the Bingham report, a peer group review process involving the G10 supervisors committee and the EC banking advisory committee will ensure that the best ways forward are implemented and that supervisory standards are assessed.
The Government and the Bank propose the establishment of peer group reviews under this process. Member states other than the United Kingdom will be responsible for accepting applications for authorisation from banks. They will have to comply with legislation under this directive. They will then be required to notify the Bank of England that a European institution wishes to passport its services into the United Kingdom and we shall have certain powers. I refer hon. Members to regulation 9, which sets out requirements on such things as liquidity and compliance with regulations. If they are not complied with, they can provide the basis for restriction or revocation, and action can be taken by the host state.
The right hon. Gentleman mentioned the fascinating question of a split in central banking responsibilities, with supervision of banking being hived off from central banking functions. That point was echoed by the hon. Member for Hackney, North and Stoke Newington (Ms. Abbott). I referred to this at some length on 5 or 6 December in my speech on BCCI, in which I set out as clearly as I could the arguments for and against.
I said that the Government are not minded to do that, but no doubt the legitimate debate on it will go on. On the basis of BCCI, Lord Justice Bingham found no case for
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such a change, although many hon. Members will know that other EC members have such a separation of powers with a banking commission as well as a central bank. With the arrival of a European central bank or independent central banks within member states, there is often a more compelling case for the separation of such powers. As we do not have that, we have no intention of changing our present arrangements.I am most grateful for the long interest of my hon. Friend the Member for Bournemouth, West (Mr. Butterfill) in these issues. He emphasised the importance of banking and financial services to the United Kingdom economy and the great opportunities that will result from the introduction of the directive and the regulations. I wholeheartedly concur with him and pay tribute to the way in which, over many years, he has brought his experience and keen interest in investor and depositor protection to the attention of the House, to the benefit of the legislation that has been passed.
We have seen today the fruition of contributions and efforts by many hon. Members over many years. We shall not get it absolutely right. Sadly, there will be failures and collapses in the future. We cannot devise a wholly fail-safe system, but we can improve the situation substantially. We can improve the opportunities for British business, banks and investment companies abroad to ensure not only their greater profitability, growth and employment for the future but, critically and above all, the highest standards of investor and depositor protection, which have always been the hallmarks of attracting funds to this country and which are why Britain-- not only the City of London but Scotland and other parts of the
country--remains the financial centre of Europe. We should be proud of that, and should be careful to enhance and protect it for the future. The regulations will bring about exactly that possibility. It is with much confidence and pleasure that I invite the House to agree the banking directive, which will be an enormous advantage and opportunity to these great industries.
Question put and agreed to.
Resolved,
That the draft Banking Coordination (Second Council Directive) Regulations 1992, which were laid before this House on 17th November, be approved.
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Package Travel
8.28 pm
The Parliamentary Under-Secretary of State for Technology (Mr. Edward Leigh) : I beg to move
That the draft Package Travel, Package Holidays and Package Tours Regulations 1992, which were laid before this House on 1st December, be approved.
The regulations are intended to implement in United Kingdom law the EC directive of the same name. This is an important landmark in the development of consumer protection in this area.
The directive and regulations have three main objectives. The first is to ensure that organisers and retailers of packages maintain proper professional standards in their dealings with their customers. The second is to require organisers and retailers to take full responsibility for the proper performance of their contract. The third is to ensure that organisers and, in some circumstances, retailers have security for the refund of any advance payments made by consumers, including the cost of repatriation in the event of insolvency of the organiser or retailer. It may be for the convenience of the House if I indicate very briefly how the regulations address these objectives.
Regulations 1 to 3 deal with definitions and application. Basically, the regulations would apply only to packages sold or offered for sale after 31 December 1992, but the provisions regarding protection against insolvency affect all contracts in place on 31 December 1992 which remain to be performed in whole or in part. This means that organisers or retailers must on that date have security for all prepayments that they hold. It would clearly be unacceptable if a tour operator became insolvent at, say, the end of January, and those customers who had entered into contracts subsequent to 31 December were protected, while those who had entered into contracts before that date were not.
Regulations 4 to 6 deal with requirements as to brochures. Brochures must not contain any misleading information, must contain--in so far as it is relevant to the package--at least the information contained in schedule 1 and, subject to certain qualification, will be binding on the organiser.
Regulations 7 and 8 deal with information to be provided before the contract is concluded. This includes, for example, passport and visa requirements, details of travel arrangements, and the name, address and telephone number of the organiser, or a representative of him, whom the consumer can contact if necessary.
Regulation 9 deals with the content of contracts. The contract must contain at least the elements spelt out in schedule 2, unless these are clearly irrelevant to the package in question, and the consumer must be given a copy of the contract in writing.
Regulation 10 gives the consumer certain rights to transfer a booking.
Regulation 11 deals with the important question of surcharges. Surcharges are permitted only under certain restricted circumstances : specifically, to deal with variations in the price of fuel, fluctuations in exchange rates or increases in certain dues and taxes.
Mr. Malcolm Bruce (Gordon) : On surcharges, does the hon. Gentleman not think it a little odd that this statutory instrument is labelled "Consumer Protection" when most
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consumers in this country wish to be protected from the existence of surcharges at all ? He is legalising a practice that most people want to see abolished.Mr. Leigh : This is a very interesting point and it has been a difficult balance to strike. The package holiday industry is highly competitive and the view held by Government is that generally the consumer gets an extremely good deal. It would be possible, of course, for the Government to outlaw surcharges. If we were to do that, the only result for the general consumer would be to push up prices. I repeat that the consumer in this country generally gets a very fair deal and very good value holidays. We believe that we have struck the right balance. We do not believe that it is opportune to change long-standing practice in this country.
In this case, therefore, we have gone beyond the strict requirements of the directive to provide that the organiser must absorb the first 2 per cent. of any increase. I hope that that will go some way to allay the concern expressed by the hon. Member for Gordon (Mr. Bruce). This mirrors the current requirements of the code of practice of the Association of British Travel Agents.
Regulation 12 permits the consumer to withdraw from the contract without penalty if there is a significant alteration to an essential term of that contract, and regulation 13 spells out the consumer's rights in this situation and also in the event of cancellation by the organiser.
Regulations 14 and 15 deal with the rights of the consumer while the contract is being performed. Under regulation 14, a duty is placed on the organiser to make alternative arrangements if a significant proportion of the services contracted for are not provided. It also provides the consumer with a right to compensation where appropriate and a right if necessary to be returned to his point of departure.
Regulation 15 is important and makes the organiser, or possibly in certain circumstances the retailer, strictly liable for the performance of the contract. This means that it will no longer be open to the organiser to disclaim responsibility if, for example, a hotel is not of the standard, or does not offer the service, which has been promised. There are certain qualifications. For example, the organiser is not liable for a failure due to an event which he could not even with all due care have foreseen or forestalled, and liability other than for death or injury may be limited, so long as that limitation is reasonable.
This brings me to regulations 16 to 22, which deal with security for prepayments and against the possible need for repatriation in the event of insolvency. I would like to take a moment or two to explain our approach to this very important provision in the directive. The first point to stress is that the number of organisers or establishments in the United Kingdom that offer packages is extremely large. There are no statistics, and any estimate can only be in the nature of an educated guess, but we believe that the total number is between 10,000 and 20,000, not counting the many people who organise packages on a voluntary basis. Many of those who offer packages are not tour operators at all, but hotels and similar establishments which offer a tourist service--perhaps golf, or fishing--in addition to accommodation. Among tour operators proper, the range varies from
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the giants of the package travel trade to one-man--or, frequently, one-woman--companies exploiting some niche in the market.Faced with this diversity, the philosophy that we adopted was to offer the widest possible range of choice for meeting the requirements of the directive. These choices are spelt out in the regulations.
Regulation 16 is a general provision and contains exceptions for packages covered by the existing air travel organisers licence system--which will not, of course, be affected by the regulations--or by arrangements in force in another member state. There are two particular points about this regulation which I would like to draw to the attention of the House. The first is that we have not provided how the requirement to have arrangements for repatriation should be met. This is because there are a great many possible ways of meeting this requirement, and it would have been over- prescriptive for us to try to list them all. The second is that we have provided that, for a period of three months following entry into force of the regulations, organisers will not have to have in place one of the specific forms of protection spelt out in regulations 17 to 21, though they will still be committing an offence if they do not have sufficient security to protect consumers if they became insolvent. This is because the interval between approval of these regulations and their date of entry into force is likely to be very short indeed, and we needed to give the very large number of operators who currently have no protection time to make appropriate arrangements.
In addition to meeting the general requirements of regulation 16, organisers of packages will need to meet one or other of the alternative provisions set out in regulations 17 to 20 or, if they are not acting in the course of business, regulation 21. Regulations 17 and 18 provide for organisers who wish to follow the well-established bonding system which is already mandatory for holders of air travel organisers licences and is operated on a voluntary basis by the main trade associations in the industry. It is envisaged that most, if not all, of those trade associations will become bodies approved under the regulations by the Secretary of State as having bonding arrangements in place which will meet the requirements of the regulations.
Regulation 19 offers an alternative to bonding in the form of insurance, and is designed primarily for those organisers who are either unable or do not choose to join one of the "approved bodies" provided for in regulations 17 and 18.
Regulation 20 provides that organisers may, if they wish, meet the requirements of the directive by placing pre-payments in a trust account from which they can be withdrawn only on completion of the contract. This option is designed primarily for hotels and similar establishments, which take only a relatively small proportion of the cost of a package by way of pre-payment.
Finally, regulation 21 makes special provision for the voluntary sector. The effect of this regulation is that an organiser not acting by way of business need ensure only that any payments that he receives are kept separate from his personal bank account so that they cannot be seized by his creditors in the event of his insolvency.
I can pass over the remainder of the regulations very quickly. Regulation 22 deals with offences arising from breach of regulations 20 and 21. Regulation 23 calls up the enforcement schedule, regulation 24 provides a due
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