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6.22 pm
Sir Nicholas Lyell (North-East Bedfordshire): I am glad to take part in this debate and to share in the welcome for the Bill. I approve of the way in which it has been brought before the House, with examination by a Joint Committee of both Houses before its final publication. I welcome the changes that have been made.
However, we should not underestimate the magnitude of what the Bill does. It is a blockbuster Bill, which will give to a single organisation the powers of nine current organisations, eight ombudsmen and five compensatory schemes, all rolled into one. That is an extremely big task. To a substantial degree, the Bill has an enabling structure. It contains some necessarily elaborate and complex schedules, and a great many regulations will be created following its enactment to establish an effective structure.
I, too, pay tribute to the work of the Burns Committee, but its work was necessarily focused and limited. I was not a member of that Committee, which I understand focused on six different issues. A significant number of other issues need to be examined in Committee, however, and if I find myself participating, I hope that I will be able to help in that examination.
I shall do no more than touch on a number of significant points today. The Burns Committee rightly focused on the human rights aspect, and the Government have gone a significant way to explaining their position and meeting some of the fears. We shall have to return to the question of human rights. Today, however, I want to point out that the Government--and this applies to any Government--are ambivalent towards human rights. They do not seek to deprive people of human rights: they simply wish to hold all the cards. Be it at the Treasury or at the Department of Health, the Government seem to go for the civil or the criminal method depending on which gives them the better cards.
In the area of financial regulation, the Government believe--and I think they may be right--that the civil structure is the more desirable. I am glad to see that, as a result of the Burns Committee's recommendations, they have added some safeguards to the Bill. However, we shall wish to scrutinise carefully how those safeguards will work, because the difference between civil and criminal in this area is highly technical.
I speak as a practising barrister. Now that I am free to do so, human rights is one of the fields in which I practise. Through my professional work--I declare an interest in this respect--it has come to my notice that the Department of Health, for example, is taking the criminal route and seeking to give enormous powers to the Medicines Control Agency and to reverse the burden of proof on to those who are regulated by the agency, so that they must prove that what the MCA has done is unreasonable. That puts the cards in the Government's hands because the MCA is an offshoot of the Government.
The Treasury has its own offshoot under the Bill and is putting a great deal of civil power into the hands of that new regulatory body. We shall want to scrutinise carefully what it has done. Having read some, although not all, of the advice of my learned friend Sir Sydney Kentridge, I feel that the difference between criminal and civil depends to a considerable extent on European Union law and cases dealing with doctors, financial advisers, and so on, which are held to be regulatory. When we examine this matter, we must look at the substance, not the shadow.
Clauses 24 to 27 deal with the enforceability--or rather, the unenforceability--of agreements. Although I should like to do further work on this matter, I think that we are going down a dangerous route in the Bill, which says that, if a provider is unauthorised, its agreement will be unenforceable. That is dangerous because in the financial world there are sharks on both sides of the fence: there can be shark providers, but also shark purchasers. Rich men and women across the world trade with the City of London, or with any regulated organisation. If their investments, which are necessarily and properly risky, go wrong, they will look for ways to get out of their deal. They will look for technical errors that render the deal unenforceable.
I hope that the Government and their officials will look again at this matter to see whether a wiser course is perhaps not to make things completely unenforceable but to make them unenforceable except by the leave of the court. I hope that the Minister is taking this point in. That means that justice will be able to prevail in each individual instance.
I am not making a small point. I am talking about confidence in the City of London. If the City of London is governed by a regulatory system which means that
sharks who do business with it can get out of their bargains too easily, we shall lose confidence in our system. I simply flag up that point for further consideration.
The question has arisen whether the chairman and chief executive of the Financial Services Authority should be the same person. We should continue to keep that question carefully under review and revisit it. We are talking about high-calibre people. We have a chairman and chief executive, for whom I have a high regard, who obviously has his own notions about how he will steer his ship. My comments are in no way personal to him. However, as the years have gone by, I have formed the view more and more strongly that nobody should be unanswerable to somebody else. Everybody should be accountable and everybody should have to look over their shoulder. Although much is said about accountability--as it is about transparency and modernisation--the meaning is not entirely clear.
There is a considerable advantage in having a chief executive, however good he is, who also has a chairman to whom he must answer, and in having a chairman who, however excellent he is, has a chief executive whom he has to control and for whom he is responsible. The advantage of having the two, especially when setting up a large and complex organisation such as the FSA--made up of nine different organisations headed by high-calibre people dealing with sophisticated concepts--is that the City, those regulated by it and those outside it, especially independent financial advisers who can work in small firms, have in the chairman somebody whom they can approach with their anxieties but who, if he is not instantly responsible for the issues, can take them up with the chief executive so that the system can work better. The cleverest people in the world cannot do everything, and dividing the jobs would make the structure of the organisation stronger.
During the Bill's progress, we should consider the question of the degree of immunity. On the whole, I favour giving immunity to a body such as the FSA. If such a body does not have immunity, the difficulty is that it is always wondering how much a decision will cost it, which leads to inhibited regulation. The organisation must not be above the law and it must be possible to obtain an injunction against it, but it could be asking too much of it to require that it must always be careful not to cause damage to a financial institution--the damages could be enormous.
I made a similar point in a speech in 1981 about Lloyd's, of which I was a member at the time and in which I declared an interest. I was in favour of its having immunity, although I have considered my position sometimes since. I still think I was right, because although Lloyd's has run into difficulties since, they were not so much structural as in the interstices of the organisation.
In the 20 years I have been in Parliament, we have greatly increased regulation of the financial market, but we have not improved the documentation that goes to the consumer. I have recently been reading mortgage documentation for a member of my family. Mortgages do not yet fall under the system in the Bill, but whether documentation is for a mortgage--in this case, with a market leader--or something else, the Plain English Campaign has made it easier to realise what one does not
understand. The documentation is cross-referenced and it is difficult to find a single piece of paper that sets out the key elements of the bargain. One finds aspects of the bargain that leave even a commercial lawyer like me scratching his head. When I ring up to try to ask a question, I do not get a very satisfactory answer. We know only too well what someone who is not a commercial lawyer, or otherwise familiar with the financial market, does with such documentation: they do not even attempt to read it. They are right not to do so, because they would become completely befuddled.
It is a good challenge for the new organisation, its chairman and its chief executive to try to simplify the documentation. I recommend following the example of the national conditions of sale for house purchase, which provide on one or two sheets of paper a number of essential and standard clauses. The price of the house and other details are on a separate sheet of paper. It should be possible for almost every commercial contract to have standard clauses that will apply, with non-standard clauses in special type or on another sheet. At the moment, the documentation is grossly over-complex.
Mr. James Plaskitt (Warwick and Leamington):
As many hon. Members have said, the Bill has followed an interesting route to get to its Second Reading, which has shown how good the pre-legislative process is: it is a better Bill as a result. That is not only because of the work of the Joint Committee, of which I was a member, but because of the speed with which the Government responded to our proposals, and their willingness to accept our points.
The nature of the debate in the Joint Committee was healthy and constructive. The debate tonight is beginning to resemble those in the Joint Committee in its character and constructiveness. However, the Joint Committee did not have enough time. As a consequence, there are some aspects of the Bill that it should have considered but did not. I personally regret that we did not have time to make more international comparisons and find out more about other regulatory regimes.
The process was constructive and will provide a useful model for other Bills. It was good for the Bill and good for Parliament. I echo the comments of the right hon. Member for Wells (Mr. Heathcoat-Amory) in praise of the Clerks. The Joint Committee had to absorb an extraordinary amount of information and we had to complete reports at short notice. The processing of our work was always done on time and the results came back to us with impressive rapidity. The excellent Clerks who served that Committee cannot have got very much sleep during the eight weeks for which we were in session, and I hope that they have caught up with it now.
The Bill is large, comprehensive and important and, although it also deals with some narrow and complex financial services issues, we must not lose sight of its importance. It is an important Bill for an industry that plays a crucial role in the health of the UK's economy, and it is an important Bill for consumers--the millions of individuals whose financial health depends on
good-quality financial services and proper regulation. That makes the argument for good regulation, which is as much in the interests of the companies which make a living providing the services as it is in the interests of the consumers whose future living depends on the vitality and security of the industry.
The industry comprises many large and wealthy institutions, although it is volatile, with much merger and acquisition activity. The biggest players are global, and the products that they bring to the market are dynamic and, in many cases, highly sophisticated. In such a climate, it is difficult, as the Joint Committee came to appreciate, for the regulators to keep up with the nature of the market--and if it is difficult for them, we should realise how difficult it is for the consumer, who is in most instances far less well-equipped.
Moreover, the trends in the financial services market are global. During its evidence sessions, the Joint Committee heard a great deal about the need to safeguard the competitiveness of the City of London as a financial centre--and rightly so--but we also heard a fair few grumbles from companies about possible over-regulation. We heard stories about companies which, for a large number of days in the year, had to meet compliance requirements, or contained regulators engaging in some sort of activities. That struck some of us as rather negative.
I was not really convinced by that, because I think that competitiveness depends on sound regulation. We should reflect on what the impact of too many big scandals in our financial services would be on the competitiveness of the City of London. It would deter companies from being here--let alone the damage that it would do to consumer confidence.
I think that we are in line with many other major financial centres around the world. If anything, the regime introduced by the Bill may strike us as being a little on the light side when we look at some of the other major financial centres. I wish that we had had more time to engage in such instructive work in the Committee. In the United States, for instance, the Federal Reserve is busy sharpening its supervisory focus on the top 20 US banks, because it is worried about systemic risk. Part of the reason for that is the fact that the top 20 own 80 per cent. of the assets of the banking system.
The Federal Reserve is continually monitoring management information in all those banks. It has direct access to their internal audit processes, and--usually on a daily basis--inspects the credit-risk models that they employ. That contrasts with some of the action that we expect the FSA to take, and we should bear it in mind when considering whether the Bill amounts to over-regulation. Indeed, some analysts of the United States market are now saying that the regulatory climate in which certain big US financial companies live is more akin to that inhabited by public utilities than to that of private sector corporations.
The core of the Bill is intended to tidy up our regulatory structure. I think everyone recognises that we currently have too many different regulators. The present situation is costly, inefficient and confusing. I do not think it surprising that most companies that gave evidence to the Committee approved of those core measures, and the introduction of the one-stop regulatory regime.
Nevertheless--although the Bill does that, and also brings a good many bodies together under one roof--important aspects of financial services are not included. Some--such as mortgages, long-term care and certain features of insurance--have been mentioned today. We have discussed mortgages in some detail. It has rightly been said that they constitute one of the biggest areas of the public's involvement in financial services, in that they represent a long-term commitment, along with savings and investments in private pensions. It is therefore important for the public to have confidence in the regulation of the mortgage business.
Mortgage products themselves are increasingly complex. It is becoming harder for consumers to make choices. Some 1.8 million new mortgages are taken out each year; there is a large turnover, and a lot of new purchasing. For two years the Council of Mortgage Lenders has operated a code of practice, but we have already discussed in the House whether it is sufficient, and we have heard evidence of problems with it. I think that we should expect the inclusion of mortgages in the remit of the FSA before long, and I am pleased that the door is open for that. Clearly, the FSA will have to expand if it is to deal with mortgages: it will need to recruit. I think, however, that it may be able to transfer expertise, rather than having to start from scratch.
Understandably, debates such as this tend to concentrate on practitioners, but the consumer has a considerable stake in the Bill. I think that the position of consumers will be greatly enhanced, as good regulation is clearly in their interest. The FSA has a consumer panel, and, as a result of pre-legislative scrutiny, the panel's role has been strengthened. It has been made a statutory requirement, and the appointment of the chair is subject to Treasury approval. That provides an important extra guarantee of independence from the FSA.
As I said in the Committee, I am still worried about the panel's budget. The panel is starting life with a budget of £420,000. I was pleased with the FSA chairman's commitment that the budget would be considered early in the FSA's operation, once its statutory basis had been conferred--but there is an important reason why I think the panel may be under-resourced.
The Bill specifies one of the FSA's objectives as raising public awareness of financial issues. That is an important objective, but, given that the FSA is putting £1.5 million into it, while the consumer panel is receiving a third of the amount, I feel that there is a bit of a mismatch. I should have thought that the panel would have a role in helping the FSA to deliver its obligation, and I hope that it will be more involved in that work before long.
Consumer confidence will also be helped by league tables. I am pleased to note that, as a result of the Bill, we expect more league tables to be brought into play by the end of next year, to help consumers make informed choices about the financial products that they are buying. That will be useful, alongside CAT--charges, access, terms--standards for individual savings accounts and, eventually, for stakeholder pensions. All that will increase consumer confidence, which in turn will boost the United Kingdom's reputation and that of the financial services and products that we provide.
Accountability was another important subject of the Committee's deliberations. It, too, is crucial to both practitioner and consumer confidence. After all, the FSA
will be one of the most powerful financial regulators in the world. It has the status of a private company, limited by guarantee, and, as has been said, it enjoys statutory immunity from suits for damages. I am sure we all understand why that is the case, and should continue to be the case. Nevertheless, some companies expressed fears that the FSA might be prosecutor, judge and jury, and in that context many issues surfaced in regard to whether it complied with the European convention on human rights.
I think we have established, as a result of the improvements in the Bill that have arisen from the Committee's work, that those fears are unfounded. The Treasury will inspect the FSA's economy and efficiency. The authority will have to publish an annual report, including an auditors' report. There is to be an independent investigator. We have established that the tribunal is one of first instance. There is now no incentive for the FSA to maximise its fine income, and there is a far greater and clearer separation between discipline and enforcement. I hope that the industry will find all that sufficient to offset its initial worries about the FSA's statutory immunity.
It is worth pointing out that statutory immunity is quite common in such supervisory regimes. It applied to the Bank of England when it performed those functions. It is also worth remembering that the FSA is not immune from acts of bad faith, criminal prosecution, judicial review and, of course, challenge under the European convention on human rights.
Pre-legislative scrutiny has improved the regime in relation to market abuse. The industry cannot now argue convincingly that there is too much uncertainty about what constitutes abuse. In any case, it is crucial to have strong deterrence against market abuse; it is one of the essential purposes of the regime. Like all other aspects of the Bill, it is in the interests of consumers and companies alike.
Current criminal sanctions are not sufficient on their own; they cover only a limited range of defined abuse such as insider trading. It is clear that the anti-abuse regime needs to be broad because of the dynamic and constantly moving nature of the market, but, as we have already established in the debate, it is right that practitioners should know where the boundaries of abuse lie--hence the code of market conduct, which will be an important document for all practitioners.
As a result of our pre-legislative scrutiny, we have improved the degree of certainty and clarity. The industry should be reassured about that. We have established that the Bill provides an absolute defence where a person engages in behaviour that the code specifically states does not amount to abuse. Furthermore, where someone can prove that they took due care, their subsequent conduct will not be deemed abusive.
In their latest response to the report, the Government have given an undertaking that the code will be supplemented by further explanatory information, all the time trying to improve clarity and certainty for practitioners, so the accusations or fears of double jeopardy and so forth have been exaggerated. Today, we have heard from the Government that even further clarity will be offered. That will no doubt receive the attention of those who serve on the Standing Committee.
We have managed to succeed in keeping a breadth to the anti-abuse regime, which is essential, while improving its certainty and clarity. It will always be a balancing act. It will be difficult to get it absolutely right, so the code of conduct will have to be kept under constant review as markets and products change.
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