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7.20 pm
Mr. Nigel Beard (Bexleyheath and Crayford): The complexity of a modern industrial economy obscures the fact that social, financial and legal obligations all depend on trust. We must trust that what is said about goods on sale is true, that a manufacturer who places goods on the market will have them fairly judged against competing goods, that investments will be safe and that returns--perhaps years later in the form of pensions--will be as promised. We must trust that insurance companies will pay up when the occasion arises. We must trust that money invested will be honestly applied to the advertised purpose. Politically, we trust that if people can make a
fair choice between goods and services, and if financial resources are allocated according to those priorities, we shall have an efficient and effective economy.
That will not happen if we allow events to take care of themselves. The right conditions must be created by Governments. That is not done by central planning that is too insensitive to allow for the variety of choices that people make and too inefficient to allow finance to be invested according to those choices. But nor will the right conditions be created by the disappearance of Governments from the scene, as the zealots of laissez-faire would have us believe. That would give neither a clear expression of people's choice nor an allocation of investment to match their choices, but would, as in the 19th century, create a financial oligarchy that ran things in its own interest. Unbridled laissez-faire ends in mobster oligarchy, as we have seen with the replacement of the communist elite of the Soviet Union.
There is a third way. Political democracy can create and define conditions for economic democracy by making sure that the sovereign choice of individuals is neither fettered nor deceived, and by creating a situation in which financial choice and allocation are made with the fullest possible knowledge of the risks and rewards, and in which the corruption of self-interested manipulators is eliminated.
The Competition Act 1998 was one leg of such a policy. The Financial Services and Markets Bill is a second leg. It is a regulatory measure, but one welcomed by financial and public interests. The essence of successful regulation lies in achieving a balance between countervailing forces, and the Bill achieves that balance. The novelty of pre-legislative scrutiny by a Joint Committee, on which I had the privilege to serve, contributed to the balance, as did the open-minded and constructive response of the Government to our reports.
The speed of change in today's financial markets makes it essential that the Bill should be adaptable. If it is not, it will rapidly become out of date. Natural justice requires that regulations are clear and certain so that no one is in any doubt about what is or is not permitted. An important balance must be struck between adaptability and certainty. That has been done by leaving detailed definitions to delegated legislation and codes or guidance to be produced by the Financial Services Authority. Detailed provisions can then be readily amended in the light of experience and changing market practices.
British financial services have an admirable reputation for innovation. The scale of operation and the climate of innovation attract operators to London rather than other financial centres. Neither innovation nor London's reputation would be served by lax regulations, but innovation would be suppressed if regulations were too prescriptive. If regulation extended to giving an official mark of approval to certain products or services, the entry to the market of those products would be inhibited and innovation slowed down. The Bill deliberately avoids that problem.
Similarly, if regulation added substantially to the costs of services, operators could be induced to move to Frankfurt or New York. At present, London's regulatory costs are among the lowest in the world, but they must be monitored to ensure that the position does not change. Provision is made for the publication of comparative regulatory costs in the annual report of the FSA.
The overwhelming weight of evidence to the pre-legislative Committee came either from financial services practitioners or their collective associations, or from lawyers serving practitioners. Their concerns tended to be amelioration of disciplinary penalties and elaboration of FSA procedures in the interests of practitioners. Members of the Committee needed to compensate with a conscious concern for the general public--the so-called consumers.
The balance between practitioners and consumers also arose in dealing with the Bill's caveat emptor--"let the buyer beware"--provisions. Practitioners tend to say that customers should be responsible for their own choices, and that it is not the practitioners' responsibility to ensure that customers know what they are signing up to, but the general public cannot be expected to have the same knowledge of the market as those who are engaged in it day by day.
There is a profound split in the community of financial services practitioners, characterised by the terms wholesaler and retailer. Many practitioners who deal mainly with other practitioners--the wholesalers--have expressed the fear that the regulatory regime, needed to protect the general public, will be irksomely restrictive for them. However, light-touch regulation appropriate to those with professional knowledge, who can look after themselves, would leave the general public exposed and unprotected if it were applied to retailers--those practitioners who deal with the general public. It is crucial to the fair working of the Bill that the FSA should recognise the distinction between the needs of wholesalers and retailers in their day-to-day operations and in the culture of their organisation.
The Bill has both a service and a geographical dimension. The Joint Committee felt that the scope of the legislation should include mortgages and long-term care insurance. Mortgages are the main financial transaction that most people will ever undertake. The division between fixed and floating rates and the conditions for transferring from one to the other have made mortgages more complex, and there is a record of mis-selling of endowment mortgages. Most firms selling mortgages will come within the provisions of the Bill for related services, but the Government wish to see how the scheme launched by the Council of Mortgage Lenders will work before making a commitment to include mortgages in the Bill. As the scope of the legislation is a matter for secondary legislation, the inclusion of mortgages and long-term care insurance need not be decided now. Although the Council of Mortgage Lenders scheme might work, it would, if made permanent, conflict with the idea that the FSA should be a one-stop shop for financial services regulation.
The Channel Islands and the Isle of Man are excluded from the geographical scope of the legislation. Clearly, if the regulatory arrangements in those two offshore havens are to be more indulgent than those within the United Kingdom, business could transfer to them once this legislation becomes law. The Government will need to decide what steps are to be taken to avoid that.
The wide-ranging commitment for the FSA to consult before finally formulating rules, codes of practice or guidance is formalised by the establishment of consumers
and practitioners advisory panels. That listening culture will seek to ensure that regulation is by consent and will enhance both public and professional confidence in the FSA.
Nevertheless, the disciplinary and enforcement provisions of the Bill are vital. When fortunes may be made by a breach of the rules, the means of enforcing them against organisations and individuals must be certain and the penalties must be deterrent.
Much of the comment on the Bill has been to ensure fairness to organisations and individuals in the disciplinary and enforcement procedures. That is important, but fairness is not served by making procedures over-complex, legalistic and protracted. In the vast majority of cases, both the FSA and those subject to disciplinary penalties have an interest in a speedy settlement of any issue.
After much debate, a balance between speed and legal procedure has been struck. Internal hearings by the FSA will provide for speedy resolution of cases, but where anyone feels that that has not delivered a fair judgment, the case can be dealt with by a tribunal applying more formal procedures.
The effective functioning of the FSA in enforcing its rules through these procedures depends upon staff freely exercising their judgment on the merits of any case. Those judgments would be distorted or become over-cautious if staff were constantly afraid of a civil suit for damages arising. Thus they are given a statutory immunity to civil liability in the discharge of their duties, as are the staff in regulatory organisations in many countries.
There is a gap between the provisions in the Bill for disciplinary and enforcement proceedings and the much more serious cases of insider dealing, misleading the market and market manipulation, which fall within the criminal law. The Bill fills that gap with provision for the FSA to deal with market abuse in those cases that are not covered by existing criminal law.
A major concern of the pre-legislative scrutiny has been to ensure that the FSA procedures proposed for discipline and enforcement and also for market abuse cases are compatible with the European convention on human rights. Legal opinion varies on just where compatibility lies. The position presented in the Bill is a good balance between those opinions. Essentially, in market abuse cases the defendant will have the safeguards of criminal procedures, whereas in all but the most serious disciplinary and enforcement cases civil law procedures will apply.
Exactly which serious cases will require criminal procedures, or indeed whether any will, is now the very limited area of uncertain compatibility with the ECHR. That question may be dealt with either by the progressive establishment of case law or by the FSA taking the precaution of applying criminal procedures to those cases that it deems serious. That limited grey area does not warrant the claim that appeared in The Daily Telegraph last week that the legislation is deeply flawed; it is not. However, it is important to have dealt with this issue exhaustively at the legislative stage. Otherwise, there was a danger that the courts might strike down significant parts of the Bill and leave no legal basis for regulation in those areas.
The Bill makes the Financial Services Authority one of the most powerful and wide-ranging regulatory authorities in the world. The future of financial services and markets
in London can be enhanced or diminished by the way in which it discharges its responsibilities. Institutions may be closed as a result of its actions and individual careers terminated. In many respects, it is effectively defining the law as applied to the various organisations of the finance industry. It is reasonable, therefore, that the accountability of the FSA should be in the forefront of many people's comments, as it has been.
That accountability has many dimensions. The Treasury will appoint the board with a majority of non-executive directors. Executive directors will be subject to confirmation hearings by a parliamentary Committee. An annual report will be published covering a prescribed list of topics, which will be reviewed by a parliamentary Committee. Panels representing consumers and practitioners are established in the Bill and their observations will have to be answered. There is an all-pervading expectation of consultation before codes of practice or guiding principles are adopted. The Treasury will have the power to commission independent reports on the efficiency of operations and there will be an independent investigation of complaints.
The question is not so much the accountability of the FSA as the impact of all those strands of accountability on the day-to-day effectiveness and flexibility of the organisation. No doubt custom and practice will evolve a settled arrangement that balances accountability with effectiveness, but it is an issue that the board, the Treasury and the parliamentary Committee may well wish to review from time to time.
The existing self-regulatory arrangements for the financial sector of the economy are widely recognised as costly, inefficient and confusing for practitioners and public alike. The Bill provides for a single regulator with statutory authority to replace nine regulators for different parts of the industry.
Scandals such as pension mis-selling, Barlow Clowes, BCCI and the collapse of Barings bank have disfigured the industry and jeopardised both market and public confidence. At the same time, the globalisation of the financial markets has given them a huge unaccountable influence over public policy and the daily lives of citizens in this country. It is damaging to those financial institutions and to democracy itself if they are popularly felt to be beyond the law.
Global markets make it essential that national regulatory authorities co-operate in taming what could be maverick forces distorting the world economy. The FSA will be able to co-operate in international regulatory arrangements with credibility derived from the powers and responsibilities set out in the Bill.
The public interest is secured without the threat of a heavy-handed and remote regime damaging a major sector of the UK economy. The Bill is not a behemoth designed to subdue and coerce. Any such fears are groundless. It aims for regulation by consent of the industry, with its substantial powers of enforcement applied as much for the good of the industry as for the public interest.
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