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8.5 pm
Mr. Tim Loughton (East Worthing and Shoreham): I declare an interest in the debate, as set out in the Register of Members' Interests. Those who served on the Joint Committee may be forgiven for feeling a sense of deja vu. The Committee sat for three intensive months and we are discussing the same issues again today--albeit in a slightly different setting.
My right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) said that the Bill had had a long gestation period. There have been several phantom pregnancies during it, and only now are we at the beginning of what I am sure will turn out to be a very long labour. As my right hon. Friend said, we must get on with it as quickly as possible, because the longer the delay, the bigger the Bill will become. Unless we progress quickly, we are in danger of spawning metaphorical triplets. The hon. Member for Huddersfield (Mr. Sheerman) said earlier that we are only at the outset of the Committee stage. However, the atmosphere in the Chamber during this debate has resembled more the weary resignation of Report. I fear that we are many, many months away from that.
Howard Davies, the supremo--for want of a better word--of the Financial Services Authority said that the Bill was like taking the scenic route to Buckingham Palace. I think that we have probably done several laps around Palace yard so far but we are still a long way from Parliament square and the open road to the Mall. I must issue a warning at this stage by referring hon. Members to the equivalent procedures involved in the Financial Services Bill in 1986. One hon. Member who spoke on Report at that time mentioned the fact that the original Bill had contained 167 clauses and 13 schedules. By the time it reached Report, it had 17 new clauses and 278 amendments, including 249 Government amendments. We have a lot of work before us yet.
I join Committee members--and those who did not serve on the Committee--in expressing a unanimous view about the success of the Joint Committee exercise. It was deftly chaired by the noble Lord Burns--whose ears must be burning--and serves as a good model for dealing with future legislation. As Labour Members have said, the major problem with the Committee was the time restriction placed upon it. We should remember that we were able to examine only six areas: the statutory objectives and principles, scope, accountability, discipline and enforcement, market abuse and the ombudsman scheme. During that time, we had also to cope with the progress report from the Government, the 24 consultation documents issued by the FSA and the 100 new clauses that landed on our doormat in April, with four schedules attached.
I sincerely welcome the Government's positive response to the recommendations in the Joint Committee report. However, the Government had to respond positively because the original draft Bill--which was sneaked out on the final day before the 1998 summer recess--was a complete dog's dinner. It succeeded in leaving the financial services industry in an extreme state of regulatory limbo--which will continue well into the
next millennium. The period has seen enormous upheavals caused by the millennium bug, the introduction of the euro, new statutory savings schemes and pension problems. The potential for problems in the financial services industry must be much greater than usual, yet we have only a skeleton FSA in its current form.
Liz Blackman:
The hon. Gentleman describes the draft Bill as a complete dog's dinner. A moment earlier, he referred to the 278 amendments that were made to the Financial Services Act 1986. Surely it is much better to use a pre-legislative process, as this Government have done, than to introduce a dog's dinner, which the 1986 Act turned out to be.
Mr. Loughton:
I agree, and one would have thought that, after 13 years, the Government might have learned from the problems of the Financial Services Act. The hon. Lady should remember that when the draft Bill was published in July, there was no mention of setting up an innovative Joint Committee to consider it. That proposal emerged only when the Bill was introduced in the Queen's Speech last November. At that stage, no one envisaged that a pre-legislative scrutiny process would apply to the Bill. That process had to be used because the draft Bill was full of flaws or, as I more elaborately described it, a dog's dinner.
I welcome the Bill because we need it. We need a single regulator with teeth such as the one that the Bill will introduce. Despite the hon. Lady's comments, the Bill is part of an evolutionary process that started with the 1986 Act. It streamlines the multiple self-regulatory organisations. For all the criticism that has been made of the SROs, many of them have, in most cases, done a good job at a time of enormous upheaval in the financial services industry in this country and the world as a whole.
For the past 13 years, there has been a good, open relationship between the regulator and the regulated, rather than a over-prescriptive regime. We need to transfer the many successful elements of that system to the new regime. It is no good writing off everything that has happened since 1986, because there has been a vast expansion of the financial services industry--in most cases, without problems. Of course, the high-profile problematic cases that many hon. Members have mentioned today have tended to overshadow that fact.
In setting up a powerful authority, we are dealing with an industry that makes a important contribution to the British balance of payments and a business that is highly technical. It is vital--even more so here than in many areas of legislation--that we get the initial legislation right.
The draft Bill would have set up the FSA in the role of chief detective, judge, prosecuting council, jury, appeal judge, executioner and beneficiary of the victim. That is not now the case. The draft Bill gave the FSA the power to issue unlimited fines.
Ms Hewitt:
Does the hon. Gentleman at least accept that the completely independent financial services tribunal was a feature of the original Bill, as published at the end of July last year?
Mr. Loughton:
That was the one saving grace in a regime that did not even put up Chinese walls between
As I said, the Bill is highly technical and it is vital that we get it right. As my right hon. Friend the Member for Wells said, the draft Bill had more than 200 clauses, and the final Bill now has 367 clauses and 16 schedules. I do not accept the idea that including more regulation makes this a better Bill. We want quality, not quantity, and we want regulation, but not just for regulation's sake and not at all cost. We certainly do not want to repeat the mistakes made with the Securities and Investments Board back in 1986, when the most enormous rule book was constructed by lawyers having a field day. Many of the technical terms had later to be revisited.
I welcome the mantra, which was mentioned several times this afternoon by Front Benchers, of light touch where possible, protection where necessary and fairness throughout. That must be the touchstone by which we decide whether the legislation works.
The press comment over the weekend, critical as it may have been, reminds us of why we need to get the Bill absolutely right. An article in The Daily Telegraph pointed to the
Conservative Members suspect that much has been added to the Bill, for the sake of regulation, that is not entirely necessary by a Government who have all too often demonstrated that they are willing to introduce extra regulatory burdens on business. The cost of regulation is nothing but a tax on the financial services industry and must be seen in that light. Hon. Members should remember that while we are discussing the Bill, a comprehensive rule book is being drawn up by the FSA. We shall play no part in that rule book, other than setting down the guidelines for it in the Bill. It is therefore vital that the people who are drafting those rules have regard to a strict, detailed framework of what is required.
As hon. Members have said, much of the work of the Joint Committee was taken up with problems relating to the European convention on human rights, particularly, as the hon. Member for Stafford (Mr. Kidney) said, with regard to market abuse, the ombudsman scheme and the immunity from prosecution proposed for the FSA.
Nothing could be more damaging than to find that the first time that the Bill's powers were used--for example, against a large firm that did not like being fined a large sum by the FSA--the FSA was struck down by the European Court of Human Rights when challenged. The noble Lord Burns has, perhaps, been misquoted, but he certainly pointed out in his response to the Bill that there is still a risk of that because of the nature of case law under the European convention.
As well as the bottom-up approach of minimal regulation, another overriding consideration for Conservative Members when scrutinising the Bill will be its cost-effectiveness for the industry and how that is passed on to the consumer. Some of the more naive submissions that we have received from consumer groups state that extra regulation and extra costs and charges to the provider of financial services and products will not feed through to the consumer. Of course they must, and the consumer will end up paying the extra costs.
Secondly, Conservative Members want a clear line of accountability for the FSA, ultimately to Parliament. Thirdly, we want clear transparency in the operations, procedures and findings of the FSA. Fourthly, we do not want to stifle entrepreneurialism in the financial markets and product innovation. Finally, as many hon. Members have said, we want recognition that the financial services industry is global, particularly now, with the use of the internet for selling financial products.
I want to highlight some of the areas where the Government have responded well to criticism in the Joint Committee's findings, and some others about which we still have concerns. The first of those areas relates to the four statutory objectives that were laid down. We had a great deal of debate about what order those should be in. The statutory objectives do not apply directly to individual acts of rule making, advice or guidance. They apply only to general policy and principles in many areas. Many of the six accompanying principles are couched in terms of desirability or form a "check list only", as they were described by Howard Davies in one of his sessions before the Committee. We would like the competitiveness of the UK financial services industry to be a core objective. It should be not only maintained but improved.
I do not take the point that that would in some way burden the FSA in its negotiations with regulators overseas. Surely it would have the opposite effect, providing an incentive for other countries' regulators to minimalise their regulation too. Regulations would not then be imposed on us by other countries' regimes--regulations that would simply not hold water over here. Establishing such a core objective must be an incentive. Indeed, the Treasury Committee agreed with that proposal. We may have the best regulated financial services industry in the world, but the regulation must be cost-effective, so that businesses, especially foreign ones, will continue to do business here.
Although we have reservations, we are pleased with the inclusion of caveat emptor. It had to be included. We did not buy the argument that one could in some way not apply the duties of financial services providers to non-business customers, as the National Consumer Council argued.
A fool and his money are perhaps easily parted, but competition between myriad products and between houses that offer information about not only their products but the principle of saving for pensions, retirement planning, tax-free savings schemes and so on, means that a fool would have to go an awfully long way to avoid the vastly increased information that is available about financial products and the healthy competition that has brought charges down. However much information we provide and however much we try to prevent mis-selling, we cannot prevent mis-buying by somebody who chooses to ignore such information.
I certainly agree with the principle that the FSA has an educational role. That must be flagged up as a sign-posting role in the many other sources of information to which people may now look. Informed customers are a source of competitiveness in the industry, and everybody would encourage that.
However, it is not the FSA's job to regulate products, an activity which would inevitably lead to a vision of product endorsement and the sort of problems that we are already encountering with CAT--charges access terms--marking. Such practices essentially delude people into thinking that the product's performance is somehow guaranteed by the Government, although that is not the intention, and often make consumers lazy because they think that they do not have to find out about the suitability or performance record of the product.
The third area in which I still have grave concerns--the phrase reared its head many times in Committee but we never really got to grips with it because it did not come within our remit--is systemic risk. The market confidence objective is inextricably linked to it, but there is little elaboration in the Bill.
We are told that there is the tripartite relationship between the Treasury, the FSA and the Bank of England which stems from the Bank of England Act 1998--which gave the Monetary Policy Committee independence in 1997--but we know little about how the arrangement works. We are assured that there are monthly meetings between the three bodies, but I am not sure whether the minutes of those meetings are made available. I would be interested to hear from the Minister whether they are.
The inclusion of the objective concerning systemic risk is also slightly ironic because, just last September, the International Organisation of Securities Commissions published a series of sound principles and practices for regulation and the supervision of securities markets which were based on three fundamental objectives, including the reduction of systemic risk. The Bill must be rather clearer and more detailed on this subject.
What is the duty or responsibility of the FSA to reduce systemic risk in the financial services industry and in banks in the United Kingdom? What will be its attitude to allowing a bank to go bust rather than thinking that it has some special status and must be kept afloat--contrasting with the many engineering or capital goods companies that go bust every day of the week? Who will give the order to launch a lifeboat, and where will the money to man it come from?
None of those questions is properly addressed in the proposed status of the FSA, but surely must be in the Bill. Such a role will be one of the most important for whoever will claim responsibility within the tripartite arrangement.
I should certainly like an objective in the Bill that is based on the soundness of the financial system and the role of the FSA in it.
Next, I turn to the comprehensiveness of the annual report, which has been mentioned by several hon. Members. Much hope seems to be pinned on some slightly woolly intentions for the content of the annual report. In no way do we want to make it even larger than the FSA rule book, but it should contain certain minimum specific requirements, of which the FSA should always be mindful.
The big grey area remains international competitiveness. We frequently heard of the good Australian Dr. Wallis who in 1995 produced a report on the international regulatory competitiveness regime. That appears to be just about the only meaningful bit of work on the subject. It is now hopelessly out of date, and must be redone. There is an increasing threat of regulatory arbitrage affecting our market and others in Europe and the United States. I would like full disclosure in the annual report of the increased regulatory burden of the previous year, the cost of that burden and the reasons for it, the cumulative cost of the regulatory burden and the amount of regulation introduced since the FSA began operation, and international comparisons, using consistent and easily contrasted tables and figures.
The Government say that schedule 1(10) includes a reserve power under which the Treasury can require the inclusion of particular matters in the annual report, but that is relatively meaningless. A good comparison would be the green book, which was to detail the environmental impact of Budgets, and which we were long promised would accompany each Budget. That was boiled down to just a page in the Treasury Red Book and very much sidelined.
Far too much of the Bill consists of the delegation of reserve powers to the Treasury. As one newspaper commentary said:
The fifth area that I should like to flag up is that of scope. It was very annoying that the major press reaction to our first report, after all the work that went into it, was that the FSA's remit should include powers over mortgages--an opinion with which I personally disagree. Although I am glad that the Government are not acting on that recommendation, they are slightly woolly about taking a decision in principle by the end of the year to extend the scope of clause 20.
I fundamentally challenge the view that mortgages should be included within the FSA remit. It would completely overload the system at this early stage, from all practical points of view. It would be entirely inconsistent to include mortgages but not other substantial financial transactions, such as hire purchase on cars or long-term care insurance. The endowment element of mortgages is already covered by the FSA legislation, and no proof--no evidence, even--has been submitted to the Committee or anyone to suggest that the mortgage industry's voluntary code has in any way failed yet.
It is very early to say, but I would say that the code has been very successful. Additional information is now provided to parties to the 1.4 million mortgage
transactions that take place every year. The mandatory qualifications of staff in the mortgage industry have been improved. Another success of the code has been in detailed monitoring and enforcement. The code has been extended to almost 100 per cent. of mortgage intermediaries. There is much to shout about, and it seems premature to slap the full rigour of the FSA on the mortgage industry at this stage. That would be unjustified and, at this stage and for the foreseeable future, entirely unworkable.
The other point on scope, as my right hon. Friend the Member for Wells said at the beginning, is one of principle, not technicality. It concerns the retrenchment of devolution from a lot of rather angry Scottish lawyers, who will now have to submit their returns to Canary wharf.
The sixth area that I want to flag up is accountability. I welcome the statutory basis on which the consumer and practitioner panels are now operating, but they must be meaningful panels, amply funded, and not predominantly staffed by compliance officers. A bugbear of mine has been that the term "practitioner" appears to extend to compliance officers who have never sold or marketed a product in the financial services world in their life but are just lawyers. I hope that the FSA will not be dominated by compliance officers, especially as compliance officers working with firms will be liable to the full rigour of the FSA; but if duff compliance officers then trot off to jobs at the FSA they will be immune from prosecution.
It seems slightly odd that there is no requirement in the new rules in clauses 7 to 9 that the FSA, when issuing a consultation paper on new rules, should consult its own panels first, to refine and better hone those rules before, perhaps, they go out to general consultation.
I welcome the majority of non-executives who will now form the main board of the FSA and the fact that the senior non-executive will be the deputy chairman, but I do not accept that the role of chairman and chief executive should continue to be combined. Splitting those roles would be an excellent way of limiting the power of and the focus on one individual. It would also enhance the roles of the non-executive directors, who would not be just yes-men. I am sure that the current line-up will not consist only of yes-men, but the relationship between non-executive directors and a non-executive chairman is very different from that between non-executive directors and a combined executive chairman and chief executive. It would also help if control of the agenda were not in the hands of one man.
As my right hon. Friend the Member for Wells said, combining the roles is completely out of kilter with good corporate governance. The Cadbury code specifically states, in relation to the board of directors:
I would query the way in which the FSA will be audited. We took suggestions that the function should be carried out by the National Audit Office, and it was probably shown that that was not appropriate. However,
there are other alternatives. The Comptroller and Auditor General could have a right of access to undertake value for money scrutinies and report to Parliament; I hope that the Government will revisit that one. We might set up a special Committee of the House, along the lines of the Joint Committee on Financial Services and Markets, with powers to summon any FSA official to make submissions on the annual report or anything else, just as the relevant Senate Committee does in the United States.
The next aspect to which I draw attention is immunity from prosecution. It is my gut feeling that I do not like giving an organisation as strong as the FSA automatic immunity--the individuals in it perhaps, but the organisation, no--especially given the vastly increased powers that it would now have. Many City bodies that made representations to us said that there should definitely be some let-out for negligence, as there would be in the case of lawyers and doctors. In any case, that aspect may fall foul of the European convention on human rights.
I welcome the idea of the investigator for complaints, but I consider that it will be meaningless--and certainly not operating on a level playing field with the complainant--if the investigator has no power to award compensation. I do not want to go into great detail about the dilemma of civil and criminal definitions because the hon. Member for Stafford has done that in his usual erudite way, but I do not think that the problem will be resolved by the Bill.
We were told by the Treasury's legal advisers that European court case law is complex, sometimes unclear and still in an embryonic stage. If the process of the Bill becomes defined as criminal, it could become unwieldy, adversarial and expensive for the financial services industry. These are things that we want to avoid. We need to see further evidence of the Government's reasoned findings. We want to know that they have done their homework properly.
I welcome many of the innovations that the Economic Secretary mentioned. It is to be welcomed that the first instance tribunal will be independent of the FSA. Separating the investigation and sanctions roles by way of the enforcement committee is to be welcomed. There was talk of Chinese walls. That had a rather sentimental tone for me because it was all the rage back in 1986. Lo and behold, it seems that they are being repaired again. We need to know more about how the tribunal and the enforcement committee will interact.
As I have said, I welcome the submission that compelled evidence will not be used. It is also to be welcomed that legal aid will be available. That matches up with the equality of arms specification in the European convention on human rights. However, we do not know how that will be funded. The Government need to provide us with more detail. Will there be a levy on the entire industry so that there will be greater charges, which will then feed through to the consumer?
It is to be welcomed that the FSA will not include its own costs wrapped up in fines. I welcome also the availability of the safe harbour. Certainly, however, we have serious reservations about weaknesses in clause 95. I have a gut instinct against the ability to levy unlimited fines. However, I was probably persuaded that that was
necessary to deter the larger operators, who were perhaps taking calculated risks and making a great deal of money, and that they should be hit hard where appropriate. If there is a penal fine, does the act by definition become criminal and again subject to the ECHR?
It is interesting that in the United States the FSA is part funded publicly--the stock exchange council--so that Congress retains greater control over its workings. Certainly, I welcome the proposals that fine income should be rebated gross, but I want to see how they will work in practice. Will there be aggregation over several years because of the great volatility in the fining system? What will happen about new members coming to the FSA? Will they qualify for reduced membership fees, whereas many other firms have paid increased fees for earlier years? The principle that these outcomes should not be seen as budgetary windfalls is to be welcomed.
I welcome the joining up of the eight financial scheme ombudsmen. This will give them the opportunity to raise their profile, as the umbrella group chairman told us. They will be able to make themselves better known and therefore more accessible to those members of the public who have genuine grievances that need to go to the ombudsmen.
There is still much work to be done, which is very important to the City, to the financial services industry generally and to the United Kingdom's trading position. It is also rather important to Howard Davies. As one journalist put it recently,
"storm brewing over FSA plans"
and quoted the Economic Secretary as promising an enormous row if the FSA imposed rules under which the costs are not justified by the benefits--because
"we do not want to tie the City up in red tape."
Rather more politically, she then asserted:
"Part of the process of creating New Labour was to change Labour's attitude to the City."
I do not disagree with any of that, but the Bill is not particularly partisan, and as many hon. Members have said, the members of the Joint Committee worked exceedingly well together.
"Running through this Bill are the threads of the disease endemic to modern legislation, that of the reserve power. The Act, when it finally grinds on to the statute book, will allow the Government to change the rules without bothering with legislation."
That must be a worry.
"There should be a clearly accepted division of responsibilities at the head of a company, which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision."
It is slightly ironic that although the FSA has a format slightly different from that of a normal public limited company, the Government have chosen to go in the opposite direction.
"Howard Davis stands to become one of the 10 most powerful people in the country, with enough independent authority and discretion at his feet to excite the envy even of a senior Cabinet Minister."
So powerful will the FSA and its governing body be that its members will be on a par with Members of the upper House and the monarch, subject to the House of Commons (Disqualification) Act 1975.
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