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4.45 pm
At the moment, there seems to be a dichotomy in the Treasury's approach. Powers are being given to the FSA to regulate products offered abroad; that is to say, products put on sale by UK businesses. That is a country- of-origin approach, which if generally accepted would be beneficial to this country.
If there were a reciprocal arrangement, a product or service approved under this country's regulatory powers could be offered to other countries on the continent or to America without further regulation. Customers, consumers and authorities in those other countries would rely on the fact that the FSA was--at least, it should be--a world-class regulator, and they would have certainty about our products and services because they had been regulated in this country.
That would be a good, desirable system, but the Government rather spoil their case by giving the authority powers to regulate here products and services offered from other countries. That is country-of-destination regulation. If other regulatory authorities take the same view, we will end up with dual regulation. Authorities in countries such as France are probably rather doubtful about the benefit to them of accepting financial products and services offered by the City of London without a further regulatory barrier. Their attitude will be reinforced by the knowledge that we insist, in the Bill, on regulating products offered to this country from abroad.
The Government need to sort out exactly where they stand on that issue; otherwise, we shall put our industry at a competitive disadvantage by putting it in jeopardy of double regulation.
Amendment No. 51 would limit the scope of the authority in relation to non-regulated activities. That, too, is an important issue of principle. The Bill is, or should be, about regulating commercial activities that fall within a definition. The Bill is widely drawn, so that definition is necessarily extremely wide; it encompasses banking, dealing in all kinds of investment and giving investment advice about a range of products and services. However, it should stop there.
I am concerned that, in addition to those activities, the authority can extend its remit to unregulated activities, which could include every conceivable form of commercial activity. For example, clause 38 states that in giving permission to an authorised person to carry on his activity, the authority can impose requirements about activities that are not regulated. The FSA could therefore authorise a company to deal in investments or services that constitute regulated activities, but in addition it could regulate any of the company's other activities without any restriction.
While clause 38 is about giving permission to people or firms to engage in such activities, clause 111 concerns the FSA's rule-making duties. It allows the FSA to make rules not only on regulated activities, but on just about anything else. That could constitute a dangerous extension of the Bill's scope to pretty well anything.
The explanatory notes, which the Government issued some time ago, described the way in which the Bill had been designed to set limits on the FSA and its duties, obligations and powers. Yet in the important matter of scope--what can be regulated and what sort of rules can be made--there are no limits; the FSA can stray into non-regulated activities of any sort. Amendment No. 51 requires that that be done only if it is prescribed by a Treasury order. It is a reasonable amendment that does not ban the activity altogether, but merely requires the Treasury to introduce an order for the House to pass by affirmative resolution, so ensuring that there is a genuine opportunity for debate.
Clause 112 allows the authority to impose on firms what can only be described as ad hoc financial requirements, in addition to its rules. The FSA can do that without issuing a warning notice. Amendment No. 8 would restrict that power to deposit takers. That, too, is a reasonable amendment, because the powers to impose such financial requirements already exist: they have been held by the Bank of England, which has similar powers over deposit takers. Our amendment would bring the Bill into line with the pre-existing situation, which has worked perfectly well.
The amendments are important because they deal with the rule-making powers of the authority and so go to the heart of the FSA's functions. Perhaps equally important is their effect on the scope of the Bill. If the amendments are made, we shall at least know the limits of the powers that we are granting to the authority.
Mr. Howard Flight (Arundel and South Downs):
As my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) has said, this debate is about many important issues of principle. We raised those issues in Committee; Ministers said that they would address some of them, but it seems to us that they have not done so.
I have discussed the provisions of new clause 4 with the FSA, which has expressed the view that it would like to carry out a cost-benefit analysis of all its rules. However, because it is not practical to do that when the legislation is enacted, the FSA believes that it should be done over time, as laid down by the new clause.
I echo the point made by my hon. Friend the Member for Buckingham (Mr. Bercow)--that our proposals contain an element of the sunset principle, in that the FSA would be required to phase out rules that had gone out of date or become uneconomic in cost-benefit terms. Hon. Members will have seen the FSA paper on risk management and its task of balancing the cost- effectiveness of rules, the importance of the territory they cover and their impact.
The industry is concerned about the costs of regulation, but there is no easy formula whereby those costs can be controlled. The Opposition suggested an amendment to limit fee increases to increases in the retail prices index,
but I do not think that that is a practical approach. Instead, we propose an internal control mechanism, governed not by total costs, but by economic efficiency.
New clause 5 deals with issues of safe harbour and guidance. The FSA has told everyone that the Bill provides a safe harbour through its approach to guidance, and that it will use guidance to put into practice the same arrangements as are found in the United States, in terms of no action letters. However, that is not what the Bill provides for. There is a gap between what the financial community, especially international groups operating in the UK, are being told and what the Bill prescribes.
My right hon. Friend has focused on territoriality and on the FSA creeping into non-regulated territories. As for territoriality, I cannot understand why the Treasury has been peddling the line that it has adopted. It seems unacceptable that United Kingdom businesses that are operating overseas should be subject to double and different regulation when they are marketing their products in other countries. That is not current practice, and an argument may be advanced by other regulatory bodies in a European Union context that it is inappropriate. The logic that the amendment picks up is ultimately that of reputation. The impact of the Bill goes considerably too far.
Amendment No. 230 reflects an amendment that we tabled in Committee. We wish to make it clear that guidance given by the FSA should relate not only to rules but to statements of principle and codes. The Government will recollect that they said that they would reconsider the matter. There are several areas where codes and statements of principle are likely to require guidance, yet they are not covered in the Bill.
Mr. Tim Loughton (East Worthing and Shoreham):
I support the comments made by my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) and my hon. Friend the Member for Arundel and South Downs (Mr. Flight). New clause 4 is probably the most important component of the group of new clauses and amendments that we are discussing. It is about efficiency and cost control but, more than that, it is about self-discipline for the Financial Services Authority itself.
There were problems with the Financial Services Act 1986--we have heard about them many times--because there was no obvious mechanism for an on-going review of the new rules that came out as a result of the Act. The measure came in for much criticism for being bogged down with many more rules. It was a matter not of taking old rules off the original book but of adding layer upon layer of rules, until we had a muddled and complicated rule book at the end of August.
We must remember that none of us has seen the new rule book. All our deliberations over the best part of the past 12 months have been to produce a rule book, the details of which we have not seen. We have plenty of principles and ideas of what might go into the book, but in terms of chapter and verse we are still very much in the dark about what the rule book--the bible of the FSA--will contain.
It is essential that the continuing appropriateness of the rules is held under review, and the mechanism proposed in new clause 3 seems to be a sensible way of proceeding. Any new rules that come along should be subject to cost-benefit analysis. After three years, there should be an
explanation of the continuing appropriateness of the rules. Markets, and the financial services industry generally, move quickly. What may be appropriate to regulate financial services today may be completely out of date in three years' time. New technology and new products will require new forms of regulation, which, hopefully, will be lighter-touch regulation. It is only right that we should have a mechanism of determining whether the rules that are put in place as a result of this legislation are still appropriate in three years' time, and that that mechanism should operate on a three-year rolling basis thereafter.
Given that the industry made so many representations in the run-up to, and during deliberations on, the Bill, it would be useful and of reassurance to it if there were a clearly defined watershed three years hence. Institutions that find that rules are not working in the best interests of the financial services community that they serve would then have a clear opportunity to make fresh representations to the FSA and then to the Treasury about how the rules might be changed, and about the on-going problems of cost-benefit analysis.
In Committee, we spent some time discussing the cumulative effect of the extra regulations and their cost, particularly when put into an international context. Many of us argued then that there should be detailed and specific requirements in the annual report, so that the FSA would have an opportunity--and, indeed, an obligation--to report in transparent terms all the regulations that had been added to the financial services industry during that year, on top of those that had been added in previous years. We could then see the sum total of regulations added--and, we hope, a few taken off as well.
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