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5 pm

Mr. Andrew Tyrie (Chichester): I strongly support the arguments of my right hon. and hon. Friends on the new clauses and amendments. We shall discuss reviews later, when we consider clause 10. Many of the same arguments apply to this group of amendments. I shall not elaborate on all the many points that my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) made in his opening remarks. Instead, I shall reiterate one of the points that has been made, and add another.

It is in the nature of regulation to ratchet up. Once regulations are in place, they tend to be built on. Unless there is a countervailing force to cut regulations back, it is difficult to get rid of them. That is why it is all too easy for so-called light-touch regulation to become burdensome.

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There are many examples. One example that should be examined when, we hope, new clause 4 is accepted and the Bill is enacted, is the self-regulating organisation- derived rules on capital adequacy. I should be interested to hear the Minister's views.

Mr. Nick Hawkins (Surrey Heath): I am grateful to my hon. Friend for giving way. He will recall that, as an officer of the all-party group on insurance and financial services, I have dealt extensively with the issue of regulation. Before entering the House, I also had to deal professionally with the capital adequacy rules of an SRO. I endorse what my hon. Friend said. Does he agree that there is an urgent need for Ministers to consider the issue, which is a matter of great concern to the industry?

Mr. Tyrie: I agree with my hon. Friend. Ministers will have to deal with the issue anyway, but the incorporation of new clause 4 into the Bill will ensure that that is done in a timely manner.

I support the suggestion that rules should be made subject to a rigorous cost-benefit analysis. The latest document produced by the FSA, "A new regulator for the new millennium", is full of new-millennial jargon, but presents a similar approach--a belief in the need for a cost-benefit analysis, reflecting the acceptance of a trade-off between economic performance and the degree of regulation, for which we have consistently argued throughout the proceedings on the Bill.

I shall make one further point. A provision such as new clause 4 might initially appear to have been tabled primarily to help practitioners. It is a classic example of a provision that appears to help the City, but would ultimately help consumers. Regulations that build up and remain without serving a valid purpose, or which impose an unnecessary burden, result in increased costs. These are ultimately borne by consumers and, to the extent that the City performs less well and provides a lower tax yield, also by taxpayers. New clause 4 is a step in the right direction towards ensuring the continued competitiveness and good economic performance of the City.

The Financial Secretary to the Treasury (Mr. Stephen Timms): I appreciate that the aim of new clause 4 is to ensure that the authority reviews its rules regularly and changes them when they are no longer appropriate. I agree that regular review should take place, and I expect the FSA to monitor the application and implications of its rules continuously, not only every three years. However, to require the FSA to undergo a public consultation exercise on each rule every three years is unnecessarily bureaucratic.

Conservative Members implied that they intended the review to be a one-off exercise. However, that is not the implication of the new clause as drafted, and I do not believe that the Opposition intend that.

Mr. Flight: It would be a rolling process.

Mr. Timms: That is right. Every three years, each rule would be reviewed. That would lead to a cumbersome bureaucracy, and would not be an effective method of achieving the Opposition's objective. As well as the FSA's review process, the consumer and practitioner panels will play an important part in continuously monitoring the rules. That will allow effort to be focused

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on problems rather than reviewing and consulting about each rule every three years. The process for which the new clause provides would be administratively onerous and potentially unworkable. It would put a strain on the authority, and divert time and money from its important tasks. It would be better to concentrate on solving the problems that have been identified.

Let us consider new clause 5. If the authority issued guidance on a specific rule, and the guidance was followed to the letter, it is difficult to understand how the FSA could discipline someone for breaching that rule. That person would be in a strong position; the FSA made that point in the policy statement that it published last September. If the FSA behaved in a contrary manner, the tribunal would take a dim view, to say the least, unless the authority had extremely good reasons for its actions. The tribunal exists as a safeguard against capricious acts by the FSA, which new clause 5 aims to address.

In Committee, we discussed the way in which attaching specific status to, for example, general guidance could lead the FSA to be unwilling or unable to give guidance informally and on request. New clause 5 would elevate guidance to law. We must maintain the important distinction between guidance and law. New clause 5 could lead to absurd results. For example, if it were accepted, would we need to issue guidance on guidance? It is important to maintain the clear distinction between law and guidance which new clause 5 would remove.

Let us consider amendments Nos. 35 and 50. We are committed to light-touch regulation. We would generally try to avoid what the right hon. Member for Wells (Mr. Heathcoat-Amory) described as double regulation in the international arena. We are committed also to the home state regulatory principle in the context of Europe, but at the same time, and in advance of a move to a fuller home state regulatory basis in certain respects, we need to balance that against proper protection for consumers.

Amendment No. 35 goes in part to what is often termed the "foreign business carve out" under the existing self-regulating organisations' rule books. Where business is conducted from an overseas branch of a UK-authorised firm, some of the self-regulating organisations' conduct of business rules are disapplied. That is clearly an important regulatory principle and although I would certainly expect an appropriately light touch to be maintained under the new regime so that unnecessary double regulation is avoided, making special provision in the Bill is another matter. That could prevent the FSA from applying rules to businesses in unusual cases in which it might be appropriate to apply them.

For example, there may be merit in the FSA applying limited conduct of business rules to overseas branches of firms to make it clear to customers that, in conducting business through the overseas branch, the firm is not acting in accordance with the FSA's detailed UK rules and regulations, which they might otherwise think was the case. It is important that customers are not misled about the protection and regulation that they are receiving and there may be other good reasons for applying conduct of business rules to overseas branches.

Amendment No. 35 could also cause difficulties, were conduct of business or marketing regulation to move to a fuller home-state approach in Europe. Currently, the home

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state is responsible under the directives for prudential supervision, including capital adequacy systems, establishing the fitness and properness of workers and so on. To me, it looks as though there would be fairly immediate conflict between the requirements of the directives and the amendment.

Amendment No. 50 proposes that the FSA should not apply conduct of business rules to UK offices of authorised firms carrying on business with overseas persons, except where the scope of the rules has been prescribed by the Treasury. Again, although I agree that double regulation should be avoided wherever possible, it is not clear, for example, how the amendment would fit in with any wider move, which may well come, to a fuller home state basis of regulation of the marketing of financial services.

On amendment No. 51, when we debated clause 111 in Standing Committee, the hon. Member for Chichester (Mr. Tyrie) expressed concern. He said:

In the narrow context of the amendment, which would give the Treasury a new policing role, he was right. The Bill provides for extensive consultation and cost-benefit analysis for rules made under clause 111 and we do not think it appropriate for that particular rule-making power to be limited in the way proposed.

Clause 111 is essentially aimed at protecting consumers and gives the FSA power to make rules for those matters on which the regulators are able to make rules under current legislation. For example, rules can currently be made to require notification of certain events to be given in respect of a firm's non-regulated activities or non-regulated group members in certain circumstances. We think that that should continue.

On amendment No. 8, it is quite right that the clause 112 power has been included, partly to enable the FSA to continue the banking supervisors' existing practice of setting individual capital ratios that reflect the overall nature and riskiness of a bank or building society. That is a long-standing and valuable tool for banking supervision, but the principle is not confined to banks. The rationale for the power to impose bespoke capital requirements is that a firm may have an unusual risk profile compared with other similar firms.

That rationale applies equally to deposit takers and investment firms. Investment firms' need to impose bespoke requirements is more likely to be used in respect of companies with complex businesses--broadly speaking, former Securities and Futures Authority member firms--but may be relevant in other cases. That is reflected not only in section 49 of the Financial Services Act 1986, but in the capital adequacy directive and the existing rules. Chapter 10 of the SFA rules includes a power to impose a bespoke "secondary requirement" on an investment services directive firm to reflect its particular risk profile or operational risks.

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