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9.29 pm
Mr. Beard: For the four of us on these Benches who have seen the Bill through all its stages from the Burns committee, tonight has something of an end of term feeling. I am sure that all four of us would wish to associate ourselves with the remarks of my hon. Friend the Member for Huddersfield (Mr. Sheerman) on the constructive way in which the committee dealt with the matter and its value through all the subsequent stages.
The main emphasis of all the evidence in the pre-legislative scrutiny Joint Committee was from financial practitioners, concerned, as the hon. Member for East Worthing and Shoreham (Mr. Loughton) has been, that the Bill would enable the Financial Services Authority to bear down on them too severely. In Committee, virtually all the Opposition amendments were designed to increase accountability, to make it easier to pursue the FSA in the courts, to remove or limit its immunities, or to secure increased consultation and reasoned responses.
It is vital for the Bill to be fair, and not to provide so draconian a regime that financial services companies in London and the rest of the country would be at a disadvantage in international financial markets. It is also vital, however, for the financial services industry in Britain to have a reputation for integrity. People should be able to trust our financial practitioners, without any suspicion or reservation. That point has never been so strongly represented in debates as has the need to avoid regulatory cost, and the need to prevent the FSA from becoming a behemoth--or the leviathan referred to earlier--trampling innocent financiers underfoot.
As the Bill moves to another place where there are many distinguished financial service practitioners, there is a danger that the same emphasis is about to be
intensified--that there will be too much emphasis on accountability and restraint of the FSA, and that too little will be said about performance and effectiveness in the achievement of its objectives. I also feel some unease about the way in which so many strands of FSA accountability have been added to each other, without much debate about the total impact on the day-to-day effectiveness and flexibility of the organisation.
Let me briefly summarise the many dimensions of accountability that already exist in the Bill. The Treasury will appoint the board with a majority of non-executive directors, who will form a committee reviewing the economy and efficiency of the FSA. The executive directors will be subject to confirmatory 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. The Treasury may appoint investigators to inquire into whatever aspect of the FSA's work it wishes to be examined.
Two panels, one representing consumers and the other representing practitioners, must be consulted on various aspects of FSA practices and rule making, and their observations must be given reasoned answers. When guiding principles and codes of practice are to be established or subsequently amended there must be consultation with the relevant public, and responses must be made about why any observation has not been accepted. All FSA decisions are subject to appeal to a tribunal involving quasi-judicial proceedings, hearing cases from scratch, and there is to be an independent investigator of complaints.
If the other place piled on a few more accountabilities and introduced a few extra impediments to fast reaction in a spirit of giving misbehaving practitioners a sporting chance, the real fear would not be that a powerful unaccountable monster had been created and let loose. The real question would be whether the staff of the FSA would have any time, energy or motivation left to pursue dodgy dealers, financial fiddlers and insider traders.
Mr. Tyrie:
I agree with much of what the Chief Secretary said. Of course, we all want regulation: we want regulation that works. We all agree that the ultimate objective should be to protect the consumer, but we do not agree on how to achieve it. Conservative Members do not think that the Government have got it right, despite our best efforts to guide them in Committee.
The reason why that should be of concern to us is, as several hon. Members have pointed out this evening and on many other occasions, that we are creating a hugely powerful institution. It has the power to act as a legislator; it can make its own rules. It has the power to act as an executive; it implements its own rules. It has the power
to act as judge and jury. Within certain limits, it can even adjudicate on whether there have been any transgressions at all. It has at its head a man who has no one looking over his shoulder, a combined chief executive and chairman. That is the first and most important source of concern.
I thought that the best thing I could do this evening was to set out an agenda of the major issues that the other place needs to look at again--issues on which I feel that we have not had satisfactory answers, or where legislation is clearly still deficient. As I have said, we must split the role of chairman and chief executive. I hope that the other place comes back to that issue.
I do not think that it can be right that we are left in a position where the FSA can act recklessly and still be immune from a civil action. The FSA must have a duty to act fairly, reasonably and proportionately. It does not, as the Bill is drafted.
There is the whole issue of the practitioner panels. The industry must have more say as to the composition of the panels. It should not be left to the regulator to appoint the people who will give advice.
There is also the issue of reviews. It is extraordinary that the Government should have decided that they are not prepared to commit themselves to at least one thorough review of the Bill, in, say, three years. They want to retain the discretion not to have any review at all. That cannot be right.
There is the question of financial promotion from outside the UK, which is governed at the moment by the phrase:
There is the question of market abuse, which we have discussed again tonight. I find it unacceptable that a firm may find itself guilty of market abuse, even if it had no intent and it can show that it had no intent to do so. Clearly, intent should be relevant in assessing the firm's guilt.
There is the issue of the FSA's powers of investigation. Those must be made subject to judicial review.
Today, we have discussed again the decisions of the ombudsman. His decisions should be binding on both parties--the firm and complainant--or on neither. They should both be permitted to go to judicial review. The imbalance, the asymmetry between the firm and the individual with respect to the ombudsman, is clearly unfair and may lead to a European Court of Human Rights review.
Finally in the list of 10 items as suggested prep for the other place to look at, there is the issue of mortgage regulation. It is true that the Liberal Democrats have scarcely been here during the whole of our lengthy scrutiny, but at least at the finish they came in with a couple of points about mortgage regulation, with which I thoroughly agree. I notice that one or two Labour Members also agree. The Government's approach, with
the lender heavily regulated and the adviser not regulated at all, is clearly in no one's interests, certainly not the consumer's.
Those are 10 major items that I want their Lordships to consider. However, the Bill contains one overriding weakness, which we have discussed time and again--competition and competitiveness--and which the Government have still not got right. They have not fully grasped the implications of the fact that the optimal level of regulation is not one that will produce zero misconduct; it must be one that maximises the consumer benefit.
To its credit, the FSA produced an interesting document--the most interesting of the great bundle that it has generated--entitled, "A new regulator for the new millennium". In it, the FSA appears to recognise exactly what we have been saying all these months. In fact, Howard Davies has gone a long way towards redefining the market confidence objective in a way that embraces consideration of our concerns. Page 6 of the document states that the FSA should aim for
The chairman of the FSA is right, but the balance that he is trying to strike in the document should have been in the Bill. With this document, the FSA is merely patching up the failures of this legislation. It is introducing an economic performance test--a competitiveness test--through the back door: through article 127, which is the cost benefit analysis clause. It is worth pausing to think through how the FSA should go about the process. I suggest to the authority and the Government a simple test; it is not perfect but it will be a good rule of thumb to enable a cost benefit analysis approach--which is clearly what Howard Davies is thinking of applying much more stringently than had originally been intended--to be applied so as to enable economic performance to be maximised. That will enable the delivery of the competitiveness objective.
I want the Government to ask the FSA to consider, before any regulation or rule is made or changed, whether the proposed regulatory change would shrink or enlarge the market. If it would enlarge it legitimately, it would almost certainly benefit the consumer. Of course, there are provisos, which I will not go into as I do not have time, but if that simple test is applied and forms the basis for cost benefit analysis we may be able to secure through the back door what the Government have so determinedly refused to allow through the front: adding a competitiveness or economic performance objective to clause 2.
"capable of having an effect in the United Kingdom",
which is clearly far too stiff. We must go back to the principle that that sort of business promotion should be regulated if the intention is to direct the product at the UK. I notice that, after months of stonewalling in Committee, the Government are finally wavering on that. I hope that, in the other place, they will table an intelligent amendment on that point.
"as low an incidence of"--
market--
"failure . . . as is consistent with the maintenance of competition and innovation".
Mr. Davies, of the FSA, says:
"achieving a 'zero failure' is . . . undesirable . . . It would be likely to damage the economy as a whole".
The FSA acknowledges that eliminating the risk of regulatory failure would be unacceptably costly to the industry, the consumer and the economy.
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