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Seventh Standing Committee
on Delegated Legislation
Tuesday 24 June 2003
[Mr. Roger Gale in the Chair]
Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 1) Order 2003
The Paymaster General (Dawn Primarolo): I beg to move,
That the Committee has considered the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 1) Order 2003 (S.I. 2003, No. 1475).
The Chairman: With this we may consider the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2003 (S.I. 2003, No. 1476), the draft Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2003, and the draft Financial Services and Markets Act 2000 (Exemption) (Amendment) (No. 2) Order 2003.
Before we proceed, I have one housekeeping announcement. Hon. Members who have not already presumed on the Chairman's understanding of Members' convenience may remove their jackets if they wish.
Dawn Primarolo: The Government announced in December 2001 that mortgage advisers and intermediaries would be regulated by the Financial Services Authority. In addition, to maintain a consistent and streamlined approach, the sale of general insurance products will also be regulated by the FSA. Brokers who deal in two or more lines of regulated business will deal with a single regulator, not several, and will be able to compete in European markets.
I should mention that the Government have laid two negative procedure orders before Parliament: the Financial Services and Markets Act 2000 (Misleading Statements and Practices) (Amendment) Order 2003 and the Insurance Mediation Directive (Miscellaneous Amendments) Regulations 2003.
The purpose of all the orders is to bring mortgage advisers and intermediaries, and the sale of general insurance mediation within FSA regulation. It might be helpful if I explain a little about the Government's decisions following consultation on the insurance mediation directive. The Government's proposals to regulate various activities relating to the sale and administration of general insurance were published in a consultation document ''Regulating Insurance Mediation'' in October 2002; we received around 400 responses. The directive requires the United Kingdom to regulate certain insurance mediation activities carried out by intermediaries, but those activities are not within the scope of the directive when carried out by employees of insurance companies. To regulate the activities of intermediaries but not insurers would cause confusion to customers and create an unlevel
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playing field for competition between intermediaries and insurers' direct sales forces. Therefore, the Government intend to regulate those activities in the same way whether they are carried out by intermediaries or by persons employed directly by insurers.
The directive requires the regulation of insurance mediation activities in relation to all contracts of insurance. However, insurance sold as part of a package, including travel insurance sold with a holiday and some extended warranties that are contracts of insurance, are exempt from the directive. Following extensive consultation the Government decided not to regulate travel insurance sold with a holiday because the consultation provided insufficient evidence of consumer detriment to warrant the extra cost of regulation, particularly for small independent travel agents. However the Government recognise that there are concerns about that market: we have received evidence of some mis-selling from the Consumers Association. We therefore decided to hold a review of that decision two years after implementation of general insurance regulation in early 2007.
The directive requires the United Kingdom to regulate extended warranties that are contracts of insurance that cost more than €500—about £300—per annum, or that are sold separately from a car, whatever the price; those costing less than €500 per annum are excluded from the scope of the directive when sold at the same time as the car. Some motor warranties cost more than €500 per annum and will fall within the scope of the directive.
The Government have decided that all motor warranties that are contracts of insurance, whatever their value, should be regulated by the FSA. That is to ensure a level regulatory playing field and to stop retailers manipulating more expensive warranties to make them appear cheaper simply to avoid regulation. The Government have also decided to await the outcome of the Competition Commission inquiry into non-motor extended warranties on domestic electrical appliances before taking a decision on whether non-motor extended warranties that are contracts of insurance should be regulated.
Except in those two areas, those who engage in insurance mediation activities will be caught by the Financial Services Markets Act 2000. Many intermediaries will require authorisation from the FSA, but the appointed representatives regime will apply to insurance mediation: that will allow representatives of FSA-authorised persons to carry out regulated activities without being authorised themselves, provided the authorised person has accepted responsibility for their conduct. As well as being able to arrange and advise on contracts of general insurance, appointed representatives will be able to conclude contracts of general insurance as agents. That change reflects market practice.
Having explained the context of the changes relating to the Financial Services and Markets Act, I shall deal briefly with the orders. The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 1) Order 2003 gives the FSA responsibility for regulating the activities of arranging
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and advising on regulated mortgage contracts. It also makes various amendments to legislation under the 2000 Act relating to mortgages. Firms will need to be authorised or exempted to carry out the activities of advising on or arranging regulated mortgage contracts. The order also makes consequential and necessary amendments to the Consumer Credit Act 1974 to ensure that there is no dual regulation for the same activity. A regulated mortgage contract is defined as a mortgage secured by a first legal charge on UK residential accommodation to be occupied by the borrower or their immediate family. Second and subsequent legal charges on property remain covered by the 1974 Act. If approved, the substantive provisions of the order will come into force on 31 October 2004.
It might be convenient to mention at this point that, as many hon. Members will know, lifetime mortgages—that is, mortgage-based equity release plans—will fall within the scope of FSA regulation—
Sitting suspended for a Division in the House.
The Chairman: Order. Before we resume, I have studied the Standing Orders carefully. It is custom and practice to allow injury time when there is a Division in the course of a Committee such as this. However, having examined the nature of the instruments before us this afternoon, I believe that we should be able to dispose of them within the time allocated, starting from the time at which the Committee commenced. It should not be regarded as a precedent, but I do not propose to allow any additional time for the Division that has just occurred. If there is a further Division on the Floor of the House, I may well take a different view, and I reserve the right to revise my view if it becomes apparent that Government or Opposition Members feel that matters have not been sufficiently debated.
Dawn Primarolo: Thank you, Mr. Gale. I was explaining to the Committee that mortgage-based equity release plans will fall within the scope of FSA regulation when it takes on regulatory responsibility for mortgages on 31 October 2004. However, under current legislation there is another type of equity release scheme, commonly known as a home reversion plan. It cannot be bought into FSA regulation because it is a sale and purchase arrangement rather than a financial services product and thus falls outside the definition of a regulated mortgage. The Government have held informal discussions with stakeholders on the regulation of home reversion plans, but the consultations provided no evidence of current consumer detriment in that market. However, in view of the widespread concerns about the potential for consumer detriment in future, the Government announced on 5 June that there is a need for an in-depth analysis of the costs and benefits of regulation, and that there will be an open consultation on that subject in the autumn.
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The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2003 gives the FSA responsibility for regulating various activities relating to the sale and administration of general insurance products, whether the activities are carried on by an intermediary or by insurers. Part 2 of the order adapts the existing exclusions to ensure that they are compatible with the directive. Part 3 relates to the conduct of insurance mediation activities by persons who are not authorised under the Financial Services Markets Act such as appointed representatives and members of designated professional bodies such as accountants and solicitors. Regulation 13 amends the principal order to require the FSA to maintain a record of appointed representatives and members of designated professional bodies who conduct insurance mediation activities. That reflects the requirement imposed by the insurance mediation directive that each member state maintain a register of all insurance intermediaries for which it is the ''home member state''.
If approved, the substantive provisions of the order will come into force on 31 October 2004 for long-term care insurance, reflecting the Government's commitment in that area, and on 14 January 2005 for other contracts of insurance in order to meet the EU timetable for implementation of the directive.
The Draft Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2003 brings into the scope of the financial promotion regime promotions relating to the activities of arranging and advising on the provision of regulated mortgage contracts. That order will come into force on 31 October 2004.
The Draft Financial Services and Markets Act 2000 (Exemption) (Amendment) (No. 2) Order 2003 extends certain exemptions in the Act so that they apply to the newly regulated activities in relation to insurance mediation and mortgages. The order extends the exemptions of local authorities and certain bodies involved in the provision of social housing to the arranging of and advice in relation to regulated mortgage contracts and activities relating to certain insurance contracts. That order comes into force on 31 October 2004 for mortgages, and on 14 January 2005 for insurance mediation.
Regulation will provide major benefits to UK consumers in two large and important markets. Each year, UK consumers pay £26.4 billion of general insurance premiums and take out £219 billion of mortgage loans. Consumer protection in those markets will be increased, with regulation providing safeguards for consumers and introducing minimum standards of advice. Intermediaries selling a range of financial services products will have to deal with one regulator, the FSA, rather than the current complex mix of statutory and self-regulatory arrangements.
The Government and the FSA have been working closely with the industry and others to design a regime that understands the markets and is targeted precisely at maximising benefits to the consumer and that does not load the industry and ultimately the consumer
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with unnecessary costs. The orders fulfil that remit, Mr. Gale, and I commend them to the Committee.