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Standing Committee Debates

Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2006

The Committee consisted of the following Members:

Chairman: John Cummings
Balls, Ed (Economic Secretary to the Treasury)
Brennan, Kevin (Lord Commissioner of Her Majesty's Treasury)
Burgon, Colin (Elmet) (Lab)
Cable, Dr. Vincent (Twickenham) (LD)
Field, Mr. Frank (Birkenhead) (Lab)
Flynn, Paul (Newport, West) (Lab)
Gibson, Dr. Ian (Norwich, North) (Lab)
Goldsworthy, Julia (Falmouth and Camborne) (LD)
Hoban, Mr. Mark (Fareham) (Con)
Hoey, Kate (Vauxhall) (Lab)
Jones, Mr. David (Clwyd, West) (Con)
Love, Mr. Andrew (Edmonton) (Lab/Co-op)
Malins, Mr. Humfrey (Woking) (Con)
Rifkind, Sir Malcolm (Kensington and Chelsea) (Con)
Selous, Andrew (South-West Bedfordshire) (Con)
Tami, Mark (Alyn and Deeside) (Lab)
Truswell, Mr. Paul (Pudsey) (Lab)
Mark Etherton, Committee Clerk
† attended the Committee

Second Standing Committee on Delegated Legislation

Wednesday 12 July 2006

[Mr. John Cummings in the Chair]

Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2006

2.30 pm
The Economic Secretary to the Treasury (Ed Balls): I beg to move,
That the Committee has considered the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2006 (S.I. 2006, No. 1969)
It is a privilege to serve under your chairmanship, Mr. Cummings, and a delight to return to a room so soon after the end of the Committee stage of the Finance (No.2) Bill with the hon. Members for Fareham (Mr. Hoban) and for South-West Bedfordshire (Andrew Selous), who probably had the same withdrawal symptoms I did.
The proposal makes the changes needed to the Financial Services and Markets Act 2000 (Regulated Activities) Order to introduce a new Financial Services Authority- regulated activity related to pensions. The change relates specifically to the regulation of personal pensions by the FSA. I shall give the Committee a brief introduction and some background.
Between September and December last year, we launched a formal consultation on the rules surrounding personal pension scheme regulation. It needs to be seen in the context of the broader changes we have been making to pension taxation and regulation in the last few years with two Acts: the Finance Act 2004 introduced a unified and simplified tax regime for pension schemes, which came into effect from 6 April 2006, or A-day; and the Pensions Act 2004 introduced a new regulatory framework for occupational pension schemes from April 2005. The order changes the rules surrounding personal pension scheme regulation, which until that point had remained largely untouched.
From September to December last year, we consulted on four proposed options with the document “Proposed changes to the eligibility rules for establishing a pension scheme”, including a “do nothing” option and a range of other options including relying on existing permissions or making a temporary one-year amendment to the Finance Act from April 2006 before introducing the changes proposed in the order from April 2007. We fully considered all 25 responses and published a formal response on 23 March, which set out the industry’s views in detail, and we announced the proposed policy change—namely, that the Government should create a new regulated activity, overseen by the FSA, relating to personal pensions from April 2007. I am pleased to say that the consultation showed overwhelming support for the changes, with three-quarters of respondents favouring the Government's preferred option in the proposal before the Committee.
The Association of British Insurers, whose members provide most personal pensions in the UK and which has today had an excellent reception here, said that the package
“offers customers the greatest protection, while maintaining wide choice.”
The Association of Investment Trust Companies said that the package will provide maximum flexibility for future development of the sector over the long term; at the same time, it will maintain the FSA's strong oversight of pension provision. Barclays said:
“Establishing a new regulated activity directly related to personal pension schemes....will ultimately benefit both consumers and the wider financial services industry.”
That overwhelming support was welcome but not surprising given the extensive consultation undertaken in the latter part of last year.
The proposed changes will bring all personal pension schemes under FSA consumer protection while ensuring that that protection extends to different aspects of operating a personal pension scheme, including administration. It will build on the FSA's existing role of regulating stakeholder pension schemes, provide transparency and improve consumer confidence.
As pension investments become more diverse, an increasing range of pension investment activity would otherwise fall outside the scope of FSA supervision. Without the changes, there is a risk that consumer protection would be inadequate. Given the importance of reliable personal pension schemes, it would not be right to keep that aspect of personal pension operation outside regulatory supervision. The FSA already regulates a number of financial services bodies related to these issues, such as insurance companies, which provide personal pension schemes. It is only right that all personal pension operators should be regulated by the FSA. The proposal will enable the FSA to open its doors to that activity this autumn so that applicants can seek permission to carry out the new activity from April 2007. That will give firms maximum time to prepare to become registered.
The FSA and the Government have worked closely together to ensure a smooth transition for firms to the new regime, including waiving FSA application fees for existing personal pension providers. Eligibility to establish a registered pension scheme that qualifies for tax privileges will, from next April, be based on having permission from the FSA to carry out this new activity. That element of the package will require a legislative change to the Finance Act 2004 and one change to the Pensions Schemes Act 1993. The legislative change—about which this is the first announcement of many over the coming months—will be made in the Finance Bill 2007, the next guaranteed vehicle available, but will have effect from 6 April 2007 to coincide with the coming into effect of the new activity.
I should like to reiterate the implications of not making these changes. If we did not do so, the operation of personal pension schemes—unless they were stakeholder schemes—would remain largely outside the scope of supervision. By making the changes to regulations, alongside associated changes to the tax regime in next year’s Finance Bill, we can implement the outcome of our consultation. I hope that this measure will have cross-party support.
2.37 pm
Mr. Mark Hoban (Fareham) (Con): I, too, welcome you to the Chair this afternoon, Mr. Cummings. It is a pleasure to serve under your chairmanship again. It is also a pleasure to be debating with the Economic Secretary—after less than a week’s gap—the teaser that he has given us of what we might be discussing in April, May and June 2007.
I do not know whether the Economic Secretary has with him the draft amendments and changes on which he is consulting, but it is a pity that we did not have them in advance of today’s sitting to enable us to have a more informed debate.
Ed Balls: I asked officials whether it would be appropriate to circulate them to Committee members in advance, because I was happy to do so, but was advised that they were minor and technical changesĀ that would be debated in next year’s Finance Bill and that it would be ruled out of order by the Chair for them to be debated today because we are amending the FSMA, not the Finance Act. If the hon. Gentleman takes any offence, I apologise wholeheartedly, and he can have the documents to read tonight if that makes him happy.
Mr. Hoban: I do not know whether, if I read them tonight, that would be preparation after the event or advance preparation for next year’s Finance Bill.
Why is there a gap between A-day and the introduction of this regulation on personal pension providers? What are we seeking to regulate? The consultation paper talks about creating a level playing field and stimulating competition. I should like to understand more clearly the Government’s view as to whether that would reduce the barriers to entry to this market or erect new barriers to people who may wish to engage in the business and start administering and providing self-invested personal pensions and other forms of personal pensions.
A-day was three months ago on 6 April. However, as this statutory instrument makes it clear and as the Economic Secretary said, this provision will not come into force until 6 April 2007. I am concerned about why there is a gap. If there is a gap and the Government are happy for it to exist, does that matter? Do we need this regulation? If it does matter, why was it not introduced earlier? If these are to be regulated activities after 6 April 2007, customers of the providers will benefit from, for instance, the Financial Ombudsman Service’s mediation and the financial services compensation scheme in the event of a failure. I am surprised that the provision was not introduced earlier. What will happen if there is a problem before 6 April 2007? Will the Government step in to tackle any complaints or market failure? We need to be able to understand what will happen between now and 2007.
What is the FSA seeking to regulate? I can understand that before the 2005 pre-Budget report there was a need to regulate the market more carefully. At that point, and when the original consultation document was published, there were plans to enable pension schemes to invest in a wider range of unregulated assets such as residential property, fine wines, antiques and jewellery. The U-turn at the time of that pre-Budget report and the provisions of the Finance Bill have removed such assets from the list of items in which pension schemes can invest. The only principal asset that can now be invested in and is not regulated by some other means is commercial property. I am slightly perplexed as to what the FSA is trying to regulate by extending regulation to pension schemes.
Where does the provision sit in terms of freeing up the market? The consultation document makes the point that the Government are seeking a level playing field to enable more people to enter the market. The list of people currently in it is set out in section 154 of the Finance Act 2004, and it is a narrow list. The regulatory impact assessment states that those not already regulated and able to offer the service can use third parties to do so. If that route is available for those unable to administer the products in question, why are we regulating? Will there be an increased number of participants in the market? Part of the aim behind the order is clearly to increase the number of people who qualify.
The regulatory impact assessment also indicates, at page 15, the cost of becoming a regulated self-invested personal pension provider for the first time. It states:
“Information from the SIPP industry suggests that a typical SIPP operator, new to regulation, would face total costs associated with regulation of around £100,000 in the first year, and £50,000 ongoing annual costs thereafter.”
Those seem steep costs for a new provider to budget for and recover from its clients. By making the regulation, will we create another barrier to entry into the market?
It is clear from the responses to the consultation document that the vast majority of respondents were those already in the market and regulated in some shape or form, who wanted everyone to incur the same costs so that there was a level playing field. That would perhaps act as a barrier to entry for new providers. I am concerned about that.
I would be grateful if the Minister could tackle the three issues that I have raised: why are we waiting until April next year rather than bringing in the change now, what are we seeking to regulate, and will the order genuinely free up the market and increase competition? All hon. Members these days believe that competition is a very good way to provide a better deal to customers in financial services.
2.44 pm
Dr. Vincent Cable (Twickenham) (LD): I do not have a great deal to add to what the Conservative spokesman said. The wide context is that all of us, particularly those who came into the House in 1997, are conscious of the political importance of consumer protection in the field of personal pensions. One of the first big acts of the Government at the time was to launch a massive personal pension mis-selling review—I believe it was led by the lady who is now the high commissioner to Australia—which was enormously painful for the people who had been mis-sold pensions, as well as for many individual financial services providers. The background was that the Government were rightly concerned about the potential for the mis-selling of personal pension products.
It may be a failing of understanding on my part, but I do not know why we have to legislate at this time. My comments partly reflect what the Conservative spokesman said about what exactly we are trying to regulate. I was one of the people who suffered the long process of the Financial Services and Markets Bill when it passed through Parliament at interminable length. One of the purposes of the legislation, as I remember it, was to bring personal as well as occupational pensions within a consistent system of unitary, statutory regulation.
I do not fully understand why we have to legislate again. Was the drafting at the time imperfect or inaccurate, or has the market developed in such sophisticated ways that we could not have foreseen that the order would be necessary? It is not at all clear why we now need a new body of statute to deal with the regulation of personal pensions, given that overarching legislation is already in place.
My next point also partly reflects what the Conservative spokesman said. I always go straight to the regulatory impact assessment. The commentary in the explanatory notes is a little breezy. It suggests that the costs are not very large but that the potential benefits from competition are. That may be true, but in the past when we have probed the costs of regulation when legislation has been extended, as it recently was for Muslim finance products and various forms of equity release products—I am not criticising that desirable legislation—the costs turned out to be substantial once the RIA made them explicit. I sense it is possible that the costs of regulation in this case could be significant, particularly on simpler products. It would be useful if the Economic Secretary would spell out in a little more detail the assessment that the Treasury has made of how much the order will add to the cost of products at different levels of the market.
Subject to those questions, I am sure that there will be all-party consensus that the instrument should be approved.
2.48 pm
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