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Session 2009 - 10
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Financial Services Bill

Financial Services Bill



The Committee consisted of the following Members:

Chairmen: Mr. Roger Gale, Mr. Joe Benton
Bain, Mr. William (Glasgow, North-East) (Lab)
Barlow, Ms Celia (Hove) (Lab)
Breed, Mr. Colin (South-East Cornwall) (LD)
Cable, Dr. Vincent (Twickenham) (LD)
Duddridge, James (Rochford and Southend, East) (Con)
Hoban, Mr. Mark (Fareham) (Con)
Howell, John (Henley) (Con)
Love, Mr. Andrew (Edmonton) (Lab/Co-op)
Marris, Rob (Wolverhampton, South-West) (Lab)
Mudie, Mr. George (Leeds, East) (Lab)
Pearson, Ian (Economic Secretary to the Treasury)
Roy, Lindsay (Glenrothes) (Lab)
Todd, Mr. Mark (South Derbyshire) (Lab)
Tyrie, Mr. Andrew (Chichester) (Con)
Walker, Mr. Charles (Broxbourne) (Con)
Watson, Mr. Tom (West Bromwich, East) (Lab)
Chris Stanton, Eliot Wilson, Committee Clerks
† attended the Committee

Public Bill Committee

Tuesday 15 December 2009

(Afternoon)

[Mr. Roger Gale in the Chair]

Financial Services Bill

4.4 pm
The Chairman: I apologise for the delay, which was entirely my fault. I remind hon. Members that the deadline for tabling amendments to be considered on Tuesday 5 January is 4.30 pm on Wednesday 30 December. It will be possible to table amendments during the recess.

Clause 16

Performance of controlled function without approval
Amendment proposed (this day): 14, in clause 16, page 20, line 7, leave out ‘P’ and insert ‘the authorised person’.—(Mr. Hoban.)
Question again proposed, That the amendment be made.
The Chairman: I remind the Committee that with this we are discussing the following: amendment 15, in clause 16, page 20, line 8, leave out ‘P’ and insert ‘the authorised person’.
Amendment 1, in clause 16, page 20, line 10, leave out from ‘P’ to end of line 14 and insert ‘either
(a) (i) did not know, and
(ii) could not reasonably be expected to have known,
that P was at that time performing a controlled function without approval, or
(b) was instructed to undertake these activities by an authorised person or where the authorised person was a company director or officer, who was an approved person.’.
Amendment 16, in clause 16, page 20, line 24, after ‘the’, insert ‘authorised’.
Amendment 17, in clause 16, page 20, line 34, leave out second ‘a’ and insert ‘an authorised’.
Amendment 18, in clause 16, page 20, line 37, leave out second ‘a’ and insert ‘an authorised’.
Amendment 19, in clause 16, page 20, line 40, leave out second ‘a’ and insert ‘an authorised’.
The Economic Secretary to the Treasury (Ian Pearson): It is a pleasure to serve under your chairmanship, Mr. Gale, for this afternoon sitting of the Financial Services Bill Committee.
This morning I was stressing the importance of credible deterrents. The Government recognise that the enforcement powers that allow the Financial Services Authority to penalise individuals must be carefully framed to ensure that they are proportionate and fair. As I shall set out in a moment, I am confident that the clause provides sufficient checks and balances to ensure that penalties on individuals are appropriate and proportionate.
As I am sure the Committee is already aware, certain roles in authorised firms can be performed only by individuals who have been approved by the FSA. Such roles are known as controlled functions and apply to director-level or significant management functions, and also to certain customer-related roles. The FSA approves an individual to perform such functions if he or she is determined to be fit and proper—that is, if the FSA is satisfied with the person’s honesty, integrity and competence, among several other criteria.
Amendments 14 to 19 seek to make a firm responsible for paying the fine if one of its employees performs a controlled function without approval. That would take the onus and responsibility away from the individual to ensure his or her own approval, and place it wholly on the firm. However, the power to fine a firm if it fails to take reasonable care to ensure that controlled functions are performed only by approved persons already exists. It is set out in sections 59 and 206 of the Financial Services and Markets Act 2000. In that respect, the proposed amendments are unnecessary.
In addition, the amendments would remove responsibility from the individual employee; it would remove any incentive for the individual voluntarily to initiate the approvals process with his or her firm if only the firm could be punished for non-compliance.
The FSA wants and needs to improve compliance with the approved persons regime to ensure that all who undertake key functions are properly vetted, and are found to be fit and proper to undertake those functions. As I said, many of the controlled functions include senior management roles, and it is right that the FSA should satisfy itself that the individual in question has the ability and necessary credentials to undertake the relevant function.
Credible deterrents need to target individuals and firms. Both need to be discouraged from bypassing the rules, but currently the only enforcement action the FSA can take against individuals who perform such a role without approval is to prohibit them from working in the industry, and even then only if they are not considered to be fit and proper. There is no power to fine such individuals.
That is why the Government have proposed to give the FSA the power to fine an individual who has performed a controlled function without the necessary approval. In effect, the proposal closes a loophole whereby one way of avoiding a possible financial penalty is simply not to be approved for the relevant activity.
Let me turn to amendment 1. I understand that the intention of the hon. Member for Fareham is to provide added defence for the individual. However, the amendment would create an almost limitless loophole whereby an individual, in order to escape a fine, need only conspire with their firm to have an e-mail chain telling them what to do. I understand the purpose behind the amendment, but I do not think that that is the right thing to do.
I appreciate the hon. Gentleman’s desire to protect employees who find themselves performing a controlled function without approval in a situation where they may feel that they have no choice but to do that, but someone performing a controlled function is playing a key role within a firm. The role is important enough to warrant the checks that come with approval, and we think that individuals with such significant roles should have matching levels of responsibility. What we need is not passive employees who know that responsibility can easily be shirked in favour of the firm. That would not improve compliance.
Of course, we need to make sure that the sanctions are targeted appropriately, and I would like to draw the Committee’s attention to the safeguard built into the clause to ensure that the FSA cannot be unduly severe. The new power cannot be used against individuals who did not know, or could not reasonably be expected to have known, that they were performing a controlled function without approval. We are not trying to catch out individuals who act in good faith.
The ultimate purpose of the clause is to discourage individuals from performing a controlled function without approval by threatening them with a disciplinary sanction. Such a measure will improve compliance and enable greater FSA scrutiny of persons who are carrying out controlled functions. If we were to allow the individual to escape all responsibility, or to limit the scope of the power to such an extent that it became almost inapplicable, we would not meet our objectives. I therefore urge the Committee to resist the amendments.
Mr. Mark Hoban (Fareham) (Con): Welcome to the Chair this afternoon, Mr. Gale.
When we get to the clause stand part debate, I would like to try to probe a bit further the issue of who will be affected by the provisions. Various comments have been made to me about the sort of people who will be caught by the measure. I take the Minister’s point that amendment 1 may be too loose and may leave too many loopholes. He suggested that some safeguards were in place to protect an individual in such a situation. I am trying to distinguish between those people who deliberately set up a structure that allows them to fall outside the scope of clause 16, and those who inadvertently fall within it. I take the Minister’s point that that could give rise to some artificial arrangements.
The Minister makes a fair point about where responsibility lies. Should we ask individuals to take more responsibility for their actions within a firm and to understand what the regulators expect of them? Whether there is a legitimate reason to be concerned will depend on how the rules are applied by the FSA. Having given the FSA new powers in the Bill, we look forward to hearing what safeguards it builds in when it starts to consult on the application of those powers. I am happy to accept the Minister’s reassurance that adequate safeguards are built in, so I ask the Committee’s leave to withdraw my amendment.
Amendment, by leave, withdrawn.
Mr. Hoban: I beg to move amendment 6, in clause 16, page 20, line 25, leave out ‘four years’ and insert ‘one year’.
This is a brief probing amendment. Clause 16 defines the limitation period as the period within which, from the date that misconduct takes place, the FSA can take action against an individual who undertook controlled functions without approval. What I want to know is: why four years? It seems a long period of time, but it is not the six years that applies under the statute of limitations. Why is four years the right period of time? Should that period be longer? Or should it be—as I suggest in my amendment—a year, to give the FSA greater focus in looking out for such people and in trying to tackle the issues more quickly, so that the matter does not hang over an individual for what appears to be quite a long period?
Ian Pearson: I appreciate the probing nature of the amendment. It might be helpful if I put clause 16 and the amendment into context by drawing the Committee’s attention to clause 17, which relates to the amount of time available to the FSA to initiate disciplinary proceedings against persons who appear to the FSA to be guilty of misconduct. Currently, the FSA has two years before it must start proceedings against individuals that it believes are guilty of misconduct. We want to extend that to four years, and have made an amendment to that effect through clause 17, which we will hopefully come on to discuss in a moment.
A four-year limitation period is an appropriate time for the FSA to investigate individuals, whether they are suspected of misconduct or of performing a controlled function without approval. Let me explain why. The starting point for the provisions is that we should ensure that the FSA has enough time to prepare a case against an individual suspected of breaching the rules. There are a number of ways in which such individuals might take advantage of the current period of two years to prevent the FSA from conducting an investigation. For example, it has been known for individuals to be deliberately obstructive in order to run down the clock, hoping to escape sanction as a result. In the case of individuals performing control functions without approval, that could involve delaying the provision of information needed by the FSA to ascertain what type of role the person was undertaking, and that is clearly wrong.
4.15 pm
Equally, a person could launch judicial review proceedings against the FSA asking a court to review the commencement of an investigation. The clock would continue to tick during such an appeal, and that would severely limit the FSA’s ability to carry out an investigation within the required time when the judicial review had finished. A sufficient period is therefore vital to allow the FSA enough time to deal with complex cases. While it could mean that complex cases take longer, it is important to allow such time to ensure that the FSA can effectively and thoroughly investigate incidences of wrongdoing and impose appropriate penalties.
I hope that the examples of judicial review, deliberately withholding information and playing it long have helped to convince the hon. Member for Fareham of my argument. I could probably cite examples of potential criminal cases that would take precedence, as a result of which the FSA’s work would only start to take place after it had been decided whether or not to prosecute. For those reasons, it is reasonable to have a period longer than two years at the moment. It is a matter of judgment whether the period is three, four or five years—and our judgment is that four years seems appropriate. It will address directly some of the problems that I have outlined in my brief contribution.
Rob Marris (Wolverhampton, South-West) (Lab): I am not an expert criminal lawyer, but I refer the hon. Gentleman to proposed new section 63A(4), where the clock can be stopped by the issue of a warning notice. The FSA could do that. I am slightly concerned that a four-year limitation period could become an excuse for the FSA to do nothing for years, because there would be no sword of Damocles over it. It would simply need to issue a warning notice, and that would stop the clock.
 
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Prepared 16 December 2009