Ian
Pearson: The amendment would delete proposed new
subsection (1A) to section 45 of FSMA. That subsection has the purpose
of continuing to allow the FSA to vary the permission of a firm to
protect the consumers of a different firm. The FSA already has that
power, as provided for by subsection (1C) of the existing section 45,
so the proposed new subsection is not giving the FSA a completely new
power. Instead the provision will extend protection to consumers of
unauthorised firms as well as of authorised firms. I want to
explain to the Committee why we think that a good
idea. 3
pm The
provision needs to be stated explicitly in such a way mainly as a
technical consequence of the drafting of the previous subsection, which
extends section 45 to cover all the FSA’s objectives. A good
example of why the power exists and needs to continue to exist is
outsourcing. Sometimes a firm—let us call it firm A
—outsources back-office functions to another authorised firm,
firm B. In such a situation, firm B has a contractual relationship with
firm A, but may have no contractual or other relationship with the
customers of firm A. If firm A fails, it may be necessary for the FSA
to impose requirements on firm B, to assist in the protection of the
customers of firm A. The option is useful for the FSA to have at its
disposal, and the motivation for the proposed new subsection is in
maintaining that
option. I
want to stress that, of course, the FSA needs to use all its powers in
a proportionate and reasonable manner. Although the proposed new
subsection may appear very wide, I assure the Committee that it does
not create an unrestrained power for the FSA that might be open to
abuse. Indeed, I am not aware of any suggestion that the FSA has abused
the power in the past, so the provision is very much more a technical
consequence of the drafting of the previous subsection. I hope that the
example is sufficiently realistic that the hon. Gentleman and others
can appreciate why it is
necessary.
Mr.
Hoban: I am grateful to the Minister for that explanation,
and for the acknowledgement that the power appears rather broad. His
example is helpful in illuminating how the power could be used in
practice. With that reassurance, I beg to ask leave to withdraw the
amendment. Amendment,
by leave,
withdrawn. Clause
7 ordered to stand part of the
Bill.
Clause
8Promotion
of international regulation and
supervision
Mr.
Hoban: I beg to move amendment 45, in
clause 8, page 6, line 7, leave
out ‘financial stability objective’ and insert
‘objectives’. With
your agreement, Mr. Gale, it may be helpful if I wrapped up
my stand part remarks with my
amendment. One
of the consequences of the financial crisis that we have been through
is an increased appreciation of the consequences of globalisation. We
see that many of the financial services businesses operate on a global
basis. They operate not just in their home market, but overseas as
well. We know that when a global banking business goes sour, the
domestic Government and their taxpayers pick up the bill for bad
lending decisions, whether the loans were made in Dudley or Dubai. That
has been one of the messages that has come home for Britain,
re-emphasising the consequence of the financial crisis. That means a
tension, because banks are operated
on a global basis but regulated in the individual jurisdictions in which
they act. We recognise that some of the risks taken overseas can have a
profound effect at
home. Such
a consideration has underpinned a great deal of the work that the FSA
has been doing in recent years. For example, it works with other
regulators in supervisory colleges—a group of regulators of
particular institutions come together and work together. That is a very
good example of international co-operation and something that the FSA
has been very good at doing over recent years. It does not work only in
regulating financial institutions; it works in many other ways in
different organisations. Lord Turner, the chairman of the FSA, said in
a speech in October last
year: “There
were many different causes of that crisis and many aspects of the
reform programme needed in response. But among the most important and
most difficult are those related to the international nature of the
financial system. The essential challenge is that we have a global
financial system...but that governments, regulations and supervisory
approaches are national, and that when banks get into trouble it is
national fiscal resources which are employed to rescue them or
compensate
depositors.” One
might think that that was a new insight that has driven the need
suddenly for the FSA to act on an international basis; it lacked the
remit to do so in the past and therefore needs the insertion of a new
duty in the Bill. In reality, it has been operating on an international
basis for years, and not just in the supervisory colleges—it has
been acting in other international forums. Indeed, Lord Turner has
become the chairman of the Financial Stability Board’s Standing
Committee for Supervisory and Regulatory Co-operation, so he has gone
in advance of the duty that has been imposed on the FSA in the Bill. We
know, for example, that the FSA has been co-operating for some time
with international institutions through the EU. Its chief executive,
Hector Sants, was until recently a member of the CEIOPS steering
committee, which deals with insurance and occupational
pensions. We
know that the FSA regularly gives evidence to the European Parliament
as well as negotiating technical aspects of European directives, so we
see already that there is an engagement from the FSA from the very
highest position through all its departments and divisions. It is
difficult to understand why we have proposed new clause 6B in the Bill,
because the FSA is already fulfilling the duty. What more is added by
including proposed new clause 6B? As with financial stability, is it
simply making the implicit explicit? Is it to create an illusion of
activity on the part of the Government? It is hard to understand what
the objective of having the new clause in the Bill is, because the FSA
has already been taking seriously its duty to promote international
regulation and supervision.
The amendment
asks whether the new clause goes far enough. I am sure that the
Minister will explain why it is needed and why it is additive rather
than a restatement of what happens already. Why is the FSA’s
responsibility limited to the financial stability objective? There are
other objectives that have an international impact. If we consider the
nature of markets, they are not defined by national boundaries any
more; they are international. Why are the market confidence and
consumer protection objectives not covered? I am keen to understand
from the Minister why the duty is limited to only one of the
FSA’s objectives and not to others.
Consider
the financial crime objective, where money laundering takes place on a
global basis and where the FSA needs to co-operate with international
authorities. Why is that objective not covered by the new duty in new
clause 6B? I am probing why we need it in the first place. If we do
need it, why is it not more broadly
drafted?
Ian
Pearson: The hon. Member for Fareham is right when he says
that the FSA already engages in international forums. Clause 5, which
we have already discussed, provides the FSA with an explicit financial
stability objective. Subsection (2)(c) of the new section 3A
establishes that the FSA, as part of its new financial stability
objective, must have regard to the impact of wider European and
international issues on the stability of the UK financial
system.
It is very
apparent to all members of the Committee that the global financial
crisis has demonstrated the need for strong domestic regulatory systems
to be complemented by enhanced supervision of international firms and
markets through more robust international standards, closer
co-operation between authorities and a more coherent international
regulatory architecture. As we have already discussed, the FSA already
operates at an international level. The purpose of the new duty,
therefore, is to formalise, clarify and strengthen the FSA’s
efforts to work internationally.
There is a
global agreement that a strengthened regulatory system requires greater
consistency and systematic co-operation between countries, and a
framework of internationally agreed standards to ensure a robust global
financial system. The existence of effective international regulation
and supervision will contribute to the stability of the UK financial
system by providing a robust framework for our own regulatory
structures and also by reducing the risks of international instability,
which could in turn affect the UK. That is why clause 8 inserts new
clause 6B to FSMA—to provide the FSA with a new statutory duty
to promote international regulation and supervision.
In its
forthcoming Bill, the US is proposing similar measures for an enhanced
international role related to financial stability for its regulators.
Hong Kong is already doing that and, in line with international
partners, we also want to impose a specific duty in legislation.
Clarifying the FSA’s international position in that way is
something that has been widely supported by respondents to our public
consultation, as the hon. Gentleman is aware. I do not think that I
need to read out the quotations from the British Bankers Association
and others who have supported this measure, but it is very clear that
the steps we are taking are widely welcomed.
With regard
to the specific amendment raised by the hon. Gentleman, he questioned
whether we are going far enough through what I envisage is a probing
amendment. The Government’s view is that it is not necessary to
widen the duty to promote international regulation and supervision to
cover all the FSA’s objectives, as he suggested. The proposed
legislation will ensure that the FSA takes into account international
regulatory developments on financial stability and that that should be
the main focus of its international duty. In fulfilling
that, the FSA will increasingly be involved in the large volume of G20
and European work relating to financial regulations and
stability. The hon.
Gentleman will be aware that the FSA already participates in the
Lamfalussy level 3 committees and will be involved with the new
European supervisory authorities, the European systemic risk
board’s work and the three committees that are also being
established. It is important that it continues to play that role. We do
not think that it needs to play a role in other areas, as suggested by
his amendment. For example, protecting consumers in another country,
which is one of its objectives, may not necessarily protect consumers
in the UK. While there might be instances where that is the case, it
would not be desirable to make that a central concern of the FSA at the
risk of diverting resources and attention from more pressing
international work relating to financial stability.
We think that
focusing the FSA more narrowly on financial stability is the right
thing to do. However, there is nothing in what we propose that will
prevent it from pursuing its existing international role in other
areas. The FSA currently has to have regard to the principles of good
regulation, one of which is the international character of financial
services and markets. The hon. Gentleman makes some valid points on
financial crime; the FSA already plays an international role in seeking
to combat such crime. Focusing narrowly on financial stability with
this new power and acting in co-ordination with other international
jurisdictions that are introducing similar powers is sensible. It sends
the right sort of signal and is appropriately targeted. That is why I
urge the hon. Gentleman to withdraw the
amendment.
3.15
pm
Mr.
Hoban: The longer the Minister spoke, the more apparent it
became that the new clause, although it may be welcomed by many, is
redundant. The FSA is already fulfilling that aspect in much of its
work. The Minister said, when arguing against the amendment, that the
FSA can already act under its existing remit. In reality, the FSA has
been working for some time on an international and European basis to
promote regulation and supervision without the benefit of the new
clause. The Minister did not make a particularly strong argument as to
why the new clause was necessary or why it was anything more than
cosmetic.
Part of the
challenge in much of the Bill is that the FSA is already doing these
things. To use the Minister’s words, the Bill is making the
implicit explicit. We want to see the FSA and successor bodies and
regulators working on a European and international basis, but they are
already doing so effectively. The challenge is for our regulators to
use their leverage to ensure that standards are raised across the
world, in order to ensure better supervision and greater consistency in
other jurisdictions. There are other markets, and for all the
regulatory failings that we have seen in recent years, there is still a
lot that we can teach other jurisdictions about what can be
done.
As the focus
of regulatory activity in determining the regulations moves from the UK
to Brussels, it is being increasingly informed by the conclusions of
the G20. We want regulators to play an important role in that
debate. We need to ensure that our voice is heard. It is in our
interests that the UK should have a strong, clear voice in those
discussions; the UK has the greatest interest in the regulations that
affect wholesale financial markets across
Europe. Ian
Pearson: That is why we want to enshrine the FSA’s
international role in legislation. It clearly needs to participate, and
although it has been participating in international forums the hon.
Gentleman will appreciate the growing importance of its continuing to
do so. That therefore needs to be reflected in the FSA’s
objectives.
Mr.
Hoban: I am not sure that I entirely buy that argument.
The FSA is already doing so without the need for an explicit objective,
and it will continue to do so. The Minister suggests that Lord Turner
will wake up one day and say, “You know, I’ve had enough
of this European lark; I’m not going to Brussels this
week.” He may say, “I’m not going to take part in
the work of my sub-committee, the financial stability board, because it
is not worth the candle.” The FSA will then have to turn off all
its activities, because it has no explicit duty under FSMA to take
part.
There is no
need to include that duty in the Bill given that the FSA is already
devoting significant resources to its interactions in Europe and
internationally. Whenever I talk to Hector Sants, it seems clear that
resources are being made available to do
that.
Ian
Pearson: I do not want to prolong the debate, but surely
the hon. Gentleman appreciates that the FSA has to make decisions on
the resourcing of particular activities. It will therefore be most
helpful for resourcing decisions to be based on the objectives of the
organisation. All businesses need to update their objectives. Given the
increase in prominence of international negotiations and forums, it is
right and proper that that is reflected in the FSA’s plans and
its resourcing decisions. It therefore makes sense to have the new
clause, which makes the organisation’s objectives more
explicit.
Mr.
Hoban: I do not wish to extend the debate either, but I
point out that the FSA seems entirely capable of acting internationally
and of devoting resources in respect of such matters without this duty.
Therefore, I do not get the sense that there are insufficient resources
or that the FSA feels that it needs a new statutory duty to enable it
to spend more money and time on this area. If there is a duty on
international co-operation to be imposed, it may be on the Treasury.
Certainly, the Treasury demonstrated last year that although it put a
great deal of time and effort on the G20, it perhaps spent insufficient
time and effort on our relations with our European counterparts when it
came to the reform of the financial regulatory system. That issue,
however, goes wider than the new clause.
I have made
my point. I think that the new clause is cosmetic and does not add much
to what the FSA is able to do. I do not think that the lack of such a
new clause has inhibited the organisation in the past. The Minister has
reassured me that under the FSA’s existing objectives, it is
able to pursue the international dimensions of other aspects of its
objectives without widening the duty any further. Therefore, I beg to
ask leave to withdraw the
amendment. Amendment,
by leave, withdrawn.
Clause 8
ordered to stand part of the
Bill.
| 
