Joint Committee on Financial Services and Markets First Report


1. The draft Financial Services and Markets Bill[1] establishes the Financial Services Authority (FSA) as a single, statutory regulator for a considerable part of the UK financial services industry (though not all of it—see Scope below), with specific regulatory objectives. In the Chancellor of the Exchequer's words, "The Bill sets clear objectives for the FSA [and] ... equips it with all the statutory functions and powers needed to operate a single regime for authorisation and regulation of financial services businesses."[2] Howard Davies, the Chairman of the FSA, has described the Financial Services and Markets Bill as "following an unusual and scenic route from the Treasury to Buckingham Palace."[3] It has, at least to date, proved an interesting and constructive route.

2. An incomplete draft Bill was published in July 1998, with a document containing an overview of financial regulatory reform and draft Explanatory Notes. There was then a period of open consultation which generated some 220 submissions to the Treasury. In February 1999 the Treasury Select Committee of the House of Commons published a report on the draft Bill, Financial Services Regulation.[4] In March the Government published a Progress Report summarising the main issues raised during the consultation period and explaining the Government's response. Our Committee was the next step in the process of consultation. The Government intend that the Bill itself should begin its conventional Parliamentary procedures in May or June, complete all its Commons stages this session, be subject to an innovative carry-over procedure, start in the House of Lords at the beginning of the next session, and receive Royal Assent in spring or early summer of 2000.

3. This is the first occasion on which a Joint Committee of both Houses of Parliament has been charged with scrutinising a draft Bill. The first formal step in setting up our Committee was taken on 23 February when the House of Commons resolved "That it is expedient that a Joint Committee of Lords and Commons be appointed to report on the consultative document on the draft financial services and markets bill presented by Her Majesty's Command on 21st December 1998 and any further draft of the bill which may be laid upon the Table of both Houses by a Minister of the Crown and to report by 30th April 1999." The formal powers of our Committee and the Commons membership were agreed to by the House of Commons on Friday 26 February. The House of Lords appointed its members on Tuesday 2 March and also sent a Message to the Commons proposing a day and time for our first meeting. It is a sign of the importance with which we viewed our task that our first meeting was held within an hour of that Message being received.

4. Given the limited time available for examining the draft Bill and any further drafts which might be laid, we decided that we might best fulfil our task of pre-legislative scrutiny by concentrating our inquiry on six specific issues:

  • Proposed statutory objectives and principles of the FSA;
  • Scope of the new regime;
  • Proposed arrangements for the accountability of the FSA;
  • Discipline, enforcement and the Tribunal;
  • Market abuse;
  • Financial Services Ombudsman Scheme.

We also decided not to consider issues surrounding the transition to the new regime, important though they may be. In announcing our decisions we invited anyone who wished to do so to submit a paper on any or all of the issues listed.[5]

5. Over 60 memoranda were received in response to that invitation. In addition we have had access to the responses to the consultative document on the draft Bill which had been submitted to the Treasury and the memoranda given to the House of Commons Treasury Select Committee. Many of the memoranda prepared specifically for our Committee are being published as Appendices in Volume II of our Report[6]; some have been reported to both Houses and placed in the Libraries of the two Houses and the House of Lords Record Office.[7]

6. We also held seven sessions of oral evidence. We opened our inquiry with evidence from the FSA and Patricia Hewitt MP, the Economic Secretary to the Treasury. Following these two general sessions, we took evidence on the specific issues we had identified. We adopted a somewhat novel structure for these meetings, taking evidence from panels of witnesses who were able not only to reply to our questions but also to respond to the comments and suggestions of their fellow panellists. We also took the unusual step of inviting David Roe, the head of the Treasury Bill team, and Andrew Whittaker, Deputy General Counsel, FSA, to attend each evidence session and reply to any questions which arose during the meetings. This proved a very useful expedient. We are grateful to them both for the expertise and enthusiasm with which they approached the task.

7. As the format of our evidence session shows, we viewed our inquiry as another important part of the process of consultation. We therefore regarded it as essential that the evidence we took from the FSA and the Economic Secretary on 16 and 18 March should be published as soon as possible. The minutes of the two evidence sessions were published on 20 and 24 March respectively. That we were able to meet this tight deadline was due in no small part to the efforts of those who took the verbatim transcript of the meetings and those involved in printing them. We are grateful to them all. All the oral evidence taken during the inquiry has been published as daily parts but it is also being reprinted, for ease of reference, in Volume II of our Report.

8. The timetable to which we were working meant that we invited witnesses at short notice and with no flexibility about dates. We are grateful to everyone who accepted our invitation to give oral evidence and to the many organisations and individuals who sent us memoranda. Their contributions assisted us greatly in our task and we hope that they will find our Report an equally useful contribution to their consideration of the draft Bill. In the little time available, we have had to be selective as to whom to call, and the coverage of our hearings has inevitably been less balanced and comprehensive than we would have wished; for instance, we have taken no evidence from overseas. Our power to travel has taken us no further than Canary Wharf, for a useful informal briefing by the FSA.

9. We should also like to thank our three specialist advisers, Dr Eilis Ferran, Director of Studies in Law, St Catharine's College, Cambridge; Professor David Llewellyn, Professor of Money and Banking, Loughborough University; and Professor Alan Page, Professor of Public Law, University of Dundee, for their contribution to our inquiry.

10. We are pleased to have had the opportunity to take part in this consultative process and have appreciated its many positive aspects. First we have all enjoyed the experience of working closely with members of "the other place" and have, we believe, brought the best features of each House to bear during the scrutiny of the draft Bill. Second, as we acknowledged above, we have been very impressed by the commitment of everyone involved and their willingness to make herculean efforts to fit in with our timetable and produce relevant and considered comments on the draft Bill. Third, we have been impressed by the genuine process of consultation in which we have been engaged—it has been far from a merely cosmetic exercise.

11. There have, however, been some difficulties. The first has been the very tight timetable within which we have had to work. To require a Committee to set itself up from scratch and report within 8 weeks places a great strain on everyone involved. Many members of our Committee are also members of other Select Committees and it has been difficult to find convenient meeting times. The necessary tasks of identifying suitable witnesses, finding specialist advisers, and even compiling a comprehensive mailing list, all take time which cannot easily be spared. In the light of our experience, we recommend for any similar situation in the future that, at the least, the terms of reference of the Committee should be agreed, a Chairman-elect identified and staff allocated and, if possible, membership of the Committee decided before the Committee is expected to begin work, so that all necessary preliminary steps can be taken and the Committee can begin its scrutiny with the minimum of delay.

12. Another difficulty related to the availability of documents. The main body of the draft Bill, containing 233 Clauses and 10 Schedules, was published in July 1998. Certain parts, which at that time had not been drafted, were published only on 14 April 1999. These parts included provisions reproducing the regulatory regime for collective investment schemes, replicating the existing powers and functions of the London Stock Exchange as the competent authority for listing, establishing a common approach to the role of financial regulators in insolvency and winding-up procedures and rationalising the existing provisions controlling the disclosure of confidential regulatory information.[8] We recognise the importance of these issues but in the short time remaining before we were required to report to the two Houses were unable to examine or comment on these sections of the draft Bill.

13. The Bill includes extensive delegation of powers. In this connection, we have been greatly assisted by the paper produced by the House of Lords Delegated Powers and Deregulation Committee which is printed as Annex B to our Report. That Committee, in offering its comments, noted that "If the draft bill were to be introduced in its present form, the Committee would have to draw the attention of the House to a number of issues." We discuss some of these issues in later paragraphs of our Report. We recommend that in responding to our Report the Government should respond also to the points made by the Delegated Powers and Deregulation Committee.

14. The House of Lords Liaison Committee in a Report agreed on 31 March welcomed the Delegated Powers and Deregulation Committee's decision to submit a memorandum to our Committee on the delegated powers in the draft Bill and hoped that that example might be followed in future. "When a draft bill is made available for pre-legislative scrutiny, it can only be beneficial for the delegated powers to be made subject to scrutiny at an early stage."[9] We agree.

15. A further problem relates to the skeleton nature of the draft Bill—many of the ultimate provisions will depend on the content of the delegated legislation, some of which has not yet been drafted. We accept this general approach, which balances the certainty of a statutory framework against the flexibility needed to regulate a fast-moving industry; but it poses particular problems for pre-legislative scrutiny. Much also depends on the outcome of the FSA's consultations: the FSA have already issued 21 Consultation Papers; their programme of consultation and response[10] extends throughout this year and into the next. The uncertainty about the final form of many of the Bill's provisions has inevitably made our task more difficult.

16. Finally, this draft Bill has raised several important issues of compatibility with the European Convention on Human Rights (ECHR). Following the passage of the Human Rights Act 1998, the then Leader of the House of Commons told the House on 14 December 1998 that the Government wishes there to be a standing Joint Committee on Human Rights, whose remit will include "the examination of draft legislation where there is doubt about compatibility with the ECHR".[11] On the basis of our experience, the two Houses should establish a specialist Human Rights Committee as soon as possible.

17. We recommend below that the Government should produce a written response on the ECHR issues raised by this draft Bill as soon as possible. It is our intention to invite the Minister to meet us again to discuss that response; we will then complete our work by making a second report. We intend to do this before the end of May.

1  Hereafter referred to as the draft Bill Back

2  Financial Services and Markets Bill: A Consultation Document, Part One, HM Treasury, July 1998 Back

3  Chancery Bar Association and Combar Spring Lecture, 3 March 1999 Back

4  Third Report from the Treasury Committee, Session 1998-99, HC 73. See also Fourth Special Report, Government's Response, HC 347 Back

5  Press Notice No 2, 10 March 1999 Back

6  For list of Appendices see Volume II Back

7  For list of memoranda reported see Volume II Back

8  Financial Services and Markets Bill: Additional Provisions Omitted from July 1998 Draft, HM Treasury, April 1999 Back

9  First Report 1998-99, HL Paper 49, para 9 Back

10  Appendices 4 and 61; Q 388 Back

11  Commons Hansard, col. 604 Back

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Prepared 29 April 1999