Joint Committee on Financial Services and Markets First Report




  Submission to the Joint Committee


The role of the Delegated Powers and Deregulation Committee

1.  The Committee's terms of reference are:

"to report whether the provisions of any bill inappropriately delegate legislative power, or whether they subject the exercise of legislative power to an inappropriate degree of parliamentary scrutiny; to report on documents laid before Parliament under section 3(3) of the Deregulation and Contracting Out Act 1994 and on draft orders laid under section 1(4) of that Act; and to perform, in respect of such documents and orders, the functions performed in respect of other instruments by the Joint Committee on Statutory Instruments."

2.  It is not our task to comment upon the merits of bills; our remit is confined to the powers proposed to be delegated by bills. This means that there are many aspects of the primary legislation which we do not have to consider, but there are some areas where, in considering the scope of proposed delegated powers, we have to look at the statutory framework within which the powers are set. The Committee's usual role is one of advising the House of Lords. We believe that it is for the House to decide whether or not to act on the Committee's recommendations. The Committee itself has no power to amend bills.

3.  In examining a bill we look to see whether the grant of secondary power is appropriate. This includes expressing a view on whether the power is so important that it should only be one granted by primary legislation. It also includes commenting on whether a bill sufficiently particularises the principles on which, and the circumstances in which, secondary legislation may be passed, and so avoids being characterised as a "skeleton bill". We consider what form of parliamentary control is appropriate and, in particular, whether the proposed power calls for the affirmative procedure. We go on to consider whether the legislation should provide for consultation in draft form before the regulation is laid before Parliament, and whether its operation should be governed by a Code of Conduct. We have also regarded secondary powers as potentially embracing the power of the Minister to make provision by Code or the issuing of guidance.

The Joint Committee's invitation

4.  The Committee1[400] warmly welcomes the Joint Committee's invitation to comment formally on the draft bill in respect of the proposed delegated powers. This is the first occasion on which we have been invited to submit our views to a Committee charged with pre-legislative scrutiny. In principle we are happy to do so on future occasions. We can see some advantage to Parliament in our undertaking this work, since we scrutinise the delegated powers in all Government Bills, and are thus well placed to provide an overview of the use of such powers, and the appropriate level of parliamentary control for them.

5.  There are, however, some caveats we should enter about the value of our comments at this stage. There is the difficulty—of which the Joint Committee will be acutely aware —of hitting the moving target of successive draft bills and consultation documents. Nor have we benefited, as we usually do, from a memorandum from the sponsoring Government Department on the delegated powers in the bill. Our comments have also not been informed by the second reading debate.

The Committee's approach to the bill

6.  The Committee considered the draft bill in a similar way as if it had been a bill introduced in the House of Lords. 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, which we highlight in the following paragraphs.

7.  The Committee had before it the following documents from the Treasury:

·   July 1998 consultation document: part one—overview of financial regulatory reform;

·  July 1998 consultation document: part two—draft Financial Services and Markets Bill;

·  July 1998 consultation document: part three—draft explanatory notes on the draft Bill—regulatory impact assessment;

·  February 1999 consultation document on regulated activities;

·  March 1999 Progress report;

·  17 March 1999 consultation document on the financial promotion regime under the Bill.


8.  A primary purpose of the draft bill is to create a single regulator—the Financial Services Authority (F.S.A.)—and to give it wide powers of enforcement. This leads to the bill conferring on the F.S.A. "legislative functions". This fact is illustrated with the utmost clarity in paragraph 1 of Schedule 1, where those functions are defined as "the Authority's functions of making rules and codes of practice and publishing statements of principle and statements of policy". The F.S.A.'s "legislation" will not be set out in statutory instruments and so is not intended to be subject to direct Parliamentary control yet it is of far greater practical importance than the statutory instruments which ministers are empowered to make under the draft bill and which are rightly to be subject to Parliamentary control. If powers of this kind were to be vested in Ministers, we would undoubtedly advise that there should be a measure of Parliamentary control.

9.  This raises the fundamental question of whether the position should be different where the powers are vested not in a Minister but in the F.S.A.? It can be cogently argued that, since the exercise of these delegated powers has wide ranging and serious implications for consumers and the financial services industry, they should be subject to Parliamentary control in the normal way. The argument to the contrary is that Parliament is faced with a stark choice: either to accept the framework in the draft bill or to insist on Parliamentary control which deprives the F.S.A. of its independent powers to take action which it judges necessary; in any event its rules are dependent on ministerial endorsement, so invoking Parliamentary control.

10.  We do not find this in any sense an easy issue and it is one which both the Joint Committee and Parliament will no doubt want to consider carefully in the light of the scope of the powers currently proposed and as they evolve during the legislative process. We welcome the fact that many of the FSA powers are specified in the draft Bill itself. It is clearly for Parliament as a whole to decide whether these powers are appropriate and not for this Committee; for example, the unlimited power of the F.S.A. to fine.

11.  We also strongly welcome the provisions of the Bill which set out both objectives for the F.S.A. and the factors to which they must have regard in discharging their functions (clauses 2-6). These provide a valuable framework and discipline for the exercise of secondary legislative powers and open the way to judicial review proceedings if it is considered that such powers are not being exercised properly. These factors include the important principle that any burden or restriction imposed should be proportionate to the intended benefit.

12.  We are also conscious that there has been widespread consultation and there is broad approval, and indeed strong pressure, for a single, independent regulator with effective powers.

13.  We consider that, in this unusual situation, there is probably no sensible alternative to the approach set out in the draft bill. We have been supported in forming this view by having regard to the reality that it will be the Authority which will have the closest understanding of market conditions, and will consequently be best placed to deal with the detailed issues, including many technical issues, which will need to be covered in regulations. But we nonetheless believe that there are some further protections and disciplines which should be imposed in regard to the exercise of these powers. We make our recommendations in paragraph 20 after we have commented on the nature of the particular rule-making powers to be given to the F.S.A.


14.  There are rule-making powers conferred on the F.S.A. by clauses 32(4), 36(1), 55(2), 70 (the general power), 71, 72, 74, 75, 76, 77, 79, 80,143, 144,157(4), 160, 169, 196, 197(10) and 219(1) (only for the definition of "rule"); Schedule 1, paragraph 13; Schedule 3, paragraphs 18(2) and 19(2); and Schedule 8, paragraph 14.2[401] Clauses 70 to 72 contain a wide power to make rules for the protection of the users of services, clauses 143 and 144 (the establishment of a compensation scheme), clauses 157(4) (specifying maximum amounts of compensation which can be awarded by the ombudsman), clause 160 (rules about the funding by the industry of the ombudsman scheme), clause 169 (rules requiring the provision of information), clause 196 (rules requiring the provision of information), clause 197 (rules requiring the appointment of auditors and actuaries) and Schedule 1, paragraph 13 (rules about fees to be paid to the F.S.A.). Clearly F.S.A. rules are intended to play a vital role in regulating the financial services and markets of the country.

15.  The legislative functions of the F.S.A. include also making codes of practice and publishing statements of principle and of policy. The relevant powers are in clauses 48 (statements of principle with respect to the conduct of approved persons and a supporting code of practice), 54 (statement of the way it proposes to exercise its power to fine), 57 (code for determining what is market abuse), 59 (statement of policy with respect to fines under clause 58), and 141 (statement of policy with respect to financial penalties under Part XII). In this context it is necessary to refer to clause 49 which makes in relation to statements and codes provision about consultation etc. much as clause 85 does in relation to rules. Statements and codes are of great significance to those to whom they apply; for example, clause 50 makes it misconduct leading to disciplinary measures to fail to comply with a statement of principle under clause 48.

16.  The F.S.A. is given other powers which are closely linked to its legislative functions. For example, clause 78 allows the F.S.A. to modify or waive particular rules in their application to an authorised person; clause 54 requires the F.S.A. to publish guidance as to the size of likely fines under clause 50; and there is in clause 87 a general provision about issuing guidance. The importance of guidance can be seen from the definition of "regulating provisions" in clause 89(1) which includes guidance as well as the F.S.A.'s legislative functions. F.S.A. "regulating provisions" are subject to scrutiny by the Director General of Fair Trading (clause 90 and the supplementary provisions of clauses 91 to 94).

17.  Finally under this head the Committee notes that the Financial Services Ombudsman Scheme (see Part XIV of the bill) is to be administered by a body corporate ("the scheme operator"—clause 151(3)) established by the F.S.A. (paragraph 2 of Schedule 8) and the scheme operator is required to make rules (paragraph 15) which may require the payment of fees (paragraph 16).

18.  The procedural provisions about rules are set out in clauses 82 to 86. The Committee attaches considerable importance to the requirement to consult widely on a draft and to provide a cost benefit analysis (clause 85). Rules are to be in writing, printed and made available to the public and must identify the powers under which they are made (clause 83). The Treasury must be notified (clause 82).

19.  The "Progress Report" outlines a number of improvements to the draft bill. For example, the F.S.A. will have to provide an explanatory memorandum when proposing to make rules (paragraph 5.2). The Government is also considering how to make it clear that the F.S.A. may not make rules "in areas where that is not appropriate" (paragraph 5.6) and it intends to remove the general power to make rules endorsing codes (paragraph 5.10). Paragraph 14.7 promises clarification of the duty to consult on any rules applying to recognised bodies in the same way as on general rules. The Committee welcomes all these improvements.

20.  It is not surprising that some of the proposed powers have raised considerable concerns. We consider that there are a number of issues which ought to be addressed before it can properly be determined that powers not subject to Parliamentary control should be granted to the F.S.A.

·  There should be an obligation on the F.S.A. to submit an annual report to the Secretary of State, outlining its exercise of the rule-making powers. The Secretary of State should, in turn, lay this report before Parliament. In addition to informing Parliament generally, such a report might be well suited to scrutiny either by a Select Committee, or by a Joint Committee of both Houses established for the purpose.

·  We understand it to be contemplated that there should be appropriate separation of functions within the F.S.A. between those responsible for bringing any disciplinary proceedings and the body responsible for adjudicating on these proceedings. We believe that this should be made plain on the face of the legislation.

·  We do not find it clear on the face of the legislation whether it is intended that breaches of rules should be regarded as invoking civil process and sanctions or criminal process or sanctions. This has important consequences for the standard of proof required to establish a breach and potentially as to the extent to which the protections of the Human Rights Act apply. We believe this uncertainty is unacceptable and that the position should be clarified in the legislation.

·  The provisions on market abuse are clearly of great importance to those regulated by the legislation. Under Clause 57 of the Bill, the F.S.A. propose a code for the purpose of determining whether or not behaviour amounts to market abuse. We consider that it should be made plain that compliance with the code is a "safe harbour" for commercial transactions.

·  We also consider that in view of the width of the rule-making powers and their potential effect, and the assumed lack of Parliamentary control, it is highly important that those who are seeking the certainty which is not necessarily granted either by the legislation or the F.S.A. rules should be entitled to seek advance rulings, whether in the form of "no action" letters or otherwise, which enable them to know in advance of taking any particular action that it does not contravene the rules. We accordingly recommend that the bill should be amended to this effect.

21.  We believe these points to be cumulatively of the greatest importance. Market practitioners have a right to know that their proposed conduct is potentially subject to civil or criminal sanctions. But, just as importantly, the rules will have application to market outsiders. Clause 56 provides for a definition of market abuse in the primary legislation. But under clause 57 the F.S.A. "must prepare and publish a code for the purpose of helping to determine whether or not behaviour amounts to market abuse, which it may "at any time alter or replace". There is, moreover, no test of intent either in the draft Code or in the bill itself.

 22.  There is a separate point which arises on Clause 55. This clause provides for a private investor (a private person) who suffers a loss because a person has acted in breach of the duty under clause 40(6) or 46(1) to bring an action for damages against the person in breach of the duty. Under clause 55(2) the Authority must make rules defining "private person" for the purposes of this section.3[402] The Committee has considerable unease about clause 55(2). Whereas it is normally the right of the individual to have the courts decide whether he has a remedy, under this subsection the F.S.A. is given this power, which it will exercise without the consent of the Treasury or Parliamentary control. Parliament will wish to consider carefully whether it considers this delegation of power appropriate.

23.  Similarly, under clause 80 (actions for damages), subsection (5) provides that "private person" has the meaning specified by the Authority. The Committee's comments on clause 55 apply here also.


24.  The Treasury has powers under the following clauses:

·   9 (exempt persons);

·  11 (prescribing regulated activities);

·  17(3) (exemption from restrictions in clause 17(1) on financial promotion);

·  18 (definition of "investment activity" for purposes of clause 17);

·  37(1)(c) (extension of F.S.A. powers to vary or revoke the terms of any permission);

·  56 (prescribing markets and investments for purpose of Part VI—civil fines for market abuse);

·  73 (regulations supplementing F.S.A. rules about insurance business);

·  75(4) (prescribing investments etc. to supplement F.S.A. price stabilising rules);

·  108 (exemptions from requirement to notify F.S.A. of proposal to take steps which will lead to acquisition of influence over UK authorised person);

·  109(4) (a Henry VIII power allowing the amendment of the definition in the clause of who is to be treated as having influence over an authorised person);

·  111 (defining what amounts to increasing influence over an authorised person);

·  117(2) (prescribing requirement as to consultation by F.S.A. for notice of objection);

·  119(1) and (3) (prescribing supplementary matters in relation to the requirement to notify F.S.A. before reducing influence over an authorised person);

·  122(4)(c) (prescribing functions for the purpose of the definition in clause 122(3) of "an overseas regulator");

·  162 (prescribing recognition requirements for the purposes of Part XV);

·  176 (a power to be exercised jointly with the Secretary of State—extending certain Companies Act provisions to prescribed contracts);

·  212(11) (prescribing "relevant agreement" and "relevant investment" for the purposes of the offence in subsection (2)—misleading statements and practices);

·  214(7) (application, with modifications, of section—offences by corporation—to foreign corporations);

·  226(6) (exclusion from collective investment schemes controls);

·  229 (consequential and supplementary provision); and

·  232 (commencement);

·  in Schedule 2 paragraph 25 extends the power in section 11;

·  in Schedule 3, paragraphs 16 and 17 allow regulations to supplement the provisions of the bill in relation to a business which does not have its head office in the UK and paragraph 20 allows regulations to make special provision in relation to a UK firm's exercise of EEA rights (as to which see paragraph 7 of the Schedule);

·  in Schedule 5 paragraph 1(2)(b) allows regulations to add to the conditions set out in that paragraph as qualifications for automatic recognition of a collective investment scheme.

25.  The Lord Chancellor is to make rules under clause 67 in respect of the conduct of appeals and proceedings before the Appeal Tribunal established by that section and Schedule 10 (which extends the rule-making power).

26.  Finally under the heading of ministerial powers, clause 65 confers on the Treasury a power to issue guidance and clause 92(3)(b) allows the Treasury to alter rules made by the F.S.A. Clause 65(2) is unusual in that it requires the Treasury to obtain the consent of the Secretary of State and the Attorney General (because the guidance relates in part to prosecution decisions). Clause 216(2) requires the F.S.A., in exercising its power to institute proceedings for an offence, to comply with any conditions or restrictions imposed by the Treasury.

Parliamentary control

27.  At present the draft bill does not make orders under clause 11 (other than orders to which paragraph 26 of Schedule 2 applies) or rules under clause 67 subject to Parliamentary control, but the Committee understands that the Treasury's intention is to correct this and provide negative procedure. When this is done, all subordinate legislation made by ministers under the bill (with the exception of the commencement power) will be subject to Parliamentary control. This will be negative procedure except for orders under sections 75(4) and 109(4) and orders to which paragraph 26 of Schedule 2 applies, which will be subject to affirmative procedure. Thus the one Henry VIII power in the bill will be subject to affirmative procedure.

 28.  The regulatory objectives of the F.S.A., as set out in clause 2(2) of the bill, are (a) market confidence; (b) public awareness; (c) the protection of consumers; and (d) the reduction of financial crime. The Committee considers that, in view of the importance of the powers in clauses 11 and 18 in achieving each of these objectives, parliamentary control by affirmative procedure is needed for the powers in these clauses, which give the Committee particular concern.

29.  Orders made under clause 11 (classes of activity and categories of investment) will set out the precise definition of the activities that are to be regulated under the Bill at any given time. As the Treasury's notes on the Bill explain, it is "possible that other activities or investments [than those indicated in Schedule 2] may be brought within the scope of the regulation under the bill". Although this is qualified by the words "only in so far as any additional activities can be said properly [to] fall within the overall object and purpose of the Bill"4[403] the potential areas for extension are considerable, and, as the Bill is currently drafted, might include areas of considerable personal interest to millions of consumers, such as pensions, mortgages and healthcare. In the light of the potential importance of this clause for consumers as well as the industry, the Committee considers that extension orders under this clause are properly subject to the affirmative resolution procedure under paragraph 26 of Schedule 2.

30.  Clause 18 (controlled activities) confers a power on the Treasury to determine the scope of the prohibition in clause 17. This can be different from the scope of regulated activities made under clause 11. The Treasury's notes5[404] suggest as an example that "it might include communications whether or not made by way of business." Although this power is narrower than that under clause 11 the Committee considers that it too should be made subject to the affirmative resolution procedure.


 31.  The Committee has made recommendations for amendment of the draft bill in the following paragraphs of this report; paragraph 20, where we recommend the submission by the F.S.A. of an annual report to the Secretary of State, and for parliamentary scrutiny of this report; paragraphs 22 and 23, where we question the delegation of power in clauses 55(2) and 80(5) of the draft bill; and paragraph 30, where we suggest that orders made under clause 18 should be made subject to the affirmative resolution procedure.

32.  In making these suggestions we are conscious that, in addition to the lack of parliamentary control, statutory immunity is to be granted not merely to individual officers or members of the F.S.A. staff but to the F.S.A itself. We believe the suggestions that we are making would go a long way to meet powerfully held anxieties about the nature and exercise of these F.S.A. powers and also in all probability reflect what the F.S.A itself would regard as good practice. Our current view is that the F.S.A. should only be granted powers which are not subject to Parliamentary control if protections along the lines we have indicated are included in the legislation. If the further protections we have recommended are not contained in the bill which will be presented to the House of Lords for second reading, then we reserve the right to report to the House at that time that the powers delegated to the F.S.A. in the bill represent an inappropriate delegation of powers.

  31 March 1999

1 400  The members of the Select Committee are: L. Alexander of Weedon (Chairman), L. Ampthill, L. Archer of Sandwell, L. Dahrendorf, L. Dean of Harptree, L. Goodhart, L. Mayhew of Twysden, L. Merlyn-Rees, L. Prys-Davies, L. Waddington.

Lord Alexander of Weedon declared a relevant interest as Chairman of National Westminster Bank plc. Lord Dahrendorf declared a relevant interest as a non-executive director of the Bankgesellschaft Berlin (UK) plc. Back

2 401  The "Progress Report" of March 1999 summarises criticisms of the draft bill during the consultation process and the government's response to them. There are passages about the F.S.A.'s legislative powers in paragraphs 5.1 to 5.6, 5.10, 6.5, 6.8 to 6.12, 14.7, 16.3, 18.3 and 18.4. Back

3 402  Footnote deleted Back

4 403  July 1998; p 8.  Back

5 404  July 1998, p 11.  Back

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Prepared 29 April 1999