Joint Committee on Financial Services and Markets Minutes of Evidence

Examination of witnesses (Questions 120 - 136)




  120.  I presume again that this is an area where you are very anxious that this should be ECHR compliant?
  (Ms Hewitt)  Absolutely, and on that particular issue I think at the heart of that is the question of whether this is a civil or a criminal regime and clearly that in turn has implications for conventions compliance. We still need to reflect upon that and to consider the legal position and, as I indicated earlier, we will obviously provide you with a further memorandum. I can come back on that point if you would like me to.

Viscount Trenchard

  121.  Minister, in the area of market abuse the Bill makes no special provision for guidance and the issuance of guidance, so the general provisions of clause 87 apply, but the problem is that guidance can be issued without consultation, which I think is a worry. I understand that under the present regime there have been occasions when self-regulatory organisations have issued guidance and subsequently withdrawn it when they found out that they had misinterpreted some of the facts. So would you consider extending the requirement to seek consultation on the issuance of guidance?
  (Ms Hewitt)  My understanding is that under the Bill there will, of course, be a code of market conduct and on that the authority has to consult market users before it finalises that code. The code itself will set out in detail the types of behaviour which will or will not be acceptable. The FSA, indeed, has already begun to consult on that code. When it is in force the code will carry evidential weight, so that if somebody has complied with the code, that will clearly be material to their defence or argument against any accusation that is made against them. Guidance is a different matter, as I understand it. It is really where the regulators are guiding an individual firm, an authorised person in most cases, about a particular course of action and in that situation, if the FSA gives somebody guidance and they act upon it in good faith, the FSA would really not be able to take action, but I do not think it would be appropriate for the FSA—in fact, I am not quite sure how the FSA could publish draft guidance in such a case and consult on it before giving that guidance to the individual market participant who had requested it. They are two different things.

Mr Sheerman

  122.  On a supplementary to that, that is the whole dichotomy here from what was said on Tuesday. On the one hand, we have the Chairman of the FSA saying there is going to be a code, the code is not established yet so it is unknown, and then there is going to be a build-up of case-law and this makes it look more like a judicial system. He assures us, on the other hand, that there is going to be thorough guidance. If that advice is taken then the operator in the market that takes that guidance and accepts that advice should not fear any ill consequences. So in a sense you and he are developing a system which says, on the one hand, it is judicial and the heavy hand of the law will come down, and on the other, here is a nice "touchy-feely" side to this organisation. Is it both or is it one or the other?
  (Ms Hewitt)  I think it is both. What I think we are trying to do here, by using the code, is to spell out in considerable detail, although it is never going to be exhaustive because the market participants think of things that nobody could have thought of before, but pretty great detail, what constitutes market abuse and what people need to do to avoid market abuse. The FSA, quite rightly, and we do not want to wait for case-law to build up slowly. We want that code to be available very early on so that people know where they stand, but the guidance will, as I understand it, go beyond the code because what it will do is respond to the needs of a particular participant who wants to see, as it were, tailormade advice on a particular course of action. David, do you want to add to that?
  (Mr Roe)  No, that is right.
  (Ms Hewitt)  That is my understanding of it.

Chairman:  I think we will move on to the question of scope, where there are a number of issues which you mentioned in your opening remarks about what is covered and how the Government has responded. Mr Heathcoat-Amory is going to deal with this.

Mr Heathcoat-Amory

  123.  On the question of scope, Howard Davies earlier in the week confirmed that, as regards investment advice given by solicitors in Scotland, that would be taken away from that professional body and would come to be regulated by the FSA. If that is so, are you happy that in the view of the Government's professed devolution policy to give more decision-making and responsibility to Scotland, this apparently goes in the opposite direction? And a second question, if I may: again my understanding is that some of the legislation touching the Scottish investment advice is embedded in specifically Scottish Acts which will fall to the Scottish Parliament to be amended or repealed. As that Parliament is shortly to be elected, they may take a different view about this to the Parliament of which we are Members. That seems to me to have dangers. Have you consulted or thought about how you might anticipate this problem rather than fall into any sort of trap?
  (Ms Hewitt)  We have certainly considered the devolution issue, as we always do. The financial services industry is a United Kingdom-wide industry and, indeed, a global industry and we believe that consumers who are using the services of the United Kingdom financial services industry should have the same level of protection, the same standards of regulation, wherever they buy the relevant financial products and services. So the regime that we are setting in this Bill will be a United Kingdom-wide regime. This is a reserved power. As far as the recognised professional firms go, there is an issue, which is not simply Scottish, about professionals—solicitors, accountants and so on—who, in the course of their business, may well give some incidental investment advice and the problem in a sense that has arisen is that quite large numbers of professionals who are regulated by their recognised professional bodies also have sought, as it were, precautionary authorisation in order to ensure that they do not inadvertently fall foul of the financial regulation regime when they are giving advice. As I say, we want to make sure that where people are buying financial products they are benefiting from the same regulatory standards. On the other hand, we do not want every firm of solicitors in the country having to seek authorisation from the FSA, and so the FSA and, indeed, ourselves have been discussing with, amongst others, the Law Societies, both of England and Wales and of Scotland, the issue about where we draw the line in terms of the boundaries between the professional bodies and the FSA. Indeed, we have just issued last month a consultation document on the scope of the Bill that addresses this particular issue. So in terms of the Scottish solicitors specifically and the Solicitors (Scotland) Act of 1980, we are looking at what amendments might be needed to that or to other legislation to ensure that there is the single regulator for financial services that we want and that that is recognised within a reserved power under the Devolution Act.


  124.  Before we move on to the question of mortgages, could I ask, about the timetable—I just cannot recall it—for dealing with this question of recognised professional bodies? You have issued a document. What you seem to be trying to do is to follow the Treasury Committee's recommendation that this should be drawn as finely as possible to limit the area of what is regarded as financial advice in order to try and avoid having 16,000 people turn up?
  (Ms Hewitt)  Indeed. As far as the timescale is concerned, the closing date for responses to the Treasury's consultation document on this is also 30 April and the reason for that and the reason why it is not earlier is partly to allow due time for consultation but also because the scope of the Bill, the scope of the Act eventually, falls to be dealt with under secondary legislation and, therefore, issues about scope, including this and also including mortgage advice, is something that we do not have to make a final judgment on at the point where we introduce the Bill. It is something we have to make a final judgment on when we come to publish and introduce the secondary legislation that will determine the scope of the Act and, therefore, we can make this decision later in the year, but we would want that decision obviously to be informed by the views of this Committee.

Mr Beard

  125.  I think the Minister has just answered my question because I was going to ask why the question of bringing mortgages in was going to be left until the Bill was introduced but you have essentially answered that?
  (Ms Hewitt)  There is one more reason on mortgages, which is, of course, the Council of Mortgage Lenders code. What my predecessor said when that was introduced, and I have said since, is that we want to see how that code works in practice. We are monitoring it very closely, as is the Council of Mortgage Lenders itself, and later this year, before we make a decision on the scope order, we will see whether that code has had the effect that the Council hoped of dealing with the problems that have arisen in some cases. Endowments, of course, sold in connection with a mortgage are already covered by financial regulation.


  126.  I can understand that and if this comes to be decided later I can see the case why you want to postpone it. But are we not going to end up with a lot of debate about these issues of mortgages, etc. whilst the Bill is going through? Would it not be better to get this issue sorted out before we go through that rather than having it tagged on later and end up with a large amount of debate and discussion about it? We know there are a lot of strong feelings about this.
  (Ms Hewitt)  Indeed.

  127.  It seems to me that it is going to complicate the process by having it on a different timescale. I wondered why you were not bringing it forward for decision now as to whether it should be in or not. Then the information would be before people when we come to put the Bill through both Houses?
  (Ms Hewitt)  I think it is fair to say that this piece of legislation is a very large undertaking—the size of the Bill itself but then the size of the secondary legislation that will follow—that it is actually not possible to get everything determined, or everything proposed, out for consultation, determined and drafted all at the same time. We have had to sequence it, but also in the specific case of mortgages, we did give an undertaking last year that we would give the mortgage code time to bed down and time to be given a fair trial and, therefore, I would not want to try, and it would be quite wrong, to rush into a decision on that in time for the introduction of the Bill. At this stage we do not have a firm timetable obviously for the Bill and I think the debates on this issue when the Bill is introduced will be very helpful in informing the decision that we make and then announce as early as we possibly can.

  128.  The FSA are due to do a cost-benefit analysis of this and this is going to come somewhat later.
  (Ms Hewitt)  We will take another look at the timing and see whether we can make it tidier.

Mr Beard

  129.  I wonder, Minister, if you are able to say what are the criteria you will be using in deciding whether to bring mortgages into the Bill or not?
  (Ms Hewitt)  What we are looking at in relation to mortgages, I think the starting-point here is that part of the issue, the endowment side, is already regulated. When it comes to the rest, although the complaints are often very highly publicised, and very disturbing given the importance of a mortgage to most of us, the number of complaints is actually very small in relation to the total number of mortgages. In 1995, which is the last year I have figures for, it was about 0.5 per cent., 50,000 compared with 10.5 million mortgages. In some cases those complaints relate to unfair terms and, of course, more mortgages were brought within the scope of the existing Consumer Credit Act when the upper limit for that Act was raised to £25,000 and all mortgages are already subject to the Unfair Terms in Consumer Contracts Regulations, whatever the amount of the mortgage involved. This is why the Office of Fair Trading is looking at the issue of redemption penalties—this is on the fixed rate mortgages—which have aroused very considerable concern with people finding themselves faced with a huge bill for early redemption that they apparently had no idea they were likely to face. So that is already being looked at. So what we will want to see is whether the code has improved the situation and I think we could judge by that by whether or not it has reduced the number of complaints, and whether those complaints that are still arising are being dealt with more efficiently, more effectively and more to the satisfaction of the consumer. The other thing we have to look at—and you mentioned the FSA's cost-benefit analysis—is that we have to balance the protection of the consumers who have taken out a mortgage and have a complaint about it with what might be the very substantial additional costs to the FSA if we bring the whole of the mortgage market within their scope.

Mr Sheerman

  130.  Just on that point, I do not know if I was amused or concerned about your anecdote that the Treasury told you only 50 per cent. of people in this country know about what 50 per cent. means. I cannot believe that is true in Huddersfield. I do not know about any other constituency. The fact of the matter is that many people have always found financial regulatory systems very complicated. That is why, presumably, part of the intent of this Bill is to have one rather than nine. We are going to have this expectation amongst people that the FSA is the place to go if you have a financial worry, concern or complaint, and in a sense, as a mortgage is such a big part, I understand the restrictions in terms of the complexity and timetable and all the rest, but to have it built in as a possibility of growing without new primary legislation would, it seems to me, be wise in the longer term because people are going to come back and say they want one identifiable, knowable way of complaining about the situation?
  (Ms Hewitt)  Surely. I think I would make two points. One is that if we decide, after we have looked at all this, not to bring mortgages within the scope of the Act initially, the FSA, I have no doubt at all, will ensure that people who do come to them with a complaint about mortgages are told how that complaint should be dealt with, but because the scope of the Bill is being dealt with through secondary legislation we will have in any case the flexibility to bring mortgages within the scope of the Act subsequently, if we decide that is the right thing to do, even if we do not do so at the outset.

Mr Heathcoat-Amory

  131.  I am a bit alarmed by this. The Bill, which has not been republished yet, will, from what you say, make very heavy use of secondary legislation and one can see that a lot of detail has to be amendable without primary legislation. On the other hand, we all know that in practice secondary legislation does not really get closely scrutinised by either House. Certainly I can speak for my own. Therefore, it is very important that when we proceed to the Bill itself we at least know, and preferably have seen, the scope of the secondary legislation, otherwise how can we make a judgment about what ought to be in the Bill itself, because Parliament will at least want to lay down the skeleton of the Bill and limit the powers and set up the balancing checks in order to be sure that Parliament's intentions are not exceeded. It is going to be very difficult for us to do that if the secondary legislation has not even been published and the scope of the Bill has not yet been announced by ministers. Could I ask you to come back to us at a later date and give us some details about the scope of the secondary legislation, including dates on when it will be exposed for consultation and can we be sure that that will be before Parliament actually enacts the primary legislation?
  (Ms Hewitt)  We have already begun the consultation on the scope of the Bill and the consultation document that we published last month sets out our view of what the scope of the Bill should be and raises specific issues for consultation and also explains, as I have just done, the approach we propose to take on making a decision on mortgages and why we are doing that. That is already out for consultation. The closing date for that consultation is 30th April. We will then respond publicly to that consultation. The secondary legislation will itself be published for debate, but one of the changes that we have signalled and reported on in the progress report and which will be contained in the new Bill when it is introduced is that the secondary legislation determining or extending scope should be subject to the positive and not the negative resolution procedure so that we somewhat strengthen the Parliamentary accountability at that point.

  132.  I can quite understand the point about timing. Will we see all the secondary legislation in draft before the primary legislation is given a First Reading?
  (Ms Hewitt)  No, we will not be able to do that because the current timetable is that your Committee will report by 30th April. We will then need to make appropriate changes to the Bill in the light of your report and other consultation and, indeed, our own progress report. We will then introduce the Bill as quickly as possible. As you know, it is our intention to get the Financial Services Authority on to a full statutory basis as quickly as possible because that is what this industry needs. But the scope Order obviously follows the enactment itself, it does not need to be finalised before First Reading of the Bill. In terms of the consultation process that we need to go through and the drafting of the secondary legislation, it would not be possible to finalise it. The consultation document itself includes the draft statutory instrument, so that is already part of what we are consulting on.

Chairman:  Thank you very much, Minister. We will need to consider this and consider the question of the timetable. But I think there is some concern about this whole question of knowing where we are going and at what timetable.

Lord Eatwell

  133.  I wonder if I could ask you a question about timing. Since timing started here I had to find some place to put it in. It is about something, as they say, completely different, but it is to do with timing. In a number of comments and speeches that Mr Davies has made recently he has intimated that the rule book for the FSA will not be ready, so to speak, when the legislation comes into effect and when the FSA acquires full statutory responsibility. In evidence to this Committee on Tuesday he took this much further when he said, "Once the legislation is in place we will then organise ourselves for the long term and then proceed in a more measured way to revise the rule books". So it is now clear that the day the FSA actually acquires legal authority it will not be ready to do the job in the sense that the rule book will not be ready. He said what he will do is he will simply be operating the old rule books under the new statutory framework. Are you content with this timing? I must say, I think it is worrying.
  (Ms Hewitt)  I have discussed this point only fairly briefly so far with Howard Davies. My understanding is that there will certainly be a rule book but it will not be an entirely new rule book and in part it will replicate existing rule books and this is really because of the scale of the task that is required to re-write, to synthesise, to improve, to consult upon, to do a cost-benefit analysis and all the rest of it that we are requiring them to do. There will be a rule book and there will be rules, but the formal process of creating a new and entirely synthesised and integrated rule book will not be complete. Could David perhaps add to that?
  (Mr Roe)  I understand the FSA have published information about the priorities that they are giving to replacing rules in particular areas where there is a stronger need to do it sooner rather than later. What we will have on the day when the Act comes into force will be partly new, partly old, but they are publicly consulting on the balance of areas and which areas they should deal with first.

  134.  The rule book is a living thing. It is always trying to catch up with the market and it is following ten yards behind it. The problem is that if you have an old rule book which you are just sitting on for what is now, Mr Davies says, "the long term" whilst in a measured way the rule book is revised then you are likely to ossify a structure. There is no point in modifying the old books or is there? In fact, there is because you will try and keep things going. You have a peculiar dual structure where you are running under an old set of rule books whilst trying to develop a new one and yet you have got to keep the old ones up-to-date.
  (Ms Hewitt)  I am not sure that there is quite the contradiction in that that perhaps you are implying. It seems to me very sensible for the FSA to prioritise this either by reference to where the existing rule books are out-of-date or where innovation is fastest or where there are particular concerns, whether it is to do with the protection of individual consumers or having an appropriate regulatory regime for complex sophisticated wholesale markets. So getting some priorities here is sensible, particularly in view of the fact that they do not have the resources to do everything all at once. They can create new rules for those priority areas and continue to do so after the Act comes into force. They can also update, presumably, the lower priority rule books or sets of rules and that in turn will feed into the process of developing the completely up-to-date rules in those lower priority areas that, of course, they will also wish to do and need to do, but they cannot do it all at once and that does not seem to me a particular problem. Of course it would be nice if they had all the resources in the world and could do everything all at once. We would like to have more Parliamentary draftsmen to draft everything quicker and all at once. But this is the real world and we have got to operate within resource constraints.

Chairman:  We have got one more question to put to you in this area, but I am very grateful for your time and I am aware of your time constraint and your need to get away. We have one or two questions on the Ombudsman which I think we will have to leave for now. We will find another way of inserting our questions after we have talked to the outside world about this. One last question from Lord Poole who wants to raise the question of Lloyd's. I hope that he will deal with this quickly and let you get to your engagement.

Lord Poole

  135.  I will ask my question swiftly. Very many of the professional operators of Lloyd's market consider it a very substantial shame that you have not been able to include a repeal of the now wholly unsatisfactory Lloyd's Acts as part of this process and inclusion of the regulation of the Lloyd's market by the FSA. I understand that in fact you are trying to find ways around this, that your officials, and possibly for all I know you, are in discussion with the FSA on steps which might be taken. This is very, very important because the regulatory authorities in Lloyd's are finding it not possible to control cases of market abuse by unauthorised people, and that is becoming quite a problem with some major international operators in the insurance market. Can you tell me whether you will indeed see whether you can find ways round this and, if so, how this might be done?
  (Ms Hewitt)  We are certainly in discussion with Lloyd's and indeed have agreed with them a process whereby the supervision and regulation of Lloyd's does include a statutory base and in particular within the Bill provides for external oversight of that regulation. That is something they very much welcome. Clearly, the provisions of the Bill, and this includes market abuse provisions in relation to unauthorised persons, could not come into effect until the Bill itself comes into effect. In terms of amendment to the Lloyd's Acts themselves, the difficulty here is that as I understand it this is private legislation and I think it would not be possible to amend it in this Bill, it is actually outside the scope of the Bill. In many cases, many of the problems you raise are private matters for the Society of Lloyd's, who may well wish to bring forward private legislation on this matter rather than something for the Government. But officials are very closely in touch with Lloyd's on this. I have on various occasions met with the chairman and other senior members of Lloyd's and I should say they have not specifically raised that concern with me.


  136.  Minister, thank you very much for what has been a long session of evidence. We have covered a lot of very interesting material and we are very grateful.
  (Ms Hewitt)  Thank you very much indeed, and thank you for your interesting questions.

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