APPENDIX 8: MEMORANDUM FROM THE DELEGATED
POWERS AND REGULATORY REFORM COMMITTEE
NB: References in this memorandum to page numbers
are to the page numbers of the draft Bill itself (and not the
white paper).
I. This memorandum responds to your invitation of
20 July to the Delegated Powers and Regulatory Reform Committee
to contribute to your Committee's scrutiny of the draft Financial
Services Bill. The Committee considered the draft bill at its
meeting this morning. We have been assisted by a memorandum by
HM Treasury (HMT) which identifies and explains the delegations
in the bill.
2. We value the opportunity to contribute to the
pre-legislative scrutiny of this draft bill. In making these observations,
our opinion should not be taken to prejudge our position should
a bill be introduced: we will report to the House at that stage
on whether its provisions inappropriately delegate legislative
power or whether they subject the exercise of legislative power
to an inappropriate degree of parliamentary scrutiny. We have
considered each issue purely as a question of delegation, and
not of policy.
Powers conferred on the Treasury
3. The draft Bill confers a number of powers on the
Treasury to make orders or regulations.
Henry VIII powers—powers
to amend primary legislation may be found at:
Clause 5 new section I F (page
18, line 11)
new section 3B(3) (page
26, line 39)
Clause 6 new section 22A(3)
(page 34, line 4)
Clause 24 new section 192A(4)
(page 99, line 13)
new section 192B(8) (page
100, line 24)
Clause 37 new section 3540(4)
(page 113, line 5)
Schedule 8, para 4 new section 204A(6)
(page 192, line 42)
Schedule 8, para 13(5) new subsection
(11) (page 195, line 13)
Schedule 8, para 15(7) new subsection
(14) (page 196, line 10)
Schedule 8, para 17(8) new subsection
(12) (page 197, line 10)
Other delegated powers—other
powers to make orders or regulations may be found at:
Clause 3 new section 9K (page
7, line 25)
Clause 5 new section 21(6) (page
24, line 30)
new section 3G(1) (page
29, line 25)
Clause 6 new section 22A (page
33, line 30)
Clause 8 new section 55D (page
37, line 15)
new section 55Q( I) and
(4)(a) (page 46, lines 25 and
34)
new section 55R(2) (page
47, line 43)
Clause 21 new section 137C(1)(b)
(page 72, line 29)
new section 1370(7) (page
80, line 11)
new section 138E(6) (page
84, line 25)
new section 138L(6)(c)
(page 88, line 42)
Clause 24 new section 192B(4)
(page 100, line 6)
Clause 45(4) (page 117, line
33)
Clause 53(6) (page 122, line
29)
Clause 69(2) (page 135, line
21)
Schedule 4, paras 2(3), (page 163, line
36; page 164, line 38; page 3(3), 15(3) and 16
167, line 40; page 168, line 3)
Schedule 5, para 15(3) (page 177, lines
11 and 22)
Schedule 8, paras 4, 13(3), (page 192,
lines 21 and 34; page 194, line 28; 15(7) and 17(6) and (8)
page 196, line 2; page 196, line 28; page 197,
line 2)
Schedule 9, para 3(4) (page 203, line
41)
There are also various expansions or other modifications
of existing powers, including at clauses 26 (page 104, line 9),
59 (page 125) and 66 (page 134, line 29).
Powers conferred on regulators
4. The Financial Services and Markets Act 2000 (the
2000 Act) confers numerous powers on the Financial Services Authority
(FSA) to make rules, give directions and issue codes, statements
and guidance. There are various requirements as to consultation,
procedure and publicity which must be met in relation to rules,
but the rules are not subject to any Parliamentary control.
5. Clause 5 of the draft Bill re-names the FSA as
the Financial Conduct Authority (FCA). There will also be a second
regulator, the Prudential Regulation Authority (PRA). Though neither
the FCA nor the PRA will actually be established by legislation,
there are rules about their constitution and governance set out
in new Schedule IZA and IZB respectively to the 2000 Act, inserted
by Schedule 3 to the draft Bill (page 141). These provisions are
similar to those which currently apply to the FSA.
6. The draft Bill gives the FCA and the PRA extensive
powers to make rules, give directions and issue codes, statements
and guidance. These powers do not differ significantly in principle
from those which Parliament has already conferred on the FSA,
nor, generally speaking, does the overall procedural framework
within which those powers must be operated differ significantly
from the existing framework. This framework is summarised at paragraphs
I 0 to 17 of HMT's memorandum, and Annex I to the memorandum shows
the provisions in the 2000 Act from which the powers to make rules
conferred by the draft Bill derive and summarises the differences.
Issues for the Joint Committee
7. Though the structure of regulation for financial
services under the draft Bill is more complex than current arrangements
(because there will be two regulators rather than one) the overall
approach of the draft Bill does not seem to raise any novel issues
about delegated powers. But there are some points of detail the
Delegated Powers Committee draws to the attention of the Joint
Committee.
Clause 3—macro-prudential measures
8. Under new section 9G of the Bank of England Act
1998, inserted by clause 3 of the draft Bill, the Financial Policy
Committee (a sub-committee of the court of directors of the Bank
of England) may give a direction to the FCA or the PRA requiring
them to exercise their functions so as to secure implementation
of a macro-prudential measure described in the direction. The
direction must be complied with (new section 9H). But it is left
to the Treasury to prescribe by order what is a "macro-prudential
measure" in respect of which a direction may be given (new
section 9K).
9. The reason for this power is explained at paragraph
28 of HMT's memorandum. We do not consider it inappropriate; and
the importance of the power is recognised by the application of
the draft affirmative procedure or, in urgent cases, the 28-day
"made affirmative" procedure, explained at paragraph
39 of HMT's memorandum.
10. There are, however, two aspects of this power
to draw to the Joint Committee's attention which are notable,
not inappropriate. First, the macro-prudential measure may be
framed by reference to a publication issued by FCA, the PRA, another
body in the UK or an international institution, as the publication
has effect from time to time. This inevitably permits an element
of sub-delegation (see paragraph 34 of HMT's memorandum) since
the scope of the order may be determined by changes to the other
publication, over which there is no Parliamentary control. Secondly,
the order may exclude or modify any procedural requirement that
would otherwise apply under the 2000 Act in relation to cases
where the FCA or the PRA is complying with a direction (see paragraph
36 of HMT's memorandum). The affirmative procedure should be a
sufficient safeguard against inappropriate use of these powers.
Clause 5—consumer protection and integrity
objectives
11. There is an important new power, subject to affirmative
procedure, at new section 1F of the 2000 Act (page 18, line 12).
The FCA has extensive rule-making powers, but this is balanced
by a framework set out in some detail in the Act. (This is acknowledged
at paragraph 12 of HMT's memorandum.) The new power enables the
Treasury to modify that framework by re-defining "consumers"
and "services" for the purposes of two of the FCA's
objectives. (There is also a related power to alter the meaning
of "consumers" for the purposes of new section 3B (regulatory
principles) on page 26.) However, there is an element of "fine-tuning"
about this and in view of the affirmative procedure the Delegated
Powers Committee is not concerned by the extent of the powers.
Clause 5—FCA/PRA boundaries
12. New section 3G(1) (page 29, line 25) enables
the Treasury to specify matters which, for PRA-authorised persons,
are primarily the responsibility of one regulator rather than
the other. The explanation for this power is at paragraphs 74
and 75 of HMT's memorandum and we do not question the appropriateness
of the delegation.
13. However, we do draw the Joint Committee's attention
to the choice of Parliamentary procedure, which in all cases is
the made affirmative procedure (28-day order), i.e. the order
is made and may have effect immediately (before approval) but
lapses unless approved within 28 days. This is justified at paragraph
77 of HMT's memorandum partly by reference to the possibility
of the need to act urgently. But it is not suggested that there
will be urgency in every case and in those circumstances one might
have expected the 28-day procedure to apply only where the Treasury
considered that urgency required it, with the normal draft affirmative
procedure applying in other cases. Powers with procedural provisions
of that kind occur elsewhere in the Bill—on pages 8 (new
section 9L of the Bank of England Act 1998—paragraph 9 above)
and 99 (new section 192A(5) to (9) of the 2000 Act). But another
consideration for the choice of procedure is consistency with
the procedure for orders under section 22 (as to which see paragraphs
14 and 15 below).
Clause 6—PRA-regulated activities
14. New section 22A of the 2000 Act (page 33, line
30) enables the Treasury by order to specify which regulated activities
are to be regulated by the PRA and provide for exceptions and
other ancillary matters. These orders are generally subject to
negative procedure, which seems appropriate. But in three cases
the orders are 28-day affirmative orders:
· the first order under section 22A;
· orders which, in exercise of the power
in section 22A(2)(e) and (3) make consequential etc. provision
which amends an Act;
· orders which bring an activity within
PRA regulation or move it out of PRA regulation.
15. As respects those three cases, the same point
appears to arise here as with orders under new section 3G(1) (paragraphs
12 and 13 above, and see paragraph 96 of HMT's memorandum). But
paragraph 95 of the memorandum suggests that the procedure for
orders under section 22A should reflect that for orders under
section 22 (under paragraph 26 of Schedule 2 to the 2000 Act),
which deal with what is a regulated activity. This is reasonable
and is what the draft Bill achieves. But it is usual nowadays
for the 28-day affirmative procedure to apply only where there
is urgency. The procedure for orders under section 22 of the 2000
Act derives from that in section 2 of the Financial Services Act
1986 which pre-dates the establishment of the Delegated Powers
Committee. There is certainly a case for HMT to consider whether
any adjustment might be made to the procedure for orders under
section 22 so that the draft affirmative procedure should apply
in those non-urgent cases to which the negative procedure does
not apply.
Clause 21—product intervention
16. New section 137C(1)(b) enables the Treasury to
enlarge the FCA's powers to make product intervention rules by
allowing the FCA to make them for the purpose of advancing the
integrity objective. The orders are 28-day affirmative orders,
and the reason given at paragraph 170 of HMT's memorandum is the
possible need to act quickly. The same point arises here as on
new section 3G, but here there is no obvious link to section 22
or 22A. Accordingly, the Delegated Powers Committee takes the
view that the 28-day procedure should be confined to urgent cases,
with the draft affirmative procedure applying in other cases.
Clause 37—request to OFT
17. New section 354D(2) of the 2000 Act requires
the Office of Fair Trading (OFT) to respond within 90 days to
a request made by the FCA under subsection (I). Section 354D(4)
enables the 90-day period to be altered (up or down) by an order
subject only to negative procedure. Since the scope of the power
is limited, and is precedented in section 11 (4) of the Enterprise
Act 2002 (super-complaints to the OFT), the Delegated Powers Committee
consider the negative procedure sufficient, even though this is
a Henry VIII power. We do not, however, share the view at paragraph
266 of HMT's memorandum that the length of the time for responding
has implications only for the OFT.
Schedule 9, para 9—Compensation Scheme Annual
Report
18. Section 218 of the 2000 Act (headed "Annual
Report") requires the manager of the Financial Services Compensation
Scheme to make and publish a report at least once a year. Paragraph
9(3) of Schedule 9 adds three new subsections to section 118,
the first of which (subsection (4)) enables the Treasury (subject
to no Parliamentary procedure) to require the scheme manager to
comply with any provisions of the Companies Act 2006 about accounts
and their audit which would not otherwise apply or direct that
provisions of that Act are to apply to the scheme manager with
such modifications as are specified in the direction. New section
218ZA of the 2000 Act (audit of accounts), inserted by paragraph
I0 of Schedule 9 to the draft Bill, exempts the scheme manager
from the requirements of Part 16 of the 2006 Act (audit) "except
as provided by section 218(4)".
19. If the application of provisions about audit
to the manager's annual report is significant, there is at least
an issue as to whether any modifications of the 2006 Act should
be contained in a statutory instrument subject to negative procedure,
since the net effect of the Bill might otherwise be to remove
requirements currently contained in primary and subordinate legislation
outside any Parliamentary control.
Clause 21—product intervention rules by
the FCA
20. We draw the Joint Committee's attention to only
one aspect of the powers conferred on the FCA (and not subject
to Parliamentary control)—new sections 137C and 138N of
the 2000 Act (pages 72 and 89).
21. New section 137A empowers the FCA to make general
rules applying to authorised persons with respect to carrying
out activities, for the purpose of advancing one or more of its
operational objectives. New section 137A(1), which has no equivalent
at present in the 2000 Act, provides that the FCA's power to make
general rules includes power to make rules prohibiting authorised
persons from doing any of the list of prohibited things in subsection
(2). The power may be exercised only for the purpose of advancing
one or both of two operational objectives (consumer protection
and efficiency and choice), but there is power for the Treasury
to extend it to the third (integrity—paragraph 16 above).
Paragraph 158 of HMT's memorandum explains the things which may
be prohibited. The power given to the regulator is considerable.
22. The power in new section 137C is also notable
in two particular respects. First, new section 138F(3) disapplies
from product intervention rules the general principle contained
in new section 138F(2) (page 84) that no contravention of a rule
made by a regulator makes any transaction void or unenforceable;
and new section 137C(7)(a) enables rules under section 137C to
provide for agreements or obligations defined in section 137C(8)
to be unenforceable. Secondly, the rules under section 137C may
provide for the payment of compensation for loss sustained in
relation to such agreements or obligations, (in addition to the
principle in new section 138E(2) that contravention by an authorised
person of a rule made by the FCA is actionable at the suit of
a private person). Though neither of these aspects of the power
seems inherently inappropriate, the Joint Committee may wish to
consider whether as a matter of policy the extent of the perceived
difficulties which conferring the powers seeks to address justifies
the extent of the powers to be given. We have assumed that the
power would not be exercised so as to apply to agreements made
before the rules come into force, but the Joint Committee may
wish to seek clarification on this from the Treasury.
23. When considering the FSA's rule-making powers
in the draft of the Bill which was enacted as the 2000 Act, the
Delegated Powers Committee attached "considerable importance
to the requirement to consult widely on a draft and to provide
a cost-benefit analysis" (paragraph 18 of Appendix 2 to the
7th Report of the Delegated Powers Committee for 1999-2000). This
is a particular aspect of the concept that the wider the powers
given to a regulator subject to no Parliamentary control, the
stronger must be the other mechanisms in place for reducing the
possibility of an inappropriate use of the powers. In this connection
it is notable that new section 138N enables the consultation procedures
in sections 138J(1)(b) and (2) to (5) and 138L to be disapplied
merely if the FCA considers it necessary or expedient not to comply
with them for the purpose of advancing the relevant operational
objective. Where this is done, the rules cannot extend beyond
12 months from the date of their coming into force. This is explained
at paragraphs 181 to 189 of HMT's memorandum.
24. Section 155(7) of the 2000 Act (to be re-enacted
under the draft Bill as section 138M(1)) currently disapplies
the consultation procedures where the FSA considers that the delay
involved in complying with them would be prejudicial to the interests
of consumers. Accordingly, section 138N is about cases where the
FCA cannot say with the requisite degree of certainty that those
interests would be prejudiced (see paragraphs 182 and 183 of HMT's
memorandum). The Joint Committee may wish to consider, in particular,
whether there is a need for a test as flexible as the "expedient
not to comply with them" test. The actual problem may be
more specific, i.e., the FCA believes that delay might
be prejudicial to the interests of consumers. On the other hand,
flexibility might be considered necessary because product intervention
rules might be made for advancing the efficiency and choice objective
as well as the consumer protection objective.
14 September 2011
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