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The Earl of Home: The noble Lord says that if there were any changes the amended document would be published. That goes a long way to meeting my point. I am grateful to him for that assurance and beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Eatwell moved Amendment No. 50:
After Clause 22, insert the following new clause--
(" . In section 43 of the Financial Services Act 1986, after subsection (1) there is inserted--
"(1A) The Authority shall have rules and practices to secure that a person included on the list referred to in this section is fit and proper to be included on that list.".").
The noble Lord said: Before moving this amendment, and also speaking to Amendment No. 52 which is closely associated with it and Amendment No. 51, I would like to apologise for not having had the opportunity to attend the Second Reading of the Bill due to teaching obligations in Cambridge on that day, and also for not having been able to attend yesterday's proceedings for the same reason. I have, however, studied noble Lords' speeches in Hansard and will refer to them in my remarks.
Let me say at the outset that I totally support the Government's objectives of placing more financial regulation, including the regulation of institutions previously supervised by the Bank of England, under the control of the new Financial Services Authority. This is the right policy and it is not before time.
The amendments I have proposed to the Bill before us will assist the Government in ensuring that this policy is not just a success in the end but that it is a success in the difficult transition period to which the noble Lord, Lord McIntosh, referred a few moments ago.
As the Committee may be aware, I am an independent member of the board of the Securities and Futures Authority and, while much of what I have to say this afternoon is motivated by my experiences in that position, my remarks are made and my amendments put down in a purely personal capacity.
Before outlining the argument for these particular amendments, I wish to comment on the underlying rationale for moving both Amendments Nos. 50 and 52, and Amendment No. 51, with which I will deal afterwards. All three amendments refer to Section 43 of the Financial Services Act. It is that section of the Act which resulted in the listing of firms which, being so listed, have up to now been regulated by the Bank of England. Listed firms have been regulated by the Bank both as regards their banking business and, in almost all cases, as regards their investment business as well.
As the Committee will be further aware, the Bill in Clause 21 transfers all supervisory activities, including the listing of firms, from the Bank of England to the Financial Services Authority.
My amendments are an attempt to enhance regulatory coherence among listed and unlisted firms with respect to all investment business (I am not concerned with banking business at all) during the period commonly known as N1 to N2; that is, from the enactment of this Bill in early summer of this year to the enactment of the more general financial services reform Bill, to which my noble friend referred, in about two years' time.
These amendments will ensure that the listing of all institutions under Section 43 follows criteria which are more nearly in line with the registration procedures used to regulate firms conducting identical investment business which are currently regulated by the SFA. Accordingly, the investment business conducted by listed firms will be regulated in a manner more nearly akin to the manner of regulation of investment business by unlisted firms.
The criteria I propose will replace the essentially informal procedures used up to now by the Bank of England in listing, and which are indeed preserved, regrettably, in the Bill. Those informal procedures may have been appropriate for a regulatory authority which is also responsible for the conduct of monetary policy and the maintenance of liquidity; they are totally inappropriate to the new FSA.
It might be suggested that all this is unnecessary. After all, in a few months' time a new Bill to reform the regulation of the financial services industry will be introduced, and when that Bill becomes law, the whole process of listing firms under Section 43 will disappear and be replaced by new listing criteria which are the same for all investment business. That is, of course, quite true.
However, Part III of the Bill already provides for important interim measures to cover the period between the transfer of the Bank of England's regulatory powers to the FSA and the transfer of the powers of the other SROs, including the SFA, to the FSA--I am sorry about the alphabet soup which I am afraid bedevils discussion of these financial regulations.
Everyone acknowledges that this interim period is a dangerous period, and that it is vital that during it the regulatory structure should be as competent, as thorough and as coherent as it is possible to make it. My amendments, deriving as they do from my experience on the board of a financial services regulator, are designed to achieve those goals of competence, thorough regulation and coherence.
I should be grateful if the Committee would consider the impact of three facts: first, the transfer of the responsibility for Bank of England regulated institutions to the FSA will mean that the investment business of the Section 43 listed firms will be the responsibility of the FSA. By the Bill, FSA staff will regulate listed firms according to Bank of England rules and procedures.
Secondly, according to the working agreement between the Securities and Futures Authority and the FSA, virtually all the staff of the SFA will be transferred to the FSA in June at the same time as Bank of England staff are transferred. Their services will then be contracted back to the SFA in order for it to maintain its statutory duties under the Financial Services Act--up to such time as the new financial services reform Bill is enacted and becomes operative in a couple of years time. By this Bill, FSA staff will regulate SFA firms according to SFA rules and procedures.
Thirdly, the FSA is organised along functional lines--supervision, enforcement, authorisation and so on--and not along old type of business lines. It is after all the recognition of Her Majesty's Government that the boundaries between types of financial business are becoming blurred to the point of irrelevance that is the rationale of the creation of the FSA in the first place.
Let us take those three facts together: first, under this Bill SFA staff will regulate listed firms according to Bank of England rules; secondly, FSA staff will regulate SFA firms according to SFA rules and procedures; and the third point concerns the functional organisation of the FSA. What do these three things amount to? They mean that the same staff will be responsible for the authorisation, enforcement and supervision of the same sort of investment activities by listed firms and by non-listed firms. And yet the listing criteria, and hence the regulatory procedures, currently employed by the Bank of England are quite different from those applied by the SFA--but not always.
In the interim period, the same people will be regulating the same sort of business but in quite different ways. The difference is due entirely to the accident of history as to whether firms were regulated by the Bank of England or were regulated by the Securities and Futures Authority.
This is, I believe, not only incoherent but confusing and even dangerous. It is exactly the sort of regulatory incoherence which can be exploited by wrong-doers. It is exactly the sort of regulatory incoherence that is the great danger facing the UK system of financial supervision in the interim between N1 and N2.
Of course, there is no way in which the three amendments can result in a complete harmonisation of regulatory rules and procedures for all investment
But the two areas I shall be covering this evening, the criteria by which firms and individuals are deemed fit and proper to conduct investment business and the enforcement of conduct of business rules, go to the heart of the matter. Incorporating these amendments will remove a large proportion of the ambiguity and incoherence which, I am afraid, is the inevitable product of the gap between N1 and N2 if these amendments are not accepted by the Government.
I make one final point before I proceed. My amendments embody some of the practical rules which have been developed since 1986 as an expression of the so-called SIB principles. I have presumed--and I should be grateful if the noble Lord, Lord McIntosh of Haringey, would confirm that this is the case--that since the FSA is just the SIB in modern guise, the SIB principles still hold and will apply to institutions previously regulated by the Bank of England once this Bill is enacted.
I now turn to the specific character of the amendments. First, Amendments Nos. 50 and 52 deal with the definition of firms and individuals who will be fit and proper. These amendments are offered in support of my noble friend Lord McIntosh, who on Second Reading said:
The Bill before us does not achieve my noble friend's objectives; my amendments do.
These amendments require that clear rules be formulated for establishing that institutions and the individuals comprising those institutions should be fit and proper to conduct investment business. They achieve coherence in the characterisation of what is fit and proper by requiring that rules which stem from the SIB principles should be applied to all investment businesses regulated by the FSA employees between N1 and N2. It is interesting that under Section 43 of the Financial Services Act there are at present no specific criteria for how firms are listed; that is, there are no specific criteria as to how the Bank of England should allow firms to join the list of firms which it supervises. It is essentially an informal procedure.
Amendment No. 50 replaces that informality by requiring that all institutions conducting investment business should, to be listed, be deemed fit and proper to conduct an investment business, according to the rules and practices of the Financial Services Authority; that is, according to the specific criteria which would and should be expected of a modern regulator. The listing procedure will no longer be informal. Amendment No. 50 will require that the procedure is clearly specified in rules and practices and is common for all institutions conducting investment business.
Amendment No. 52 requires that in order to be included on the list each institution must satisfy itself that its employees are fit and proper persons to carry out
I should make clear to the committee that Amendment No. 52 amounts to requiring the registration of individuals as fit and proper, something which the Bank of England has consistently opposed.
It does not, however, amount to "kite-marking" of individuals. Section 43(2C)(a) of the Financial Services Act makes it clear that it is the responsibility of firms to satisfy themselves that individuals are fit and proper, and Section 43(2C)(b) makes it clear that an individual's registration is related to his or her post within a specific institution. In other words, the registration cannot be transferred from one firm to another; it is not a registration of an individual but registration of an individual within a specific post.
I should also make clear that by these amendments the burden of proof will be on the individual and on the firm which employs that individual. That is the case for investment businesses which are presently regulated by the SFA, and I believe that is entirely appropriate.
Amendments Nos. 50 and 52 replace the informality of Bank of England procedures with the more formal rules required of a modern regulator. They will ensure that coherent rules and practices will define which firms and which individuals are fit and proper for all investment business, not just some investment business. If these amendments are accepted, the same FSA staff will be regulating the same sort of business in the same way.
I turn now to Amendment No. 51, which applies to another dimension of the SIB principles, as developed in SFA rules, extending that to all investment business including that of firms listed under Section 43. In this case what is required is that the authority should ensure that listed firms obey conduct of business rules appropriate to the kind of investor it is dealing with and appropriate to the costs involved.
Once again I believe it is vital, especially in the period between N1 and N2, that Bank of England informality be replaced with modern rules. As regards the conduct of business, the Bank of England seeks to regulate conduct of business by means of its code of conduct set out in the so-called grey book; but the terms of the code are not rules. The code defines best practice, whereas rules demand a minimum satisfactory performance. Breaking a code does not automatically trigger disciplinary procedures. Breaking a rule does automatically trigger disciplinary procedures.
Conduct of business regulation is the fundamental protection which the supervisory system offers to individuals. It ensures that in what may be very complex areas, firms have the responsibility to provide
In a modern regulatory system, it is surely imperative that what is appropriate should be embodied in clear rules, and of course that those rules are attuned to the characteristics of the counterparty, as set out in my amendment.
It would surely be a nonsense if investment business conducted by listed firms--that is, those previously supervised by the Bank of England--was subject only to a best practice code, while identical investment business conducted by unlisted firms was subject to clearly defined conduct of business rules. Amendment No. 51 ensures that conduct of business regulation will be formal, clear and coherent rather than informal, unclear and incoherent.
These three amendments provide a framework of coherence between N1 and N2 which will ensure that the dangers, of which I spoke earlier and to which the Minister referred in introducing this section of the Bill, will be at least mitigated and substantially diminished. I beg to move.
"The key to the SFA's regulatory role will be the authorisation of those carrying on business in the relevant areas. It is consistent with having a single regulator that there should be a single authorisation requirement and a single process for considering applications".--[Official Report, 13/2/98; col. 1387.]
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