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Lord McIntosh of Haringey: My noble friend raised very serious matters and he raised them as appropriate in a serious way which reflects his expertise in the field and his wish to enhance the regulatory system. I am grateful to him for all of that. I thought at one stage that I would simply be able to answer by saying that he is trying to hurry us on and to implement more of the second Bill in the Bill than we had intended. Having listened intently to what he said, however, I rather think he is going further than that and is saying that there are new contradictions which will be introduced by the transfer which is proposed at this time. I shall, therefore, have to reflect that in my response.

Let me make it clear, first, that his amendments, which are in Section 43 of the 1986 Act, refer to wholesale money market institutions. He is quite right in saying that it has been the principle on which that Act operated that there should be a somewhat looser system when we are dealing with wholesale money market institutions whose clients are themselves in the financial services industry rather than members of the general public. He reflected that on a number of occasions in what he said. He is quite right in saying that the Bill simply transfers the existing regime--that is the somewhat looser regime for supervising money market institutions--from the Bank to the financial services industry, and that more general reform of the regulatory system will follow in the second Bill.

Let me deal with the content of his amendments and then think aloud about how we are going to tackle the more complex points which he made in his speech. First, in relation to Amendment No. 50, under the general reform that will be the subject of our second Bill, money market institutions will be subject to a general fit and proper requirement as will all other authorised persons. It will be an explicit authorisation criterion applicable

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to money market institutions as well as to retail banks, securities houses, insurance companies and investment advisers.

In the meantime, the money market institutions must meet certain conditions for admission to the list under Section 43. Those conditions are: that its financial position is sound; that its controllers, directors, managers and, where relevant, its partners are suitable and do not prejudice the sound management of the institution; that its ownership structure does not give rise to unacceptable conflicts or is otherwise a source of potential weakness; and that its systems, controls and record-keeping are adequate.

Those conditions are clearly central to the general fit and proper concept as applied elsewhere in the financial services sector. The listed institutions are required to abide by the standards and principles set out in the London Code of Conduct. The conditions are set by the Bank and will in future be set by the FSA and approved by the Treasury. If there were any deficiencies in them--and my noble friend clearly indicated that he believes there are--they could be rectified without the need. for any amendment to the Bill. If my noble friend has any concerns about the listing criteria and he has raised those concerns in his speech, I shall be happy to discuss them with him before Report.

I should note that most of the Section 43 firms are banks or members of the Financial Services Authority in respect of other business they carry on and so will be subject to the fit and proper test as applied by the FSA or the SFA.

I will take the amendments in the order in which my noble friend dealt with them. Turning to Amendment No. 52, in keeping with our broad objective of ensuring that the FSA has the powers it needs, we are considering what powers are needed to ensure that individuals employed in the financial services industry meet high standards of competence and integrity.

Until we have resolved the general approach, though--this is why I know that my noble friend is trying to hurry us up--we are reluctant to go down the route in the Bill for wholesale market institutions such as those listed under Section 43. These are firms which are granted the privilege of a lighter touch regime on the basis that they are dealing only with other expert players in the wholesale markets, not with retail customers. It would be odd to have a statutory power in that area alone.

The approach that we adopt will need to take into account the full range of authorised persons for which the FSA will be responsible. It may be that some statutory power along the lines suggested by my noble friend is the right approach, but that needs to be considered as part of the wider system.

I turn to Amendment No. 51. Again, we are entirely in sympathy with my noble friend's intention. The FSA will have rule-making powers. In exercising those powers the FSA will in all cases be informed by its overall statutory objectives, including the protection of consumers and the duty to ensure the costs imposed by regulation are proportionate to its benefits. However, both the listing conditions and the London code of

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conduct under which these money market institutions are required to operate have been drawn up with professionalism and integrity at their heart. The aim is to ensure that wholesale markets deliver the confidence that is needed for the benefit of investors and consumers more widely.

I am conscious that I have not answered the point that my noble friend made, which was to some extent central to his argument that the very fact of transfer brings the possibility of conflict and the possibility of the same people operating under different rules or under the same rules for different people. Rather than attempt to answer off the cuff two points which were not self-evident in the way the amendments were drafted, although they are clear in the way that he has spoken to them, much the best thing is for me to seek an opportunity to talk to him in detail before the next stage of the Bill and to undertake to take very seriously the matters that he has raised.

I do not think it would be possible for me to have anticipated the full rigour of the arguments that my noble friend has made. I apologise to him for that. However, I assure him that we shall seek every opportunity to ensure that the issues that he has raised are addressed.

Lord Eatwell: I am enormously grateful to my noble friend for his reply. I apologise if I placed him in a difficult position by the form of arguments that I put forward. I believe that we are facing a very serious problem of regulatory incoherence when we have the same sort of business being regulated by the same people but according to different rules.

I would say, however, that much of his answer hung on the argument that what we were dealing with was purely wholesale money market institutions. He may at this point have been misadvised or be labouring under a misconception. Under Part II of Schedule 5 to the Financial Services Act, it is clear that where the monetary limits on transactions are defined, which come under the terms of actions by investment business by listed firms, those monetary limits can be as low as £100,000 and are typically £500,000. Given the forms of gearing typically associated with transactions in money markets these days, those could easily be transactions made by individuals. There is no reason to suppose that they are just transactions made by large financial institutions. They could be individuals acting as a one-person firm. These are therefore not surely wholesale business transactions defined with respect to large banks or institutions dealing with each other but transactions which could involve individuals.

I hope I made the argument clear with respect to the definition of fit and proper. It is very important that, in particular, the notion of the registration of individuals as fit and proper should be introduced as soon as possible and should not wait until N2. It is an absolutely vital component of the supervisory apparatus in modern financial services and we need it as soon as possible to be applied throughout investment business in the British financial services sector.

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However, I take into account the very kind offers which my noble friend has made to discuss these propositions and I very much look forward to discussing them with him. On that basis, I give notice that I am likely to return to these issues at Report. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 51 and 52 not moved.]

Schedule 4 agreed to.

Clause 23 agreed to.

Schedule 5 [Transfer of functions: consequential amendments]:

7 p.m.

Lord McIntosh of Haringey moved Amendments Nos. 53 to 56:

Page 29, line 22, leave out ("paragraphs 31 and") and insert ("paragraph").
Page 30, line 9, leave out ("48(4)(a) and 52(6) (in both places)") and insert ("and 48(4)(a)").
Page 30, line 10, at end insert--
("(2A) In section 52(6)--
(a) in paragraph (a), the words "by the Bank of England" are omitted, and
(b) for "with the Bank of England" there is substituted "with the Financial Services Authority".").
Page 30, line 15, at end insert--

("Building Societies Act 1997 (c. 32)

.--(1) Section 32 of the Building Societies Act 1997 is amended as follows.
(2) In subsection (1), for "Bank" there is substituted "Authority".
(3) In subsection (3)(a), for "Governor of the Bank" there is substituted "Chairman of the Authority".
(4) In subsection (7), for the definition of "the Bank" there is substituted--
""the Authority" means the Financial Services Authority."").

The noble Lord said: In moving Amendment No. 53 I would like to move also Amendments Nos. 54, 55, 56 and speak to Amendment No. 73, although not necessarily in that order.

Amendment No. 53 is a technical amendment to tidy up some of the consequential amendments and repeals contained in Schedules 5 and 9 to the Bill. As currently drafted, the Bill both substitutes a reference to the Bank and revokes that reference. This is clearly inconsistent, and the amendment I have tabled removes this inconsistency.

Amendments Nos. 54, 55 and 73 are technical amendments. Paragraph 41 of Schedule 5 makes consequential amendments to the Court and Legal Services Act 1990. Subparagraph (2) deletes the reference to the Bank of England in various sections of that Act and in Section 52(6) of the 1990 Act two references to the Bank of England are deleted. These three amendments ensure that the consequential changes to the Courts and Legal Services Act are accurate.

Finally, Amendment No. 56 is a technical amendment required to make a consequential amendment to the Building Societies Act 1997. It arises because of the transfer of banking supervision to the FSA. The Building Societies Act in Section 32 makes provision

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for a future amalgamation of the Building Societies Investor Protection Board with the Deposit Protection Board. Provision is made for consulting the Building Societies Commission and the Bank before making any order affecting this amalgamation and for the Governor of the Bank to appoint ordinary members of the new board. Following the transfer of supervision, the comparable supervisory body for banks will be the FSA, so it will no longer be appropriate for the Bank to be consulted.

The amendments make the necessary change to allow the authority to be consulted for the Bank, rather than the Bank, and for the chairman of the FSA to appoint ordinary members of the new board. I beg to move.

On Question, amendments agreed to.

Schedule 5, as amended, agreed to.

Clause 24 agreed to.

Clause 25 [Liability]:

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