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Lord Eatwell: My Lords, with the leave of the House, the important point with respect to subsection (2D), which refers to the fitness and propriety of individuals, is that the particular regulations of fitness and propriety may be different, for example, for a senior executive officer from those required for a trader on the desk. It provides the flexibility for the authority to define appropriate fitness requirements for people at different positions within an investment organisation.
Lord McIntosh of Haringey: My Lords, I am grateful to my noble friend for raising this matter again. I appreciate that it was not possible for him to do so on Report. I recognise his expertise as a director of the FSA, and his proper concern, which we share, to ensure that the highest regulatory standards are established from the outset.
As I explained in Committee, the Bill merely transfers the existing regime for supervising money market institutions from the Bank to the FSA. More general reform of the regulatory system, is, and has always planned to be, in a second Bill.
First, I shall set out, as far as I can, what the powers of the FSA will be under the second Bill, and then I shall talk about the transitional arrangements about which my noble friend asked me. In case there is any confusion, I should say that the second Bill will, of course, be a financial services Bill and not a finance Bill.
The Government's aim is to make the FSA a more effective regulator with the necessary statutory powers, drawing on the best of each of the existing systems. There has been much support for the less-prescriptive approach to regulation which has been adopted hitherto for these wholesale market institutions. I appreciate that my noble friend does not share that view, but it is a view that is widely held.
The Government recognise the importance of the wholesale-retail split. We intend that the FSA should have the scope to adopt both code-based and rule-based systems for players in different markets. Code-based rules can be more effective, and less easy to circumvent, than detailed prescriptive rules. That depends upon the type of business the firms are doing and the sort of counterparties with which they are dealing.
The important point is to ensure that the FSA has the powers to make appropriate rules in respect of all the businesses that it authorises. I can assure the House that it will have. It is important that its rule-making and supervision are subject to statutory objectives to protect investors, depositors and policy-holders, and to maintain confidence in the integrity of the markets. Again, I can assure the House that that will be the case. A statutory objective to ensure that the requirements it imposes are proportionate to the benefits that they bring in terms of
I can also assure my noble friend that we are considering what powers the FSA ought to have to discipline individuals holding key positions in authorised firms--he made a particular and legitimate point about that--bearing in mind, the objectives that I have mentioned. Again, the FSA's powers will apply equally to authorised firms which were listed and those which were not. I hope that those assurances meet my noble friend's concerns about the future regime.
The answer in respect of my noble friend's two final questions is yes: do the Government intend that in future individual registrations should be the rule in what were previously listed firms? Yes. Do the Government intend that in future conduct of business rules should apply to all firms whether previously listed or not? Again, the answer is yes.
I turn now to the transition period. My noble friend talked about the need for the FSA to achieve maximum coherence during the transition period. Again, I can assure him that the FSA is adopting an approach that maximises continuity and ensures a carefully managed integration of the different regimes. The current rules book will continue.
SFA staff that come across to the FSA will continue to act on behalf of the SFA in applying the SFA rules to SFA firms for the time being. Equally, in the wholesale markets supervisors from the Bank will continue to supervise the Section 43 firms, and will do so according to the same rules. From the start, it will be the same firms being regulated or supervised, under the same rules, and by the same supervisors.
In the meantime, we do not accept that the wholesale markets regime established by the Bank under Section 43 of the Financial Services Act is inadequate. If there are any difficulties, of course the FSA can bring forward changes to the listing conditions.
The important point that the House should recognise is that we should not make ad hoc changes to the wholesale markets regime through this Bill which may not fit in with the final regime under the second Bill. It would send the wrong message to those markets. It would involve potential costs to business in implementing two different sets of changes, especially coming on top of preparing the euro and resolving the year-2000 millennium bug problem. It is important that we should not chop and change and undermine the attractiveness of London as an international financial centre.
In Amendment No. 2 my noble friend proposes to introduce an explicit fit-and-proper test for wholesale market firms. Most of the Section 43 firms are banks or members of the SFA, so they are already subject to a fit-and-proper test. Indeed, the vast majority of
My noble friend spoke next to Amendment No. 4. He proposes a power for the FSA to introduce a statutory system of regulation for individuals in capacities that the FSA may determine. That reflects contractual powers which are already used by two of the three existing self-regulating organisations, including the FSA, and a similar regime is in the process of being introduced by the third.
Finally, in Amendment No. 3 my noble friend talks about an explicit rule-making power. The FSA will have powers to make rules or establish principles for the conduct of business along the lines of the existing code. In exercising that power, the FSA will, in all cases, be informed by the overall statutory objectives we are to introduce, including the protection of consumers and the duty to ensure that the costs imposed by regulation are proportionate to its benefits.
My noble friend's third final question relates to what steps the Government expect the FSA to take to achieve maximum coherence in the regulation of investment business between the passage of this Bill and the next financial services Bill. Perhaps my answer has been set out--and I apologise--at too great length, but I hope that on that basis my noble friend will feel able to withdraw his amendment.
Lord Eatwell: My Lords, I am grateful to my noble friend for that reply. He reiterated the Government's devotion to the notion that there is a black and white split between wholesale business and retail business and that their regulatory procedures should be different. The Government should take great care over that proposition. There is a significant grey area between wholesale and retail businesses. When Baring failed, a number of ordinary individuals were not paid their salaries and could not pay their mortgages during that week. Individuals were affected by what happened in wholesale markets on the other side of the world. It is enormously important to realise that behind all wholesale business there are individuals who will be affected by the nature of its conduct.
I am given considerable comfort by the fact that the FSA appears to be taking a more flexible view than that taken by my noble friend. It has not, for example, organised the Financial Services Authority in a manner which takes note of that split. The organisation of the FSA is along functional lines and does not divide wholesale and retail businesses. I hope that the differences in the nuances between wholesale and retail businesses will be recognised by the Government.
I am greatly reassured by my noble friend's confident "yes" that individual registration will become a characteristic of previously listed and unlisted firms in the financial services Bill. I am sure that the entire industry will take considerable comfort from that.
I focused in particular on the transition period between N1 and N2. My noble friend made an important point in arguing that the rule books of the Bank of England and the FSA would be run by different people
Finally, he suggested that my amendments appeared to be ad hoc and would result in firms chopping and changing the regulatory procedures to which they were subject. I was a little puzzled when he then said that Amendment No. 2 did not add much. If it did not add much how could it lead to considerable chopping and changing? However, given that that is nitpicking and given the reassurances and additional information which my noble friend has provided today, I am happy to withdraw my amendment.