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Lord Eatwell moved Amendment No. 166A:

The noble Lord said: The objective of Amendment No. 166A is to assist in raising professional standards in the financial services industry and, in particular, to ensure that standards of competence keep up with the changing circumstances of financial markets. Clause 60 as currently drafted is peculiarly static for what is one of our most dynamic industries.

In evaluating the characteristics of a candidate, the authority is required to consider only his or her current qualifications with no regard to any commitment to maintain competence in the future. Unfortunately, the skills, say, of 10 years ago, if someone had been authorised then, are likely to be quite inadequate for today's markets, and the skills of someone authorised today are likely to be inadequate in 10 years' time. Things move on. The amendment recognises the nature of the industry and requires that, to be authorised, candidates will make a reasonable commitment to engage in continuing professional education and development. By adding the amendment, the clause will ensure that authorised persons are committed to maintaining their competence and skills in line with the development of the financial services industry over time. I beg to move.

Lord Lipsey: I support the principle of the amendment. None of us would like to be treated by a doctor who had not read a medical magazine since leaving medical school--50 years after he qualified. The same point should apply to financial advisers. Just taking the exam is not enough. To some extent the existing regulator recognised that when it decided against "grandfathering" being allowed in the industry--that is, one cannot carry on doing the job just because one has been doing it for a long time; one has to obtain the necessary qualifications. In the same way, it is right in principle that qualifications should be continually updated in the way suggested by the noble Lord, Lord Eatwell.

However, I can see some practical difficulties with the amendment. I sit on the PIA membership committee. We receive great bundles of papers for each of the applications for individual registration. If Members of the Committee think that there is a great deal of paperwork for this Bill, they should see what I receive for a PIA membership committee meeting. It is essentially a "tick the boxes" operation. The applicants state that they have the necessary exams and the necessary experience. They state that they have the right financial resources or are backed by their firms. It is rather harder to assess whether an applicant whom one will not see in person really has the continuing commitment to which the amendment of the noble Lord, Lord Eatwell, refers.

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I very much hope that the Minister will accept the principle of the amendment and before the Report stage will think a little about the practical difficulties. Perhaps there is some different wording of the amendment which would achieve the objective, to which the noble Lord, Lord Eatwell, is rightly directing us, without causing the practical problems to which I have referred.

Lord Sharman: I support the principle of the amendment, although I wonder whether it goes far enough. As the noble Lord, Lord Lipsey, said, demonstrating a commitment at a point in time is difficult enough. What does one do? One says "Yes, I am going to do it" and then one signs a piece of paper. Many professional bodies now require their members to demonstrate that they have maintained what is commonly known as continuing professional education. The objectives of the amendment would be well served by some form of approach which requires maintenance of authorisation by reference to continuing professional education. Nevertheless, I support the principle of the amendment. I just wonder whether it goes far enough.

The Earl of Home: I support the principle of the amendment. At my bank we constantly encourage people to seek the latest qualifications. However, there are times when experience and age have to be considered because it may not interest an individual to move on to the next stage of qualification. I should have thought that it is up to the management of the institution to ensure that those people get to the right stage of qualification for the job that they are asked to do. If they have to go further, either by statute or by the wish of management, they will move forward. I think that it is best to leave it to the management of the institutions to decide the qualifications of that person and whether by going one stage further the Peter principle may apply whereby he is promoted beyond what he is capable of doing and therefore cannot necessarily give the best advice to the client.

Lord Saatchi: We have some concerns about this amendment. In order to move forward, I wish to make a suggestion about it because, as Members of the Committee have said, the principle behind it is admirable. In order to explain the suggestion, perhaps I may address some of our concerns about Clause 60 in general. One of our concerns is that Clause 60 appears to take over the responsibilities of firms and to allocate matters to the FSA which in our opinion ought properly to be the responsibility of the firms and the employer. We think that the thrust of this is strange, given the comments on page 20 of consultation paper 26, in which an earlier Treasury document, an overview of financial regulatory reform, is referred to. It states:

    "Regulation of the financial services industry should be directed first and foremost at the level of the firms operating in the industry. As now, the organised firm will continue to be the entity on which rules are imposed by the FSA and which is responsible for complying with those rules and for the consequences of not doing so".

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The document goes on to argue:

    "That justifies the FSA regulating and authorising directors and other senior members of the firm. It could also be used to support the concept that once the FSA has authorised those senior members, the firm--i.e. its directors and senior officers--should then be responsible for ensuring that more junior middle management conform to the rules and standards required in the Bill".

We should contrast that with what appears to be happening in the Bill, especially in Clause 60. The FSA is introducing itself directly into the regulation of middle management in attempting to assess not only whether someone is a fit and proper person, by ensuring that he has no record of dishonesty or of breaking rules elsewhere, but also in trying to assess whether people are fit for the jobs and activities at a micro-level. We believe that that is probably undesirable and, as the noble Lord, Lord Lipsey, hinted, perhaps unworkable. Perhaps it would be better if the FSA concentrated on regulating the firm and ensuring that it introduces and adheres to strict internal arrangements to ensure that more junior staff conform to these standards. We have to remember that 150,000 to 200,000 people in the City will have to be regulated and approved within the meaning of the clause. Out of that total, about 10,000 people change jobs every month. There is constant movement. Therefore, this will be an active area for the FSA.

As far as we can tell, Clause 60 already gives the FSA a veto on the appointment of directors, salesmen, corporate finance managers and other senior line management. That is set out in greater detail on page 23 of consultation document 26. We believe that the problem with the clause is that the tentacles of the FSA can reach right to the heart of decision making in any business by addressing and influencing staffing and remuneration--two issues usually considered to be the function of management. In that sense it is highly intrusive and takes a great deal of justification. We believe that the Government have acknowledged that point. In consultation document 26 the Treasury stated, in its overview of financial regulatory reform:

    "It is not the role of regulators to try to run regulated businesses".

It went on to say:

    "The regulator clearly needs however to have some direct influence over individuals in positions of senior management responsibility".

Those are the reasons why we believe that Clause 60 has already gone a little too far. Amendment No. 166A would take the process even further. The amendment is more or less the same as one tabled by the Liberal Democrats at the Committee stage of the Bill in the House of Commons. It was not accepted by the Government. The amendment describes the matters which the FSA must take into account when considering whether to grant an application to an individual to become an approved person.

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In Clause 63(13) the definition of "approved person" is,

    "a person in relation to whom the Authority has given its approval under section 58".

Approved persons are the individuals employed by an authorised person to carry on the controlled functions of the authorised person. Controlled functions must satisfy one of the conditions set out in subsections (5), (6) or (7) of Clause 58.

In summary, approved persons are the individuals who, among other things, provide investment advice, carry out investment management, arrange deals and securities, deal with client assets or have management functions which allow them to exercise significant influence on the conduct of the authorised person's affairs.

The amendment would require such a person, when applying to become an approved person, to demonstrate to the FSA a commitment to engage in continuing education and development. That is, as other noble Lords have said, a laudable objective, but perhaps I may respectfully suggest that the amendment may be in the wrong place. The FSA would find it very difficult to make a judgment on a person's commitment to engage in continuing education and development. A better approach might be to require the FSA to introduce continuing education requirements for approved persons so that an approved person would run the risk of ceasing to be approved unless he maintained a certain level of continuous training.

5 p.m.

Lord McIntosh of Haringey: The noble Lord, Lord Saatchi, has raised the ante on the amendment by calling into question not only the provisions under Clause 60(2)--it is what others were discussing--but also the whole basis of Clause 60 and, by implication, of the whole approvals regime in Clauses 58 to 62. He seems to think that Clause 60, and presumably therefore the other clauses, go too far in taking over the responsibility of firms. I think that that is what he says.

If we go back to the beginning, Clause 2(3)(b) requires the FSA to have regard to,

    "the responsibilities of those who manage the affairs of authorised persons".

They will have to bear that principle in mind in developing a proportionate approach to the use of the powers under Part V of the Bill. The Bill limits the types of functions which require approval.

If we take the section under the chapeau approval, it is the authorised person who has to ensure that no person performs a controlled function. As amended now, he has to take reasonable care to ensure that this applies to contractors. There are conditions in Clauses 58, 59 and 60 about applications for approval. If we were to debate the whole issue of approval we should take a good deal longer than would be justified on this amendment.

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I have a past interest, I suppose, to declare on the question of professional education and development. I was the chairman, and many years later the president, of my professional organisation, the Market Research Society. Professional education and development was one of the aspects I was most keen to develop in the society. It did not always involve qualifications. Indeed, when it involved qualifications it did not work well. It did not always involve what one might call training; and it did not always involve (although it sometimes did) a level of competence. Therefore I recognise that professional education and development as a concept may well go beyond the training, competence and qualifications mentioned in Clause 60(2).

The difficulty I have with the amendment is one which has been referred to. It refers to a commitment to professional education and development. A commitment could mean, as the noble Lord, Lord Sharman, said that the applicant ticks a box saying, "Yes, I am committed to it" and thereafter does nothing about it. So we have to think again about the wording. We have to be sure--I am not yet sure--that professional education and development as a concept adds to the other criteria set down in Clause 60(2).

Having said that, I should like to think again about the relationship between professional education and development and the other aspects before Report stage. Of course, I cannot make any commitment, but I hope that my noble friend will not press an amendment which is not acceptable at present because of the aspect of commitment, and as presently worded.

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