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The Deputy Chairman of Committees: I must inform the Committee that there is a misprint in Amendment No. 231ZA. In subsection (2), "section 129" should read "section 146".

Lord Newby: While I agree with what the noble Lord, Lord Saatchi, seeks to achieve in Amendment No. 231YA, I believe that the amendment is unnecessary. Clause 146(2)(c) already requires the authority to explain why it believes that the rules that it makes are compatible with its general duties under Clause 2. By definition, that includes Clause 2(3) which is referred to in the amendment.

As to Amendment No. 231ZA, I have some sympathy with the idea that there should be a trigger whereby rules can be revised. There is always a danger that one piles rules upon rules, and one must have a trigger to review the process. However, I believe that the amendment as set out is unduly prescriptive. It requires every set of rules to be reviewed within three years, which presumably means that the review must be completed in that period. Presumably, the purpose of the amendment is that, having been reviewed within three years, the rules should be further reviewed within another three years. That seems to us to be unduly prescriptive. What is required is a situation in which it is relatively easy to require the authority to amend the rules either because the circumstances to which they apply have demonstrably changed or there have been complaints about them. Arguably, that can already be

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achieved under the Bill either by the practitioner or consumer panel expressing a view or the Treasury itself ordering a review under Clause 10, although one suspects that the latter would be to use a sledgehammer to crack a nut. I should be grateful for guidance from the Minister as to whether under the Bill as drafted it is easy for such a review to be triggered by external pressure on the authority.

I conclude with a question to the Minister and perhaps also to the noble Lord who moved the amendment. I believe that this is the first time in the Bill that the authority is required to justify its conclusions by reference in part to the publication of a cost-benefit analysis. Like motherhood and apple pie, that is one of those sentiments which sounds very good on paper, but one wonders to whom the cost and the benefit are to be applied. Who will bear the cost and who is to benefit? We have assumed that the cost will be borne by the body to be regulated and that the consumer will benefit, but we should welcome clarification on that. We should also welcome clarification on how the benefit of the rules can be quantified given that in many cases their purpose is to prevent an abuse. One can draft a paragraph and claim that it is a cost-benefit analysis which shows that the benefit is that the consumer is spared a particular abuse. That may represent potentially a huge sum compared with the relatively modest costs to the firms involved and, therefore, it may be a sensible precaution. However, one doubts whether a cost-benefit analysis often achieves the claims that are made for it.

Lord McIntosh of Haringey: The first amendment is to Clause 146 which sets out the FSA's consultation requirements when it wishes to make any rules. Those requirements were expanded and made more detailed during the passage of the Bill through the Commons. I am pleased to see that the requirements are so extensive that noble Lords opposite have drawn on the wording of new Clause 146 in framing the second amendment in this group. The effect of the amendment is to require the FSA before making a rule to issue a statement of the extent to which it has taken into account the principles--proportionality, facilitating competition and so on--to which it must have regard in discharging its functions.

There is a technical problem with the amendment--I do not make too much of it--in that it requires the FSA to take into account the principles. Clause 2 requires the FSA to have regard to the principles, not to take them into account. Therefore, it is, strictly speaking, incompatible with the requirement in Clause 2.

Fortunately, the noble Lord, Lord Newby, said it first. I support the thinking behind the amendment but believe that it is unnecessary. That is the mantra that we use in these circumstances. Clause 146(2)(c) requires the FSA when making a rule to provide an explanation of why it is compatible with its general duties under Clause 2. That clause sets out the FSA's general duties. The principles to which it must have regard are part of that clause. Therefore, the FSA is

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already required to explain why the rule is compatible with those principles. For that reason, we do not believe that the amendment is necessary.

Amendment No. 231ZA requires the FSA to review each and every one of its rules three years after it is made. It also requires the authority to publish a cost-benefit analysis and effectively to consult on each one every three years. I appreciate that the purpose behind the amendment is to ensure that the authority regularly reviews its rules, and that where the rules are no longer appropriate they should be changed. I agree that there should be regular review and I expect the FSA to monitor the application and implications of its rules on an ongoing basis, not just every three years; but to require the FSA to go through a public consultation exercise on each and every rule every three years is unnecessary.

In addition to the FSA's own review, the consumer and practitioner panels will play an important role in monitoring the rules on an ongoing basis. To require the FSA constantly to monitor its rules would also be administratively onerous. The noble Lord, Lord Saatchi, said that this would be a continuous obligation on the authority, and he referred to the potential to create bureaucracy. The potential to create bureaucracy is created precisely by this amendment. The amendment would place a huge strain on the authority and divert time and money away from its proper business--regulating--but it would also have knock-on effects on the regulated community and consumers. The regulated community would have to pay the costs of the review and consultation, and consumers would have to put up with the disruption involved. I fear that the effect of the amendment would be the reverse of the very admirable sentiments which the noble Lord, Lord Saatchi, expressed.

In relation to reviews under Clause 10, which was a matter touched on by the noble Lord, Lord Newby, normally they could not be triggered by outsiders unless the effect of a rule was to lead to a major regulatory upset. However, it is open to the Director-General of Fair Trading to report at any time on the competition implications of the rules, and we shall turn to that matter in a few moments.

The noble Lord, Lord Newby, also asked about the quantification of cost-benefit analyses. We have deliberately refrained from specifying the methodology of cost-benefit analyses. As the noble Lord suggests, it is rather akin to motherhood and apple pie. Those who conduct such analyses, such as the consultancy divisions of some major accountancy firms, frequently change their methodologies because a good number of them do not work. (Perhaps I should not have said that!) We do not believe that we should prescribe details of that kind in a Bill which must survive for a number of years to come. I am sorry to be discouraging about the wording of the amendments and the way in which they would operate because the original thinking behind them is very sound.

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Lord Jenkin of Roding: I do not believe that the Minister has met the point raised by my noble friend and the noble Lord, Lord Newby. What appears to be missing is some way in which the practitioner community can compel the authority to review rules. Yes, the panel can make its report. We have discussed all the provisions for that. But one can envisage that an authority with these powers and the substantial domination that it will inevitably exercise will simply say, "We'll get round to it some time". The practitioner community--it might be the consumers--might say, "You really should review your rules; they are not working correctly". There should be some provision which could ultimately be justiciable.

That is what my noble friend seeks. The Minister has not replied. It is not a Clause 10 situation. I think that the phrase used is "a sledgehammer to crack a nut", but what else do we have? There needs to be some provision.

7 p.m.

Lord Elton: I support my noble friend Lord Jenkin of Roding. We have been reminded that there are bodies outside the authority which can review it or require it to review. But surely there needs to be some internal duty on the authority to maintain a regulatory system that is efficient. That may sound like befriending the practitioner at the expense of the client. But in fact the public who use the financial services in this country will be properly served only if the regulation of those services is not only effective but also efficient.

We have seen how enormously burdensome regulations can be on what we now call authorised persons if there is no satisfactory link between them and the bodies which regulate them. From time to time they thought that regulators had ears that did not work. That is why I was moved earlier to press for an effective mechanism within the practitioner panel for bringing the needs of the practitioner to the notice of the Financial Services Authority. I express badly the same fears to which other noble Lords around the Chamber have referred. The danger is that the FSA may believe that its mechanism is working wonderfully and is intellectually sound and criminologically faultless but it may cost so much to run that it will drive people out of business. The people then to suffer will be the consumers.

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