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Lord Saatchi: My Lords, I want to see whether I have this completely straight. First, the Chancellor of the Exchequer decides to review an industry. He chooses a distinguished man to carry out a report on the industry. That man produces a report and makes a very clear recommendation. He says, "A competition objective that is weak relative to the regulator's other objectives is unlikely to be delivered effectively." Let us say that one is now that man. One gives in and says, "We will not seek to make it an objective. We will retreat to the position where the FSA is obliged only to promote the competitiveness of the UK." The Government say that that is unacceptable because the idea of promoting the competitiveness of the UK might in some way offend other regulators in other countries which would find it difficult to deal with a regulator who was so excessively patriotic in his approach. Let us now say that the man I am describing gives in on that too. He will not seek to promote competitiveness. All that is now being asked is that the Government consider it desirable not adversely to affect the competitive position of the UK. I find it extraordinary that that desire not adversely to affect the competitive position of this country is so objectionable to the Government. Nevertheless, I look forward to another view at Third Reading. At this stage, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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[Amendment No. 31 not moved.]

Clause 3 [Market confidence]:

Lord Kingsland moved Amendment No. 32:

    Page 2, line 32, at end insert (", including minimising risks to the stability of the financial system and preventing market abuse").

The noble Lord said: My Lords, in moving Amendment No. 32, I shall speak also very briefly to Amendments Nos. 33 and 34. Amendment No. 32 is intended to make clear that the authority's market confidence objective should cover not only the minimising of risks to the stability of the financial system but also the prevention of market abuse. In relation to the stability of the financial system, there is a need for clear responsibility on the face of the Bill for systemic risk.

The memorandum of understanding between the Treasury, the Bank of England and the authority, at best an opaque document, avoids addressing this issue. Someone should be required to take primary responsibility for systemic risk in our economy. We believe that it should be the authority. If market confidence is to be a regulatory objective, then dealing with systemic risk must form part of the authority's brief. The memorandum of understanding should not be allowed to stand in the way of clear responsibility and, if necessary, can be amended to reflect the provisions in the Bill.

In debate the Minister said that the prevention of market abuse was part of the FSA's market confidence objective. My noble friend Lord Alexander suggested, in response, that that should be made clear by adding to Clause 3(1) the words "and preventing market abuse". We agree with my noble friend. That is achieved by Amendment No. 32. Amendments Nos. 33 and 34 relate to an issue which we raised in Committee. Although Clause 3(2) refers to markets and exchanges and regulated activities, it does not refer to banks and other institutions which operate within the system. The addition of "institutions" in Clause 3(2)(a) and (c) will correct that omission. I beg to move.

Lord Newby: My Lords, at the Committee stage we supported an amendment on this issue. Having looked further at the Bill and discussed the matter further, we doubt whether the amendment is either necessary or, even if it were incorporated in the Bill, would serve the purpose which the noble Lord, Lord Kingsland, wishes. We do not think it necessary because, on our understanding, the memorandum of understanding between the Bank, the Treasury and the FSA provides a framework for dealing with systemic risk with which all three of those institutions are happy. They do not feel that there is the kind of problem referred to by the noble Lord, Lord Kingsland, about who, to put it crudely, takes the lead.

Even if there were such a provision in the Bill, that would not mean, and could never mean, that the FSA in all circumstances would have prime responsibility for systemic risk. For example, it is not the lender of last resort. In many cases the Bank will still have to take prime responsibility for dealing with a crisis

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involving a financial institution and the FSA will simply sit on the sidelines and, presumably, hope that the Bank gets it right. The amendment is neither necessary nor sufficient for the purpose suggested by the noble Lord and, therefore, we do not support it.

Lord McIntosh of Haringey: My Lords, I can certainly confirm that Clause 3 already covers the FSA's responsibilities in the territory of market abuse and systemic risk, and that the reference to regulated activities and other activities connected with financial markets and exchanges covers bodies engaged in regulated activities or connected activities. However, very much for the reasons given by the noble Lord, Lord Newby, I am afraid that I cannot accept these amendments. It is not that they are unnecessary, which would be reason enough for rejecting them. Putting these words into Clause 3 would cast some doubt on what was covered by the clause.

The Joint Committee recommended that the market confidence objective should,

    "refer to 'maintaining confidence in the soundness of the financial system', and should be expanded to include a reference to the management of systemic risk in collaboration with the Treasury and the Bank of England".

Perhaps I may quote our response to that. We said that,

    "public and market confidence in the financial system clearly requires confidence in the soundness of the system as a whole. However, other aspects are also relevant, notably maintaining confidence in the effective prudential supervision of individual institutions. Singling out one aspect could throw doubt on the FSA's role in this area and narrow its remit".

That remains our position. If there was any doubt that market confidence covered systemic risk and market abuse, we would put it beyond doubt. But there is none. The market confidence objective encompasses these things, although it goes wider.

There is also no doubt that both of these things are also covered by the protection of consumers objective. If the financial system is not robust and risk is not properly contained, or if market abuse is not deterred or tackled, then consumers will not be properly protected. We must not cast doubt on the width of the protection of consumer objective since it is the interests of consumers that form the ground for exercising the relevant powers of the FSA under the Bill, most importantly the own-initiative power in Clause 43. There should be no doubt that the FSA can act quickly and decisively to head off systemic problems using these crucial powers.

The FSA's rule-making power is also exercisable on the grounds of protecting consumers. Clearly, rules must be capable of addressing systemic risks and requiring firms to take steps to control them: for example, by having adequate systems and controls in place and holding adequate financial reserves.

I think there is a danger in seeking to relate the broad issue of systemic risk to just one objective--which is what the amendment would do--with all the implications that it may have for the FSA's ability to take the necessary measures to deal with it. I see no reason to run that risk.

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In addition, I am not sure that it would be appropriate for the market confidence objective to refer to "minimising systemic risks". First, I do not think that "minimising" is the right word. I am sure that noble Lords do not mean taking risk down to the minimum possible. No regulator anywhere can or should do that. What is important is that risks are controlled and that an appropriate balance between risk and protection is secured. Secondly, as the noble Lord, Lord Kingsland recognised, the maintenance of confidence in the financial system is not the sole responsibility of the FSA. The Treasury and the Bank of England have clear roles to play, and we should not undermine this by implying that the FSA alone has responsibility here.

The noble Lord referred to the published memorandum of understanding between the Treasury, the Bank and the FSA as being opaque. I do not believe that that is the case. It sets out in clear and comprehensive terms the responsibilities of the respective institutions. It sets out the details of the standing arrangements for ensuring that there is full and effective co-operation between the various parties. The FSA is clear as to what its responsibilities are and what is covered by their objectives. The effect of the amendment might be to introduce some confusion about the respective roles of the three institutions where currently there is none.

However, it is valuable to have these amendments moved. It is important that we are clear that market abuse and systemic risks are covered by the market confidence objective. I am glad to have had the opportunity to confirm that, but I am afraid that we cannot accept the amendments.

7 p.m.

Lord Kingsland: My Lords, this is yet another example of the Minister agreeing that our amendments reflect what the Bill says, but not being prepared to clarify the Bill to make sure that everyone understands its intentions. If the Bill does cover market abuse and systemic risk but it is not clear that it covers them, why on earth is the Minister not prepared to accept our amendments?

The substance of the matter concerning systemic risk remains of considerable concern to me. I accept the fact that systemic risk is a matter that is capable of being, and will be, discussed by the three parties to the memorandum of understanding. But let us suppose that systemic risk is identified in those discussions and it affects a particular branch of the authorised sector. Does not the authority need power to act in relation to that systemic risk within its sphere of responsibility? Surely it does. I see the Minister nodding.

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