By the Select Committee appointed to report whether
the provisions of any bill inappropriately delegate legislative
power, or whether they subject the exercise of legislative power
to an inappropriate degree of parliamentary scrutiny; to report
on documents laid before Parliament under section 3(3) of the
Deregulation and Contracting Out Act 1994 and on draft orders
laid under section 1(4) of that Act; and to perform, in respect
of such documents and orders, the functions performed in respect
of other instruments by the Joint Committee on Statutory Instruments.
FINANCIAL SERVICES AND MARKETS BILL
1. This bill establishes a new statutory framework
for the regulation of financial services in the United Kingdom.
It establishes the Financial Services Authority
(previously called the Securities and Investment Board) as the
single regulator for financial services.
2. The bill has had a lengthy gestation period,
and indeed has been the only public bill so far to have been subject
to the new procedure whereby public bills may be "carried
over" from one session of Parliament to the next, rather
than falling at the end of the session.
The proposals were announced by the Chancellor of the Exchequer
in May 1997, and in July 1998 the Treasury published a draft bill.
The draft bill underwent particularly detailed pre-legislative
scrutiny. Firstly, it was reported on by the Treasury Select Committee
in the House of Commons, which heard oral evidence from the then
Economic Secretary, Patricia Hewitt MP. Following that evidence
the Government accepted several of the points which the Treasury
Select Committee had put to Ms Hewitt during its enquiry.
3. More detailed pre-legislative scrutiny of
the draft bill was carried out by a Joint Committee of both Houses,
chaired by Lord Burns ("the Burns Committee"), constituted
to scrutinise the draft bill. The Joint Committee also considered
a progress report published by the Treasury in May 1999 in response
to its public consultation on the bill. The Burns Committee published
its first report in April 1999
and its second report in June 1999.
4. The Delegated Powers and Deregulation Committee
considered a draft of the bill while it was being considered by
the Burns Committee. We made a number of recommendations in our
submission to that Committee dated 31 March 1999. This submission
is published as Appendix 2 to this report.
5. Our conclusions on the draft bill were as
"The Committee has made recommendations for
amendment of the draft bill in the following paragraphs of this
report; paragraph 20, where we recommend the submission by the
F.S.A. of an annual report to the Secretary of State, and for
parliamentary scrutiny of this report; paragraphs 22 and 23, where
we question the delegation of power in clauses 55(2) and 80(5)
of the draft bill; and paragraph 30, where we suggest that orders
made under clause 18 should be made subject to the affirmative
In making these suggestions we are conscious that,
in addition to the lack of parliamentary control, statutory immunity
is to be granted not merely to individual officers or members
of the F.S.A. staff but to the F.S.A itself. We believe the suggestions
that we are making would go a long way to meet powerfully held
anxieties about the nature and exercise of these F.S.A. powers
and also in all probability reflect what the F.S.A itself would
regard as good practice. Our current view is that the F.S.A. should
only be granted powers which are not subject to Parliamentary
control if protections along the lines we have indicated are included
in the legislation. If the further protections we have recommended
are not contained in the bill which will be presented to the House
of Lords for second reading, then we reserve the right to report
to the House at that time that the powers delegated to the F.S.A.
in the bill represent an inappropriate delegation of powers."
6. The Joint Committee commented as follows on
the Committee's contribution:
"13. The Bill includes extensive delegation
of powers. In this connection, we have been greatly assisted by
the paper produced by the House of Lords Delegated Powers and
Deregulation Committee which is printed as Annex B to our Report.
That Committee, in offering its comments, noted that "If
the draft bill were to be introduced in its present form, the
Committee would have to draw the attention of the House to a number
of issues." We discuss some of these issues in later paragraphs
of our Report. We recommend that in responding to our Report
the Government should respond also to the points made by the Delegated
Powers and Deregulation Committee.
7. The Treasury welcomed and responded to our
suggestions in its published response to the Joint Committee in
June 1999, when the Bill was introduced into Parliament. In addition,
in Annex 3 to the Treasury's excellent memorandum on the delegated
powers in the bill introduced into this House, which is printed
with this report, the Treasury lists each of the points we made
in our original submission, together with the action which the
Government has taken in response to each. The fact that the Government
has responded so positively to each of our recommendations makes
our present task much simpler than it otherwise would have been,
even though the bill now looks very different to the draft bill
we considered a year ago.
The effect and value of pre-legislative scrutiny
8. The arrangements for pre-legislative scrutiny
flowed from recommendations made by the Select Committee on Modernisation
of the House of Commons in its First Report, on the Legislative
Process, in July 1997.
Several departmentally related Commons committees, and one ad
hoc Commons committee,
have reported on draft bills.
9. The House of Lords has been involved in the
pre-legislative scrutiny of three draft bills. Two draft bills
have been considered by Joint Committees, and one by separate
select committees of the two Houses. The three draft bills concerned
have been as follows:
- The draft Financial Services and Markets
- The draft Local Government (Organisation and
Standards) Bill was referred to an ad hoc joint committee
of 8 peers and 8 MPs, which was appointed on 27 May 1999 and reported
on 27 July 1999.
The Chairman was Lord Bowness;
- The draft Freedom of Information Bill
was referred to an ad hoc Lords select committee of 11 members
which was appointed on 17 June 1999 and reported on 27 July 1999.
The Chairman was Lord Archer of Sandwell. The same draft bill
was simultaneously considered by the House of Commons Public Administration
All three bills were considered last session. So
far this session the House of Lords has not been involved in formal
10. The Delegated Powers and Deregulation Committee
commented on each of these draft bills.
11. When reporting the ad hoc pre-legislative
scrutiny Committees have commented on the mechanics of the procedure
in which they were involved, including the tight time constraints
under which they worked and, in the case of the Lords-only Committee
on the draft Freedom of Information Bill, the desirability of
operating by Joint Committees in future. Although each Committee
has considered that the procedure was worthwhile, it is inevitably
only at a later stage in the parliamentary process that the benefits
of the procedure can be evaluated fully. However, the fact that
once ad hoc Committees have reported they cease to exist
means that these Committees are not able to evaluate the effect
of their own work. As a result, there has to date been no systematic
evaluation of the pre-legislative scrutiny procedure as it affects
the House of Lords.
12. Nevertheless, some general observations on
the likely benefits of the procedure may be, and have been, made.
As the Lords Committee on the draft Freedom of Information Bill
"This ... pre-legislative scrutiny procedure
... is to be welcomed. It enables Parliament to make its views
known to the government, and it enables the government to respond,
more effectively than the traditional legislative process. A characteristic
of the traditional procedures in modern times is the reluctance
of governments of all political complexions to accept amendments
to bills once they have been formally introduced into Parliament."
13. Additionally, the Royal Commission on the
Reform of the House of Lords observed of pre-legislative scrutiny
that "apart from being more likely to produce better legislation,
it should also reduce the chance of differences of view between
the two chambers at a late stage in Parliamentary proceedings."
14. Now that the present bill has been introduced
into the House of Lords it is possible to see how beneficial the
pre-legislative scrutiny exercise has been. The Financial Services
and Markets Bill was heavily amended in the light of the pre-legislative
scrutiny it received. As the Treasury's memorandum states: "many
helpful recommendations were made which have helped substantially
to improve the Bill in many respects. Further improvements have
been made as a result of consideration in Standing Committee and
Report Stage during the Bill's passage through the Commons."
15. This is, of necessity, a large and complex
bill, which now contains some 400 delegated powers. It now extends
to over 400 clauses and 19 Schedules. As the Treasury's memorandum
explains, "the delegation of powers through the Bill reflects
the inevitable complexity of financial regulation and the need,
against a background of markets continuously developing, in some
cases very rapidly, for regulation to be able to adapt effectively."
We have no doubt that the pre-legislative scrutiny process has
added considerable value to the parliamentary examination of this
The present bill
16. The Department's memorandum is a remarkable
achievement. The bill was extensively amended in Committee and
at Report Stage in the Commons and all those working on the bill
must have been under intense pressure yet they have produced a
memorandum of over 100 pages within a day of the first reading
of the bill in this House. The memorandum is clear, comprehensive
and well written and will be a valuable tool for those wishing
to take part in the debates on the bill and serves as an introduction
to the bill as a whole and not just to the delegated powers.
17. The most significant feature of the delegated
powers in this bill is that the majority are conferred not on
Ministers but on the Financial Services Authority and are not
subject to any form of Parliamentary control. The Committee considered
this fact carefully at the pre-legislative scrutiny stage. We
accepted in principle that the delegation of powers to the F.S.A.
was appropriate, but only if this delegation were made subject
to a number of safeguards. Our comments have led to changes which
are discussed in Annex 3 of the Treasury's memorandum. These changes
are significant. They include:
- an obligation on the F.S.A. to submit an annual
report to the Treasury, to be laid before Parliament - the Treasury
will have power to ensure that each report covers the use of delegated
- the amendment of the bill to require a separation
of functions within the F.S.A. between those responsible for bringing
any disciplinary proceedings and the body responsible for adjudicating
on these proceedings;
- the amendment of the bill to make plain that
compliance with the F.S.A.'s market abuse code is a "safe
harbour" for commercial transactions;
- conferring the power to define "private
person" on the Treasury (rather than the F.S.A.) and making
this power exercisable by statutory instrument.
18. For the most part we are satisfied with
the way in which the Bill has been amended during the parliamentary
process. But there is still concern over whether the substantial
powers which are - rightly in our view - being delegated to the
F.S.A. will be exercised in a way which will be compatible with
the European Convention on Human Rights. As a public body the
F.S.A. will be under a duty to be satisfied when exercising its
rule-making powers on the compatibility of the resulting rules
with the Convention rights. But in view of the concern about this
we recommend that the F.S.A., in its annual report to be laid
should include a statement that, in its view, the provisions of
the delegated legislation it has made in the reporting period
under the Financial Services and Markets Act 2000 are compatible
with the Convention rights as defined in section 1 of the Human
Rights Act 1998.
19. Exemption orders under this clause are
subject to negative procedure but paragraph 44 of the memorandum
says that the Treasury are considering whether the first exercise
of the power should attract affirmative procedure. The House may
consider that an amendment of the Bill to that effect would be
20. This clause confers a Henry VIII power to
amend the definitions relating to "control" in clauses
170, 171, 172 and 397. The bill provides negative procedure. While
the Committee always examines anxiously the proposal that a Henry
VIII power should not be subject to affirmative procedure this
seems an appropriate case for negative procedure.
21. Subsection (5) confers a power to define
the boundaries of the term "collective investment scheme".
The bill provides negative procedure but paragraph 170 of the
memorandum says that the Government intends to introduce amendments
to provide affirmative procedure "in certain cases".
The Committee welcomes this.
22. Subsection (5) confers a power to modify
the rule-making powers conferred on the SA by the clauses. The
bill provides negative procedure which the Committee considers
appropriate for this limited power even though it could be regarded
as a Henry VIII power.
23. At present open-ended investment companies
are established by and regulated under regulations made under
the European Communities Act 1972. The clause confers a new power
to make regulations for those purposes and to revoke the existing
regulations. The power is a Henry VIII power (see subsection (3)(f)
and (g)) and is clearly a licence for law-making in a specialised
area of investment and company law. The bill provides affirmative
procedure and that and the previous history suggests that this
is an appropriate delegation of powers.
24. Clause 338 places restrictions on the
disclosure of confidential information by the Authority. Clause
339 allows regulations to create exceptions from clause 338. The
power is wide and the Committee wishes to draw attention in particular
to subsection (2)(d) allowing the disclosure of confidential information
"by any recipient if the disclosure is ... for prescribed
purposes". The Committee has commented in its Report on the
Electronic Communications Bill on a very similar power in that
bill: "The House may wish to consider amending the bill to
restrict the powers in a way which clearly limits it to information
needed for regulatory and other public functions." (5th Report,
The Committee reports in similar terms on the power in Clause
25. The Committee wishes to draw to the attention
of the House the width of the power in clause 339 to allow the
disclosure of confidential information. We have recommended that
the House may wish to consider amending the bill to restrict this
power in a way which clearly limits it to information needed for
regulatory and other public functions.
26. We have also recommended that the Bill
should be amended so that the first exercise of the power to make
exemption orders under clause 36 should attract affirmative procedure.
27. As a reassurance against concern over
whether the substantial powers which are being delegated to the
F.S.A. will be exercised in a way which will be compatible with
the European Convention on Human Rights we recommend that the
F.S.A., in its annual report to be laid before Parliament should
include a statement that, in its view, the provisions of the delegated
legislation it has made in the reporting period under the Financial
Services and Markets Act 2000 are compatible with the Convention
rights as defined in section 1 of the Human Rights Act 1998.
28. There is nothing else in the bill which
the Committee wishes to draw to the attention of the House.
1 F. S. A. Back
2 Private bills are often "carried over" in this way. Back
3 Third Report from the Treasury Select Committee Session 1998-99,
Financial Services Regulation (HC 73-I), paragraph 7. Back
4 Draft Financial Services and Markets Bill: First Report
(HL Paper 50 I-II Session 1998-99, HC 328 I-II Session 1998-99). Back
5 Draft Financial Services and Markets Bill: Second Report
(HL Paper 66 Session 1998-99, HC 465 Session 1998-99). Back
6 HC 190, Session 1997-98. Back
7 On the draft Food Standards Bill. Back
8 HL Paper 97. Back
10 Cm 4534, paragraph 4.33. Back
11 Paragraph 10. Back
12 Paragraph 11. Back
13 Under paragraph 10(3) of Schedule 1 to the Bill. Back
14 HL Paper 30. Back
15 This report is also published on the Internet at the House of
Lords Select Committee Home Page (http://www.parliament.uk), where
further information about the work of the Committee is also available. Back