DRAFT FINANCIAL SERVICES AND MARKETS BILL
The Committee's Submission to the Joint
The role of the Delegated Powers and Deregulation
1. The Committee's terms of reference are:
"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."
2. It is not our task to comment upon the merits
of bills; our remit is confined to the powers proposed to be delegated
by bills. This means that there are many aspects of the primary
legislation which we do not have to consider, but there are some
areas where, in considering the scope of proposed delegated powers,
we have to look at the statutory framework within which the powers
are set. The Committee's usual role is one of advising the House
of Lords. We believe that it is for the House to decide whether
or not to act on the Committee's recommendations. The Committee
itself has no power to amend bills.
3. In examining a bill we look to see whether the
grant of secondary power is appropriate. This includes expressing
a view on whether the power is so important that it should only
be one granted by primary legislation. It also includes commenting
on whether a bill sufficiently particularises the principles on
which, and the circumstances in which, secondary legislation may
be passed, and so avoids being characterised as a "skeleton
bill". We consider what form of parliamentary control is
appropriate and, in particular, whether the proposed power calls
for the affirmative procedure. We go on to consider whether the
legislation should provide for consultation in draft form before
the regulation is laid before Parliament, and whether its operation
should be governed by a Code of Conduct. We have also regarded
secondary powers as potentially embracing the power of the Minister
to make provision by Code or the issuing of guidance.
The Joint Committee's invitation
4. The Committee
warmly welcomes the Joint Committee's invitation to comment formally
on the draft bill in respect of the proposed delegated powers.
This is the first occasion on which we have been invited to submit
our views to a Committee charged with pre-legislative scrutiny.
In principle we are happy to do so on future occasions. We can
see some advantage to Parliament in our undertaking this work,
since we scrutinise the delegated powers in all Government Bills,
and are thus well placed to provide an overview of the use of
such powers, and the appropriate level of parliamentary control
5. There are, however, some caveats we should enter
about the value of our comments at this stage. There is the difficulty
- of which the Joint Committee will be acutely aware - of hitting
the moving target of successive draft bills and consultation documents.
Nor have we benefited, as we usually do, from a memorandum from
the sponsoring Government Department on the delegated powers in
the bill. Our comments have also not been informed by the second
The Committee's approach to the bill
6. The Committee considered the draft bill in a
similar way as if it had been a bill introduced in the House of
Lords. 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, which we highlight in the following paragraphs.
7. The Committee had before it the following documents
from the Treasury:
- July 1998 consultation document: part one - overview
of financial regulatory reform;
- July 1998 consultation document: part two - draft
Financial Services and Markets Bill;
- July 1998 consultation document: part three -
draft explanatory notes on the draft Bill - regulatory impact
- February 1999 consultation document on regulated
- March 1999 Progress report;
- 17 March 1999 consultation document on the financial
promotion regime under the Bill.
THE BILL'S APPROACH
8. A primary purpose of the draft bill is to create
a single regulator - the Financial Services Authority (F.S.A.)
- and to give it wide powers of enforcement. This leads to the
bill conferring on the F.S.A. "legislative functions".
This fact is illustrated with the utmost clarity in paragraph
1 of Schedule 1, where those functions are defined as "the
Authority's functions of making rules and codes of practice and
publishing statements of principle and statements of policy".
The F.S.A.'s "legislation" will not be set out in statutory
instruments and so is not intended to be subject to direct Parliamentary
control yet it is of far greater practical importance than the
statutory instruments which ministers are empowered to make under
the draft bill and which are rightly to be subject to Parliamentary
control. If powers of this kind were to be vested in Ministers,
we would undoubtedly advise that there should be a measure of
9. This raises the fundamental question of whether
the position should be different where the powers are vested not
in a Minister but in the F.S.A.? It can be cogently argued that,
since the exercise of these delegated powers has wide ranging
and serious implications for consumers and the financial services
industry, they should be subject to Parliamentary control in the
normal way. The argument to the contrary is that Parliament is
faced with a stark choice: either to accept the framework in the
draft bill or to insist on Parliamentary control which deprives
the F.S.A. of its independent powers to take action which it judges
necessary; in any event its rules are dependent on ministerial
endorsement, so invoking Parliamentary control.
10. We do not find this in any sense an easy issue
and it is one which both the Joint Committee and Parliament will
no doubt want to consider carefully in the light of the scope
of the powers currently proposed and as they evolve during the
legislative process. We welcome the fact that many of the FSA
powers are specified in the draft Bill itself. It is clearly for
Parliament as a whole to decide whether these powers are appropriate
and not for this Committee; for example, the unlimited power of
the F.S.A. to fine.
11. We also strongly welcome the provisions of the
Bill which set out both objectives for the F.S.A. and the factors
to which they must have regard in discharging their functions
(clauses 2-6). These provide a valuable framework and discipline
for the exercise of secondary legislative powers and open the
way to judicial review proceedings if it is considered that such
powers are not being exercised properly. These factors include
the important principle that any burden or restriction imposed
should be proportionate to the intended benefit.
12. We are also conscious that there has been widespread
consultation and there is broad approval, and indeed strong pressure,
for a single, independent regulator with effective powers.
13. We consider that, in this unusual situation,
there is probably no sensible alternative to the approach set
out in the draft bill. We have been supported in forming this
view by having regard to the reality that it will be the Authority
which will have the closest understanding of market conditions,
and will consequently be best placed to deal with the detailed
issues, including many technical issues, which will need to be
covered in regulations. But we nonetheless believe that there
are some further protections and disciplines which should be imposed
in regard to the exercise of these powers. We make our recommendations
in paragraph 20 after we have commented on the nature of the particular
rule-making powers to be given to the F.S.A.
FINANCIAL SERVICES AUTHORITY POWERS
14. There are rule-making powers conferred on the
F.S.A. by clauses 32(4), 36(1), 55(2), 70 (the general power),
71, 72, 74, 75, 76, 77, 79, 80,143, 144,157(4), 160, 169, 196,
197(10) and 219(1) (only for the definition of "rule");
Schedule 1, paragraph 13; Schedule 3, paragraphs 18(2) and 19(2);
and Schedule 8, paragraph 14.
Clauses 70 to 72 contain a wide power to make rules for the protection
of the users of services, clauses 143 and 144 (the establishment
of a compensation scheme), clauses 157(4) (specifying maximum
amounts of compensation which can be awarded by the ombudsman),
clause 160 (rules about the funding by the industry of the ombudsman
scheme), clause 169 (rules requiring the provision of information),
clause 196 (rules requiring the provision of information), clause
197 (rules requiring the appointment of auditors and actuaries)
and Schedule 1, paragraph 13 (rules about fees to be paid to the
F.S.A.). Clearly F.S.A. rules are intended to play a vital role
in regulating the financial services and markets of the country.
15. The legislative functions of the F.S.A. include
also making codes of practice and publishing statements of principle
and of policy. The relevant powers are in clauses 48 (statements
of principle with respect to the conduct of approved persons and
a supporting code of practice), 54 (statement of the way it proposes
to exercise its power to fine), 57 (code for determining what
is market abuse), 59 (statement of policy with respect to fines
under clause 58), and 141 (statement of policy with respect to
financial penalties under Part XII). In this context it is necessary
to refer to clause 49 which makes in relation to statements and
codes provision about consultation etc. much as clause 85 does
in relation to rules. Statements and codes are of great significance
to those to whom they apply; for example, clause 50 makes it misconduct
leading to disciplinary measures to fail to comply with a statement
of principle under clause 48.
16. The F.S.A. is given other powers which are closely
linked to its legislative functions. For example, clause 78 allows
the F.S.A. to modify or waive particular rules in their application
to an authorised person; clause 54 requires the F.S.A. to publish
guidance as to the size of likely fines under clause 50; and there
is in clause 87 a general provision about issuing guidance. The
importance of guidance can be seen from the definition of "regulating
provisions" in clause 89(1) which includes guidance as well
as the F.S.A.'s legislative functions. F.S.A. "regulating
provisions" are subject to scrutiny by the Director General
of Fair Trading (clause 90 and the supplementary provisions of
clauses 91 to 94).
17. Finally under this head the Committee notes that
the Financial Services Ombudsman Scheme (see Part XIV of the bill)
is to be administered by a body corporate ("the scheme operator"
- clause 151(3)) established by the F.S.A. (paragraph 2 of Schedule
8) and the scheme operator is required to make rules (paragraph
15) which may require the payment of fees (paragraph 16).
18. The procedural provisions about rules are set
out in clauses 82 to 86. The Committee attaches considerable importance
to the requirement to consult widely on a draft and to provide
a cost benefit analysis (clause 85). Rules are to be in writing,
printed and made available to the public and must identify the
powers under which they are made (clause 83). The Treasury must
be notified (clause 82).
19. The "Progress Report" outlines a number
of improvements to the draft bill. For example, the F.S.A. will
have to provide an explanatory memorandum when proposing to make
rules (paragraph 5.2). The Government is also considering how
to make it clear that the F.S.A. may not make rules "in areas
where that is not appropriate" (paragraph 5.6) and it intends
to remove the general power to make rules endorsing codes (paragraph
5.10). Paragraph 14.7 promises clarification of the duty to consult
on any rules applying to recognised bodies in the same way as
on general rules. The Committee welcomes all these improvements.
20. It is not surprising that some of the proposed
powers have raised considerable concerns. We consider that there
are a number of issues which ought to be addressed before it can
properly be determined that powers not subject to Parliamentary
control should be granted to the F.S.A.
- There should be an obligation on the F.S.A.
to submit an annual report to the Secretary of State, outlining
its exercise of the rule-making powers. The Secretary of State
should, in turn, lay this report before Parliament. In addition
to informing Parliament generally, such a report might be well
suited to scrutiny either by a Select Committee, or by a Joint
Committee of both Houses established for the purpose.
- We understand it to be contemplated that there
should be appropriate 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.
We believe that this should be made plain on the face of the legislation.
- We do not find it clear on the face of the
legislation whether it is intended that breaches of rules should
be regarded as invoking civil process and sanctions or criminal
process or sanctions. This has important consequences for the
standard of proof required to establish a breach and potentially
as to the extent to which the protections of the Human Rights
Act apply. We believe this uncertainty is unacceptable and that
the position should be clarified in the legislation.
- The provisions on market abuse are clearly
of great importance to those regulated by the legislation. Under
Clause 57 of the Bill, the F.S.A. propose a code for the purpose
of determining whether or not behaviour amounts to market abuse.
We consider that it should be made plain that compliance with
the code is a "safe harbour" for commercial transactions.
- We also consider that in view of the width
of the rule-making powers and their potential effect, and the
assumed lack of Parliamentary control, it is highly important
that those who are seeking the certainty which is not necessarily
granted either by the legislation or the F.S.A. rules should be
entitled to seek advance rulings, whether in the form of "no
action" letters or otherwise, which enable them to know in
advance of taking any particular action that it does not contravene
the rules. We accordingly recommend that the bill should be amended
to this effect.
21. We believe these points to be cumulatively
of the greatest importance. Market practitioners have a right
to know that their proposed conduct is potentially subject to
civil or criminal sanctions. But, just as importantly, the rules
will have application to market outsiders. Clause 56 provides
for a definition of market abuse in the primary legislation. But
under clause 57 the F.S.A. "must prepare and publish a code
for the purpose of helping to determine whether or not behaviour
amounts to market abuse, which it may "at any time alter
or replace". There is, moreover, no test of intent either
in the draft Code or in the bill itself.
22. There is a separate point which arises on Clause
55. This clause provides for a private investor (a private person)
who suffers a loss because a person has acted in breach of the
duty under clause 40(6) or 46(1) to bring an action for damages
against the person in breach of the duty. Under clause 55(2) the
Authority must make rules defining "private person"
for the purposes of this section.
The Committee has considerable unease about clause 55(2). Whereas
it is normally the right of the individual to have the courts
decide whether he has a remedy, under this subsection the F.S.A.
is given this power, which it will exercise without the consent
of the Treasury or Parliamentary control. Parliament will wish
to consider carefully whether it considers this delegation of
23. Similarly, under clause 80 (actions for damages),
subsection (5) provides that "private person" has the
meaning specified by the Authority. The Committee's comments
on clause 55 apply here also.
24. The Treasury has powers under the following clauses:
- 9 (exempt persons);
- 11 (prescribing regulated activities);
- 17(3) (exemption from restrictions in clause
17(1) on financial promotion);
- 18 (definition of "investment activity"
for purposes of clause 17);
- 37(1)(c) (extension of F.S.A. powers to vary
or revoke the terms of any permission);
- 56 (prescribing markets and investments for purpose
of Part VI - civil fines for market abuse);
- 73 (regulations supplementing F.S.A. rules about
- 75(4) (prescribing investments etc. to supplement
F.S.A. price stabilising rules);
- 108 (exemptions from requirement to notify F.S.A.
of proposal to take steps which will lead to acquisition of influence
over UK authorised person);
- 109(4) (a Henry VIII power allowing the amendment
of the definition in the clause of who is to be treated as having
influence over an authorised person);
- 111 (defining what amounts to increasing influence
over an authorised person);
- 117(2) (prescribing requirement as to consultation
by F.S.A. for notice of objection);
- 119(1) and (3) (prescribing supplementary matters
in relation to the requirement to notify F.S.A. before reducing
influence over an authorised person);
- 122(4)(c) (prescribing functions for the purpose
of the definition in clause 122(3) of "an overseas regulator");
- 162 (prescribing recognition requirements for
the purposes of Part XV);
- 176 (a power to be exercised jointly with the
Secretary of State - extending certain Companies Act provisions
to prescribed contracts);
- 212(11) (prescribing "relevant agreement"
and "relevant investment" for the purposes of the offence
in subsection (2) - misleading statements and practices);
- 214(7) (application, with modifications, of section
- offences by corporation - to foreign corporations);
- 226(6) (exclusion from collective investment
- 229 (consequential and supplementary provision),
- 232 (commencement);
- in Schedule 2 paragraph 25 extends the power
in section 11;
- in Schedule 3, paragraphs 16 and 17 allow regulations
to supplement the provisions of the bill in relation to a business
which does not have its head office in the UK and paragraph 20
allows regulations to make special provision in relation to a
UK firm's exercise of EEA rights (as to which see paragraph 7
of the Schedule);
- in Schedule 5 paragraph 1(2)(b) allows regulations
to add to the conditions set out in that paragraph as qualifications
for automatic recognition of a collective investment scheme.
25. The Lord Chancellor is to make rules under clause
67 in respect of the conduct of appeals and proceedings before
the Appeal Tribunal established by that section and Schedule 10
(which extends the rule-making power).
26. Finally under the heading of ministerial powers,
clause 65 confers on the Treasury a power to issue guidance and
clause 92(3)(b) allows the Treasury to alter rules made by the
F.S.A. Clause 65(2) is unusual in that it requires the Treasury
to obtain the consent of the Secretary of State and the Attorney
General (because the guidance relates in part to prosecution decisions).
Clause 216(2) requires the F.S.A., in exercising its power to
institute proceedings for an offence, to comply with any conditions
or restrictions imposed by the Treasury.
27. At present the draft bill does not make orders
under clause 11 (other than orders to which paragraph 26 of Schedule
2 applies) or rules under clause 67 subject to Parliamentary control,
but the Committee understands that the Treasury's intention is
to correct this and provide negative procedure. When this is done,
all subordinate legislation made by ministers under the bill (with
the exception of the commencement power) will be subject to Parliamentary
control. This will be negative procedure except for orders under
sections 75(4) and 109(4) and orders to which paragraph 26 of
Schedule 2 applies, which will be subject to affirmative procedure.
Thus the one Henry VIII power in the bill will be subject to affirmative
28. The regulatory objectives of the F.S.A., as set
out in clause 2(2) of the bill, are (a) market confidence; (b)
public awareness; (c) the protection of consumers; and (d) the
reduction of financial crime. The Committee considers that, in
view of the importance of the powers in clauses 11 and 18 in achieving
each of these objectives, parliamentary control by affirmative
procedure is needed for the powers in these clauses, which give
the Committee particular concern.
29. Orders made under clause 11 (classes of activity
and categories of investment) will set out the precise definition
of the activities that are to be regulated under the Bill at any
given time. As the Treasury's notes on the Bill explain, it is
"possible that other activities or investments [than those
indicated in Schedule 2] may be brought within the scope of the
regulation under the bill". Although this is qualified by
the words "only in so far as any additional activities can
be said properly [to] fall within the overall object and purpose
of the Bill"
the potential areas for extension are considerable, and, as the
Bill is currently drafted, might include areas of considerable
personal interest to millions of consumers, such as pensions,
mortgages and healthcare. In the light of the potential importance
of this clause for consumers as well as the industry, the Committee
considers that extension orders under this clause are properly
subject to the affirmative resolution procedure under paragraph
26 of Schedule 2.
30. Clause 18 (controlled activities) confers
a power on the Treasury to determine the scope of the prohibition
in clause 17. This can be different from the scope of regulated
activities made under clause 11. The Treasury's notes
suggest as an example that "it might include communications
whether or not made by way of business." Although this power
is narrower than that under clause 11 the Committee considers
that it too should be made subject to the affirmative resolution
SUMMARY OF RECOMMENDATIONS
31. 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
32. 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.
31 March 1999
16 The members of the Select Committee are:
L. Alexander of Weedon (Chairman), L.
Ampthill, L. Archer of Sandwell, L. Dahrendorf, L. Dean of Harptree,
L. Goodhart, L. Mayhew of Twysden, L. Merlyn-Rees, L. Prys-Davies,
Lord Alexander of Weedon declared a
relevant interest as Chairman of National Westminster Bank plc.
Lord Dahrendorf declared a relevant interest as a non-executive
director of the Bankgesellschaft Berlin (UK) plc. Back
17 The "Progress Report" of March 1999 summarises criticisms
of the draft bill during the consultation process and the government's
response to them. There are passages about the F.S.A.'s legislative
powers in paragraphs 5.1 to 5.6, 5.10, 6.5, 6.8 to 6.12, 14.7,
16.3, 18.3 and 18.4. Back
18 By contrast, a "regulated person" is defined in clause
6(5) of the bill as "an authorised person, a recognised investment
exchange or a recognised clearing house. Back
19 July 1998; p 8. Back
20 July 1998; p 11. Back