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Lord McIntosh of Haringey: My Lords, I have three speeches to make: one about long-term care insurance; one about split capital investment trusts and one about the order before the House. I am not sure in which order to make them. If the House will allow me, I shall deal first with the original order and then finish by dealing with the amendment, because that is the question which will be put immediately to the House.
I am grateful to my noble friend Lord Lipsey and the noble Lord, Lord Newby, for saying that they do not
object to the order. Perhaps I may deal with the points raised by the noble Lords, Lord Blackwell and Lord Kingsland.The noble Lord, Lord Blackwell, asked me about pre-paid mobile phones and premium services orders. Pre-paid mobile phones which do not involve premium services would not count as e-money because the money goes back to the issuer. They are no different from existing BT phone cards. The question is whether pre-paid mobile phones can be accepted as a means of payment by persons other than the issuer. It is critical to determine whether that is the case when interpreting the definition of e-money. The case raised by the noble Lord concerns premium rate services, where third parties are paid for the services provided—although of course they are paid by the mobile phone operator rather than directly by the customer using the services. We do not yet have an answer. The FSA is considering whether such pre-paid services constitute e-money and it hopes to give its formal view shortly.
I turn now to the first point raised by the noble Lord, Lord Kingsland, which concerns the distinction between e-money and deposits in paragraph (3) and the provision that cash paid to buy electronic money, which could be used to pay for goods and services and to repay the cash by doing so,
- "is not a deposit for the purposes of article 5 if it is immediately exchanged for electronic money".
The directive states that sums received in exchange for e-money do not constitute deposits if they are,
- "immediately exchanged for e-money".
Respondents to consultation welcomed our proposal to use this wording in the implementing legislation on the grounds that it provides a clear distinction between e-money and deposit taking.
But scenarios can be envisaged where there is a time period between when a consumer purchases the e-money and when he activates his e-money account or card. We believe that "immediate" does not mean "instantaneous" and that certain such delays in issuance can be justified on operational grounds. Much will depend on the length of the delay and the reason for it, and the FSA will be responsible for interpreting this element of the directive. I understand that it agrees with our analysis.
The noble Lord's next question concerned why a waiver is not available for traditional credit institutions. It is correct that Article 9C(2) states that traditional credit institutions cannot benefit from a waiver. This is a requirement of the directive.
The noble Lord asked about the waiver for e-money accepted only by undertakings in the same group. This concerns the conditions under which the FSA can grant an exemption by means of a waiver to a qualifying e-money institution—which I am afraid we are going to have to learn to call an "ELMI"—if the e-money is accepted as payment only by the parent undertaking, subsidiaries of the ELMI which perform ancillary functions and other subsidiaries of the parent.
This again is a matter of the directive, which stipulates one waiver condition as being that,
- "the e-money issued by the institution is accepted as a means of payment only by any subsidiaries of the institution which perform operational or other ancillary functions relating to e-money issued or distributed by the institution, any parent undertaking of the institution or any other subsidiaries of that parent undertaking".
The noble Lord then asked about conditions for the waiver of geographical and close relationships, and asked whether both of the conditions with regard to permitted locations and close relationships must apply to all of the 100 persons or whether they can be combined. This relates to Article 9C(6)(b). The waiver condition is met only where all the undertakings accepting the e-money fall under either sub-paragraph (i) or (ii). It is not possible for some of them to fall under one sub-paragraph and some under the other. All the undertakings concerned must operate in a limited local area or as part of a close business relationship with the issuer for a waiver to be available.
As to the question about drafting for applications process work under Article 9E—the noble Lord, Lord Kingsland, raised the issue of the deeming provisions—we believe that the order achieves the desired application of the warning and decision notice procedures contained in the Financial Services and Markets Act. The order provides that the relevant provisions of the Act,
- "apply to the revocation of a certificate . . . As they apply to the cancellation of a Part IV permission".
The further words suggested by the noble Lord are therefore not necessary.
Turning to the issue of a compensation scheme for small issuers, the Government believe that it is important to allow e-money to develop under as light a regulatory touch as possible while taking into account the need for prudential regulation of large-scale issuers. Such issuers may not exist at present, but they will in the future as e-money develops. Not only are current e-money schemes fairly small but also the amount of e-money that consumers are likely to hold is limited. The directive noted that e-money is largely used for lower value payments, so the losses that a consumer may suffer in the event of an e-money issuer's failure are correspondingly likely to be fairly low.
As to the overseas persons exemption, the noble Lord asked whether I could clarify that Article 9(4)(b) of the order, which refers to issuants on a services basis, also applies where the e-money is issued from outside the United Kingdom to a recipient in the United Kingdom. He queried whether it would not be appropriate to provide an exemption in terms of Article 72 of the original regulated activities order. Article 9(4)(b) must be read in the context of the rest of the Financial Services and Markets Act—and neither he nor I wish to do that. In particular, Section 19 of the Act makes it clear that the carrying on of a regulated activity requires authorisation only if it is carried on in the United Kingdom. So where an overseas person issues e-money in the United Kingdom, whether by way of a branch or otherwise, he
will require authorisation. We have not applied the exclusion for overseas persons in Article 72 of the order to the activity of issuing e-money. The directive requires us to prohibit persons who are not credit institutions from carrying on the business of issuing e-money. It is therefore not open to us to apply the existing exclusion for overseas persons to e-money.The noble Lord's final point concerned debt securities, and he quoted paragraph 20 and the amendment to Article 12. The intention is that if a debt security is repayable on notice of less than a year, including repayment on demand, it is treated as commercial paper and it is a deposit. The current definition provides that the investment,
- "must be redeemed before the first anniversary of the date of issue".
That is speech number one. Speech number two relates to split capital trusts. We appreciate the work being carried out by the noble Lord, Lord Newby, and the attention that he has drawn to the problem of split capital investment trusts. It is a problem and he is right to draw attention to it in public. We share his concerns about the problems which appear to be arising with some—but by no means all—split capital investment trusts.
The FSA has put useful information for investors in split capital investment trusts on its website and will shortly be releasing the responses to the issues paper it published earlier this year. This will help to decide whether there are allegations of mis-selling and collusive behaviour which need to be investigated further. Ministers will then be in a position to consider whether the regulation of investment trusts is appropriate or whether further regulation would be appropriate.
It would be a mistake to think that there is nothing the FSA can do with its existing powers. Where split capital investment trusts are held in an ISA or unit trust, or where a firm gave advice, then FSA rules apply. Where a firm gave advice on whether or not to buy a split capital trust, FSA rules on suitability apply. FSA advertising rules will also apply to sales brochures and publicity material. FSA powers to deal with market abuse mean that the FSA can censure or fine anyone, authorised or not, who, for example, creates false or misleading impressions about a financial product. In addition, most investment trusts are companies listed on the London Stock Exchange and the listing rules apply to them. These govern how shares are offered for sale. In addition to these FSA powers, there may also be a case for action to be taken under company law. I should add that it would be wrong to assume that investment trust companies have fallen foul of these rules before the FSA has properly investigated.
There is still a problem about investors who bought direct from the provider. Where an investor bought a split capital investment trust on an execution only
basis—that is, direct from the provider, without advice—and feels that the promotional literature misled him or her as to the nature of the product, he or she should complain direct to the company in the first instance and, if they are not happy, should go to the financial ombudsman.It is necessary to say how we would regulate investment trusts. As I have said, some of the aspects of the operation are already investigated. If further regulation is required, it would depend on how we proposed to regulate them. The regulated activities order would need to be amended. I can confirm specifically that the noble Lord is right in thinking that there will be more regulated activities amendment orders in the future and this could be one of them.
If the decision was to regulate the products in the same way as unit trusts or open-ended investment companies—having mentioned ELMIs, I am reminded of OEICs. Separate legislation would be required setting out the product regulation. Beyond this, the FSA would need to consult on any proposed regulation and be sure that it was supported by cost-benefit analysis. I hope that that covers the range of points made by the noble Lord, Lord Newby.
I turn now to the matter raised in the amendment moved by the noble Lord, Lord Lipsey. I should respond first to the noble Lord's comment about what was said during the passage of the Bill. I indicated that the Government would aim to include long-term care insurance in the regulated activities order. I also outlined the various processes which the Government still needed to go through before determining what measures should be taken to ensure that consumers in this area are fully protected. These include completion of the work of the Treasury committee, completion of the process of regulatory impact analysis, and the necessary consultation with interested parties.
As the noble Lord said, I undertook in this House in April 2000 that the Government would give the House a full report of our conclusions on the matter, with a clear timetable for action when the regulated activities order was debated in the House. That debate took place on 16th March 2001, and I did not do that. I formally apologise to the House for that failure. I did not explain why we had not included the regulation of long-term care. I did not provide a timetable for future action. However, I should like now to give a full explanation of why that was missing, and outline our timetable for the regulation of long-term care insurance. I ought to begin with a firm assurance that we do intend to regulate long-term care insurance.
The conclusions of the Treasury committee were published as part of the Treasury's consultation document on long-term care insurance regulation in December 2000. The noble Lord, Lord Lipsey, did indeed receive his copy and responded to the consultation. The purpose of the committee was not to examine whether or how long-term care insurance should be subject to regulation, but to explore with the financial services industry ways in which long-term care insurance products could be made more attractive
to a wider audience. The main recommendation was that the Treasury should promulgate a set of CAT standards which operate on a voluntary basis.However, when following the public consultation the Government decided to bring in statutory regulation, they decided against additionally setting CAT standards for LTCI products. Such detriment as might arise in future would be addressed through statutory regulation. CAT standards are useful for those products that consumers can choose off the shelf; but LTCI is not bought that way. It is bought alongside other products and with help from advisers. So we believe that the best way forward is to let the market develop and innovate in a regulated environment.
We published the first consultation document in December 2000, and consultation closed at the end of March 2001, which was too late for legislation to be included in the original regulated activities order made in March 2001. But with the subsequent decision to regulate the sale of general insurance products more generally, announced at the end of December 2001, the Economic Secretary decided to dovetail regulation of long-term care insurance with implementation of the wider general insurance regime. I understand that she wrote to the noble Lord, Lord Lipsey, to explain the decision in January 2002.
The Government are fully committed to legislate to regulate long-term care insurance. There are, however, good reasons why we have not yet legislated to regulate it. We intend to dovetail the regulation of long-term care with the implementation of the European Community insurance mediation directive. I shall respond to the point made by the noble Baroness, Lady Dean, about the timetable.
The regulation of both mediation of long-term care insurance and mediation of other forms of insurance—because, of course, contracts are already regulated; it is the question of mediation and advice with which we are concerned here, the conduct of business regulation—will need to be compatible with the EU insurance mediation directive which we expect to be adopted in the summer.
Doing things in parallel brings with it the advantage that we can create a seamless regime for the regulation of long-term care insurance and other related insurance products—for example, private medical and critical illness insurance. One of the difficulties in attempting to do it separately is the difficulty of defining a contract of long-term care insurance. Many of the products on the market are a mixture of life insurance, critical illness insurance and provision for long-term care. The FSA Consumer Panel's response to the long-term care insurance consultation was that there were problems with all these products that could be addressed by regulation. There is a risk that pressing ahead with long-term care now and fitting the general regime around it could produce an overall structure that distorts the market and might cause anomalies for the consumer who buys these and closely related products. We cannot anticipate such potential problems in advance. The only way to avoid
them is to take the regime forward at the same time. That is my basic response to the first way referred to by the noble Lord, Lord Lipsey.My response to his second way is that, even if we did go ahead and regulate long-term care insurance as soon as we could, there is still a need to prepare difficult and technical legislation, to undertake public consultation and to put orders through Parliament. The FSA would need to consult on its rules, and then give time for the industry to gear itself for the detailed regulatory regime. That process could take more than a year; therefore, we should be talking about autumn 2003 anyway. The burdens on industry would be increased, because it would have to respond to two streams of consultation as well as needing to seek permission from the FSA twice. Even though I acknowledge that many firms are keen to see regulation brought in quickly, they would not welcome two rounds of compliance costs in quick succession. Therefore, we argue that regulating separately from insurance mediation would be inefficient, requiring two public consultations, two sets of legislation, and two sets of FSA consultation and FSA rules.
Regulating long-term care insurance in advance of other forms of mediation will also give rise to substantive difficulties. Any regime for long-term care insurance will, from mid-2004, have to comply with the new general insurance regime which will implement the insurance mediation directive. This is a technical directive which has yet to be finalised and adopted. We could not be certain that a regime that we put in place quickly would be directive compatible. If we did so, we would have to amend the LTCI regime when we implemented the insurance mediation directive. That would cause difficulty for the industry and could confuse consumers.
There will also be real advantages for consumers in developing the overall regime in a way that takes account of the work that we have already done on long-term care, but firms up the detail of that regime alongside related products. In that way, we can develop a smoother regime that offers consumers protection across the board in a way that is proportionate to the risks inherent in the products.
The noble Lord, Lord Lipsey, and the noble Baroness, Lady Dean, asked about the timetable. The Government plan to legislate later this year, once the insurance mediation directive has been adopted and the new general insurance regime can be finalised. The Council of Ministers reached a common position on the insurance mediation directive on 5th March 2002. The European Parliament is starting the process of its Second Reading, which it must complete by mid-July. We expect the directive to be adopted by the Council shortly after that. It is possible that it could be changed or rejected by the European Parliament, but we do not think that is likely and we are working on the assumption that the directive will be adopted in July or soon after. Once it is in its final form and has been adopted, we shall consult on the implementing legislation. We are preparing now so that we can issue
consultation as soon as possible, within a few weeks of the directive being adopted. Following that, we shall put the legislation before Parliament.Once we have legislated, the FSA will prepare and consult on its rules. Once the rules have been finalised, we expect firms to be able to apply for authorisation. We expect the regime to become fully operational by mid-2004. That is to give the FSA time to develop its rule books and register many thousands of insurance intermediaries, who will be brought within the scope of regulation. The General Insurance Standards Council has more than 6,000 members and 1,000 applicants, all of whom will need to be registered. The regime will also cover certain insurance intermediaries not covered by GISC. Bearing in mind that we shall also be regulating mortgage lenders for the first time, it will be seen that this is an enormous extension in the scope of responsibilities of the FSA.
The noble Lord, Lord Lipsey, made a third point about the need to protect consumers in the run-up to regulation. Ministers and officials will certainly discuss with the FSA and the industry ways of maximising the current protections for consumers in the run-up to regulation. We shall be happy to involve him and any other noble Lords who have taken part in the debate in the consultation. Insurers who effect and carry out contracts of insurance, including the contracts of long-term care, are regulated by the Financial Services Authority. They have to comply with FSA rules on areas such as capital requirements, fitness and properness. The insurance mediation activities—advising on and arranging contracts of insurance—need to be brought under FSMA regulation. Some protections are already in place because of the compulsory jurisdiction of the Financial Ombudsman Service, which ensures that consumers have access to an independent and free service that provides redress. The ABI has its own code of best practice. The General Insurance Standards Council has a code of conduct. If an insurer is a member of the General Insurance Standards Council, its rules require that it ensures that intermediaries who distribute its products who are not in GISC membership understand that they have to comply with the various ABI codes.
IFACare is a national organisation of independent financial advisers with a special interest in providing financial planning services to those concerned with current or future need for long-term care. IFACare has more than 250 IFA members, all of whom are regulated by the FSA—not in respect of selling long-term care insurance, but they have to meet FSA fitness and propriety and other requirements.
Ministers and officials will be talking to the industry about the existing protections, options for strengthening them, and marketing them more effectively in the run-up to full regulation to give customers a better service and better reassurance. We are happy to include other noble Lords in that process.
Once again, I apologise to the House for not describing sooner the outcome of the work on long-term care insurance and the timetable of its regulation. I am pleased to have had the opportunity to rectify that and to set the matter straight on our future plans. I am convinced that implementing long-term care insurance as part of the wider general insurance regime under the scope of the insurance mediation directive will benefit consumers by introducing a seamless and comprehensive regulatory regime covering long-term care insurance and other related insurance products.
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