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Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2003
2.50 p.m.
Lord Davies of Oldham rose to move, That the draft order laid before the House on 5th June be approved [22nd Report from the Joint Committee].
The noble Lord said: My Lords, I beg to move the draft Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2003, and, with the leave of the House, to speak to the three other orders which relate to these issues.
Before I turn to the orders themselves, it might be helpful if I set them out in context. The Government have already legislated to give the Financial Services Authority responsibility for mortgage lending and administration through the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, which was laid before Parliament on 27th February 2001. That followed a wide-ranging consultation in the second half of 1999 and a further consultation in October 2000. Those provisions were due to be brought into force in September 2002.
However, the Banking Services Consumer Codes Review Group recommended that mortgage advisers and intermediaries should be regulated as well as lenders and administrators. In addition, the Government received representations from the industry and consumer groups calling for regulation of mortgage advice and advisers.
In parallel, it became clear that the Insurance Mediation Directive—the European Parliament and Council directive—was likely to be adopted before
mortgage regulation came into force. That directive lays down rules in respect of insurance mediation, including that insurance intermediaries should be registered with a competent authority and comply with certain professional requirements. Most mortgage brokers also sell insurance and they would therefore have needed to be regulated by the FSA in any case.In view of that, the Government announced in December 2001 that mortgage advisers and intermediaries would be regulated by the FSA. In addition, and in order to maintain a consistent and streamlined approach, the sale of general insurance products would also be regulated by the FSA. Brokers who deal in two or more lines of regulated business will deal with a single regulator, not several, and will be able to compete in European markets.
Since then, the Government and the FSA have worked closely with industry and others to design a regime that understands the market and is targeted precisely at maximising benefits to the consumer, and not loading industry and ultimately the consumer with unnecessary costs.
The purpose of these orders is to bring mortgage advisers and intermediaries and the sale of general insurance mediation within FSA regulation.
It might be helpful if I explain a little about decisions the Government have made following consultation on the Insurance Mediation Directive, which I know has been the basis for some critical comment. The Government's proposals to regulate various activities relating to the sale and administration of general insurance were published in a consultation document in October 2002. The Government received around 400 or so responses.
The directive requires the regulation of insurance mediation activities in relation to all contracts of insurance. However, insurance sold as part of a package, including travel insurance sold with a holiday, and some extended warranties that are contracts of insurance are exempt from the directive. Following extensive consultation, the Government decided not to regulate travel insurance sold with a holiday. That is because the consultation provided insufficient evidence of consumer detriment to warrant the extra costs of regulation, particularly for small independent travel agents.
However, the Government recognise that there are concerns about this market. For example, we have received evidence of some mis-selling from the Consumers' Association. The Government have therefore decided to hold a review of this decision two years after implementation of general insurance regulation in early 2007.
The directive requires the UK to regulate extended warranties, which are contracts of insurance costing more than 500 euros, or which are sold separately from the car, whatever the price. However, those costing less than 500 euros per annum are excluded from the scope of the directive when sold at the same time as the car. Some motor warranties cost more than 500 euros per annum and so will fall within the scope of the directive.
The Government have decided that all motor warranties that are contracts of insurance—whatever their value—should be regulated by the FSA. That is to ensure a level regulatory playing field and to stop retailers manipulating more expensive warranties to make them appear cheaper simply to avoid regulation—for example, by increasing the price of the car or reducing the cover provided. Most respondents agreed with that proposal.
The Government have decided to await the outcome of a Competition Commission inquiry into non-motor extended warranties on domestic electrical appliances before taking a decision on whether non-motor extended warranties that are contracts of insurance should be regulated.
Except in those two areas, those who carry on insurance mediation activities will be caught by the FSMA regime. For many intermediaries, that will mean that they will require authorisation from the FSA. However, the appointed representatives regime will apply to insurance mediation. That will allow representatives of FSA authorised persons to carry out regulated activities without themselves being authorised, provided that the authorised person has accepted responsibility for their conduct.
Following representations during consultation, that regime will be extended in relation to general insurance contracts. As well as being able to arrange and advise on contracts of general insurance, appointed representatives will also be able to conclude contracts of general insurance as agents. They will also be able to assist in the administration and performance of contracts of general insurance. Those changes reflect market practice and should make it easier for firms and individuals to become appointed representatives, if they and their principals so wish.
I turn to the orders themselves. I apologise for the length of my speech, but these four orders are important and, by grouping them together, I have a substantial case to make and, no doubt, some significant questions to answer. The purpose of this package of legislation is to expand the range of activities for which authorisation is required from the Financial Services Authority to include the mediation of certain mortgage contracts and of all contracts of insurance. "Mediation" in this context means making arrangements for a sale, advising on a sale or potential sale or—in relation to insurance only—entering into a contract of insurance as agent for another person or assisting in the administration and performance of such a contract.
These statutory instruments are also intended to implement the directive on insurance mediation. I should also mention that the Government have laid two negative resolution orders before Parliament: the Financial Services and Markets Act 2000 (Misleading Statements and Practices) (Amendment) Order 2003 and the Insurance Mediation Directive (Miscellaneous Amendments) Regulations 2003.
I now turn to the specific orders. The first brings into the scope of the financial promotion regime promotions relating to the activities of arranging and advising on the provision of regulated mortgage contracts. The financial promotion regime restricts the communication of an invitation or inducement to engage in investment activity.
Entering into an agreement the making or performance of which by either party constitutes a controlled activity amounts to engaging in investment activity for those purposes. The controlled activities to which the financial promotions regime applies are specified in the financial promotions order. Such communications must be made or approved by a person who is authorised under the FSMA. In addition, the Treasury may under the order specify circumstances in which the financial promotion restrictions do not apply.
Promotions by authorised persons are not subject to the financial promotion restriction but instead are governed by FSA rules. However, the FSA cannot impose on authorised persons restrictions that are greater than those imposed on unauthorised persons. The order will come into force in October 2004.
The Draft Financial Services and Markets Act 2000 (Exemption) (Amendment) (No.2) Order 2003 extends certain exemptions in FSMA so that they apply to the newly regulated activities in relation to insurance mediation and mortgages. The order also provides that Partnerships UK is exempt in relation to the carrying on of regulated activities relating to investment services. Finally, the order removes the exemption of the Treasury task force.
The order extends the exemptions of local authorities and certain bodies involved with the provision of social housing to include the carrying on of regulated activities relating to the arranging of, and advice in relation to, regulated mortgage contracts and activities relating to certain insurance contracts. The order comes into force on 31st October 2004 for mortgages, and 14th January 2005 for insurance mediation.
The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.1) Order 2003 gives the FSA responsibility for regulating the activities of arranging regulated mortgage contracts and advising on regulated mortgage contracts. It also makes various amendments to legislation made under the Financial Services and Markets Act relating to mortgages. Firms will need to be authorised or exempted in order to carry out the activities of advising or arranging regulated mortgages contracts. The order also makes consequential and necessary amendments to the Consumer Credit Act (CCA) to ensure that there is no dual regulation for the same activity.
A regulated mortgage contract is defined as a mortgage secured by a first legal charge on UK residential accommodation to be occupied by the borrower or their immediate family. Second and subsequent legal charges on property remain covered by the CCA. If approved, the substantive provisions of this order will come into force on 31st October 2004.
It might be convenient to mention that, as many noble Lords will know, lifetime mortgage—mortgage-based equity release schemes—will fall within the scope of FSA regulation when the FSA takes on responsibility for regulating mortgages in October 2004. However, under current legislation, another type of equity release scheme, home reversion plans, cannot be brought into FSA regulation, as those are sale and purchase arrangements rather than financial services products. They fall outside the definition of a regulated mortgage.
However, the Government have had informal discussions with stakeholders on the regulation of home reversion plans, but they provided no evidence of consumer detriment at present in this market. However, there are widespread concerns about the potential for consumer detriment in the future. The Government announced on 5th June that there is a need for a more in-depth analysis of the costs and benefits of regulation and that there will be consultation in the autumn. I seek to emphasise that the Government have an open mind about this part of the market.
The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.2) Order 2003 gives the FSA responsibility for regulating various activities relating to the sale and administration of general insurance products, whether carried on by intermediaries or insurers.
Part 2 of the order adapts the exclusions that already exist in the regulated activities order to ensure that they are compatible with the directive. In addition, the order creates new free-standing exclusions from the insurance mediation activities where permitted by the directive. For example, the order excludes from regulation travel insurance sold as part of a holiday package, implementing the equivalent exclusion in the directive. Article 11 excludes from regulation the provision of information in the course of carrying on a profession of business that does not consist of regulated activities. This order will also come into force on 31st October 2004.
The Government believe that regulation will provide major benefits to UK consumers in two large and important markets. Each year, UK consumers spend £26.4 billion on general insurance premiums and take out mortgage loans worth £219 billion. Consumer protection in those markets will be increased with regulation providing safeguards to consumers and introducing minimum standards of advice. Intermediaries selling a range of financial services products will have to deal with one regulator only—the FSA—rather than the current complex mix of statutory and self-regulatory arrangements. The Government and the FSA have been working closely with the industry and others to design a regime that understands the market and is targeted precisely at maximising benefits to consumers and not at loading industry and ultimately the consumer with unnecessary costs.
I am aware that the orders are not without some criticism and that there is an element of controversy to them. The Government's view, however, is that in this
area, the case for regulation has been made. It should be recognised that the Government are approaching the matter as part of a coherent pattern, which ensures that there is reference to one regulator across the field. I commend the order to the House.
Moved, That the draft order laid before the House on 5th June be approved [22nd Report from the Joint Committee].—(Lord Davies of Oldham.)
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