Financial Services Bill

Lord Newby Excerpts

Monday 8th October 2012 Lords Chamber

[Lord Newby]

My Lords, I agree strongly with the motivation behind the amendments of the noble Lord, Lord Eatwell. The process for approving new entrants to the market should be streamlined to the maximum possible extent because it is clearly a flaw in the current financial services market that while in many sectors there is strong competition, in some, particularly banking, we wish to see significantly more competition. In terms of giving an impetus to the speedy processing of applications, we strongly support his view. However, I hope that I can persuade him that the Bill already makes it clear how the two regulatory bodies are going to deal with applications for firms that will be jointly regulated. In Clause 9, proposed new Sections 55E to 55G set out in detail who is to determine applications for authorisation, while new Sections 55U to 55Z1 set out the detail of the procedure which the regulators have to follow. We have already attempted to clarify who does what.

Those who are applying to become a dual-regulated firm are required to make a single application for authorisation to the PRA, and there will be a single administrative process. The PRA and the FCA will be under a duty to co-ordinate which will cover all of their functions, including those related to authorisations. They are under a duty to set out in their memorandum of understanding, in high level terms, how that co-ordination will be delivered. To deliver the duty to co-ordinate, the two authorities are required to put processes in place that will allow for efficient co-ordination. They also need to establish a process for authorisation and variation of permission, and to communicate that to firms. The FSA does this at present, and guidance is available on authorisation from its website. I do not think there is a need for an express requirement in legislation about exactly what the regulators should publish.

I shall move on to Amendment 149AC. We are aware that the ESAs are to assist in preparing equivalence decisions relating to supervisor regimes in third countries under relevant sectoral legislation, such as Article 33 of the ESMA regulation. Where EU law provides for the ESAs to have a role in determining equivalence of an overseas regulator, of course the regulators must comply with EU law and recognise that decision. However, we believe that it would be inappropriate to extend the role of the ESAs by requiring our regulators to have regard to any equivalence decisions they make in contexts that are not required by EU law. But, of course, the question is really one of whether the regulatory bodies are going to take account of the overseas regulators supervising those firms which are applying for passporting into the UK. When the FCA or the PRA is assessing a firm seeking to passport in to the UK from outside the EEA, the opinion of an overseas regulator that knows the firm, its operations and its management extremely well is quite likely to be helpful. The FCA and the PRA must also consider how the overseas regulator supervises the firm and take this into account, but in doing so, they may well wish to consider any view that the EU regulatory authorities may have about the overseas regulator.

I turn now to Amendment 150B, spoken to by my noble friend Lady Kramer. The Bill already provides that the regulators may exercise their powers of intervention, including the power to vary permission, at the request of an overseas regulator. In considering any such request, the regulators are required to have regard to whether they are required by EU law to assist the overseas regulator. The relations between the FCA and PRA and the European supervisory authorities, which are not technically regulators in the same way, are set out comprehensively in primary EU law. For example, Regulation 1093/2010/EU establishing the European Banking Authority runs to 82 articles and covers in detail matters such as the role of the EBA in settling disagreements between national competent authorities, the limited circumstances in which the EBA may direct the national competent authorities to take action, the status of the national competent authority when it attends the EBA and the sharing of information between EBA and the national competent authorities. There is considerable scope for our regulators to work with the European supervisory authorities established in EU law. So while I agree with the importance of the two sets of bodies working closely together, I do not think that this amendment is strictly necessary.

We now come to Amendment 151 tabled by the noble Lord, Lord McFall of Alcluith, which, sadly, takes us back to a discussion of the use of the English language. I say sadly because the debate about whether “may” or “must” should be used has exercised some of the finest brains in the Treasury to a greater extent than almost any other provision in the Bill. I found myself getting drawn into the debate and I became extremely enthusiastic about something that I was then persuaded was not of as much significance as I had originally thought.

Amendment 151 is one of the cases where we have looked very carefully at whether we should change “may” to “must”. We have come to the conclusion that to do so would impose a disproportionate and unnecessary burden on the regulator and, indirectly, on existing and potential authorised persons. The reason for this conclusion is that the amendment taken literally—and people do sometimes take these things extremely literally—would require the regulator to consider, when taking a decision on an application for permission or whether to vary or cancel a permission or to impose a requirement on a firm, each relationship which was “relevant” to the matter in hand. The amendment does not introduce any kind of materiality thresholds; all relevant relationships would have to be considered.

Even for a relatively simple provider such as a sole trader IFA, the range of relationships that are potentially relevant to the matter could be very significant. For a complex firm such as Barclays, the range of relevant relationships would be absolutely mind-boggling. Therefore, we think it is very important to retain the “may” to keep proportionality to the level of relationships that would have to be investigated.

[Lord Peston]

My Lords, am I right in thinking that the noble Lord is talking about the “may” on line 27 and that he is well aware that there is a “must” on line 33? I get a bit bored with mays and musts, although I have had my fair share of them. However, I cannot make any sense of them, and if I switched them around, the Bill would look to me just as sensible or not. Could he tell us why the “must” is there?

My other question relates to the point that my noble friend Lord Eatwell made on the importance of regulatory authorities abroad. Is the position at present symmetric? In their regulations and regulated activities elsewhere, do they have a series of mays and musts to take account of what our regulatory authorities say about our firms? In other words, is there any danger that people overseas will prevent our firms competing with their firms under regulations where we are following the quite correct line—which I totally support—that competition is generally to the good? Therefore, we are broadly saying that we must welcome overseas competition rather than reject it. How much danger are we in from the mercantilist views that we know dominate French policy-making and that of others?

[Lord Newby]

My Lords, I can deal with the first part of that intervention more quickly and easily than the second. The first “must” in subsection (2) is there because it is an EU legal requirement. If we are asked to do something, we have to do it; we do not have the option of not doing it. There is a good reason for a “must” there.

With regard to the noble Lord’s second point, I was speculating about the Romanian or Hungarian or Finnish languages as he was speaking and wondering whether there was the same absolute distinction between “may” and “must” in every case. I am not an expert in every bit of regulation in every member state. I realise that this is a major deficiency but I do not think that it pertains very strongly to the amendments before us today. For the second time, the noble Lord has raised a potential other amendment that is not on the Marshalled List. If he will excuse me, I will go back to concentrating on the ones that are.

[Lord Desai]

Perhaps I may say one word in favour of my noble friend’s amendment. It strikes me that there may be what we call a multicultural problem here, that in an investment situation relatives are defined much more broadly in certain communities than others. The noble Lord may be right that “may” will do and “must” will not do, but I have been asked to be non-executive director of some Indian companies and the number of relations they ask me to certify who do not hold assets in that company runs to something like 30. I hope that the regulators are aware that “must” may be a better word than “may”, but I concede the point, as long as the noble Lord assures me that the regulators are aware of the multicultural problem.

[Lord Newby]

I am sure that the regulators are aware of the multicultural problem, but the example given by the noble Lord absolutely exemplifies the problem. If one had a single-trader IFA who came from a particular culture and had a very large extended family, it would be at a disproportionate cost that the regulator looked at every single relationship that he or she had, which could run to many hundreds.

[Lord Desai]

Until it goes wrong.

[Lord Newby]

That is why the regulator has to look at relevant and appropriate relationships rather than everybody who could be conceivably considered to have a relationship with that regulated entity or individual.

Amendment 152 was also put forward by the noble Lord, Lord McFall. I hope that I can persuade the Committee that, again, this is unnecessary. It is important that those to whom permission is granted are not subject to influences that may act in a way which is not in the best interests of potential clients. That is why new Section 55R(1) is in the Bill. The current text in new Section 55R(1) refers to “relationship”. It deliberately does not specify the nature or type of the relationship, so that out of all conceivable relationships—including family, business, and other associations—the regulators can exercise their judgment on which relationships should be investigated and which should be factored in to the instances of decision-making set out in new Section 55R(1). This reiterates the point that I have just been making to the noble Lord, Lord Desai, that a degree of judgment needs to be exercised by the regulator over which relationships are taken into account.

However, I assure the noble Lord, Lord McFall, that the specific types of relationships to which his amendments refer will be among those considered by the regulator and will be looked at where appropriate. Therefore, I hope that the noble Lord will be satisfied that the amendments are unnecessary.

[Lord Eatwell]

My Lords, I welcome the noble Lord, Lord Newby, to the consideration of the Bill but I suggest that he has failed to take the point of Amendment 149AA. His argument consisted of two points. First, he argued that there was sufficient requirement for the PRA and the FCA to work together in giving permissions under new Sections 55E, 55F and 55G. Secondly, he argued, extraordinarily, that it was not the task of the Bill to require either the PRA or the FCA to publish guidance on these matters. One of the great failures in the current process in giving permissions is the inadequate guidance which firms have in preparing their permissions. It is one reason why the permission process has become so extended and has so limited the development of competition in financial services which we would all like to see. In particular—

[Lord Newby]

What I said was that at present the FSA does make guidance available on its website. The new regulators intend to do the same. For that reason, I did not think there was a need for an express requirement in the Bill to do so.

[Lord Eatwell]

They may intend to do lots of things, but it would be nice if the Bill could actually require them to do so in this particular case. However, the more important point I would like the noble Lord to help me with is that Amendment 149A requires the collaborative activity of the FCA and the PRA to publish guidance for applicants, so that an applicant is not caught between two stools, continuously going backwards and forwards between one and the other in the application process. If this is already in new Sections 55E, 55F, and 55G, can the noble Lord point out to me precisely where this requirement appears?

[Lord Newby]

The PRA and FCA are under a duty to co-ordinate covering all their functions, including those related to authorisations. They are under a duty to set out in their MoU how that co-ordination will be delivered. Therefore, the noble Lord’s concern that there will not be adequate co-ordination, and that even if there were, it might not be readily available to regulated or would-be regulated firms, is mistaken. There is recognition that there is a potential problem, obviously, with two regulators, but the Bill and the MoU seek specifically to address those problems.

[Lord Eatwell]

Pushing things into the MoU is unsatisfactory, particularly when the noble Lord pleaded in aid new Sections 55E, 55F, 55G, and so on. It does seem that there is a problem with the whole current application process. Anybody who has been involved with, or been approached by, people involved in the application process knows that as it stands it is not working very well. Once we have two regulators responsible for the approval of applications, there is the possibility that it will work less well, which will not be good for the health and vitality of financial services, particularly banking, in this country. However, we will no doubt return to this matter at a later stage. In the mean time, I beg leave to withdraw the amendment.

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Moved by

[Lord Newby]

149H: Clause 9, page 48, line 8, at end insert—
“(6A) Without prejudice to the generality of subsections (1) and (2), the FCA may, in relation to an authorised person who has permission to carry on the regulated activity specified in article 24A of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (which relates to bids in emission allowance auctions), exercise its power under this section to vary the Part 4A permission of the person concerned by removing that activity from those to which the permission relates if it appears to the FCA that the person has seriously and systematically infringed the provisions of paragraph 2 or 3 of Article 59 of the emission allowance auctioning regulation.”

[Lord Newby]

My Lords, this is a small group of minor and technical government amendments. They serve, among other things, to update the Bill to reflect European legislation and update the schedule that makes consequential amendments to legislation as a result of the changes introduced by the Bill.

Perhaps I may speak briefly about two sets of amendments in this group. The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2012 has recently come into force to implement the requirement in Article 18 of the Commission regulation 1031/2010 on the timing, administration and other aspects of the auctioning of greenhouse emission allowances. The order amended FiSMA to enable the FCA to authorise certain categories of persons to make them eligible to bid in auctions of emissions allowances on their own account or for clients under the EU emissions trading system.

Amendments 149H, 173ZAA, 173AAA, 183ZA, 183ZB, 183ZC and 183ZD amend the Bill to ensure that where the order has amended FiSMA, those provisions are reflected in the Bill. Amendments 187TB, 187TC, and 187TD make some technical clarifications to the provisions in FiSMA relating to the Lloyd’s insurance market. They make no changes of substance; there are no underlying changes in policy. Amendment 187TD replaces a reference to Part 10 of FiSMA with a reference to Part 9A of FiSMA. Clause 22 of the Bill replaces the rule-making provisions of Part 10 of FiSMA with new provisions in a new Part 9A of FiSMA. This amendment simply updates a cross-reference to those provisions in Section 316.

Government Amendment 187VA is a minor and technical amendment which maintains the current position under FiSMA whereby the FSA may disclose information obtained by HMRC for the purposes of a criminal prosecution without the consent of HMRC. Government Amendment 193B is a minor technical amendment to remove an unnecessary reference to Section 328 of FiSMA. Government Amendments 193C and 193D make minor changes to the technical provisions of the Bill relating to the special resolution regime and bank administration. Specifically, Amendment 193C relates to a situation where the holding company of a failing bank has been taken into public ownership. The amendment will allow shares that have been transferred, whether within public ownership or to a private sector purchaser, to be transferred back to their original ownership.

Amendment 193D is a consequential amendment, reflecting the insertion of a new Section 81A into the Banking Act by Clause 86(2). Amendments 198A, 200A and 200B amend Schedule 18 to include further consequential amendments required by the Bill. They amend references to the FSA and to Part 4 of FiSMA, which is repealed by this Bill.

Amendment 198A is a consequential amendment to the Lloyd’s Act 1982. The Act currently lists FSA-approved persons as one of a list of specified persons who may sit on the disciplinary committee. The amendment replaces FSA approval with FCA or PRA approval.

Amendment 200A makes a consequential amendment to the Charities and Trustee Investment (Scotland) Act 2005 to update the reference to Part 4 of FiSMA, with the new Part 4A. Finally, Amendment 200B adds the Prudential Regulation Authority and the Financial Conduct Authority to the list of bodies that are required to comply with standards of record keeping in the Welsh language. The Bank of England is already listed. Noble Lords will be relieved to hear that I do not plan to attempt to pronounce the translation of the two authorities to the House. I beg to move.

[Lord Tunnicliffe]

My Lords, we are very happy, in a sense, to accept the blanket assurance that these amendments are minor and technical and we will not probe them in any detail. However, we are going to have a host of government amendments to the Bill, as was discussed earlier. We did, on this first day back, request a written explanation of this group of amendments so that we could study them at our leisure before the Committee met. Unfortunately, there has been no response to that request. It is important that the Government get into the habit of extremely comprehensive supporting documentation for their amendments. Therefore, I will study with care what the noble Lord has said and make sure that I can be comfortable that they are minor and technical, but it would have been much better if we had had a response to our request. I would value an assurance from the noble Lord that, as these amendments come along over the rest of the Bill—we will all try to work together to ensure the success of debates about new government amendments—the Government will facilitate those debates by providing proper documentary support.

[Lord Newby]

I hope I can give the noble Lord two assurances. First, I can assure him that the amendments are indeed technical and have no policy substance attached to them. I also assure him that, wherever possible, we will make available adequate written information about government amendments in good time so that people can look at them and ensure they are what they say on the tin.

Amendment 149H agreed.

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[Lord Newby]

My Lords, as both noble Lords have said, these amendments are about fairness and transparency. The regulators will have wide powers to take action against firms. Therefore, it is right to be sure that the Bill requires the regulators to use those powers in a fair and proper manner. I therefore very much agree with the thinking behind the majority, if not all, of these amendments. Perhaps noble Lords will forgive me if I explain why I think that they are either unnecessary or inappropriate.

Let me deal first with Amendments 150, 165, 168, 171, 173, 177 and 178, which are all in the name of the noble Lord, Lord McFall. These amendments would require the regulator to carry out an investigation before taking regulatory action. I agree that the regulators should not take invasive regulatory action against a firm unless they have carried out a thorough investigation. I also agree with the thinking behind Amendments 169, 170, 172, 175, 179 and 180; namely, that the regulator should give a statement of reasons when it takes regulatory action. However, these amendments are unnecessary as these are already requirements under existing law and the Financial Services Bill will not change that position.

First, as a matter of ordinary administrative law, a regulator could not take action against any person unless it had sufficient evidence for doing so. This would normally mean that it had undertaken an investigation or an inquiry of some kind. The regulator cannot act on a whim. The FSA’s enforcement manual sets out at great length how its investigation procedures are fair and appropriate.

Secondly, Sections 387 and 388 of FiSMA already require warning and decision notices to give the regulator’s reasons for the action it proposes or the decision it has taken. There are similar requirements in the new provisions inserted by this Bill for other notices where that is appropriate. Of course, if the person concerned disagreed with the reasons that the regulator gave, he or she could challenge the action or decision before the tribunal.

Amendment 176 seeks to compel each of the regulators to consult with persons whom it considers appropriate when preparing and issuing a statement of policy with respect to the imposition of penalties and the amount of penalties under the new powers in new Part 12A of FiSMA in relation to unregulated holding companies. Again, I entirely agree with the spirit of the amendment: the regulators should consult on their statements of policy. But let me reassure the noble Lord, Lord McFall, that this amendment is not required, as new Section 192N(9) already requires the regulators to consult when preparing and issuing a statement of policy.

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Clause 25, as amended, agreed.

[Lord Newby]

My Lords, I beg to move that the House do now resume. In doing so, I inform the House that because the Question for Short Debate tabled by the noble Lord, Lord Alderdice, will now be taken as last Business, the time limit for the debate becomes 90, rather than 60, minutes. Speeches should therefore be limited to nine minutes, except for those of the noble Lord, Lord Alderdice, and the Minister, which will remain limited to 10 and 12 minutes respectively.

House resumed.