I beg to move,
That the draft Financial Services Act 1986 (Delegation) Order 1991, which was laid before this House on 19th December, be approved.
The purpose of the order is to give to the Securities and Investments Board a power parallel to that of the Secretary of State for Trade and Industry under the Financial Services Act 1986 to take action against an individual who may be making money or causing investors to lose money while contravening the conduct of business provisions under that legislation. The SIB has a power parallel to the DTI under the FSA to take such restitution orders against authorised persons or appointed representatives. The order would give it a similar power to take action, where appropriate, against people who are not authorised.
This is a small transfer of additional power which will enable the SIB to pursue one or two extra cases. In the interests of good regulation, I commend the order to the House.
I welcome the order and the enhanced powers for the SIB that will result. Why has the Minister brought forward this parallel power for the SIB and DTI now? The Financial Services Act was introduced in 1986. Why has the order come forward now, rather than in 1988, 1989, or 1990? One must assume either that the SIB needed this power before, and without it has been functioning inefficiently, or that the DTI had the power and has not used it efficiently. Either the SIB has not had the full powers necessary to do its job or the DTI has not been doing its job. It would be useful if the hon. Gentleman would explain why he finds it necessary to introduce the order after so many years.
This is just another tinkering with the Financial Services Act. Because of the speed with which the legislation was introduced and the way in which it was cobbled together, we continue, week in, week out, to have these difficulties.
I mean "We". Last week, I talked to people in the City and to a unit trust group and asked them about the FSA's function. Giving an example of Government tinkering and the difficulties that have resulted since the legislation was introduced, they said that, since June 1989, they have had 24 consultative papers from the SIB, including three major ones, 90 changes to the SIB rulebook, 14 updates to the rulebook for the Investment Management Regulatory Organisation, two complete rewrites of the IM RO rulebook, and an attempt to rewrite the rulebook in simpler language.
The hon. Gentleman asks what is wrong with that. We have these changes month in, month out because of the way in which this cobbled together financial services legislation was introduced by the Government. The order is just another elastoplast applied by the Government to the SFA. The Government should be considering the surgery that will be needed to make the SFA work more efficiently for industry and investors as we move toward a single European market.
We must place the order in the context of Europe and the legislation that we hope will come as we move towards a single market. We hope that five directives will be in place to allow the single market to move forward in the 1990s. The order deals with fraud and protecting investors' money. As the previous financial debate was too early in the Minister's view, it would be useful if he would explain why we have not yet had a consumer directive from Europe. It is needed desperately. The Economic and Finance Council and similar organisations tell me that, although this small delegation order deals with one aspect of fraud in relation to investors and the City, we have no chance of having a consumer directive in place at the same time as the investment services, capital adequacy and other directives.
I dread to think what will happen, come the completion of the single market, when a Spanish investor is working through a French company with a subsidiary in Britain. Supposedly, home rules will function in those circumstances. Does the Minister really believe that that will constitute consumer protection in the 1990s? The Minister feigns support for consumer protection, but, as yet, we have seen little evidence in the European negotiations that that will be forthcoming in 1992.
Let me ask the Minister to clarify five points. First, why now? Secondly, will the Minister confirm that the present delegation order has nothing to do with the difficulties at Hamilton House? I understand that many investors await compensation following the problems and difficulties of Hamilton House and that the Securities and Investments Board is having trouble dealing with their problems because it has been waiting for months for the response from the Department that would allow the investors to get their money back. The worry is that, as a result, directors are taking money out of the country, and that money that could be recouped by restitution under an order such as this has not been obtained. Is Hamilton House at the back of the Minister's mind? Is that why he feels it necessary to delegate powers concurrently to the SIB and the Department?
Thirdly, will the powers that will be given to the SIB concurrently with the Department apply only to restitution of directors as individual unauthorised persons under the Financial Services Act, or will they also apply to accountants and solicitors? Who will the order, and the powers delegated to the SIB, cover?
Fourthly, will the order apply to cases such as Polly Peck and Levitt? If so, will it be used by the SIB; if not, why has not the Department used its powers already?
Fifthly, there have been reports in the press recently that many members of the Financial Intermediaries, Managers and Brokers Regulatory Association are concerned that, because of the cost of compensation—particularly in the Levitt case, if that cost proves to be very high—the association will not be able to pay the necessary compensation. Does the order have something to do with the SIB and Levitt's difficulties? What is the Minister's response to those at FIM BRA who say that, if the Levitt case results in great demands for money, the present compensation scheme will not be able to handle those demands, or that, if it does, it will be at the expense of independent intermediaries whose payments into the compensation scheme are at present higher than their payments for membership of FIMBRA?
Will the Minister come clean on those issues and explain what relation the order has to our regulatory system?
It is an honour to follow the hon. Member for Redcar (Ms. Mowlam). The House respects the way in which she has followed these matters and her careful and close interest in them. She does a great service to the minutiae of the Financial Services Act 1986 by following up these matters and fulfilling her remit so well.
I welcome the order, which marks a further stage in the transition towards the transfer of power from the Secretary of State to the Securities and Investments Board. When the Financial Services Act was passed, many of us envisaged an increasing devolution of supervisory powers down to the SIB and we recognised that it had to be a tried and tested procedure.
I see in his place my hon. Friend the Member for Beaconsfield (Mr. Smith), who played such a formative role in these matters. I think that he would agree that the careful balance that has been struck between self-regulation and central supervision has stood the test of time. The Government have been right to ensure that the Securities and Investments Board does not run before it can walk. In fact, the SIB has a creditable record, and I believe that the devolution of parallel responsibility for investigating the contravention of the status of authorised person or appointed intermediary represents an important devolution of power.
As, in the end, it comes down to people and to those who are authorised to conduct investment businesses, it is a great vote of confidence in the SIB that the Government and the Secretary of State are prepared to devolve this particular power. The order is not a technical or sidelining measure. It is an important reflection of the progress, responsibility and success of the SIB and the policy that the Government have enunciated and pursued since the enactment of the Financial Services Act 1986. I congratulate my hon. Friend the Minister on presenting the order today.
I, too, welcome the introduction of the order. I asked the Library how many orders had been made under the Financial Services Act 1986. I was told that this is the 61st order on the Library computer, which lists the orders subject to affirmative and negative resolutions and also commencement orders.
The flexibility of the Financial Services Act 1986 is demonstrated in the fact that it is possible to make such changes, which may simply be tinkering. However, each change is in response to new circumstances. The financial services industry is continually producing new products and it is inevitable that we will have new regulations. Regulations that simplify life for investment businesses are particularly welcome.
I was not suggesting that this order was before us as a result of a new product. The scene is changing, and the idea that we can have permanent rules and regulations is not realistic. The market is constantly changing, and it is inevitable that the rules and regulations made under the Financial Services Act will change in response. It is not realistic to suppose that we will have a long period during which there will be no changes to the rules. There are many proposals on the stocks at the moment which deal with new investment products—for example, unit trusts that allow people to invest in futures. I am not suggesting that this order deals with such a change. I shall be interested to hear my hon. Friend the Minister respond to the hon. Member for Redcar (Ms. Mowlam) and tell us why the order has been introduced today, because I cannot answer that.
As my hon. Friend the Member for Chichester (Mr. Nelson) said, it is right that as the SIB becomes more experienced, more powers should be passed to it. As my hon. Friend said, that is a recognition of the fact that the SIB has made progress and is now widely respected. A mark of that was the award in the new year's honours list of a knighthood for Sir David Walker, which I welcomed. That was good news.
My only complaint about the order relates to the explanatory note. It would have been nice if the explanatory note covered what my hon. Friend the Minister said in his opening remarks. It is a typical explanatory note, in that it tells us nothing about the order. I had to look up the relevant sections in the Financial Services Act to discover what the order did. The explanatory note should be what it says and not a circuitous civil service effort that tells us nothing that we did not already know.
None of us wants to prolong our proceedings. I agree that the order makes further progress towards the devolution of powers to the SIB. I do not want to speak specifically about the order, but instead to take this opportunity, as the hon. Member for Redcar (Ms. Mowlam) did, to voice one or two other concerns relating to the financial services industry generally.
I want to state first how much the people in the financial services industry in this country recognise the stand that my hon. Friend the Minister has taken in respect of the European Community directives, particularly on capital adequacy rules. It will come as no surprise to hon. Members to learn that, as the people who work in the industry trundle off to bed tonight, they are thinking not about the order that we are considering, but about their future in relation to what will happen to capital adequacy. I encourage my hon. Friend to continue his fight.
When we discussed this matter right after the summer recess, my hon. Friend the Minister said that too many people were caught by the current interpretation of the exemption rules. I hope that my hon. Friend will continue to press that matter. Without question, European Community directives pose a serious threat to the viability of the independent financial adviser in the next decade. It would be sad if that competitive industry, which is at the heart of what we wish to see in Europe, were destroyed in the name of creating a European single market. I know that my hon. Friend recognises those matters, and I hope that he will continue to pursue them robustly.
The order also raises another matter to which the hon. Member for Redcar referred—the continuing problem of the compensation scheme. As my hon. Friend the Minister knows, I firmly believe that investor protection continues to be the Achilles' heel of the financial services industry. It is increasingly to the credit of the Financial Services Act 1986 and the Government's persistence with the measure that we have begun to expose people who should not be in the industry because they cannot be trusted to look after investors' money.
However many there may be, the financial services legislation has created a mechanism that has exposed those who are dishonest in a way that the old Prevention of Fraud (Investments) Act 1958 never did. For that reason, everyone in the industry recognises that there have been benefits from financial services legislation.
The corollary is that, in putting the compensation arrangements in place, we are in danger of threatening the existence of the independent sector which we wish to protect. Above all, I am concerned that the likely demands on independent financial advisers, small firms, and on people who are regulated by the Financial Intermediaries, Managers and Brokers Regulatory Association or by the Insurance Brokers Registration Council to contribute to the compensation scheme could be such that they will either be driven out of business or will seek to become tied agents to protect their livelihoods. That would not be good for investor advice in the long term.
I do not expect my hon. Friend to respond to my comments tonight—I have raised a wider subject—but I am sure that he will understand that the debate provides an opportunity to remind him and the House that there are widespread concerns within our financial services industry about these matters. I am sure that my hon. Friend will understand why I felt that I should raise them.
The Financial Services Act 1986 was introduced with the best of good intentions. I do not know whether it has actually worked, but it has been proved to be hugely costly. The costs run into hundreds of millions of pounds, but still the Levitts, the Polly Pecks and hundreds of other crooks still seem to get through. It is not that the Act is too strong—in some ways it is too weak. One of the great problems is that we have a system in which, before ne'er-do-wells can be brought to book, they must go through a vastly expensive and time-consuming legal system.
The Americans have something to teach us. Under their set-up, without having to go through their courts—their court process is much more long-winded than ours—they can fine people considerable sums. Salomons was fined $1·3 million the other day because of its ne'er-do-wells. That is a good thing.
If we should do anything, it is to make sure that, without all the vast expense, we give more confidence to the individual. It is not the Government's fault if crooks abound. Given the right backing, the City is one of the best policemen of itself that there has ever been. Let us take compensation. When the stock exchange was only individual stockbrokers, it literally guaranteed all its clients against loss due to the malfeasance of any stockbroker, but today the limit is £40,000. Yet the cost of malpractising brokers is about 20 times more than it was before the Financial Services Act 1986 was introduced.
The Financial Services Act 1986 may be a step in the right direction but how much does it genuinely support and defend the small investor? Investors still seem to lose tens of thousands of pounds to crooks. People such as Adam Faith are allowed to continue giving advice in the Mail on Sunday. We all know what his advice is worth. It is worth what someone will pay him for it. Financial journalists should be much better controlled. Unless we bring them to book and keep much tighter control of them, including those who tip—most people who tip have bought for themselves beforehand—we shall not progress. The Act deserves support, but there is still an awfully long way to go.
I am grateful to my hon. Friend the Member for Chichester (Mr. Nelson) for his helpful comments in support of the Securities and Investments Board and this transfer of powers and to my hon. Friend the Member for Beaconsfield (Mr. Smith) for his favourable comments on the way in which the Government have progressively transferred powers to the SIB so that it can do the job that was envisaged for it when the House passed the Financial Services Act 1986—the FSA. I take note of his comments on explanatory notes. I, too, prefer explanatory notes that are intelligible and give all the information required. I shall certainly seek to achieve that next time.
My hon. Friend the Member for Ryedale (Mr. Greenway) was right to worry about threats to independent financial advisers in Britain which may be posed by certain draft European directives. He can rest assured that, if there is anything that I can do to stop those unfortunate drafts being passed, I shall do so. Anything that he, as a powerful advocate for that sector, and his friends in the sector can do to put our joint case to Brussels and make sure that enough member states support our just cause, will be welcome. We must make a combined effort to make sure that our case is fully understood time and again in Brussels so that the directive can come out in the right shape.
My hon. Friend the Member for Ryedale will be pleased to know that the Government are strongly committed to a strong independent sector for financial advice. He may have seen some reference in the past few days to my speech and a press release on the subject of commissions. That is another issue of importance to independent financial advisers. Both he and my hon. Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) made the powerful point that the best protection for honest members of the profession—the vast majority—must be by the regulators finding the crooks and those guilty of misdeeds as quickly as possible in order to limit the losses, prevent hardship to retail customers and prevent the image of the entire industry being tarnished by the few wrongdoers.
That is the purpose of the Financial Services Act regime. As my hon. Friends have said tonight, there is evidence that such people are being found more quickly and that stronger action is being taken now that we have the regime. Both my hon. Friends can rest assured that I shall do anything in my power to make sure that the small minority who are guilty of misdeeds are brought to book, and that the regulators follow them as swiftly and completely as possible.
The hon. Member for Redcar (Ms. Mowlam) asked several questions. She asked why we were bringing these powers forward now. It is now that the SIB has requested the transfer of the powers. That is as good a reason as any. We have progressively transferred powers to the SIB as it has sought them. It has sought this important power and we are happy for it to have it. The SIB may have cases that are appropriate for this treatment.
The hon. Lady asked me about a specific case. She must know that I will not tell her about any specific case in such a sensitive area. It is no help to the regulators to alert people to possible actions against particular businesses. I shall stick to my usual practice of making no comment on individual regulatory cases, for the good reason—I hope that she approves—that it would only make the task of the regulator more difficult.
I accept the point, however frustrating that may be at times. Can the Minister see that the logic of his argument without specific cases is that, if he grants this power concurrently to the SIB now, it is because it has asked for it? The SIB must have asked for the power because it feels that it needs that power to do the job efficiently. If the power at present lies with his Department, one must conclude that the Department is not doing its job efficiently.
That logic does not work. Now or in future, the SIB will know in detail about cases which the DTI has left it to handle, where it thinks that the particular power would be useful. It would be an unnecessary expense and a waste of time and trouble to transfer all that information, interrupt the investigations or transfer the intelligence when it would be easier for the SIB to do the task. The hon. Lady's smile shows that she well understands that that is how this works in practice and why the proposal has come forward now.
To keep the hon. Lady smiling may be difficult, but it brings us naturally on to the subject of her lunches. I am glad to hear that she is now lunching in the City and learning about the important challenges facing the City.
The hon. Lady asked why there had been so many consultative papers from the SIB and changes in the rule books. It is because this is a dynamic industry, with constant changes in the range and style of products and services, which therefore raises new challenges to the regulators. The regulators want to hear what the City practitioners and the retail interests have to say about these proposals before regulating, so they issue consultative papers. There have been changes in the rule books for that reason, and because the SIB has introduced its new settlement which is designed to produce shorter, simpler, more intelligible rule books. That required the revision of the old ones, which were not satisfactory. I am sure that the hon. Lady, like me, will welcome that revision.
As for this being elastoplast, that is a silly image to choose. I wonder what surgery the hon. Lady is proposing. I ask her in every debate what this drastic surgery is that she would like to apply to the Financial Services Act.
So may it stand. It cannot be a serious criticism of the Government's policy if the alternative is not on offer and the House is not to be told what it may be.
The hon. Lady asked whether the action could take place against directors only, or also against others. She will be pleased to know that it could be taken against anyone who contravenes the FSA in the way specified in the order. That could include accountants or lawyers breaking the conduct of business rules and profiting by so doing. She can rest assured that this applies not just to directors, but to anyone who undertakes crooked work at the expense of the public.
The hon. Lady asked about the costs of compensation. I understand some of the worries of FIM BRA members in that connection. The main protection against unreasonable escalation of the compensation fund must be tight regulation to detect these things as early as possible, to nip them in the bud before they become expensive.
Does my hon. Friend agree that there is a problem—I entirely take his point about not wanting to deal with specific cases—with some recent frauds that have come to light in which losses have been incurred before the Financial Services Act was put in place? Given the Government's extremely generous response to the losses incurred by clients of the Barlow Clowes affair, does he accept that the Government will have to think carefully about how these people should be compensated for losses incurred before the regulations were brought into force?
The question of who is eligible for compensation under the new regime is for t he compensation fund. There may be cases that should be taken up with it on behalf of those who are seeking compensation. It is not for the Government to specify, as we do not run that fund.
As to whether the Government should do anything along the lines of the action taken in relation to Barlow Clowes, my hon. Friend will remember that there were special circumstances in that case. The most important point was the ombudsman finding against the Government. In the light of that and the number of people who had been affected, together with the concern expressed in the House about the matter, the Government decided to make the ex-gratia payment. I do not think that we can accept that, in all cases where there have been losses of any kind, at any date in the past, the Government should automatically make such payments. On that issue, I fear that I cannot help my hon. Friend as much as he would like.
I hope that I have answered all the questions raised, and I commend the order to the House.