[Relevant documents: The First and Second Reports from the Joint Committee on Financial Services and Markets, Session 1998-99, HLSO/HC328 and HL66/HC465 and the Government Response thereto, HM Treasury, June 1999, and the Third Report from the Treasury Committee, Financial Services Regulation, Session 1998-99, HC73, and the Government's Response thereto, Fourth Special Report, Session 1998–99, HC347.]
I beg to move, That the Bill be now read a Second time.
The UK's financial services industry is one of our country's greatest success stories. It accounts for 7 per cent. of our national wealth and employs more than 1 million people. The City of London is one of the three leading global financial centres and it is rightly renowned around the world for its innovation and integrity. It is home to hundreds of foreign banks; it is a major insurance centre, and it is the global leader in foreign exchange dealing and eurobond issue and trading—a position that the Government will protect. The London stock exchange is the largest trade centre for foreign equities.
The City therefore contains some of the most formidable financial expertise in the world, but the UK financial services industry does not relate only to the City of London. Increasingly, financial services are a key component of local economies throughout the United Kingdom. Edinburgh is the UK's second financial centre, and Manchester and Leeds, among others, have thriving financial sectors. The health of the industry is a matter of concern to the whole country. It is vital to Britain's future as a modern, enterprising economy competing successfully in global markets.
The sector matters to every business seeking capital to expand and create jobs. Indeed, it is the availability and efficiency of an increasingly wide array of modern, competitive financial products and services, ranging from pensions and insurance to securities and derivatives, that allows UK industry to raise capital effectively and competitively and helps to make the UK an attractive place in which to do business.
The financial services industry does not only serve the needs of business. Millions of ordinary people also rely on its services. The sector matters to every household with an insurance policy and every person who is saving for retirement.
The proper regulation of the industry is a matter of national significance. In supporting enterprise and providing funds for investment, the financial markets use the savings that millions of people entrust to the industry. Investors will not be willing to buy products and entrust their money to the markets unless they have confidence in the stability of those markets and in the integrity of the providers of the products.
Individual investors themselves cannot of course monitor the minutiae of the markets, so confidence depends in practice on there being a system of regulation capable of safeguarding the public interest. We all—as investors, as consumers and as businesses—have a shared interest in a regulatory structure that is fair, clear and, above all, accountable. It is no exaggeration to say that getting the most efficient and effective means of regulating the industry is key to its future prospects for growth in a global marketplace that is becoming more sophisticated and competitive by the day.
The Bill provides a far-reaching and long-overdue overhaul of financial services regulation. It establishes the Financial Services Authority as a modern world-class regulator for a modern world-class industry. The authority will operate according to a philosophy based on light-touch regulation with protection where necessary and fairness throughout. The Bill will reduce regulation and increase accountability. In place of nine regulators, there will be one. In place of eight dispute procedures, there will be one ombudsman. In place of five compensation schemes, there will be one. One-stop regulation will be better for practitioners and fairer for consumers.
Is the Minister aware that the Law Society has expressed concern that the Bill may result in double regulation in Scotland because both the Law Society of Scotland and the FSA will be involved in such regulation? Will he tackle those issues, particularly as a commitment to do so was given in the Scottish Parliament by the Deputy Minister for Justice, who does not want double regulation?
I understand those issues and the concerns that have been expressed by the Law Society of Scotland and others. However, I remind the hon. Lady that the Bill is designed to effect new forms of regulation across the United Kingdom as a whole. The Financial Services Authority's remit will extend not only to England and Wales, but to Scotland and elsewhere, because we want common standards applied across the whole of the United Kingdom. As the hon. Lady is aware, there is a technical issue about whether amendments will need to be made to the Solicitors (Scotland) Act 1988, and if so, what the relevant procedures should be. We are in discussion with the profession, not just in Scotland but in England and Wales. We want appropriate regulation; we certainly do not want unnecessary and over-regulated authorisation procedures. We have already consulted about that. The FSA is in discussion with the profession in Scotland and elsewhere. I hope that, before too long, we can make satisfactory progress. I hope that that allays the hon. Lady's concerns and, indeed, those that have been expressed elsewhere—not just in Scotland but in England.
Will the Minister admit that he is talking about an effective retrenchment of devolution? Scottish lawyers who offer financial services, who until now have been subject to the Law Society of Scotland, will, under the Bill, be subject to the FSA, which is based in London—very far south of the Scottish border.
No, that is a misreading of the position concerning devolution. I know that the hon. Gentleman follows these issues very closely, so I am surprised that, on this occasion, he has got it wrong. He will be aware that issues to do with finance are reserved for this Parliament. Given his position and that of his party, I should have thought that he would support that. There is no retrenchment on this issue. As the hon. Gentleman is aware, however, appropriate regulation of solicitors, accountants and other bodies must be sorted out. That applies not just in Scotland but elsewhere. I assure him that there has been no U-turn on that issue.
The Bill fulfils the promise that the Labour party made before the election, in its manifesto for business promise—a promise set in train by the Chancellor in his statement in May 1997. My right hon. Friend announced, alongside operational independence for the Bank of England, that a new regulator would be created with responsibility for supervising all aspects of the financial services industry. The Bill gives the FSA the statutory basis and powers that it needs to be the world's leading regulator of financial services. In so doing, it establishes a modern regulatory framework that will stand the test of time and apply into the next century.
Change of the order that we are proposing has taken both time and effort. I make no apology for that; we need to get financial regulation right. That is why the Bill is the product of thorough and exhaustive consultation. I know that in some quarters, the word "consultation" invariably produces some sighs of cynicism, but in this case, such sighs would be misplaced.
We published the Bill in draft at the end of July last year. We have undertaken further consultation on key pieces of secondary legislation that are to be introduced under the Bill. In total, 222 organisations responded to consultation on the draft Bill. I take this opportunity to thank each of those organisations for their contributions, not least because there has been such a positive response to our proposals. It is worth reminding the House of the breadth of support that the Bill enjoys.
The Association of Unit Trusts and Investment Funds said, for example, that it welcomed the overall aim of the Bill to simplify the regulatory structure. The British Bankers Association said that the introduction of a single legislative framework for the financial services industry in the United Kingdom was welcome. The Futures and Options Association said that it supported the Government's policy of rationalising and simplifying the structure for regulating financial services. The Association of British Insurers said that it fully supported the objective of a single regulator. The Consumers Association said that it was enthusiastic about the Bill and saw a variety of advantages in a single regulator.
That consensus for change has also included the Select Committee on the Treasury, which held a brief inquiry into the Bill over the winter. I thank my right hon. Friend the Member for North Durham (Mr. Radice), who chairs that Committee so assiduously, for its work. The consensus also includes the Joint Committee on Financial Services and Markets, which was established in March under the chairmanship of Lord Burns. I pay tribute to the Committee for its excellent work, and particularly to the leadership shown by Lord Burns. As hon. Members are aware, the Bill is quite complex and technical, but the Committee managed to respond in remarkable detail, to a very tight timetable. The Committee has made a major contribution to a major piece of legislation, and the Bill is better for its efforts.
The Government have responded positively to most of the Joint Committee's recommendations. We have made several key changes to the Bill, especially in relation to the accountability of the authority and the fairness and transparency of its enforcement procedures.
The establishment of the Joint Committee and the proposed carry-over of the Bill to the third parliamentary Session are historic developments for the House. They demonstrate our belief in the Bill's significance. Now, however, it is time to start making progress. That is what the City wants. It is what the industry wants. It is what consumer organisations want. The Government are determined to maintain the momentum so that, by spring 2000, subject to Parliament's approval, a full set of FSA powers will be on the statute book. We intend to make as much progress as possible on the Bill in this Session, with a view to carrying it over into the next. We hope that, by working co-operatively with other parties in the House, we can meet that timetable.
Of course, there will be differences of view about the changes that we are making to financial services regulation, but one thing should be clear from the outset—no change is not an option.
It has long been apparent that the overlapping and inconsistent regulatory structures under the Financial Services Act 1986, the Banking Act 1987, the Insurance Companies Act 1982 and all the other legislation in this area were not delivering the standard of supervision and investor protection that the industry and the public have a right to expect. For example, the old system under the Financial Services Act 1986 had two tiers, with regulatory responsibility split between the old Securities and Investments Board and self-regulating organisations. That split has caused confusion for consumers and regulatory overload for the industry.
In any case, the old regulatory framework has been overtaken by events. I say that for two principal reasons. First, in today's world of integrated global financial markets, the old distinctions between different types of financial institution are becoming increasingly blurred. Nowadays, banks, securities firms and insurance companies all play in the same pond. But while the traditional sectoral boundaries are disappearing, the old regulatory structures have failed to keep pace. The result is the worst of all worlds—heavy-handed and confused regulation, with more than one supervisor, all with different rules and procedures, seeking to regulate the self-same firm. That is not just a recipe for confusion; it is costly and inefficient and, ironically, it can dilute the impact of effective regulation. It works neither to enhance competitiveness nor to improve transparency.
Secondly, the system is complicated enough for experienced professionals. What chance, then, for the ordinary investor who is faced with a veritable alphabet soup of regulation—the PIA, IMRO, the BSC, the different ombudsmen, the different compensation schemes? The trust on which successful financial services must be based is undermined when there is so much overlapping and confusion.
Of course there is a great deal of merit in the simplification and codification of all these things, but the Minister talked about the global aspect and about individuals. Is he satisfied that the new framework can cope with the dramatic growth of electronic communications networks and, effectively, the ability to trade in any stock market in the world from the internet site on one's desk?
Yes, I am. That is an important question. That is why the Bill seeks to introduce appropriate flexibility so that the Bill—once, with Parliament's approval, it is on the statute book—can stand the test of time. The hon. Gentleman might be aware that we have already consulted about certain exemptions from proposed legislation on financial promotions—legislation that is specifically designed to deal with the challenges that the internet and other forms of modern communication bring to the industry. I hope that appropriate flexibility is built into the heart of the Bill, in order to deal with modern challenges such as that. Those are challenges for the United Kingdom and for the industry worldwide. We can be proud our industry has adapted pretty well and that in some senses it is ahead of the game. However, it is important that we have a flexible structure that is not always tied down to specifics, so that legislation can anticipate precisely the future trends that the hon. Gentleman highlights.
Nor, as the personal pensions mis-selling scandal reveals all too clearly, has regulatory overlap prevented gaps from appearing in regulation. Clarity, accountability and transparency are the vital ingredients that are missing from the old regulatory framework. They are all the more necessary in the context of the pensions mis-selling scandal which so badly damaged the industry's reputation.
Of course the Government have taken action to find redress for those who suffered. To date, more than 401,000 people who were mis-sold a pension have been offered £2.7 billion of compensation by the industry. The FSA estimates that the final costs of redress could be £10 billion. However, the other impact, including the delay in offering people redress, has been on the confidence of ordinary investors in financial services products. Now more than ever they need to be confident that when they buy a financial product they will not face similar problems again. Investors also need to know that if they have a grievance, there will be simple, clear and effective ways of dealing with it. That is not the position under the law as it stands.
The old regulatory maze has not worked and is not sustainable. Both the industry and consumers deserve better. The Bill is designed to be fair to both. It will reduce and simplify regulation. There will be one regulator, one authorisation process, one compensation scheme and one independent tribunal. For the first time, too, there will be one set of objectives, functions and powers.
By simplifying and reducing regulation, the Bill will increase accountability. The creation of one powerful regulator must, of course, be balanced by the creation of new mechanisms to ensure that it uses its powers responsibly and accountably. The various consultations that the Government have undertaken have been particularly helpful. The changes that we made to the draft Bill strengthened the accountability framework under which the FSA will operate while allowing it to get on with the day-to-day job of effective regulation.
In the first place, the FSA will be accountable to Parliament and to Ministers. The Treasury will be able both to appoint and to remove its board. There are powers to commission statutory inquiries in the public interest. There will be an annual report from the FSA on how it has performed against its objectives and on other matters that the Government specify. Those reports will be laid before Parliament to aid scrutiny of the authority.
Secondly, the FSA will be answerable both to practitioners and to consumers. There will be an open annual meeting of the authority. There will be a majority of non-executives on its board. There will be a practitioner panel and a consumer panel, both of which will have to be consulted by the FSA and both of which will have a role in assessing the authority against its statutory objectives.
Those are not only necessary safeguards—they will help also to shape the nature of the regulatory regime for which the FSA will be responsible. There will be a light touch where possible and protection where necessary, with fairness throughout. The Bill avoids over-burdensome regulation that would serve only to stifle innovation and to increase consumer costs. Instead, it provides for regulation which is firm and fair: indeed, the FSA will be under a duty to demonstrate that the burdens that it seeks to impose are proportionate to the benefits that will result.
The Bill gives the authority effective powers to make rules and to enforce them, but at the same time it contains safeguards to protect individuals' rights and the principles of natural justice. A key part of our plans from the outset has been the new tribunal, set up by the Lord Chancellor's Department and run as part of the court service. It will be completely independent of the FSA, and the Bill provides a right to refer all the FSA's enforcement decisions to be considered afresh by it.
There is no question of the FSA acting, as some have alleged, as prosecutor, judge and jury. I should make it clear that the FSA cannot enter the premises of an authorised person without a warrant; nor will it benefit from the penalty income that it imposes; nor will it have powers to award itself costs. In other words, the Bill does not give the FSA the draconian powers that some commentators have rather mischievously suggested it does. Rather, the authority will have powers that are commensurate with the job that it needs to do. It will be accountable to Parliament and answerable to those whom it serves.
We are satisfied that the Bill is fully compatible with the European convention on human rights, and the Chancellor has signed a statement to that effect, as required under the Human Rights Act 1998. We have made changes to the draft Bill in light of concerns voiced by Lord Burns's Joint Committee, that the market abuse regime might be classed as criminal for convention purposes. We have listened to those concerns and have now included additional safeguards in the arrangements for imposing financial penalties when people abuse the financial markets. Today I can tell the House that we are publishing for consultation a draft order prescribing the markets to be covered by the new regime.
Clearly, there is a tricky balancing act to be achieved—between protecting the consumer and not hampering innovation and enterprise with excessive regulation. The consultation process has helped us get that balance right, not least by setting the FSA clear statutory objectives— market confidence, the reduction of financial crime, the protection of consumers and the raising of public awareness. That is a balanced portfolio that we will expect the FSA to reflect in all its work.
The objective relating to public awareness is a good example of the innovative way in which we envisage that the FSA will operate. Consumers enter into contracts for what may be complex financial products, often worth large sums of money, but about which they may understand precious little of the detail. However, not all users of financial products lack financial expertise—far from it. Many of them will be financial services practitioners themselves. In pursuing its objectives, therefore, the FSA must be proportionate. Clearly, those at the expert end of the consumer spectrum do not need protecting from their own kind, and to try to do so would be to over-regulate.
However, the vulnerability of some consumers in this sector is very real, as we all know from what happened with pensions mis-selling. Consumers need information so that they can make informed decisions to choose the most competitive products and the ones most suitable for their needs. That is why we have charged the FSA with the objective of raising consumer awareness, but that does not and should not remove responsibility from individual consumers for reaching decisions based on their own judgment.
Protecting consumers does not mean absolving people of responsibility for their investment decisions. It is of course the job of the regulatory system to ensure that customers have sufficient information to make an informed choice. Consumers have a right to that, but it is not the job of regulation to provide a guarantee that nothing can ever go wrong; sadly, it sometimes does. That is the balance that the Bill seeks to strike—a light touch where possible, and protection where necessary. The result will be a fair deal for the industry and for the consumer.
There is another balance to be struck. Modern light-touch regulation requires the industry and individual practitioners to look to themselves and to ensure that their own houses are in order. That is why, for example, the Bill takes a reserve power to regulate the sale of mortgages, but it will not be used without first carefully considering whether the industry's own voluntary code has been found wanting. We will regulate only if we are clear that that could make a difference to consumer welfare in a way that did not impose undue burdens on the mortgage industry.
I believe that that is the right approach. We look to the financial services industry as a whole to manage its affairs properly. Those firms that do will gain competitive advantage. Those that do not must know that they will face a regulator with real teeth. In particular, nobody should be in any doubt that we shall take a tough and resolute approach to City crime, malpractice and abuse. We have given the FSA proportionate powers to deal with those problems.
The Bill provides for modern, proportionate regulation, which will be firm but fair. In May 1997, when we first announced this approach, it was regarded by many as novel and by a few as unworkable. Two years later, it commands almost universal support as the right model for a dynamic, fluid and competitive international industry. Indeed—
I am extremely grateful to my right hon. Friend, and I am conscious that I am interrupting his flow. May I take him back to his reference to mortgages? He said that there will be a reserve power to regulate the provision of mortgages. He will be aware that many of his own hon. Friends would like that power to be used. So far, he has not referred to the provision of long-term care insurance, which is another important matter; nor has he referred to general insurance. It is not easy to separate the training, professional intermediaries and products that constitute long-term care insurance and general insurance on the one hand and those that will be regulated by the Bill on the other. Does he intend to clarify those matters?
I am grateful to my hon. Friend for those questions. May I deal first with the point about mortgages? He will be aware that the Council of Mortgage Lenders has now produced its mortgage code. It has been pretty well adopted by the industry and we want to see whether it works in practice. We shall not just wait and see, but shall monitor the process. We shall take statistics and information not just from the CML, but from the ombudsman concerned. If my hon. Friend and others have concerns about the effective regulation of mortgages, the Government will be happy to hear them.
On long-term care insurance, my hon. Friend will be aware that both Lord Burns's Joint Committee and the royal commission recommended that we regulate for long-term care insurance. We are looking at those recommendations carefully, particularly in the context of the royal commission's report. In due course the Government will respond to the royal commission's report and it is important that what we say is in line with what we are doing in the Bill.
Finally, on general insurance, my hon. Friend will be aware that schedule 2 provides for the regulation of a number of areas that are currently unregulated, including general insurance. We want to see whether the industry's own efforts, through the new General Insurance Standards Council, can safeguard the public interest in the way that we want. We want to give that a fair wind and, again, we shall monitor how well the industry puts its own house in order.
In all those cases, we shall take action where necessary, but we want a regulatory system that is in line with the appropriate principles of light-touch regulation, which offers protection where necessary but does not impede effective regulation of the industry. I believe that that is the right approach. I also believe that the approach that we are taking in the Bill, through a one-stop arrangement, is one that others will seek to emulate. Indeed, others as far apart as Ireland and Japan are now following the lead that this Government established in May 1997 when we first announced our proposals for the Financial Services Authority. There is little doubt that the trend that we have started towards regulatory consolidation will intensify in the future to reflect the parallel changes that are taking place in the industry.
The UK is leading the way in defining a new form of regulation for financial services industries worldwide. This is a modernisation that is long overdue. It is part and parcel of the Government's modernisation programme for our country as we prepare to enter the next century. Our future prosperity as a nation depends on the good functioning of our financial services industries. They are growing, not diminishing, in importance. Their ability to compete successfully in tough and competitive world markets relies on modern, firm and fair regulation. The Bill will create a regulatory framework that will enhance the standing and the success of the UK's financial service industry. In the FSA, the UK will have a regulator that will command the confidence of industry, of practitioners and of consumers. The Bill will create a successful world-class regulator for a successful world-class industry. I commend it to the House.
It might be thought that this Bill would appeal only to financial specialists, but it raises some important and broad issues of principle, including matters of human rights and the rule of law, the realities of international competition and the perils of over-regulation. It is therefore a substantial Bill that it is our duty to consider.
The Bill has had a somewhat delayed birth, despite its early conception in the weeks following the general election in 1997. I do not blame Ministers personally for that because several important changes have been made to the Bill and Ministers inherited a fluid situation. It now runs to 367 clauses, including 130 additional ones since it was first published. Bills have a tendency to expand the longer they are left, so on those grounds alone it is probably wise that we should legislate as soon as possible. Indeed, it is not the Opposition's intention to hinder unnecessarily the legislation in this House or in the other place.
The importance of the Bill is undoubted. As the Chief Secretary said, the financial sector is one of our biggest and most successful industries. It is a huge employer and generates colossal overseas earnings for this country. In many respects, the City is the largest international market in the world. When we talk about the City, we must be careful not to overlook the fact that financial services are transacted in every part of the United Kingdom, and the Bill will affect all those who buy and sell financial products. Also, Edinburgh is an important international centre in its own right.
The very success of the UK's financial services industry also makes it vulnerable. It is by definition operating in a very competitive global marketplace and the same forces that brought firms, banks and other institutions to this country could equally drive them away. They are highly sensitive to changes in taxation and regulation. We have been critical in the past about tax changes and we still want to know what the Government intend to do about the threat of the withholding tax to the City of London.
Regulation can be a deterrent, but when it is done well it can be an asset. We are anxious to ensure that the Bill sets in place a structure that provides a reason for people to come and transact business in the United Kingdom, not a reason for them to leave. Therefore, we believe that regulation should be minimal, but that is not an argument for no regulation or for weak regulation. Markets require rules. Some of the more brainless critics of the free market system allege that it is about the law of the jungle. That is the opposite of the case. There are no rules in the jungle, whereas the free enterprise system requires laws and rules. It requires defined property rights and it requires security of transaction.
We support the principle of a Bill that will provide for such a structure in this country. We support the aim of giving statutory cover to the Financial Services Authority. The authority badly needs that: it is operating with only partial secure legislative cover, which itself creates uncertainty in the marketplace.
Let me say in passing that we are not sure whether it is wise to transfer banking supervision to the FSA. However, as that has been done in the Bank of England Act 1998, and as we wish to move on, we shall not press the matter—although I hope that, if a systemic risk is posed to the banking system, the procedures for the FSA to co-operate with the Treasury and the Bank of England will prove adequate to the task. We certainly believe that the Bank had considerable expertise in this regard, and we are pleased that many of its staff have transferred to the FSA to do the same job.
With that proviso, we accept in principle the case, as advanced by the Chief Secretary, for consolidating a number of existing regulatory bodies. None the less, we have some major concerns. Overall, we want to ensure that the new regulatory system is an asset, and that it is effective in tracking down and dealing with dishonesty, while at the same time respecting the principles of British justice and providing fairness for the accused. In doing that, the FSA must be vigilant and not over-regulate. All public bodies have a tendency to expand their responsibilities, expand their powers and expand their expense. That is a natural dynamic in the public sector, but if it imposed extra costs on the marketplace and on savers, the consequences could be highly detrimental. The danger of what I call "regulatory creep" must be countered by the provision of safeguards in the legislation itself and the designing of countervailing pressures to stop that danger from becoming a reality.
How does the Bill shape up? The draft Bill published in 1998 was seriously flawed in a number of respects. In particular, it is now clear that that Bill could never have survived a challenge under the European convention on human rights—which, of course, is now to be incorporated into British law, giving members of the public a right to test its provisions directly in British courts without having to go to the European Court of Human Rights.
The earlier Bill was, however, a consultation draft, and it did provide the essential raw material for the Lords-Commons Joint Committee on Financial Services and Markets. The Committee was originally due to be set up in January and to report by Easter. In fact, it was finally formed in March. Despite the tight time scale on which it operated, and despite the delays, I think that it was an undoubted success. Much of the credit for that goes to its Chairman, Lord Burns, who conducted our proceedings so skilfully. I also thank the very able Clerks, who did a great job in creating and distilling the enormous amount of evidence, both written and oral, that the Committee received.
The Joint Committee had less than two months to complete its main report. That is why we concentrated on six areas, including the FSA's objectives, the scope of the legislation and the FSA's powers and procedures, as well as the knotty issue of market abuse and how that could be defined in legislation.
We were a little shocked—I think that I speak for a number of the members of the Joint Committee—when the Treasury suddenly landed on us another 100 clauses halfway through proceedings on the draft legislation. We were unable to examine them. To be fair to the Treasury, they were of secondary importance. Nevertheless, it is true that large chunks of the Bill remain completely unscrutinised, either by the Joint Committee or by any other Committee of the House. We will need to examine the Bill very carefully at every stage to ensure that the assurances that Ministers have given—in good faith, I am sure—are in fact reflected in the Bill.
I stress that the Joint Committee was a useful procedure. The House may like to do the same with other legislation. The subject lent itself particularly well to the procedure. It meant that, in a relatively unpartisan atmosphere, hon. Members could examine issues that did not fall naturally to one side or the other of a party political debate.
We noticed with regret that the Liberal Democrats hardly participated. I am glad to see the hon. Member for Twickenham (Dr. Cable) in his place now and look forward to listening to what he says, but it was somewhat surprising to us that the Liberal Democrats, who are usually so forward with their suggestions for innovative ways in which to scrutinise legislation, barely participated in the Joint Committee.
We had a stream of high-calibre witnesses, including trade associations, City practitioners, consumer groups, regulators, ombudsmen and lawyers. Indeed, we had two useful sittings with the Economic Secretary to the Treasury who gave the Government's view. Nevertheless, as I have mentioned, some matters still cause us considerable concern—I expect that I speak not just for Conservative Members but for Labour Members who participated, who may have their own points to put in due course. We will use the Standing Committee and Report stages to strengthen and amend the Bill in ways that we think are essential. I thank in particular my hon. Friend the Member for East Worthing and Shoreham (Mr. Loughton), the only other member of the Conservative party from the Commons on the Joint Committee, who brought particular City expertise to bear on the issues.
We were pleased when the Government announced that they accepted most of the Joint Committee's recommendations. As I mentioned, we will be vigilant in ensuring that they are actually carried through into the drafting, because there have been occasions when that was not the case. Solicitors, for example, noticed at an early stage that although they had received some assurances about the registration of their members in relation to their incidental financial advice, those assurances were not entirely carried through into the draft statutory instrument when it was published.
Our concerns about the Bill may be said to fall into two general areas. The first is the very wide power still vested in the FSA, and the danger that any concentrated executive power can lead to abuse. The second is the danger of over-regulation, with consequential damage to the United Kingdom's position.
On the first question—the FSA's power—a central part of the Joint Committee's second report considered whether the Bill was compatible with the European convention on human rights, or, indeed, with the basic principles of British law. It is very easy to appreciate people's concerns. The FSA is a private company. It enjoys substantial statutory immunity and has wide powers of investigation. It is also able to deprive people of their livelihood, to levy unlimited fines and to keep that fine income. Very few other bodies enjoy that amount of power and authority. It is therefore very important that those powers, which in many respects are necessary, should be circumscribed and closely defined by Parliament, and that the FSA should be accountable for the use of those powers.
The right hon. Gentleman mentioned the proposal that the FSA should be able to keep fine income. Does he accept that the Bill provides that the FSA is required to rebate gross to the regulated community any income from fines imposed on authorised persons?
Yes; I gladly accept that clarification of the position, of which I was aware. Perhaps I put the case in a rather shorthand manner, but it is still the case that the money will remain with the FSA—although, as the hon. Lady said, that will offset the fees levied on the regulated community. Whether that will satisfy all lawyers and observers is another matter; but certainly the Government have moved on the issue, as they have on others. I mentioned the matter only because it was critically commented on by senior legal figures, including an appeal judge. Therefore, the use to which the money will be put is an important issue.
The FSA sometimes, in some evidence sessions, took refuge in assurances that it would always use its powers reasonably. I believed the FSA's chairman and senior executives when they gave those assurances—I have a very high regard for those executives whom I got to know during the proceedings—but that does not entirely satisfy participants in the market, who may be on the sharp end of the FSA's powers of investigation and prosecution. Many institutions and individuals will be dealing with comparatively junior FSA members, and they want to know that those good assurances will be fully reflected in the FSA's working practices at every level.
Another point is that people at the FSA could change and the regulatory environment could alter. Happily, we are in a situation in which, generally, those who have bought savings products have seen them do quite well. Generally, we are enjoying a bull market. However, those who legislate have to consider the possibility that the atmosphere could change completely. If the stock market or the property market went into a prolonged decline, the atmosphere would alter, and those who had bought savings products could feel resentment or feel that they had been mis-sold those products. They could look for people to blame, and the FSA could come under pressure to look differently at those who originally sold the products in good faith.
It is therefore important that we include those good intentions in legislation, and limit and define the powers that we expect the FSA to deploy.
My right hon. Friend is touching on one of the Bill's most important aspects—learning lessons from the past. Does he agree that those who give advice and conclude business have to know that, at the time they do so, that advice and business complied with the regulatory regime? Only in that way will there be no question of retrospective judgment on the quality of the advice given or the product purchased.
Yes; my hon. Friend endorses my point. It is always tempting, with the benefit of hindsight, to revisit decisions taken and perhaps alter judgments made in good faith.
The Government accept many of these observations, and there is genuine intent to put the safeguards into law. That will certainly be our intention in Committee. The Government's first shot at the Bill was seriously at odds with the requirements of justice. I do not know whether that was due to mistaken legal advice or because they did not fully recognise or understand the implications of adopting the European convention on human rights, but they have moved on a number of those issues. For example, the financial services tribunal is to be given more status and independence, which I welcome, but several senior legal figures had grave misgivings.
It might help hon. Members if I draw attention to the evidence given by Lord Hobhouse, who is an appeal judge. He picked up the point, which was raised by one of my hon. Friends, about the international dimension and the possibility that savings products could be sold on the internet or electronically; indeed, people in other legal jurisdictions could somehow come under the Bill's provisions. He was also concerned that there was not sufficient clarity or certainty in the part of the Bill relating to market abuse. He summed that up in these words:
All those things when one adds them together add up to a scheme for punishing people who may be abroad, who may not be taking any active part in any market in this country, who have not done anything illegal, whose conduct is innocent, who are under no duty to act where they are accused of failing to act and nevertheless punishing them for such conduct.
That was some of the most devastating legal evidence that I have ever heard being given to a Committee of the House and, because of it, the Joint Committee went on specifically to examine the compatibility of the draft Bill with the European convention. I happily acknowledge that the Government moved on that issue, and the market abuse provisions will now apply to a more narrowly drawn category of market participant. The Chief Secretary said that an announcement on that was due today.
The right to silence—or the fact that compelled evidence should not be used in subsequent proceedings—is to be clarified, and those accused of market abuse will be eligible for a form of legal aid. In other words, the safeguards of the criminal law will now apply to that part of the Bill—I welcome that—but my hon. Friends and I are still concerned that the offence of market abuse is still not clear. What is now clause 95 is still, in many respects, quite dangerously ambiguous.
The Government have responded by saying that they will not be relying entirely on a clause in the Bill to define market abuse but will be relying also on a subsequent code, which is still to be published. That is all very well, but a general problem is that too much of the Bill will depend on subsequent rules published by the FSA or subsequent regulations published by the Treasury as secondary legislation.
Does the right hon. Gentleman believe that, in a market as dynamic and global as that for financial services, it is possible to have a watertight definition of market abuse?
I accept the part played by secondary legislation, and I certainly do not suggest that all the matters covered by the Bill should be dealt with in primary legislation. Legal witnesses have observed, however, that if someone is to be prosecuted, he must know where he stands and must be certain of what rules he may have broken. As the House must judge the effectiveness of the clause on market abuse, it would be highly desirable if we could see the codes of conduct and the secondary legislation—even in draft—before we proceed much further.
In too many respects the Bill is merely a framework. We must think about what may occur subsequently before we take an overall view. I hope that the Government will accelerate publication of draft legislation so that we may take a full view. The same applies to the FSA. More than 20 consultation papers have been published, though fewer than five have received responses. We remain in the dark about the totality of the powers and rules to be exercised by the FSA.
Should the Government get the Bill wrong on European convention on human rights matters, the consequences would be extremely serious. We can say little this afternoon about that hurdle—the Government erected it and they must jump it because they incorporated the convention into British law. Whether the Bill complies with the convention remains a matter of legal dispute. I hope that the Government are right, because a successful challenge to the Bill could torpedo almost the entire regulatory system.
We are concerned to ensure that the Bill's powers are balanced by fairness. Several past cases were brought to the Joint Committee in which regulators had used their powers in an overbearing or arbitrary way. We were not able—indeed, it was not our duty—to inquire into those cases, but we are concerned to ensure that there are safeguards in future. If something has gone wrong in the past, we must ensure that it does not happen again. Some of the cases were disturbing, and we should keep them in mind as we consider the Bill.
We wish to examine in particular the idea of statutory immunity, the granting of which by Parliament is a serious matter. The police do not have statutory immunity; nor do doctors, or the Serious Fraud Office. However, we are giving immunity to the FSA. There is a case for some statutory immunity, but I am less sure that the Bill is exactly right in providing the FSA with immunity from prosecution while it acts in good faith. That does not cover examples of negligence. The Bill does not give the complaints investigator—to some extent an alternative to prosecution of the FSA—powers to grant compensation. If, through negligence, the FSA causes financial loss to an institution, the complaints investigator should be empowered to grant monetary compensation.
The Joint Committee believed that the FSA should not be accountable to Parliament only through a Minister. We need to find a way to make the FSA accountable in some respects to Parliament itself—perhaps to the Treasury Select Committee or to an ad hoc committee constituted for the purpose.
The Joint Committee also suggested splitting the role of the FSA's chairman and chief executive. That suggestion was not directed at the present incumbent, Mr. Howard Davies. It was suggested that after he relinquishes his office, future chairmen and chief executives should be two different people, which would act as a check on any unnecessary concentration of powers and would strengthen the position of the chief executives on the FSA board.
That suggestion met with opposition from existing members of the FSA, but I note that the Hampel committee on corporate governance, which is a successor to the Cadbury committee, recommends splitting those posts in corporations of any size. Perhaps it is at least arguable that what is desirable and urged on private industry by the Government should also apply in the public sector. Again, that is an issue to which we shall undoubtedly return.
I have already mentioned over-regulation and costs, but I want to stress that this is not merely a question of the competitive position of the United Kingdom; it is also about creating a genuine savings culture among the population at large. As for the City and the United Kingdom financial services industry in general, they require and deserve that the FSA should report regularly on compliance costs that it could be transferring to them through additional regulation. Those matters should not only be calculated but reported on at least annually in aggregate and also in comparison with jurisdictions in other countries. We also believe that competitiveness, or competition, should be elevated from a principle under which the FSA operates to one of its objectives. That would be one of those countervailing forces to the regulatory creep to which I referred.
The dangers of excessive costs do not apply only to the industry. If we are to create a real savings culture as an alternative to the welfare culture, it is important for people on all income levels to invest and buy savings products. If the result of over-regulation is to make doing so more expensive, it will have the opposite effect.
We have been critical of the Government on savings. We criticised the £5 billion a year raid on pension funds that was a feature of their first Budget in 1997; we criticised the abolition of tax-exempt special savings accounts and personal equity plans; and we criticised the fact that the 10 per cent. threshold for income tax would not apply to savings. If the Bill leads to any increase in costs for savers, it will certainly be a further blow to savings. If that happens, it will not only deter savers from saving but will put them off seeking good financial advice.
To some extent, the signs are already not entirely encouraging. The Law Society of Scotland pointed out that the FSA proposes that a sole Scottish solicitor practitioner should be charged a minimum £1,000 for authorisation with the FSA, compared with the existing charge of £135 levied by the society. That is a proposed increase of 640 per cent. If that is replicated in other parts of the savings and financial services industry, the results will be extremely serious.
We have already heard an intervention from the now deserted Benches that are usually inhabited by the Scottish National party. I was interested, but not entirely reassured, by the Chief Secretary's answer. It has been pointed out—indeed, it was emphasised by my hon. Friend the Member for East Worthing and Shoreham—that, on the face of it, financial services regulation will undergo a form of reverse devolution. Matters that are currently handled by the Law Society of Scotland will now come south to London. I do not know whether that was the intention, but it has not been explained to those north of the border.
Indeed, further confusion was engendered by a debate in the Scottish Parliament last week. The Bill, which applies to the whole of the United Kingdom, will require amendment to the Solicitors (Scotland) Act 1980 and also to Scottish bankruptcy law. However, those are matters for the Scottish Parliament. In that short debate last week, the Deputy Minister for Justice in Scotland seemed to imply that those changes to Scottish legislation would be made not by the Scottish Parliament but by this Parliament. Will the Economic Secretary clarify that matter when she replies to the debate? We do not want the Bill to become a wrangle between the two Parliaments. We gave many warnings that, if two Parliaments were set up in a unitary state, such confusion and overlaps would be created with, at best, the possibility of ambiguity—at worst, there could be confrontation between two Parliaments, both of which felt that they had jurisdiction in the matter.
Not only will great resentment be created if those Scottish legal and financial practices have to send large amounts of money south to London to pay their membership fees, but the fixed membership fees and charges that my right hon. Friend mentioned will hit smaller firms disproportionately. That can give only two results: either the costs will be passed on disproportionately to the consumer, or many of those businesses will withdraw from the market altogether and there will be less competition and less choice for the consumer.
My hon. Friend is right. Just as all taxes are eventually paid by individuals, so too charges and fees are eventually borne by the saving public. An escalation in fees will deter the very savings habit that we all want to encourage.
I have said enough to show that we shall not oppose the Bill's Second Reading. We have several deep-rooted worries about it, and our suggestions for its improvement will be tabled as amendments. In respect of timing, we shall not unnecessarily delay the Bill, if it is true that the Government have accepted the recommendations of the Joint Committee and have implemented all of them in the Bill. If that has been done, as we have been assured, there is a good case for the Bill to go to Committee in short order and to be carried over into the next Session of Parliament without having to start the process all over again in November. The Bill has already been delayed enough, and there is considerable uncertainty in the marketplace. We certainly want to improve the Bill, but we shall not impede it.
In conclusion, it is in the interest of all hon. Members that there is a regulatory system that serves the market and all who buy and sell in it. Let the House, and the Government, reach out for a regulatory system that will be the asset to the United Kingdom that I have already urged. The system should be the scourge of wrongdoers, but, at the same time, a model of how to balance effectiveness with fairness. If that is the Government's aim, the Bill certainly has our support.
Since the general election, the Labour Government have introduced a large number of constitutional reforms. Some would say that, through the Select Committee on Modernisation of the House of Commons, one of the most revolutionary changes has been the innovation in which many of those present in the Chamber this afternoon have participated: the pre-legislative inquiry, especially one of both Houses of Parliament. I had the privilege to be the deputy Chairman of the inquiry into the Bill before us. A Member of Parliament is asked to do all sorts of things, some dull and boring, others exciting and challenging. Participation in the pre-legislative inquiry fell into the exciting and challenging category.
We should not underestimate the revolutionary nature of such an inquiry, for in many ways it upsets our traditional methods. Some of us are sick to death of the yah-boo element in the House of Commons—one builds up a certain distaste for it after a while, even while continuing to participate when necessary—but the inquiry offers a process whereby at least two cultures are blended. Working with Members of the upper House was an education, because their approach to Committee work differs from ours: they were surprised by our approach, and we learned a great deal from theirs.
The experience was a valuable one. If I want to stay on-message, I should not say this, but it should be acknowledged that some of the hereditary peers gave the Committee excellent quality advice that I would not have wanted to be without. I am sure that, in due course, we shall find new sources of high-quality information. However, for the sake of honesty about the quality of the debate, it has to be said that knowledge in the upper House of how this country's financial institutions work is of greater quality than that of the lower House. That is due to the breadth of experience available in the upper House, especially on the academic side, such as that of Lord Eatwell, Lord Poole and others.
We had an interesting time. The mix of the two cultures was productive and we gradually learned to work together in a positive manner—even more positive than I have experienced on Select Committees in the past. There was a task in hand that we had to achieve in a relatively short time: we were given two months, extended by an extra month to examine the Bill's compliance with the European convention on human rights. Politicians will go on as long as they are allowed to, so even if we had been given six months, we would have said that there was not enough time. However, the discipline of having two months plus one struck me as sufficient to enable the job to be done.
There is one caveat, which was strongly expressed by Lord Burns, whose chairmanship I greatly valued. I do not know whether he was gamekeeper turned poacher, or poacher turned gamekeeper, but it was interesting to see him struggle with the change between the two roles, which at times had to happen quite quickly. I am sure that some of the parliamentarians taught him a little in that respect, although he taught us a great deal in terms of technique and tactics. Our approach to the task was constructive: we had an end in view and a timetable to keep, and we got on with the task.
Those of us who had spent more time dealing with industrial concerns than with the City became far more aware of the importance of the Bill. Not one of us failed to learn something of great value about the contribution that the financial services sector makes to the life of this country. That sector contributes at least 6.4 per cent.—and probably more than 7 per cent.—to national income in terms of gross domestic product. It employs 1.17 million workers, although that is probably an understatement. If we compare that with the 21.5 per cent. of gross domestic product that flows from manufacturing industry—I must always make that point—which employs 5 million people, we can see how important the City and the financial institutions and services are to this country.
The challenge is to ensure that we introduce regulation that delivers the right environment that allows the industry to grow. It is a fascinating industry because it will grow only with good regulation. It will not grow without regulation because that is an essential quality of the United Kingdom, and of London in particular. One does not always win arguments about what language should be in a Bill, so one derives quiet satisfaction when an amendment that one really wants is accepted. I was most grateful when my fellow Committee members said that an environment of integrity is important to the workings of the City of London. That reputation for good regulation, honesty and integrity on the part of all who work in the City makes all the difference.
Things will go wrong in any complex area of our economy. Pensions mis-selling is one shadow of the past, and some of us remember well what the Maxwell experience did to the City. Morgan Grenfell was another unfortunate experience, as was the Bank of Credit and Commerce International. Any large sector must learn from five or six such episodes. In some ways, the regulatory system that we are introducing in this Second Reading has benefited from the failures of the past. The incoming Government knew—and the seeds were sown with the previous Administration—that there had to be a dramatic change in the quality of regulation. Achieving a market of integrity was a prime concern.
This is a particularly unique sector. An Opposition Member who knows a hell of a lot about information technology and electronic communications—and who is not in his place at present—pointed out that we are introducing a regulatory regime at a time when the industry has never moved so quickly. There is an accelerating pattern of change in all our lives—and it is particularly fast in the financial services area. It is a global market. Instant transactions can be made electronically, which means that London and Britain—this country benefits from our use of the English language and our financial expertise—has a wonderful opportunity. We must make every effort to ensure that this fine industry grows and expands.
At the same time, we must be aware that regulations that are set in concrete will not measure up. A financial services authority must have the flexibility to move quickly and to change in order to respond to enterprise. This is a very enterprising sector—but those who would make mischief are also enterprising. If a regulator cannot move quickly, the mischief makers will not be caught. We must strike that fine balance between the needs of an expanding industry and the need for flexible, quality regulation.
Before I refer to the nature of this Bill, I point out that we must get it right. I have been in the House long enough to have seen an awful lot of bad legislation passed. I acted as a shadow spokesman on home affairs in the proceedings on several large criminal justice Bills. They were awful, and the Administration had, with a red face, to abandon large sections of many of them. I do not want to mention particular instances—some were mentioned in the Special Standing Committee. On two or three occasions, I was the Opposition spokesman on prevention of terrorism Acts. That legislation was originally introduced in haste by a Labour Government, and experience demonstrates that much of it was wrong.
Much ordinary legislation is, despite every effort, poorly conceived, thought through and delivered. The process undergone by this Bill is a great contrast. The draft Bill was introduced in July 1998; the period of consultation on the Bill was extended and, as the Chief Secretary said, there were 240 responses. The Select Committee on the Treasury held a short inquiry, followed by a Government response to the consultation process and the establishment of the Joint Committee.
Hon. Members should not forget that the House of Lords Delegated Powers and Deregulation Committee had a valuable input into our report and expressed wise opinions. The Joint Committee report was published two months later and the Government then responded to it. They asked us to extend the Joint Committee's work to assess the Bill's implications for the European convention on human rights. The Government then responded to that assessment. All that happened before Second Reading.
This is complex legislation and we want to get it right, and I cannot think of anything more that could have been done to achieve that. The Bill has been through an excellent process, and I hope that the Government and all successive Governments will learn that it is a model for a better way to deal with complex legislation. This Second Reading is, therefore, a milestone, and I hope that it will be a beacon—if I may mention beacons—in legislative performance. I hope that many other Bills undergo such scrutiny to the same effect.
I do not want to go back over ground that was properly covered in the opening remarks of Members on both Front Benches. We all know that the Joint Committee decided to specialise—we considered particular accountability and statutory objectives and principles. We had amusing and interesting debates about what is an objective and what is a principle, which is more important and whether they should be listed in alphabetical order or prioritised. We think that we got it right in the end.
The Joint Committee also did a great deal of work on discipline, enforcement and the tribunal. We concentrated on six areas. I fear that the only people who will read our reports will be those writing PhD theses about 20 years from now, but they will find that we made a substantial difference.
Working parliamentarians understand the issues arising from legislation because they immerse themselves in them. I am concerned, however, because I read in the so-called serious press comments about our work which were totally inaccurate and often superficial. One newspaper attributed to the right hon. Member for Wells (Mr. Heathcoat-Amory), who opened the debate for the Opposition, remarks that he did not make in the Joint Committee. The Daily Telegraph inaccurately reported the remarks of the Chairman of the Joint Committee, which he then had to correct in a letter to that paper. The tone of commentary, particularly in The Daily Telegraph, was superficial. The City editor and his journalists could not have run their stories had they read the material and acted professionally. That is not a total condemnation of the media; one or two people read the stuff and wrote reports on the basis of what was said in Committee rather than what was suggested.
A report in The Times said that our Committee's two main recommendations—after all the time taken—were to split the job of chairman of the Financial Services Authority from that of chief executive and to bring mortgages into the proposals. The inference was that, since the Committee failed on those two matters, it had wasted its time. Nothing could be further from the truth. If one reads the recommendations, one finds that the Government have responded to the majority of them—the serious stuff—and changed the Bill in the right direction, which all members of the Committee appreciated.
I say in passing that, as I sat through discussions on the posts of chairman and chief executive, I did not regard the issue as a priority. It is an issue that perhaps would be nice to consider following the retirement or moving on of Howard Davies; it was not seen as one of the matters on which we would go to the wall.
The Government have responded very positively on mortgages by including in the Bill the possibility of addressing the issue later. We will not have to return to primary legislation. Given a fair view, the issue may be revisited if the structure and code do not work. So, let us sometimes say what really happened in a Committee and not what some journalists imagine happened.
A long time ago, I used to be a member of the Public Accounts Committee, before which civil servants were hauled and intensely questioned. Committee members would try to wrong-foot them and embarrass them. Another revolutionary aspect to this Committee's approach was that we did not play such games. We ran the Committee like a seminar. Given that, when I worked for a living, I was a university academic, people may say that that was a result of my malign influence, but that was not so. The Committee decided that proceedings would be run like a seminar and that six—or even eight—people would join us to give evidence and participate.
Without looking around the Chamber at places to which I should not even allude, rather unusually, six or eight senior people from the City, the regulatory world, the ombudsman's office and elsewhere contributed to a positive discussion, and intervened on each other. Indeed, even the person in charge of the Bill from the Treasury and those from the FSA intervened in the discussion. What a different, innovative way in which to approach the legislative process. It was excellent, and achieved results.
There was a quiet satisfaction when we saw that the Bill, especially as amended, met with increasingly wide acceptance. Of course there was some variance on some parts; everybody wants a little more than he is going to get. Indeed, I received a very nice letter from the Consumers Association only on Friday, suggesting other changes. It will of course have an opportunity to continue lobbying when the Bill is in Committee. It is amazing to think that we are only about to begin that process. Although there is still an opportunity for change, there is a fair degree of acceptance that this important Bill goes in more or less the right direction. We should be reasonably content with that.
Of all those who gave evidence, no one objected to or found a problem with the notion of a single regulator. No one wanted to defend the old method of self-regulation, because it was not really self-regulation but what was described as "a self-regulatory process". The broad view was that we wanted to move to a fully statutory system.
Very strong voices also argued that we should include practitioners and consumers, to give them a real hold on the Bill and the FSA. I believe that, as a result of all our recommendations and everything that happened during our investigations, the role of the consumer and the practitioner were enhanced. I believe that practitioners and consumers went away fairly content with the changes that they had managed to persuade us—and that we had managed to persuade the Government—were along the right lines.
To conclude, I admit that one journalist got it right on 30 April, after we had completed our investigation and publicly launched our report. The leader in The Independent that day said that we had improved an entirely practical and relatively enlightened piece of legislation and helped to turn it into a practical and workmanlike piece of legislation. I believe that we have helped the Bill to be the Bill that it should have been—the Bill that it wanted to be—although the legislative process was difficult. I do not believe that we have created a bureaucratic monster, but I take what the right hon. Member for Wells said about watching the FSA grow and seeing how things work.
The test of any regulatory body is how it carries out its task from day to day. In this instance we have had a great deal of experience, because the FSA, under Howard Davies, has been operated under the previous legislation, albeit in a rather contrived way. At least we have something on which to make a judgment. I believe that many of us feel reasonably content about those early months of practice.
I think back to the experience under the previous Administration of setting up the Environment Agency. I applaud many of the things that have happened in the overarching Environment Agency, but real problems with the agency have not yet been sorted. I am sure that we shall not have a similar experience with the FSA.
The Bill has the makings of good legislation. It is a vital piece of legislation, so I was delighted to hear the right hon. Member for Wells say that, provided certain standards and criteria were met, the Conservatives would accept its carry-over to the next Session. The new FSA must be in place if we are to face the next century with a regulatory system that will allow this important industry to grow.
The focus on one ombudsperson is also important. Many of our constituents are very confused about what happens when they want to complain about their pension or insurance policy—or perhaps, some day, their mortgage. We have all met people in our advice surgeries who have been the casualty of poor financial advice that they were given more than 30, or even 40 years ago. People visit me and say, "Mr. Sheerman, I worked for a certain well-known company in the town"—perhaps an engineering company—"and I thought that I was in a good pension scheme, but the only thing that that pension delivered was the difference between getting any state benefits and being in the poverty trap." Over the years, many people have not been given enough good-quality information on which to take the important life decisions that affect every aspect of life—on pensions, mortgages and long-term care. I believe that the regulatory system that the Bill will erect will be flexible enough to ensure that such good-quality information is provided.
I especially like that part of the Bill which ensures that the FSA gets out there and helps to educate the British people. I sometimes say, having something of an environmental interest, that we conduct lifecycle analysis for products, but it is time that we conducted lifecycle analysis for human beings, because the decisions that people take early in life can change—and sometimes warp—their opportunities for the rest of their life. Financial services are especially important in that regard. Anyone who makes the wrong choices early on, as a result of being given bad guidance and advice, gets a pretty rough deal later on, in terms of a happy retirement and much else. We did not spend a great deal of time on that part of the Bill which relates to the provision of financial information, but I feel passionately that it is very important.
I want to express broad support for the Bill, whose philosophy and whose architecture of financial regulation reflect a broad consensus. I appreciate the extent to which there has been broad and extensive consultation with practitioners and with Parliament, and the fact that the Government have responded to very many of the anxieties that have been expressed.
My reservations—I shall raise them in Committee—relate primarily to the exclusion of mortgages. As the hon. Member for Huddersfield (Mr. Sheerman) has just explained, there are reserve powers in the Bill and that omission may well be rectified; but that omission sends wholly the wrong signal at this stage by defending the rather discredited principle of self-regulation in the one area that is almost certainly of most concern to most of our constituents.
There are broad areas of consensus. I do not believe that any hon. Member present would argue either of the two extreme philosophical positions on financial regulation. No one is arguing for an increasingly severe, more onerous and dirigiste system of regulation. Equally, no one is arguing for laissez-faire. Quite properly, the right hon. Member for Wells (Mr. Heathcoat-Amory) drew attention to the fact that the liberal market approach to financial services involves a rules-based system, not a free-for-all.
There are major market failures, which are broadly recognised. In what are loosely called the wholesale markets, the main aspect that requires regulation is systemic weakness. History is littered with examples of one unsound or corrupt institution dragging down many soundly managed and safe institutions. Regulation is necessary to prevent that from occurring. However, as I believe the Government now acknowledge, that should be done on a light-touch basis. In their response to the Joint Committee on Financial Services and Markets and others, they acknowledged the need to ensure that compliance costs are comparable to and competitive with those of other financial markets. I believe that that point is understood and non-controversial.
In many ways, the most important area covered by the Bill is consumer protection. I believe that we all share the view that the biggest abuses often occur in the consumer markets. They occur because of a vast disparity and asymmetry between the bargaining power of people selling complex financial products and that of consumers. Consumers are often ill informed—for a very good reason—about products that can be understood only with a great deal of specialist expertise. Much abuse takes place in those markets.
So strong regulation is needed—strong regulation which retains the principle that, ultimately, purchasers are responsible for their own actions, and which does not increase compliance costs to such an extent that poor consumers are forced out of the market by the additional costs of regulation. I believe that the balance in that area has been roughly struck.
I have not sensed a great deal of philosophical difference between Government and Opposition regarding the Bill.
On the architecture of regulation, I acknowledge the consensus that we do need a unitary regulator, and that it was wasteful and inefficient to have a substantial number of separate regulators and ombudsmen. That is a helpful advance. In the Select Committee, we tested in some detail the argument that the differing requirements of the wholesale and retail markets should be reflected in the structure of the regulator. Some of the academic witnesses argued in favour of having two separate systems of regulation that maintained that distinct philosophy. The issue was pursued to exhaustion and I think that at the end of the process we all accepted that it made much more sense to keep the regulatory structure intact under one roof.
The hon. Member for Huddersfield talked about the many stages of pre-legislative consultation in which the Government were involved. That consultation and involvement was commendable. It is part of a wider process of improving legislative scrutiny. I was severely over-extended as a result of simultaneously trying to participate in the pre-legislative scrutiny of this Bill and in parallel efforts to deal with the Immigration and Asylum Bill and other measures. In passing, I reassure the Conservative spokesman, the right hon. Member for Wells, that in the next Parliament, when Liberal Democrat numbers more accurately reflect our party's strength in the country, he is more likely to be outnumbered than he is to be pining for our company, as he was in this instance.
One of the key issues that emerged in our discussion related specifically to the legal issue in respect of human rights. It is essential that the Government correctly determine that issue. I have been slightly taken aback by some of the comments of those in the City, which in some instances have come near to implying that the London dungeon has been reopened for normal business and that people in the City will be racked for their financial activities. That is hardly what we are discussing.
Those of us who are non-lawyers have always wondered whether the legal system is far too lenient towards those who perpetrate fraud. Many of us think that on a commonsense basis there is much to be said for testing whether prosecution should take place and thereafter considering whether harsh penalties should be imposed. The somewhat ambiguous wording at the end of the Joint Committee's report on human rights implies an understanding of that dilemma. However, we want fraudsters to be prosecuted and penalised severely. That may conflict with a demanding test of human rights legislation. We understand the dilemma with which Treasury solicitors are grappling.
I have referred to the areas where we enjoy broad common ground. I shall now say a few words about the area in which I think the Bill is deficient and where there lies an important issue of principle, which is mortgage regulation. The Government have been subjected to conflicting advice. The Council of Mortgage Lenders and the Financial Services Authority, for administrative reasons, have been anxious to keep mandatory regulation of mortgages out of the Bill. However, there has been—this should be recorded—substantial pressure in the other direction. The Consumers Association has argued strongly for mortgage inclusion from the outset, as have the Financial Advisers Association and some banks and building societies, which see no reason for being exempted at this stage. I shall set out some of the reasons why I think that the Government are making a mistake in this instance and why they should, perhaps, rethink their position.
First, the Government's position will undermine much of what the Bill is designed to achieve. Instead of unitary regulation, banks—at the early stages, at least—will be responding to two separate sets of regulation. There will be a self-regulatory system and another system for other aspects of their business, which will involve the FSA. The Government's position appears to contradict their confidence that a statutory system of regulation is appropriate.
There are many severe market abuses perpetrated by some of the largest players. I am sure that right hon. and hon. Members are familiar with these abuses, from their postbags. For example, the system of repayment penalties is extremely onerous in some instances. I have nothing against the National Westminster bank and I bank with it, but its system of compensation penalties involves about a third of the loan. Extremely large penalties are imposed on customers who for good reasons wish to pay mortgages early.
As for building insurance—new competitors in the market are pointing this out rather brutally—there is about £1 billion of over-charging as a result of linkage between mortgage lenders and building insurers. Many mortgage protection products offer very bad value. It is reported that on average a 40 per cent. commission is paid on mortgage protection products. There are excessive linkages in endowment policies. That is a longstanding problem with the mortgage industry. There are also arrangement fees.
At the bottom end of the market there is something akin to loan sharking for non-status borrowers that operates with little regulation. That system that should be brought within the regulatory framework as a matter of priority.
In practice, because self-regulation has been put in place, large lending institutions may be happy to see individual financial advisers put into the dock for serious mis-selling—for example, the excessive promotion of inappropriate endowment products. However, many of the problems relate to the big lenders. That is why they should be regulated rather than allowing them to regulate their own industry.
Many of the problems in the mortgage market relate specifically to the extent to which it has been demutualised. That is an issue that we shall be pursuing in the Treasury Select Committee over the next few weeks. New forms of banking competition have come into the housing market and as a result many of the players are trying to widen their margins. They have to pay dividends, whereas mutual lenders do not. This is giving rise to many practices that are disadvantageous to borrowers.
In some respects the code is probably not satisfactory. The Council of Mortgage Lenders has done its best to produce one. To take a simple example, there is no league table, as there is for pension funds, of performance. The results of such a simple test should be available to consumers. I hope that the Government will think again. Clearly we shall be examining these matters in Committee. The right signal will be sent—I do not think that there is an enormous gulf between us on this issue—if it is clear to the mortgage lending industry that it will be subject to the same degree of supervision as other players in the market.
I am interested in what the hon. Gentleman has to say. In a way, it is a shame that he was not able to elaborate on his comments in the Joint Committee. During three months of intensive sittings he made two cameo appearances of half an hour each, I believe. As for the inclusion of mortgages, how does he think that the Financial Services Authority will be able to cope with 1.4 million mortgage transactions a year? An enormous number of staff would have to be taken on. How can the hon. Gentleman give an opinion at this early stage on the voluntary code set up for the Council for Mortgage Lenders, which has already brought about many successes, all of which he has conveniently forgotten to mention?
The hon. Gentleman has made several points. If he were a member of the Select Committee he would know that I dealt extensively with the mortgage regulation issue during the cross-questioning. The hon. Gentleman referred to 1.4 million mortgages. Regulation would operate through a series of test cases. It is ludicrous to imagine that every mortgage transaction would be subject to individual regulation. Of course that would not happen. There is already a bureaucracy within the mortgage lending industry. It is a voluntary one, but it exists. I think that it is implied in what the Government have been saying that the transfer will take place, be it in six months or 12 months. I am arguing for it largely because of the signals that we need to send to the industry that the transfer takes place now. I do not see the gulf that the hon. Gentleman is describing.
I have already had a fistful of critical comments from the various players in the City about the Bill. We shall come later to our proposed amendments to it. Like the Conservative Opposition, we shall approach the issues constructively. There is no reason to hold back the Bill. I hope that the Government will do what they have already done to a commendable degree: listen to the criticisms that emerge and seek to improve what is already a well above par piece of legislation.
The importance of financial services to the United Kingdom's economy and the high standing of that sector in the global context have been well rehearsed in the Chamber this afternoon. It is essential that the sector should be seen to function efficiently and properly. In recent years there has been damage and some loss of confidence as a result of bad practice.
There is no better example than pensions mis-selling. Such scandals not only affect the standing of financial services but ruin the lives of people who, in the case of pensions mis-selling, saved and invested in good faith, determined not to rely on the state. The Government are to be congratulated on tackling that abuse, but some of the pensioners concerned have already died and some have not yet been compensated. For those people, the torment and worry have been incalculable. There has been widespread recognition that change was necessary, and the Bill and the setting up of the Financial Services Authority have been the response.
I remind the House of the case of the Child Support Agency. No one disagreed with the principle, but the legislation was deeply flawed, with the result that the lives of many women, children and men have been severely damaged. That will continue until new legislation comes on stream. The problems with the CSA in its current form are due to the lack of consultation and pre-legislative scrutiny.
The right hon. Member for Wells (Mr. Heathcoat-Amory), the shadow Chief Secretary to the Treasury, described the original draft Bill in July 1998 as deeply flawed, and did so again this afternoon. However, the draft Bill was clearly intended as the start of a process that would produce much more effective legislation. Indeed, the right hon. Gentleman acknowledged that the process has been useful.
I read in this month's edition of Securities and Investment Review that Howard Davies had described the progress of the draft Bill as taking the scenic route, which I think is a pretty good description, and it is right that that should be so.
My hon. Friend the Member for Huddersfield (Mr. Sheerman) described the scenic route that the Bill took—as it moved forward, the Government offered their response. Not only did the Bill move into the Joint Committee, but responses from the Select Committee on the Treasury and other Committees were taken on board.
Much has been said about the Joint Committee and its role as a prototype. It achieved incredible results over a short period and enjoyed excellent cross-party co-operation. As a relatively new Member in an entirely new set-up, I was struck by the genuine desire on the part of all members of the Joint Committee to get the Bill right. That is extremely important.
The shadow Chief Secretary displayed a positive attitude towards the Bill this afternoon. I read in a newspaper—I know that I should not believe everything that I read in newspapers—that he said that it had rather restored his faith. For those reasons, the Opposition agreed to the carry-over, which is remarkably helpful in dealing with legislation of this magnitude.
I pay tribute to the Chairman of the Joint Committee, Lord Burns, who was exceptional in the way in which he handled the Committee and ensured that we met our tight deadline.
At the heart of the Bill is the objective of consumer protection and the principle of caveat emptor—buyer beware. That means that the consumer cops it if things go wrong, so he or she should take reasonable precautions. I welcome the fact that the Bill recognises the distinction between the wholesale and retail sectors of the market. I particularly welcome the acknowledgement that, within the retail sector, there are vulnerable consumers and also consumers who are much more able; and the fact that the vulnerable consumers need good advice and accurate information for their protection.
The accountability of the FSA is crucial, and the consultation process has been extremely helpful in strengthening it, in the ways that my right hon. Friend the Chief Secretary outlined earlier. It is right that Treasury Ministers should appoint board members and apply Nolan standards, that the majority should be non-executive, that there should be consumer and practitioner panels, that the FSA should have regard to their representation—it is essential that those two wings of the financial services spectrum be represented—that the chairmen of those panels should be subject to Treasury approval, and that an annual report should be published.
In cases in which the FSA has acted in good faith, it should have immunity, provided that complaints procedures are strengthened. The Government have acknowledged that the investigation of complaints should be effective and independent of the FSA. The FSA is therefore required to maintain an independent investigator, whose initial appointment and its renewal are subject to Government approval. That is absolutely right.
The FSA annual report is clearly important for the transparency and accountability of the authority. The Bill does not require a report on regulatory burdens and compliance costs, but the Government expect the FSA to take them on board and would not hesitate to use reserve powers accordingly. We should all be concerned to ensure good value for money.
With regard to discipline and enforcement, the Government acknowledged in March that internal disciplinary processes lacked fairness and transparency, and that the FSA would be able to act as prosecutor, judge and jury. There clearly needed to be a separation between those investigating complaints and those responsible for decisions. The Government responded by ensuring that investigation would be separate from enforcement, and that the adjudication tribunal would be part of the court service.
With reference to costs and fines, the Government accepted the recommendation that each side should bear its own costs, so as not to deter firms from defending themselves, but that the tribunal should have broad discretion to award costs. Checks and balances will operate. I believe that the Government's conclusion on fines is right: they should be rebated to the regulated community, so that there is no incentive to maximise fine income. Consultation will follow. I favour arrangements to even out the volatility.
The last aspect to be considered by the Joint Committee was the nature of the civil justice regime and how that would sit with the European convention. Lord Stein's comment that
the new regulatory system must be just and must protect convention rights but…in order to serve the interests of the public it must be effective
was a principle reflected in the Government's response to our deliberations on the disciplinary regime.
Discipline is clearly confined to a regulated group. The Government therefore argue that it is a civil matter, and take a pragmatic approach to it. The Government's legal opinion was extremely helpful in providing case law that was quite convincing in support of their approach.
On market abuse, I am pleased that the Government have recognised that they are in danger of venturing into criminal territory, and have provided additional safeguards to ensure that those being prosecuted are covered in that respect.
I, too, am concerned that mortgages are outside the scope of the Bill. Buying a property is the biggest financial transaction that most people make in their lives, and the range of products on the market is increasingly complex and confusing.
I was worried about the investigation carried out by Suffolk trading standards officers earlier this year into the implementation of the voluntary code. Their findings were appalling. I am encouraged that the Government are reviewing how the code is working, and I know that they will look not only at the Council of Mortgage Lenders but at information from the ombudsmen. However, will they also consider asking a sample of trading standards departments to check the effectiveness of the mortgage code? That would be extremely useful. I congratulate the Government on agreeing to publish the review, as promised to the Treasury Select Committee when we carried out our inquiry.
The Government have taken on board a considerable amount of feedback and recommendations. I congratulate them on the extent to which they have consulted and on the model that they have set up for consultation on such large Bills. I slightly disagree with the right hon. Member for Wells, who said in his concluding remarks that the Bill had been delayed for too long and that he looked forward to its Committee stage. The Bill has not been delayed; it has deliberately taken a scenic route to ensure that it is as robust as possible. The impact that it will have on the financial services industry and on individuals will be significantly improved as a result.
I am glad to take part in this debate and to share in the welcome for the Bill. I approve of the way in which it has been brought before the House, with examination by a Joint Committee of both Houses before its final publication. I welcome the changes that have been made.
However, we should not underestimate the magnitude of what the Bill does. It is a blockbuster Bill, which will give to a single organisation the powers of nine current organisations, eight ombudsmen and five compensatory schemes, all rolled into one. That is an extremely big task. To a substantial degree, the Bill has an enabling structure. It contains some necessarily elaborate and complex schedules, and a great many regulations will be created following its enactment to establish an effective structure.
I, too, pay tribute to the work of the Burns Committee, but its work was necessarily focused and limited. I was not a member of that Committee, which I understand focused on six different issues. A significant number of other issues need to be examined in Committee, however, and if I find myself participating, I hope that I will be able to help in that examination.
I shall do no more than touch on a number of significant points today. The Burns Committee rightly focused on the human rights aspect, and the Government have gone a significant way to explaining their position and meeting some of the fears. We shall have to return to the question of human rights. Today, however, I want to point out that the Government—and this applies to any Government—are ambivalent towards human rights. They do not seek to deprive people of human rights: they simply wish to hold all the cards. Be it at the Treasury or at the Department of Health, the Government seem to go for the civil or the criminal method depending on which gives them the better cards.
In the area of financial regulation, the Government believe—and I think they may be right—that the civil structure is the more desirable. I am glad to see that, as a result of the Burns Committee's recommendations, they have added some safeguards to the Bill. However, we shall wish to scrutinise carefully how those safeguards will work, because the difference between civil and criminal in this area is highly technical.
I speak as a practising barrister. Now that I am free to do so, human rights is one of the fields in which I practise. Through my professional work—I declare an interest in this respect—it has come to my notice that the Department of Health, for example, is taking the criminal route and seeking to give enormous powers to the Medicines Control Agency and to reverse the burden of proof on to those who are regulated by the agency, so that they must prove that what the MCA has done is unreasonable. That puts the cards in the Government's hands because the MCA is an offshoot of the Government.
The Treasury has its own offshoot under the Bill and is putting a great deal of civil power into the hands of that new regulatory body. We shall want to scrutinise carefully what it has done. Having read some, although not all, of the advice of my learned friend Sir Sydney Kentridge, I feel that the difference between criminal and civil depends to a considerable extent on European Union law and cases dealing with doctors, financial advisers, and so on, which are held to be regulatory. When we examine this matter, we must look at the substance, not the shadow.
Clauses 24 to 27 deal with the enforceability—or rather, the unenforceability—of agreements. Although I should like to do further work on this matter, I think that we are going down a dangerous route in the Bill, which says that, if a provider is unauthorised, its agreement will be unenforceable. That is dangerous because in the financial world there are sharks on both sides of the fence: there can be shark providers, but also shark purchasers. Rich men and women across the world trade with the City of London, or with any regulated organisation. If their investments, which are necessarily and properly risky, go wrong, they will look for ways to get out of their deal. They will look for technical errors that render the deal unenforceable.
I hope that the Government and their officials will look again at this matter to see whether a wiser course is perhaps not to make things completely unenforceable but to make them unenforceable except by the leave of the court. I hope that the Minister is taking this point in. That means that justice will be able to prevail in each individual instance.
I am not making a small point. I am talking about confidence in the City of London. If the City of London is governed by a regulatory system which means that sharks who do business with it can get out of their bargains too easily, we shall lose confidence in our system. I simply flag up that point for further consideration.
The question has arisen whether the chairman and chief executive of the Financial Services Authority should be the same person. We should continue to keep that question carefully under review and revisit it. We are talking about high-calibre people. We have a chairman and chief executive, for whom I have a high regard, who obviously has his own notions about how he will steer his ship. My comments are in no way personal to him. However, as the years have gone by, I have formed the view more and more strongly that nobody should be unanswerable to somebody else. Everybody should be accountable and everybody should have to look over their shoulder. Although much is said about accountability—as it is about transparency and modernisation—the meaning is not entirely clear.
There is a considerable advantage in having a chief executive, however good he is, who also has a chairman to whom he must answer, and in having a chairman who, however excellent he is, has a chief executive whom he has to control and for whom he is responsible. The advantage of having the two, especially when setting up a large and complex organisation such as the FSA—made up of nine different organisations headed by high-calibre people dealing with sophisticated concepts—is that the City, those regulated by it and those outside it, especially independent financial advisers who can work in small firms, have in the chairman somebody whom they can approach with their anxieties but who, if he is not instantly responsible for the issues, can take them up with the chief executive so that the system can work better. The cleverest people in the world cannot do everything, and dividing the jobs would make the structure of the organisation stronger.
During the Bill's progress, we should consider the question of the degree of immunity. On the whole, I favour giving immunity to a body such as the FSA. If such a body does not have immunity, the difficulty is that it is always wondering how much a decision will cost it, which leads to inhibited regulation. The organisation must not be above the law and it must be possible to obtain an injunction against it, but it could be asking too much of it to require that it must always be careful not to cause damage to a financial institution—the damages could be enormous.
I made a similar point in a speech in 1981 about Lloyd's, of which I was a member at the time and in which I declared an interest. I was in favour of its having immunity, although I have considered my position sometimes since. I still think I was right, because although Lloyd's has run into difficulties since, they were not so much structural as in the interstices of the organisation.
In the 20 years I have been in Parliament, we have greatly increased regulation of the financial market, but we have not improved the documentation that goes to the consumer. I have recently been reading mortgage documentation for a member of my family. Mortgages do not yet fall under the system in the Bill, but whether documentation is for a mortgage—in this case, with a market leader—or something else, the Plain English Campaign has made it easier to realise what one does not understand. The documentation is cross-referenced and it is difficult to find a single piece of paper that sets out the key elements of the bargain. One finds aspects of the bargain that leave even a commercial lawyer like me scratching his head. When I ring up to try to ask a question, I do not get a very satisfactory answer. We know only too well what someone who is not a commercial lawyer, or otherwise familiar with the financial market, does with such documentation: they do not even attempt to read it. They are right not to do so, because they would become completely befuddled.
It is a good challenge for the new organisation, its chairman and its chief executive to try to simplify the documentation. I recommend following the example of the national conditions of sale for house purchase, which provide on one or two sheets of paper a number of essential and standard clauses. The price of the house and other details are on a separate sheet of paper. It should be possible for almost every commercial contract to have standard clauses that will apply, with non-standard clauses in special type or on another sheet. At the moment, the documentation is grossly over-complex.
The Bill will give us an opportunity to make the improvements I have mentioned. We have much to scrutinise and I look forward to taking part in that. I wish the Bill well, but we have a lot of work to do.
As many hon. Members have said, the Bill has followed an interesting route to get to its Second Reading, which has shown how good the pre-legislative process is: it is a better Bill as a result. That is not only because of the work of the Joint Committee, of which I was a member, but because of the speed with which the Government responded to our proposals, and their willingness to accept our points.
The nature of the debate in the Joint Committee was healthy and constructive. The debate tonight is beginning to resemble those in the Joint Committee in its character and constructiveness. However, the Joint Committee did not have enough time. As a consequence, there are some aspects of the Bill that it should have considered but did not. I personally regret that we did not have time to make more international comparisons and find out more about other regulatory regimes.
The process was constructive and will provide a useful model for other Bills. It was good for the Bill and good for Parliament. I echo the comments of the right hon. Member for Wells (Mr. Heathcoat-Amory) in praise of the Clerks. The Joint Committee had to absorb an extraordinary amount of information and we had to complete reports at short notice. The processing of our work was always done on time and the results came back to us with impressive rapidity. The excellent Clerks who served that Committee cannot have got very much sleep during the eight weeks for which we were in session, and I hope that they have caught up with it now.
The Bill is large, comprehensive and important and, although it also deals with some narrow and complex financial services issues, we must not lose sight of its importance. It is an important Bill for an industry that plays a crucial role in the health of the UK's economy, and it is an important Bill for consumers—the millions of individuals whose financial health depends on good-quality financial services and proper regulation. That makes the argument for good regulation, which is as much in the interests of the companies which make a living providing the services as it is in the interests of the consumers whose future living depends on the vitality and security of the industry.
The industry comprises many large and wealthy institutions, although it is volatile, with much merger and acquisition activity. The biggest players are global, and the products that they bring to the market are dynamic and, in many cases, highly sophisticated. In such a climate, it is difficult, as the Joint Committee came to appreciate, for the regulators to keep up with the nature of the market—and if it is difficult for them, we should realise how difficult it is for the consumer, who is in most instances far less well-equipped.
Moreover, the trends in the financial services market are global. During its evidence sessions, the Joint Committee heard a great deal about the need to safeguard the competitiveness of the City of London as a financial centre—and rightly so—but we also heard a fair few grumbles from companies about possible over-regulation. We heard stories about companies which, for a large number of days in the year, had to meet compliance requirements, or contained regulators engaging in some sort of activities. That struck some of us as rather negative.
I was not really convinced by that, because I think that competitiveness depends on sound regulation. We should reflect on what the impact of too many big scandals in our financial services would be on the competitiveness of the City of London. It would deter companies from being here—let alone the damage that it would do to consumer confidence.
I think that we are in line with many other major financial centres around the world. If anything, the regime introduced by the Bill may strike us as being a little on the light side when we look at some of the other major financial centres. I wish that we had had more time to engage in such instructive work in the Committee. In the United States, for instance, the Federal Reserve is busy sharpening its supervisory focus on the top 20 US banks, because it is worried about systemic risk. Part of the reason for that is the fact that the top 20 own 80 per cent. of the assets of the banking system.
The Federal Reserve is continually monitoring management information in all those banks. It has direct access to their internal audit processes, and—usually on a daily basis—inspects the credit-risk models that they employ. That contrasts with some of the action that we expect the FSA to take, and we should bear it in mind when considering whether the Bill amounts to over-regulation. Indeed, some analysts of the United States market are now saying that the regulatory climate in which certain big US financial companies live is more akin to that inhabited by public utilities than to that of private sector corporations.
The core of the Bill is intended to tidy up our regulatory structure. I think everyone recognises that we currently have too many different regulators. The present situation is costly, inefficient and confusing. I do not think it surprising that most companies that gave evidence to the Committee approved of those core measures, and the introduction of the one-stop regulatory regime.
Nevertheless—although the Bill does that, and also brings a good many bodies together under one roof—important aspects of financial services are not included. Some—such as mortgages, long-term care and certain features of insurance—have been mentioned today. We have discussed mortgages in some detail. It has rightly been said that they constitute one of the biggest areas of the public's involvement in financial services, in that they represent a long-term commitment, along with savings and investments in private pensions. It is therefore important for the public to have confidence in the regulation of the mortgage business.
Mortgage products themselves are increasingly complex. It is becoming harder for consumers to make choices. Some 1.8 million new mortgages are taken out each year; there is a large turnover, and a lot of new purchasing. For two years the Council of Mortgage Lenders has operated a code of practice, but we have already discussed in the House whether it is sufficient, and we have heard evidence of problems with it. I think that we should expect the inclusion of mortgages in the remit of the FSA before long, and I am pleased that the door is open for that. Clearly, the FSA will have to expand if it is to deal with mortgages: it will need to recruit. I think, however, that it may be able to transfer expertise, rather than having to start from scratch.
Understandably, debates such as this tend to concentrate on practitioners, but the consumer has a considerable stake in the Bill. I think that the position of consumers will be greatly enhanced, as good regulation is clearly in their interest. The FSA has a consumer panel, and, as a result of pre-legislative scrutiny, the panel's role has been strengthened. It has been made a statutory requirement, and the appointment of the chair is subject to Treasury approval. That provides an important extra guarantee of independence from the FSA.
As I said in the Committee, I am still worried about the panel's budget. The panel is starting life with a budget of £420,000. I was pleased with the FSA chairman's commitment that the budget would be considered early in the FSA's operation. once its statutory basis had been conferred—but there is an important reason why I think the panel may be under-resourced.
The Bill specifies one of the FSA's objectives as raising public awareness of financial issues. That is an important objective, but, given that the FSA is putting £1.5 million into it, while the consumer panel is receiving a third of the amount, I feel that there is a bit of a mismatch. I should have thought that the panel would have a role in helping the FSA to deliver its obligation, and I hope that it will be more involved in that work before long.
Consumer confidence will also be helped by league tables. I am pleased to note that, as a result of the Bill, we expect more league tables to be brought into play by the end of next year, to help consumers make informed choices about the financial products that they are buying. That will be useful, alongside CAT—charges, access, terms—standards for individual savings accounts and, eventually, for stakeholder pensions. All that will increase consumer confidence, which in turn will boost the United Kingdom's reputation and that of the financial services and products that we provide.
Accountability was another important subject of the Committee's deliberations. It, too, is crucial to both practitioner and consumer confidence. After all, the FSA will be one of the most powerful financial regulators in the world. It has the status of a private company, limited by guarantee, and, as has been said, it enjoys statutory immunity from suits for damages. I am sure we all understand why that is the case, and should continue to be the case. Nevertheless, some companies expressed fears that the FSA might be prosecutor, judge and jury, and in that context many issues surfaced in regard to whether it complied with the European convention on human rights.
I think we have established, as a result of the improvements in the Bill that have arisen from the Committee's work, that those fears are unfounded. The Treasury will inspect the FSA's economy and efficiency. The authority will have to publish an annual report, including an auditors' report. There is to be an independent investigator. We have established that the tribunal is one of first instance. There is now no incentive for the FSA to maximise its fine income, and there is a far greater and clearer separation between discipline and enforcement. I hope that the industry will find all that sufficient to offset its initial worries about the FSA's statutory immunity.
It is worth pointing out that statutory immunity is quite common in such supervisory regimes. It applied to the Bank of England when it performed those functions. It is also worth remembering that the FSA is not immune from acts of bad faith, criminal prosecution, judicial review and, of course, challenge under the European convention on human rights.
Pre-legislative scrutiny has improved the regime in relation to market abuse. The industry cannot now argue convincingly that there is too much uncertainty about what constitutes abuse. In any case, it is crucial to have strong deterrence against market abuse; it is one of the essential purposes of the regime. Like all other aspects of the Bill, it is in the interests of consumers and companies alike.
Current criminal sanctions are not sufficient on their own; they cover only a limited range of defined abuse such as insider trading. It is clear that the anti-abuse regime needs to be broad because of the dynamic and constantly moving nature of the market, but, as we have already established in the debate, it is right that practitioners should know where the boundaries of abuse lie—hence the code of market conduct, which will be an important document for all practitioners.
As a result of our pre-legislative scrutiny, we have improved the degree of certainty and clarity. The industry should be reassured about that. We have established that the Bill provides an absolute defence where a person engages in behaviour that the code specifically states does not amount to abuse. Furthermore, where someone can prove that they took due care, their subsequent conduct will not be deemed abusive.
In their latest response to the report, the Government have given an undertaking that the code will be supplemented by further explanatory information, all the time trying to improve clarity and certainty for practitioners, so the accusations or fears of double jeopardy and so forth have been exaggerated. Today, we have heard from the Government that even further clarity will be offered. That will no doubt receive the attention of those who serve on the Standing Committee.
We have managed to succeed in keeping a breadth to the anti-abuse regime, which is essential, while improving its certainty and clarity. It will always be a balancing act. It will be difficult to get it absolutely right, so the code of conduct will have to be kept under constant review as markets and products change.
Overall, we have erred generously towards the interests of the industry. The only people worrying are those who may consider sailing close to the margins of abusive behaviour. They are the people who should worry—that is how it should be.
All in all, therefore, the Bill contains a coherent model and constructive regime. It will be good for consumers, the industry, the City of London and the United Kingdom economy.
I am grateful for the opportunity to contribute to the debate.
I begin, as the hon. Member for Warwick and Leamington (Mr. Plaskitt) did, by saying that there is no question but that the debate is crucial to everyone in the country: not only consumers but our financial services industry. The Chief Secretary to the Treasury reminded us that we have a world-class industry. Indeed we do, but we should remind ourselves that it became world class because of the regulatory regime in the City of London. Despite difficulties in the retail sector, the general regulatory structure that we have enjoyed in the City—as my hon. Friend the Member for Arundel and South Downs (Mr. Flight) knows from daily working experience—has enabled innovation to flourish and brought to London major centres of banking and insurance, and an increasing number of financial services from not just Europe, but throughout the world.
The all-party group on insurance and financial services, which I have had the fortune to chair since 1992, has had numerous meetings with the industry and market, and received many representations from them over quite a number of months. I say genuinely to those hon. Members who have contributed who were members of the Joint Committee that the industry's view is that they have done an extremely good job. It is much more relaxed than it was perhaps six or nine months ago. There is still some apprehension about what the rule books will look like and how the new regulatory regime will work in practice, but it is fair to place on record the industry's gratitude for the work of Lord Burns and his Committee of members of both Houses.
The representations and meetings that the all-party group has had have been, as they are by nature, rather more informal. I sometimes wish that we had the resource of the clerical assistants that the Joint Committee has had. None the less, the group has had an interesting exchange of views and has helped to bring progress on the Bill to where it is today: it is much improved.
I want to speak mainly from the perspective of my long experience of working in the insurance and financial services industry, which has gone on since 1970, when I left the police. I worked for Equitable Life and National Provident Institution, which have both been much in the news lately in circumstances that, when I was working for them, no one would possibly have considered likely, but that is how things move on.
Since 1973, I have been an independent financial adviser and insurance broker. Even since being elected to the House in 1987, I have retained a directorship as both an IFA and insurance broker. I am president of the Institute of Insurance Brokers. More important in terms of what I will discuss, for eight years, I have been an elected member of the Insurance Brokers Registration Council, the regulatory body for insurance brokers. I am currently the council's treasurer.
The Bill still leaves uncertain the regulatory arrangements for the independent sector, whether IFAs, intermediaries in the general insurance market or insurance brokers. I want in all genuineness to convince the House that, although my comments will clearly be influenced by special pleading—it would be impossible for them not to be because of the experience that I have had—equally, I plead for a clearer regime for consumers. At the moment, we have a recipe for confusion. We are still a long way off from being satisfied that the consumer interest has been adequately protected.
The hon. Member for Newcastle upon Tyne, Central (Mr. Cousins) asked the Chief Secretary about mortgage and general insurance regulation. I understand entirely the motivation for wanting to retain a self-regulatory approach in mortgage advice. I understand the objectives of the general mortgage code and, equally, the philosophy that lies behind the request for the general insurance industry to find a more comprehensive regime.
Therefore, on principle, I should like to make it clear—particularly to my hon. Friend the Member for Arundel and South Downs—that self-regulation is undoubtedly to be preferred. Nevertheless, in advice on both mortgages and general insurance, we have to face up to the fact that significant hurdles will have to be overcome if we are to achieve a satisfactory self-regulation regime.
One hurdle will be the major concerns about enforcement. In the general insurance market—particularly among insurance brokers and intermediaries—there is real anxiety that regulation will become merely a distribution tool, with standards being enforced and discipline imposed by withdrawing agency. Currently, such withdrawal underpins the mortgage code, as lenders will end one's ability to arrange mortgages if one does not comply with the code. Although some might think that such a sanction would be satisfactory for the general insurance market, its possible use causes anxiety as it would not be underpinned by statute or enforced transparently.
There is also a great possibility that the arrangements would create confusion among consumers. In opening the debate, the Chief Secretary mentioned one-stop shops. However, the retail financial services market does not have anything like a one-stop shop.
People who seek mortgage advice from intermediaries—who have to be registered with the Insurance Brokers Registration Council only if they call themselves a broker—will receive advice on life assurance; perhaps on investments; on whether they require health and sickness cover; on unemployment benefit, if they have been laid off work; and probably also on insuring building and contents.
The Government's proposals, however, would entail advice on those various matters falling into three different regulatory categories. Advice on mortgages, for example, would be covered by the general mortgage code, whereas advice on life insurance policy would have to be authorised advice—so that the firm would have to be authorised directly by the Financial Services Authority. Advice on other general insurance products—setting aside the issue of whether health and sickness insurance cover will be covered by the FSA-authorised regime—would be regulated by the General Insurance Standards Council.
Such an arrangement does not come close to resembling a one-stop shop. However, that arrangement would have to be used every second of every minute of every hour of every day, in every high street across the United Kingdom. Although the system might work, we have to face the fact that it cannot be characterised as a one-stop shop. Moreover, if firms are authorised—as their stationery letterhead will state—"by the Financial Services Authority for investment advice", and if something subsequently goes wrong with a mortgage or general insurance policy, consumers will not understand why the proclaimed FSA authorisation does not apply to those products.
There may be some scope for doing something about those potential problems. Clause 111—which I do not remember reading in the draft Bill—on non-regulated activity rules, states that the FSA may make rules
applying to the carrying on of non-regulated activities"—
such as mortgage and general insurance advice—
by authorised persons".
I hope that my hon. Friend the Member for Arundel and South Downs will explore that issue in Committee.
I should like to make it clear to the Minister that the proposed arrangements will certainly not enable a one-stop shop, and that there may not yet be a case for giving the FSA power directly to authorise all those activities. However, there must be a case for ensuring that regulation of non-authorised activities is not merely adequate, but equivalent to current best practice and appropriate to risk. There must be a clear complaints mechanism, with access to redress and compensation. There is clear provision for such a mechanism in dealing with authorised products, but it is not clear how such provision would apply to non-authorised activities.
As a regulator for eight years with the Insurance Brokers Registration Council, I have experience of how such concepts and provisions work in practice. I also think that the Financial Secretary, and certainly the Economic Secretary, will know that I am disappointed that the Government have announced that they are minded to repeal the Insurance Brokers (Registration) Act 1977 and to get rid of the IBRC.
Page 4, paragraph 12 of the Bill's explanatory notes states that the Government continue to hold the view that substantial parts of the 1977 Act, which established the council, should be repealed after the Bill's provisions are implemented. It is fair to say that the Bill, which I have read, currently does not provide for repealing those provisions. I should therefore be very grateful if the Minister could, either today or in a letter, tell me by what process the Act's provisions would be repealed.
When replying to the hon. Member for Newcastle upon Tyne, Central, the Chief Secretary said that the Government supported the concept of establishing a General Insurance Standards Council. Although the Minister may be aware of it, other hon. Members may not know that that proposal has not met with universal acclamation within the general insurance industry. Some people might like us to believe that the proposal has received such acclaim, but the truth is that many insurance brokers and non-broker intermediaries have serious reservations about it.
I should like to establish some facts. The first one is that brokers effectively volunteer to be registered on the list, so that, if they are disciplined and struck off, they may continue in business if they call themselves not insurance brokers, but consultants or intermediaries. Over the years, many small firms have been disciplined by the council and chucked out, but—if insurers were prepared to do business with them—remained in business.
In fairness to the Association of British Insurers, I should say that, gradually, many insurers are whittling away at the number of less reputable firms. Nevertheless, people are on the list entirely voluntarily; no one is forcing them to be on it. Conversely, those who give investment advice must be authorised by the Personal Investment Authority and the FSA.
Although the Government announced last year that they intended to repeal the 1977 Act and to get rid of the IBRC, as council treasurer, I am able to tell the House that more than 80 per cent. of insurance brokers have paid their 1999 membership retention fees. I believe that they have done so not only because they believe in the council and in high professional standards, but because they wish to belong to a discrete body that provides a badge of that professionalism.
Recently, and partly at my instigation, the Institute of Insurance Brokers conducted a survey of the approximately 2,700 insurance broker firms who remain on the register. Over 50 per cent. of firms responded to the survey, of whom 86 per cent. said that their preference would be to keep the council and not to be forced into the General Insurance Standards Council. If the firms that have not paid their membership fee are taken out of the survey, the figure rises to more than 90 per cent.
I make it clear to the Minister that we are not objecting to the creation of the GISC. On the contrary, insurance brokers welcome that and over the years have campaigned time and again for standards to be raised in the non-broker general insurance retail market. We welcome all moves to raise standards, especially in the non-broker sector. Equally, we are not saying that all insurance brokers are saints and angels, because clearly some are not, but the majority are brokers because they want to be seen as professional.
Why should we be so concerned? I remind hon. Members that, through the 1977 Act, Parliament provided the structure under which the Insurance Brokers Registration Council operates. Although that structure was not perfect, and we would have liked some changes to have been made over the years, it is important to understand why we believe that it has strengths. The majority of people on the council are elected to it by their peers and we have a clear disciplinary structure. Disciplinary hearings are held in public and there is a right to appeal to the High Court.
A broker who was struck off last year has appealed to the High Court because he thinks that he has been wrongly done by, which is far superior to simply taking away someone's agency because we say he has broken a rule that we created. There is no transparency and nothing that can inspire confidence in such a system. We have a proper code of conduct, enforceable client fund segregation and a grant and compensation scheme.
I have had the onerous duty—I am not sure that it was a pleasure—of having to agree with the FSA that the council will raise a levy of all registered brokers to contribute towards the compensation of losses from insurance broker firms that are in default in respect of about 130 cases of pensions mis-selling and the loss of more than £1 million through staff embezzlement at a firm up in Scotland. The professional indemnity insurance does not cover that so we have raised a levy and people are paying it. We have proper monitoring of professional indemnity insurance and solvency. My hon. Friend the Member for East Worthing and Shoreham (Mr. Loughton) said earlier that it will cost £4,000 for a solicitor in Scotland to be registered with the FSA, but it costs an individual insurance broker £60 and an authorised firm £325 to be on our register each year, so reasonable cost is clearly a factor.
I have outlined all that to make the point that the GISC is miles away from showing such equivalence. I welcome the fact that the chief executive of GISC, Chris Woodburn, who has been recruited from another regulator, has said that he wants to meet IBRC standards. That will be a tall order without a statutory structure. The other serious point is that we believe that he should concentrate on the non-broker part of the general insurance market because that is where the problems are.
I would wager that Members of the House have constituents who have complained about an insurance product that was sold to them and for which they could not get redress. A major reason for that is that such policies are sold not by insurance brokers, but by nonregistered intermediaries. Such people are independent and are not the responsibility of the insurer. Consequently, there is no redress, no compensation and no complaints mechanism. Standards clearly need to be raised, but how they will be enforced without statutory underpinning and the transparent disciplinary process to which I have referred remains an unanswered question. I do not believe that the threat of agency withdrawal is an adequate solution.
There is concern that regulation will become an instrument of controlling distribution and I suspect that, if hon. Members across the House share a concern, it is not the globalisation of the industry, but the fact that the big get bigger and bigger by the day. Three or four of the biggest firms control a great volume of business, which is not a bad thing in respect of ensuring that we can compete in world markets. Competitiveness has been one of the factors behind some recent mergers of general insurers and I saw in my paper yesterday that CGU and Royal and Sun Alliance may merge. Such a company would be a big player.
The danger of having self-regulation instead of regulation underpinned by statute with transparent standards that apply to all is that the big boys will get away with it and the little guys will get hit for six every time. That is not only me speaking. I am not sure whether the hon. Member for Edmonton (Mr. Love) was present, but the all-party group had dinner with the Association of Insurance and Risk Managers the other day and its concern on this very point was how the GISC will deal with malpractice in the big broker firms. We know how it will deal with the little guys.
The situation is not satisfactory and a lot of work has to be done. I hope that the Minister will listen to a constructive solution. We are not against the GISC—we welcome it—but it has to be given time to put right what needs putting right in the rest of the general insurance market. It also needs time to show that, although it will not be part of the FSA, it will be able to meet consumer needs and expectations wholly satisfactorily. The need for statutory regulation would then be avoided.
In the meantime, the registered insurance broker community should be left alone to get on with things. There is a great deal to be said for continuing the work that we are doing. We are some way off reaching a stage at which the GISC could apply to registered brokers. In any event, why should anyone want to stand in the way of professional insurance brokers maintaining their own professional body? Solicitors and accountants have the Law Society and the Institute of Chartered Accountants respectively.
All we in the insurance broker community are asking—particularly those in the provincial insurance broker market, although similar concerns are being expressed to me by some of the smaller London brokers who are Lloyd's brokers—is why people should want to stand in the way of allowing us to maintain our own professional body with our own disciplinary arrangements? I am sure that insurance brokers would meet whatever standards that the GISC decides that it needs to impose. We want it to bring the rest of the market up to our standards.
Unless we do something along such lines, what the Government are trying to do will not work. Unless consumers have confidence in the organisations that are supervising and regulating the activities of people who give them advice—not only about investments that have to be authorised, but about other financial services products that the Government are not minded to authorise—not only will consumer confidence be affected and that element of the proposals fail, but the Government will be seen to have failed in their wider objective of cleaning up the entire industry.
For that reason, the smaller voices of those in the independent sector who have genuine concerns about their future need to be listened to. Above all else, they know that their future lies in satisfying their policyholders and consumers, many of whom have been on their books for years. It is in their interest to keep those customers so they want a regulatory regime in which both sides can have confidence.
The complexity of a modern industrial economy obscures the fact that social, financial and legal obligations all depend on trust. We must trust that what is said about goods on sale is true, that a manufacturer who places goods on the market will have them fairly judged against competing goods, that investments will be safe and that returns—perhaps years later in the form of pensions—will be as promised. We must trust that insurance companies will pay up when the occasion arises. We must trust that money invested will be honestly applied to the advertised purpose. Politically, we trust that if people can make a fair choice between goods and services, and if financial resources are allocated according to those priorities, we shall have an efficient and effective economy.
That will not happen if we allow events to take care of themselves. The right conditions must be created by Governments. That is not done by central planning that is too insensitive to allow for the variety of choices that people make and too inefficient to allow finance to be invested according to those choices. But nor will the right conditions be created by the disappearance of Governments from the scene, as the zealots of laissez-faire would have us believe. That would give neither a clear expression of people's choice nor an allocation of investment to match their choices, but would, as in the 19th century, create a financial oligarchy that ran things in its own interest. Unbridled laissez-faire ends in mobster oligarchy, as we have seen with the replacement of the communist elite of the Soviet Union.
There is a third way. Political democracy can create and define conditions for economic democracy by making sure that the sovereign choice of individuals is neither fettered nor deceived, and by creating a situation in which financial choice and allocation are made with the fullest possible knowledge of the risks and rewards, and in which the corruption of self-interested manipulators is eliminated.
The Competition Act 1998 was one leg of such a policy. The Financial Services and Markets Bill is a second leg. It is a regulatory measure, but one welcomed by financial and public interests. The essence of successful regulation lies in achieving a balance between countervailing forces, and the Bill achieves that balance. The novelty of pre-legislative scrutiny by a Joint Committee, on which I had the privilege to serve, contributed to the balance, as did the open-minded and constructive response of the Government to our reports.
The speed of change in today's financial markets makes it essential that the Bill should be adaptable. If it is not, it will rapidly become out of date. Natural justice requires that regulations are clear and certain so that no one is in any doubt about what is or is not permitted. An important balance must be struck between adaptability and certainty. That has been done by leaving detailed definitions to delegated legislation and codes or guidance to be produced by the Financial Services Authority. Detailed provisions can then be readily amended in the light of experience and changing market practices.
British financial services have an admirable reputation for innovation. The scale of operation and the climate of innovation attract operators to London rather than other financial centres. Neither innovation nor London's reputation would be served by lax regulations, but innovation would be suppressed if regulations were too prescriptive. If regulation extended to giving an official mark of approval to certain products or services, the entry to the market of those products would be inhibited and innovation slowed down. The Bill deliberately avoids that problem.
Similarly, if regulation added substantially to the costs of services, operators could be induced to move to Frankfurt or New York. At present, London's regulatory costs are among the lowest in the world, but they must be monitored to ensure that the position does not change. Provision is made for the publication of comparative regulatory costs in the annual report of the FSA.
The overwhelming weight of evidence to the pre-legislative Committee came either from financial services practitioners or their collective associations, or from lawyers serving practitioners. Their concerns tended to be amelioration of disciplinary penalties and elaboration of FSA procedures in the interests of practitioners. Members of the Committee needed to compensate with a conscious concern for the general public—the so-called consumers.
The balance between practitioners and consumers also arose in dealing with the Bill's caveat emptor—"let the buyer beware"—provisions. Practitioners tend to say that customers should be responsible for their own choices, and that it is not the practitioners' responsibility to ensure that customers know what they are signing up to, but the general public cannot be expected to have the same knowledge of the market as those who are engaged in it day by day.
There is a profound split in the community of financial services practitioners, characterised by the terms wholesaler and retailer. Many practitioners who deal mainly with other practitioners—the wholesalers—have expressed the fear that the regulatory regime, needed to protect the general public, will be irksomely restrictive for them. However, light-touch regulation appropriate to those with professional knowledge, who can look after themselves, would leave the general public exposed and unprotected if it were applied to retailers—those practitioners who deal with the general public. It is crucial to the fair working of the Bill that the FSA should recognise the distinction between the needs of wholesalers and retailers in their day-to-day operations and in the culture of their organisation.
The Bill has both a service and a geographical dimension. The Joint Committee felt that the scope of the legislation should include mortgages and long-term care insurance. Mortgages are the main financial transaction that most people will ever undertake. The division between fixed and floating rates and the conditions for transferring from one to the other have made mortgages more complex, and there is a record of mis-selling of endowment mortgages. Most firms selling mortgages will come within the provisions of the Bill for related services, but the Government wish to see how the scheme launched by the Council of Mortgage Lenders will work before making a commitment to include mortgages in the Bill. As the scope of the legislation is a matter for secondary legislation, the inclusion of mortgages and long-term care insurance need not be decided now. Although the Council of Mortgage Lenders scheme might work, it would, if made permanent, conflict with the idea that the FSA should be a one-stop shop for financial services regulation.
The Channel Islands and the Isle of Man are excluded from the geographical scope of the legislation. Clearly, if the regulatory arrangements in those two offshore havens are to be more indulgent than those within the United Kingdom, business could transfer to them once this legislation becomes law. The Government will need to decide what steps are to be taken to avoid that.
The wide-ranging commitment for the FSA to consult before finally formulating rules, codes of practice or guidance is formalised by the establishment of consumers and practitioners advisory panels. That listening culture will seek to ensure that regulation is by consent and will enhance both public and professional confidence in the FSA.
Nevertheless, the disciplinary and enforcement provisions of the Bill are vital. When fortunes may be made by a breach of the rules, the means of enforcing them against organisations and individuals must be certain and the penalties must be deterrent.
Much of the comment on the Bill has been to ensure fairness to organisations and individuals in the disciplinary and enforcement procedures. That is important, but fairness is not served by making procedures over-complex, legalistic and protracted. In the vast majority of cases, both the FSA and those subject to disciplinary penalties have an interest in a speedy settlement of any issue.
After much debate, a balance between speed and legal procedure has been struck. Internal hearings by the FSA will provide for speedy resolution of cases, but where anyone feels that that has not delivered a fair judgment, the case can be dealt with by a tribunal applying more formal procedures.
The effective functioning of the FSA in enforcing its rules through these procedures depends upon staff freely exercising their judgment on the merits of any case. Those judgments would be distorted or become over-cautious if staff were constantly afraid of a civil suit for damages arising. Thus they are given a statutory immunity to civil liability in the discharge of their duties, as are the staff in regulatory organisations in many countries.
There is a gap between the provisions in the Bill for disciplinary and enforcement proceedings and the much more serious cases of insider dealing, misleading the market and market manipulation, which fall within the criminal law. The Bill fills that gap with provision for the FSA to deal with market abuse in those cases that are not covered by existing criminal law.
A major concern of the pre-legislative scrutiny has been to ensure that the FSA procedures proposed for discipline and enforcement and also for market abuse cases are compatible with the European convention on human rights. Legal opinion varies on just where compatibility lies. The position presented in the Bill is a good balance between those opinions. Essentially, in market abuse cases the defendant will have the safeguards of criminal procedures, whereas in all but the most serious disciplinary and enforcement cases civil law procedures will apply.
Exactly which serious cases will require criminal procedures, or indeed whether any will, is now the very limited area of uncertain compatibility with the ECHR. That question may be dealt with either by the progressive establishment of case law or by the FSA taking the precaution of applying criminal procedures to those cases that it deems serious. That limited grey area does not warrant the claim that appeared in The Daily Telegraph last week that the legislation is deeply flawed; it is not. However, it is important to have dealt with this issue exhaustively at the legislative stage. Otherwise, there was a danger that the courts might strike down significant parts of the Bill and leave no legal basis for regulation in those areas.
The Bill makes the Financial Services Authority one of the most powerful and wide-ranging regulatory authorities in the world. The future of financial services and markets in London can be enhanced or diminished by the way in which it discharges its responsibilities. Institutions may be closed as a result of its actions and individual careers terminated. In many respects, it is effectively defining the law as applied to the various organisations of the finance industry. It is reasonable, therefore, that the accountability of the FSA should be in the forefront of many people's comments, as it has been.
That accountability has many dimensions. The Treasury will appoint the board with a majority of non-executive directors. Executive directors will be subject to confirmation hearings by a parliamentary Committee. An annual report will be published covering a prescribed list of topics, which will be reviewed by a parliamentary Committee. Panels representing consumers and practitioners are established in the Bill and their observations will have to be answered. There is an all-pervading expectation of consultation before codes of practice or guiding principles are adopted. The Treasury will have the power to commission independent reports on the efficiency of operations and there will be an independent investigation of complaints.
The question is not so much the accountability of the FSA as the impact of all those strands of accountability on the day-to-day effectiveness and flexibility of the organisation. No doubt custom and practice will evolve a settled arrangement that balances accountability with effectiveness, but it is an issue that the board, the Treasury and the parliamentary Committee may well wish to review from time to time.
The existing self-regulatory arrangements for the financial sector of the economy are widely recognised as costly, inefficient and confusing for practitioners and public alike. The Bill provides for a single regulator with statutory authority to replace nine regulators for different parts of the industry.
Scandals such as pension mis-selling, Barlow Clowes, BCCI and the collapse of Barings bank have disfigured the industry and jeopardised both market and public confidence. At the same time, the globalisation of the financial markets has given them a huge unaccountable influence over public policy and the daily lives of citizens in this country. It is damaging to those financial institutions and to democracy itself if they are popularly felt to be beyond the law.
Global markets make it essential that national regulatory authorities co-operate in taming what could be maverick forces distorting the world economy. The FSA will be able to co-operate in international regulatory arrangements with credibility derived from the powers and responsibilities set out in the Bill.
The public interest is secured without the threat of a heavy-handed and remote regime damaging a major sector of the UK economy. The Bill is not a behemoth designed to subdue and coerce. Any such fears are groundless. It aims for regulation by consent of the industry, with its substantial powers of enforcement applied as much for the good of the industry as for the public interest.
It is to the Government's credit that they have not allowed the existing inadequacies merely to drift but have had the courage to tackle this complex issue comprehensively as a major contribution to modernising the British economy. I am pleased that the Bill will have the confidence and support of both sides of the House this evening.
I agree with much of what the hon. Member for Bexleyheath and Crayford (Mr. Beard) said. In particular, he was right to say that the Financial Services Authority will need to cater for the differences in the retail and wholesale selling of financial products. I do not think that that has been emphasised enough this evening.
First, I must declare an interest as a member of Lloyd's, although I shall not comment on the part of the Bill that deals with that much-tried organisation. Instead, I start with the general observation, which has already been made by both Front-Bench spokesmen and by most of those who have spoken in the debate and which will no doubt be repeated before it ends, that London is a hugely successful financial centre, which attracts business and practitioners from all parts of the world, to the economic benefit of the United Kingdom economy.
Despite several highly publicised scandals and failures, London has continued to flourish because financial organisations, and their customers at home and abroad, find that it is the best place to do business, and because the regulatory system compares favourably with those in financial centres in other parts of the world. The recent survey compiled by the London chambers of commerce attests to that. The comparative lightness, flexibility and honesty of our system is the attraction. With the Bill, the test for Parliament and for the Government is so to improve the regulatory regime that scandals are reduced—if not eliminated—without reducing the attractiveness of London to honest businesses from all over the world.
It is a truism to say that we live in a global market, but financial institutions can certainly relocate easily to more congenial environments in other parts of the world. The Bill will fail dismally if, along with eliminating the scandals, it manages to prevent businesses from coming here.
It is sometimes argued that a Bill such as this must strike a balance between commercial freedom and the protection of the customer. That analysis is not right. I am sure that a major reason that foreign firms locate in London is the honesty and reliability of the institutions with which they deal here—including the regulatory system. Firms with good products to sell cannot compete to best advantage if the market is not open and transparent. What is good for markets, competition and customers is bad for crooks and incompetents.
The Bill will be judged on how well it helps markets to work better; there is no underlying conflict between service providers and customers. However, that simple truth could be lost in the complexity of this measure and in the considerable discretion that will be left—quite rightly—to the FSA and its staff. I am glad that the four principal objectives of the authority have been set out in the Bill: market confidence; public awareness; protection of consumers; and the reduction of financial crime. The FSA will have those objectives before its collective mind and knows that it will be judged on them. My only complaint is the same as that made by my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory); he said that there should be a fifth objective—the encouragement of competition. He is right. because competition is one of the best guarantees of good service to consumers and customers; that objective should also be at the front of the Bill.
If the prime purpose of the FSA was to promote competition, it would undoubtedly inhibit it from co-operating internationally with other regulators. They would feel that they were being duped in a ruse to stimulate competition in the UK. That would remove one of the great powers of the authority under the new arrangements: that it can co-operate internationally and can contribute to an international regime of regulation.
That is not true at all. Competition—internally, nationally and internationally—is highly desirable for all customers and consumers. It should be the objective of all regimes in this country and abroad. I do not accept the point made by the hon. Gentleman. It troubles me that he thinks that such an objective would make it difficult to co-operate with regimes abroad. We should not go along with them, as he suggests; they should bring their attitudes up to date in the interests of their own customers, consumers and businesses.
Like other hon. Members who have spoken in the debate, I am glad that the Government want to build on the existing structure, eliminating its shortcomings, rather than starting again from scratch. The Government were wise to proceed by consultation. The first draft of the Bill smacked too much of the Star Chamber; it was much improved as a result of the brief report of the Treasury Committee and of the fuller deliberations of the Joint Committee. As several hon. Members have pointed out, we shall need continuing parliamentary scrutiny of the FSA's use of its powers. The authority will need to be overseen regularly by a Select Committee, taking regular evidence—not merely by occasional debates in the House or a by debate on an annual report. Parliament needs to examine the authority regularly, thoroughly and carefully, through a Select Committee, so that Parliament and the public can see how the authority is working.
Part of the Bill's purpose is to streamline the bewildering array of regulatory bodies and bring them together under one roof so that the public will more easily know where to take their complaints. There will be greater consistency in the rules and their application; and duplication, and hence costs, will be reduced. However, the trouble is that large conglomerates can end up by being more, rather than less, expensive. I trust that there will be a mechanism to ensure that value for money audits are regular and searching; they should not merely publish comparative statistics, which people can take or leave, but should make an active and dynamic inquiry into the organisation of the FSA and whether it uses its powers cost-effectively. I hope that the Economic Secretary will say something about that matter when she winds up. It is important for London as a financial centre that regulation is economical as well as effective.
The Chief Secretary spoke approvingly of one-stop shopping as one of the Bill's objectives, although my hon. Friend the Member for Ryedale (Mr. Greenway), who is no longer in the Chamber, had some doubt as to whether the Bill would achieve that objective. The problem of one-stop shopping is that the shop assistants may not know well the needs of their different types of customer, or the characteristics of their different suppliers. At least the old system encouraged regulators to build up an intimate knowledge of their specialist area, although it failed dismally in respect of the mis-selling of private pensions. However, it is not obvious that the new system proposed in the Bill, in which the FSA will stretch across a range of different financial markets, will be any better. When all is said and done, why should the FSA be any more aware that things are going wrong than the organisations that it will subsume? That short question goes to the heart of the Bill and of the benefits that it is supposed to produce. I hope that the Minister will address that point.
Large organisations tend to develop a corporate approach; indeed they usually take pride in doing so. A real danger is that the FSA may try to deal in much the same way with very different market sectors, and with different customers with different requirements. That will cause harm to the markets and disbenefit to the customers. Having been put together as one seamless organisation, the FSA will need to decentralise and specialise, if it is to know its constituent markets intimately and to regulate flexibly and effectively. I hope that the Minister will tell us that she is aware of that potential problem, and will explain why she is confident that it will not become an actual problem.
The most glaring shortcoming of the original Bill was in the Star Chamber powers that it gave the FSA and the apparent assumption that they would be used in a Henry VIII fashion. Thanks to the Joint Committee and the Government's response to it, the Bill is greatly improved in that respect, although I fear that, in parts, it may have moved only from the 16th to the 18th century.
I am concerned that, in investigations that involve companies or individuals regulated by the FSA, there is, as I understand it, no right to silence or legal aid, and the burden of proof is only that of the civil courts, even though someone's reputation and livelihood is at risk. Despite the Minister's assurances in his opening remarks, I am not convinced that the original criticism of the Bill—that it makes the FSA prosecutor, judge and jury—has been entirely met by the recent changes. The concerns expressed by my right hon. Friend the Member for Wells still need to be addressed.
I shall not ask the Minister to respond to all of those points when she replies to the debate, not only because I have already asked enough questions for her to deal with this evening, but because that whole area is so crucial and so complex that it must be dealt with point by point in Committee. Scandals in the City have not always lain in the failure to protect customers and the public; sometimes, they have lain in what appears to be the heavy-handed and unfair way in which the authorities have occasionally proceeded against an alleged rogue trader whom they happen to have had in their sights. Such spectacles have not enhanced the respect in which the regulatory system is held.
I am glad that the Government decided to include caveat emptor in the Bill. The customer is best served if he understands that he must look out for himself. If the Government, by their legislation, give the impression that they have eliminated risk, they will have done the customer a disservice, because it will not be true, or, alternatively, it will mean that they have so circumscribed financial institutions that their risk-free products are hardly worth buying.
What customers require is well placed confidence that they will be dealt with honestly—that they will be given sufficient information to make a reasonable assessment of risk, and objective advice that is appropriate to their level of experience and knowledge and their needs, so that they can use that information well. If the Bill ensures that that happens in future more often than it does now, without inhibiting the development of services that financial services institutions are in the business of offering, it will have justified both the support it has received from hon. Members on both sides of the House today, and the time and effort that has already been spent and that is still needed in Committee to improve it still further.
I am pleased to hear so many constructive comments from right hon. and hon. Members on the Conservative and Liberal Democrat Benches. I especially liked the description of the Bill as a blockbuster, because I intend to concentrate on the new market abuse regime, which I am certain will be big at the box office. Today, we are all engaged in the process of creating a single modern regulator to oversee complex and sophisticated markets and a financial services sector that contributes hugely to the UK's wealth. As we do so, the eyes of the world are on us, for I am sure that others will follow where we lead.
As others have already explained, the process has been open and consultative: it started with the publication of the draft Bill last July, since when two reports of the Joint Committee have been published. There is nothing new to say about the process so far, save that public and professional interest in it has not flagged, as was most recently evidenced by the packed meetings of the Joint Committee whenever it sat in public. As the right hon. Member for Wells (Mr. Heathcoat-Amory) said, the process continues after tonight, with consideration of all the many new clauses that have escaped our scrutiny thus far—for example, those relating to open-ended investment companies—and the innovative process to carry over the Bill between Sessions.
However, as I said, I intend to concentrate on the market abuse regime—a new civil regime proposed to deal solely with market abuse. Clause 95 sets out the sort of behaviour that is regarded as unacceptable. The new regime is intended to complement the existing criminal law controls over insider dealing and market manipulation. I shall briefly explore three questions: why is the new regime needed; how will it work; and what are the European convention on human rights implications?
First, why is it needed? It is fair to say that we have a poor record on detecting the existing criminal offences. I hasten to add that it would be wrong to apply a new civil regime solely for the purpose of making it easier to catch criminal wrongdoers by widening the range of conduct that may be caught and lowering the standard of proof needed to prove our case. However, it is an inescapable fact that existing criminal offences have not been adequate to control market abuse misbehaviour.
The Department of Trade and Industry publication "Companies in 1997/98" tells us that, in the past five years, 126 cases have been referred to the DTI for investigation, but that, in the same period, there have been only five convictions for insider dealing. I suppose that an optimist would cite that as evidence of there being hardly any misbehaviour in the markets, but I doubt that such a claim could be sustained. The London stock exchange annual report for 1997 offers a glimpse of the pyramid of regulatory activity that precedes DTI referrals: there are about 50 potentially suspicious trades a day, and, in a year, more than 1,000 merit further investigation.
Moving the target slightly, to money laundering, in a written submission to the Select Committee on the Treasury on the subject of "money laundering suspicious transactions", the British Bankers Association tells of the number of reports rising from 490 in 1987 to 14,129 in 1998. Little wonder that one of the FSA's four regulatory objectives is to be the reduction of financial crime. Clause 117 specifically addresses the issue of money laundering by authorised persons.
If the only problem were the weakness of the existing criminal law and its procedures, the proper response would be simply to tighten the criminal law and prosecute more rigorously. However, there are other factors that tell us that the regulator needs a broader array of responses in cases of market abuse, and I shall give three examples. First, most right-thinking people would regard market abuse as wrong, but not always as criminally wrong. Secondly, civil remedies are flexible and can adapt more easily to keep pace with changing trade practices. Thirdly, civil remedies can support the integrity of the markets and protect other participants through such measures as injunctions, disgorgement of profits and restitution to injured parties.
Therefore, I welcome a civil regime to sit alongside the criminal law, always provided that, when there is a question of both the criminal law and the civil law applying, the FSA first considers the criminal route. We have received a written assurance from the Treasury that that will indeed be the case.
My second question is, how will the new regime work? Clause 95 contains a widely drawn definition of market abuse, and there has been criticism that the definition is too widely drawn. That matters because people are entitled to know what actions on their part would be likely to be regarded as contravening the law. That is a principle of article 7 of the European convention on human rights. The people who need to know what is or is not market abuse are not only authorised persons, because the provision will apply to all market participants. However, it is fair to point out that the behaviour must occur in the United Kingdom, or relate to investments traded on a market in the United Kingdom.
The Government intend that clause 95 will be supplemented by a market code drawn up by the FSA. Following many representations, the Government have at least conceded that abiding by the letter of the code gives traders an absolute safe harbour from market abuse action. That is a great reassurance for market participants.
It is clear that a person who infringes the code will be in trouble, but what will happen if the code is silent on the behaviour detected by the FSA? The FSA will then have to measure the behaviour against clause 95. Hon. Members can readily see the problem if clause 95 is so widely drawn that, at a later date, its application is regarded by a court as being uncertain. If the FSA concludes that there has been market abuse, it may seek to impose a fine and/or restitution or it may apply to the court for the same financial outcomes and/or to obtain an injunction.
The processes that apply to a person accused of market abuse apply also to a person accused of regulatory breaches—indeed, regulatory action may also be taken with the one exception of the Government's concession on the point relating to the European convention on human rights, which I shall deal with in a moment. A person who is accused may take the case further than the notification by the FSA of the financial penalty and go to the newly established tribunal and appeal from it to the Court of Appeal on a point of law.
Thirdly, what are the European convention on human rights implications? The Government describe the market abuse regime as a civil regime. Under the European convention, a court can conclude that the procedure is criminal in nature despite its legislative label. Article 6 gives additional safeguards to persons who are accused of wrongdoings that are criminal in nature. Those safeguards include a fair and public trial, a trial within a reasonable time and legal aid in appropriate cases. A fair trial includes protection from self-incrimination—for example, protection for an accused person who is made to answer questions under section 436 of the Companies Act 1985. That person will be protected from answers that have been given under compulsion being used in evidence against him or her.
However, the Government have made the great concession that the market abuse regime is likely to be found to be criminal in nature. In that sense, article 6 safeguards will apply. I do not think that the Government should be portrayed as being dragged kicking and screaming to that conclusion, nor should it be regarded as a weakness. Article 6 is known colloquially as the "British article" because it is regarded as incorporating traditional British values of fair play and reasonableness.
Civil regimes of market abuse already apply in other jurisdictions. European Union members such as France and Spain have civil regimes for market abuse—although their systems of civil codes make comparisons slightly difficult. However, we can see from recent events that they are wrestling with the same questions about the implications of the European convention on human rights—as was shown by the Oury cases in France.
The United States has a successful civil regime that is operated by the Securities and Exchange Commission. There has been no trammelling of its powers, although there is a strong and robust written constitution. The big difference with the SEC's operation of the regime regulating market abuse in the United States is that it does not impose the fines directly—it must take the case to the civil courts—and nor does it keep the fine income, which goes to the Treasury. I am not clear that a civil regime operated through the civil courts would deny the FSA the flexibility that it requires in tackling market abuse. However, I support the FSA's having this new set of powers alongside the criminal law and regulatory powers, and I wish it well in its operations.
As I have said, the eyes of the world will be upon us as we legislate for a single regulator of financial services. We are all watching as the FSA begins to exercise its powers and carry out its duties. We have a heavy responsibility to ensure that we establish a system that works well; that allows trade in financial services to flourish, free from unnecessary restrictions; and that gives the public confidence that they are paying fair prices for services of integrity. In short, it must be a system of which we can all be proud.
I declare an interest in the debate, as set out in the Register of Members' Interests. Those who served on the Joint Committee may be forgiven for feeling a sense of déjé vu. The Committee sat for three intensive months and we are discussing the same issues again today—albeit in a slightly different setting.
My right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) said that the Bill had had a long gestation period. There have been several phantom pregnancies during it, and only now are we at the beginning of what I am sure will turn out to be a very long labour. As my right hon. Friend said, we must get on with it as quickly as possible, because the longer the delay, the bigger the Bill will become. Unless we progress quickly, we are in danger of spawning metaphorical triplets. The hon. Member for Huddersfield (Mr. Sheerman) said earlier that we are only at the outset of the Committee stage. However, the atmosphere in the Chamber during this debate has resembled more the weary resignation of Report. I fear that we are many, many months away from that.
Howard Davies, the supremo—for want of a better word—of the Financial Services Authority said that the Bill was like taking the scenic route to Buckingham Palace. I think that we have probably done several laps around Palace yard so far but we are still a long way from Parliament square and the open road to the Mall. I must issue a warning at this stage by referring hon. Members to the equivalent procedures involved in the Financial Services Bill in 1986. One hon. Member who spoke on Report at that time mentioned the fact that the original Bill had contained 167 clauses and 13 schedules. By the time it reached Report, it had 17 new clauses and 278 amendments, including 249 Government amendments. We have a lot of work before us yet.
I join Committee members—and those who did not serve on the Committee—in expressing a unanimous view about the success of the Joint Committee exercise. It was deftly chaired by the noble Lord Burns—whose ears must be burning—and serves as a good model for dealing with future legislation. As Labour Members have said, the major problem with the Committee was the time restriction placed upon it. We should remember that we were able to examine only six areas: the statutory objectives and principles, scope, accountability, discipline and enforcement, market abuse and the ombudsman scheme. During that time, we had also to cope with the progress report from the Government, the 24 consultation documents issued by the FSA and the 100 new clauses that landed on our doormat in April, with four schedules attached.
I sincerely welcome the Government's positive response to the recommendations in the Joint Committee report. However, the Government had to respond positively because the original draft Bill—which was sneaked out on the final day before the 1998 summer recess—was a complete dog's dinner. It succeeded in leaving the financial services industry in an extreme state of regulatory limbo—which will continue well into the next millennium. The period has seen enormous upheavals caused by the millennium bug, the introduction of the euro, new statutory savings schemes and pension problems. The potential for problems in the financial services industry must be much greater than usual, yet we have only a skeleton FSA in its current form.
The hon. Gentleman describes the draft Bill as a complete dog's dinner. A moment earlier, he referred to the 278 amendments that were made to the Financial Services Act 1986. Surely it is much better to use a pre-legislative process, as this Government have done, than to introduce a dog's dinner, which the 1986 Act turned out to be.
I agree, and one would have thought that, after 13 years, the Government might have learned from the problems of the Financial Services Act. The hon. Lady should remember that when the draft Bill was published in July, there was no mention of setting up an innovative Joint Committee to consider it. That proposal emerged only when the Bill was introduced in the Queen's Speech last November. At that stage, no one envisaged that a pre-legislative scrutiny process would apply to the Bill. That process had to be used because the draft Bill was full of flaws or, as I more elaborately described it, a dog's dinner.
I welcome the Bill because we need it. We need a single regulator with teeth such as the one that the Bill will introduce. Despite the hon. Lady's comments, the Bill is part of an evolutionary process that started with the 1986 Act. It streamlines the multiple self-regulatory organisations. For all the criticism that has been made of the SROs, many of them have, in most cases, done a good job at a time of enormous upheaval in the financial services industry in this country and the world as a whole.
For the past 13 years, there has been a good, open relationship between the regulator and the regulated, rather than a over-prescriptive regime. We need to transfer the many successful elements of that system to the new regime. It is no good writing off everything that has happened since 1986, because there has been a vast expansion of the financial services industry—in most cases, without problems. Of course, the high-profile problematic cases that many hon. Members have mentioned today have tended to overshadow that fact.
In setting up a powerful authority, we are dealing with an industry that makes a important contribution to the British balance of payments and a business that is highly technical. It is vital—even more so here than in many areas of legislation—that we get the initial legislation right.
The draft Bill would have set up the FSA in the role of chief detective, judge, prosecuting council, jury, appeal judge, executioner and beneficiary of the victim. That is not now the case. The draft Bill gave the FSA the power to issue unlimited fines.
Does the hon. Gentleman at least accept that the completely independent financial services tribunal was a feature of the original Bill, as published at the end of July last year?
That was the one saving grace in a regime that did not even put up Chinese walls between the investigative and disciplinary processes. The original Bill lacked an awful lot, according to the noble Lords who gave legal evidence, particularly Lord Hobhouse, who used the terms that I have just used. The initial Bill gave the FSA powers to issue unlimited fines with relatively few checks, powers to enter premises in the middle of the night without a warrant, which had quickly to be retracted, and the ability to use compelled evidence in subsequent disciplinary procedures. That was clearly nonsensical. In its original form, the Bill would have made the Athenian law code of Draco pale into the insignificance of a laundry list by comparison.
As I said, the Bill is highly technical and it is vital that we get it right. As my right hon. Friend the Member for Wells said, the draft Bill had more than 200 clauses, and the final Bill now has 367 clauses and 16 schedules. I do not accept the idea that including more regulation makes this a better Bill. We want quality, not quantity, and we want regulation, but not just for regulation's sake and not at all cost. We certainly do not want to repeat the mistakes made with the Securities and Investments Board back in 1986, when the most enormous rule book was constructed by lawyers having a field day. Many of the technical terms had later to be revisited.
I welcome the mantra, which was mentioned several times this afternoon by Front Benchers, of light touch where possible, protection where necessary and fairness throughout. That must be the touchstone by which we decide whether the legislation works.
The press comment over the weekend, critical as it may have been, reminds us of why we need to get the Bill absolutely right. An article in The Daily Telegraph pointed to the
storm brewing over FSA plans
and quoted the Economic Secretary as promising an enormous row if the FSA imposed rules under which the costs are not justified by the benefits—because
we do not want to tie the City up in red tape.
Rather more politically, she then asserted:
Part of the process of creating New Labour was to change Labour's attitude to the City.
I do not disagree with any of that, but the Bill is not particularly partisan, and as many hon. Members have said, the members of the Joint Committee worked exceedingly well together.
Conservative Members suspect that much has been added to the Bill, for the sake of regulation, that is not entirely necessary by a Government who have all too often demonstrated that they are willing to introduce extra regulatory burdens on business. The cost of regulation is nothing but a tax on the financial services industry and must be seen in that light. Hon. Members should remember that while we are discussing the Bill, a comprehensive rule book is being drawn up by the FSA. We shall play no part in that rule book, other than setting down the guidelines for it in the Bill. It is therefore vital that the people who are drafting those rules have regard to a strict, detailed framework of what is required.
As hon. Members have said, much of the work of the Joint Committee was taken up with problems relating to the European convention on human rights, particularly, as the hon. Member for Stafford (Mr. Kidney) said, with regard to market abuse, the ombudsman scheme and the immunity from prosecution proposed for the FSA. Nothing could be more damaging than to find that the first time that the Bill's powers were used—for example, against a large firm that did not like being fined a large sum by the FSA—the FSA was struck down by the European Court of Human Rights when challenged. The noble Lord Burns has, perhaps, been misquoted, but he certainly pointed out in his response to the Bill that there is still a risk of that because of the nature of case law under the European convention.
As well as the bottom-up approach of minimal regulation, another overriding consideration for Conservative Members when scrutinising the Bill will be its cost-effectiveness for the industry and how that is passed on to the consumer. Some of the more naive submissions that we have received from consumer groups state that extra regulation and extra costs and charges to the provider of financial services and products will not feed through to the consumer. Of course they must, and the consumer will end up paying the extra costs.
Secondly, Conservative Members want a clear line of accountability for the FSA, ultimately to Parliament. Thirdly, we want clear transparency in the operations, procedures and findings of the FSA. Fourthly, we do not want to stifle entrepreneurialism in the financial markets and product innovation. Finally, as many hon. Members have said, we want recognition that the financial services industry is global, particularly now, with the use of the internet for selling financial products.
I want to highlight some of the areas where the Government have responded well to criticism in the Joint Committee's findings, and some others about which we still have concerns. The first of those areas relates to the four statutory objectives that were laid down. We had a great deal of debate about what order those should be in. The statutory objectives do not apply directly to individual acts of rule making, advice or guidance. They apply only to general policy and principles in many areas. Many of the six accompanying principles are couched in terms of desirability or form a "check list only", as they were described by Howard Davies in one of his sessions before the Committee. We would like the competitiveness of the UK financial services industry to be a core objective. It should be not only maintained but improved.
I do not take the point that that would in some way burden the FSA in its negotiations with regulators overseas. Surely it would have the opposite effect, providing an incentive for other countries' regulators to minimalise their regulation too. Regulations would not then be imposed on us by other countries' regimes—regulations that would simply not hold water over here. Establishing such a core objective must be an incentive. Indeed, the Treasury Committee agreed with that proposal. We may have the best regulated financial services industry in the world, but the regulation must be cost-effective, so that businesses, especially foreign ones, will continue to do business here.
Although we have reservations, we are pleased with the inclusion of caveat emptor. It had to be included. We did not buy the argument that one could in some way not apply the duties of financial services providers to non-business customers, as the National Consumer Council argued.
A fool and his money are perhaps easily parted, but competition between myriad products and between houses that offer information about not only their products but the principle of saving for pensions, retirement planning, tax-free savings schemes and so on, means that a fool would have to go an awfully long way to avoid the vastly increased information that is available about financial products and the healthy competition that has brought charges down. However much information we provide and however much we try to prevent mis-selling, we cannot prevent mis-buying by somebody who chooses to ignore such information.
I certainly agree with the principle that the FSA has an educational role. That must be flagged up as a sign-posting role in the many other sources of information to which people may now look. Informed customers are a source of competitiveness in the industry, and everybody would encourage that.
However, it is not the FSA's job to regulate products, an activity which would inevitably lead to a vision of product endorsement and the sort of problems that we are already encountering with CAT—charges access terms—marking. Such practices essentially delude people into thinking that the product's performance is somehow guaranteed by the Government, although that is not the intention, and often make consumers lazy because they think that they do not have to find out about the suitability or performance record of the product.
The third area in which I still have grave concerns—the phrase reared its head many times in Committee but we never really got to grips with it because it did not come within our remit—is systemic risk. The market confidence objective is inextricably linked to it, but there is little elaboration in the Bill.
We are told that there is the tripartite relationship between the Treasury, the FSA and the Bank of England which stems from the Bank of England Act 1998—which gave the Monetary Policy Committee independence in 1997—but we know little about how the arrangement works. We are assured that there are monthly meetings between the three bodies, but I am not sure whether the minutes of those meetings are made available. I would be interested to hear from the Minister whether they are.
The inclusion of the objective concerning systemic risk is also slightly ironic because, just last September, the International Organisation of Securities Commissions published a series of sound principles and practices for regulation and the supervision of securities markets which were based on three fundamental objectives, including the reduction of systemic risk. The Bill must be rather clearer and more detailed on this subject.
What is the duty or responsibility of the FSA to reduce systemic risk in the financial services industry and in banks in the United Kingdom? What will be its attitude to allowing a bank to go bust rather than thinking that it has some special status and must be kept afloat—contrasting with the many engineering or capital goods companies that go bust every day of the week? Who will give the order to launch a lifeboat, and where will the money to man it come from?
None of those questions is properly addressed in the proposed status of the FSA, but surely must be in the Bill. Such a role will be one of the most important for whoever will claim responsibility within the tripartite arrangement. I should certainly like an objective in the Bill that is based on the soundness of the financial system and the role of the FSA in it.
Next, I turn to the comprehensiveness of the annual report, which has been mentioned by several hon. Members. Much hope seems to be pinned on some slightly woolly intentions for the content of the annual report. In no way do we want to make it even larger than the FSA rule book, but it should contain certain minimum specific requirements, of which the FSA should always be mindful.
The big grey area remains international competitiveness. We frequently heard of the good Australian Dr. Wallis who in 1995 produced a report on the international regulatory competitiveness regime. That appears to be just about the only meaningful bit of work on the subject. It is now hopelessly out of date, and must be redone. There is an increasing threat of regulatory arbitrage affecting our market and others in Europe and the United States. I would like full disclosure in the annual report of the increased regulatory burden of the previous year, the cost of that burden and the reasons for it, the cumulative cost of the regulatory burden and the amount of regulation introduced since the FSA began operation, and international comparisons, using consistent and easily contrasted tables and figures.
The Government say that schedule 1(10) includes a reserve power under which the Treasury can require the inclusion of particular matters in the annual report, but that is relatively meaningless. A good comparison would be the green book, which was to detail the environmental impact of Budgets, and which we were long promised would accompany each Budget. That was boiled down to just a page in the Treasury Red Book and very much sidelined.
Far too much of the Bill consists of the delegation of reserve powers to the Treasury. As one newspaper commentary said:
Running through this Bill are the threads of the disease endemic to modern legislation, that of the reserve power. The Act, when it finally grinds on to the statute book, will allow the Government to change the rules without bothering with legislation.
That must be a worry.
The fifth area that I should like to flag up is that of scope. It was very annoying that the major press reaction to our first report, after all the work that went into it, was that the FSA's remit should include powers over mortgages—an opinion with which I personally disagree. Although I am glad that the Government are not acting on that recommendation, they are slightly woolly about taking a decision in principle by the end of the year to extend the scope of clause 20.
I fundamentally challenge the view that mortgages should be included within the FSA remit. It would completely overload the system at this early stage, from all practical points of view. It would be entirely inconsistent to include mortgages but not other substantial financial transactions, such as hire purchase on cars or long-term care insurance. The endowment element of mortgages is already covered by the FSA legislation, and no proof—no evidence, even—has been submitted to the Committee or anyone to suggest that the mortgage industry's voluntary code has in any way failed yet.
It is very early to say, but I would say that the code has been very successful. Additional information is now provided to parties to the 1.4 million mortgage transactions that take place every year. The mandatory qualifications of staff in the mortgage industry have been improved. Another success of the code has been in detailed monitoring and enforcement. The code has been extended to almost 100 per cent. of mortgage intermediaries. There is much to shout about, and it seems premature to slap the full rigour of the FSA on the mortgage industry at this stage. That would be unjustified and, at this stage and for the foreseeable future, entirely unworkable.
The other point on scope, as my right hon. Friend the Member for Wells said at the beginning, is one of principle, not technicality. It concerns the retrenchment of devolution from a lot of rather angry Scottish lawyers, who will now have to submit their returns to Canary wharf.
The sixth area that I want to flag up is accountability. I welcome the statutory basis on which the consumer and practitioner panels are now operating, but they must be meaningful panels, amply funded, and not predominantly staffed by compliance officers. A bugbear of mine has been that the term "practitioner" appears to extend to compliance officers who have never sold or marketed a product in the financial services world in their life but are just lawyers. I hope that the FSA will not be dominated by compliance officers, especially as compliance officers working with firms will be liable to the full rigour of the FSA; but if duff compliance officers then trot off to jobs at the FSA they will be immune from prosecution.
It seems slightly odd that there is no requirement in the new rules in clauses 7 to 9 that the FSA, when issuing a consultation paper on new rules, should consult its own panels first, to refine and better hone those rules before, perhaps, they go out to general consultation.
I welcome the majority of non-executives who will now form the main board of the FSA and the fact that the senior non-executive will be the deputy chairman, but I do not accept that the role of chairman and chief executive should continue to be combined. Splitting those roles would be an excellent way of limiting the power of and the focus on one individual. It would also enhance the roles of the non-executive directors, who would not be just yes-men. I am sure that the current line-up will not consist only of yes-men, but the relationship between non-executive directors and a non-executive chairman is very different from that between non-executive directors and a combined executive chairman and chief executive. It would also help if control of the agenda were not in the hands of one man.
As my right hon. Friend the Member for Wells said, combining the roles is completely out of kilter with good corporate governance. The Cadbury code specifically states, in relation to the board of directors:
There should be a clearly accepted division of responsibilities at the head of a company, which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision.
It is slightly ironic that although the FSA has a format slightly different from that of a normal public limited company, the Government have chosen to go in the opposite direction.
I would query the way in which the FSA will be audited. We took suggestions that the function should be carried out by the National Audit Office, and it was probably shown that that was not appropriate. However, there are other alternatives. The Comptroller and Auditor General could have a right of access to undertake value for money scrutinies and report to Parliament; I hope that the Government will revisit that one. We might set up a special Committee of the House, along the lines of the Joint Committee on Financial Services and Markets, with powers to summon any FSA official to make submissions on the annual report or anything else, just as the relevant Senate Committee does in the United States.
The next aspect to which I draw attention is immunity from prosecution. It is my gut feeling that I do not like giving an organisation as strong as the FSA automatic immunity—the individuals in it perhaps, but the organisation, no—especially given the vastly increased powers that it would now have. Many City bodies that made representations to us said that there should definitely be some let-out for negligence, as there would be in the case of lawyers and doctors. In any case, that aspect may fall foul of the European convention on human rights.
I welcome the idea of the investigator for complaints, but I consider that it will be meaningless—and certainly not operating on a level playing field with the complainant—if the investigator has no power to award compensation. I do not want to go into great detail about the dilemma of civil and criminal definitions because the hon. Member for Stafford has done that in his usual erudite way, but I do not think that the problem will be resolved by the Bill.
We were told by the Treasury's legal advisers that European court case law is complex, sometimes unclear and still in an embryonic stage. If the process of the Bill becomes defined as criminal, it could become unwieldy, adversarial and expensive for the financial services industry. These are things that we want to avoid. We need to see further evidence of the Government's reasoned findings. We want to know that they have done their homework properly.
I welcome many of the innovations that the Economic Secretary mentioned. It is to be welcomed that the first instance tribunal will be independent of the FSA. Separating the investigation and sanctions roles by way of the enforcement committee is to be welcomed. There was talk of Chinese walls. That had a rather sentimental tone for me because it was all the rage back in 1986. Lo and behold, it seems that they are being repaired again. We need to know more about how the tribunal and the enforcement committee will interact.
As I have said, I welcome the submission that compelled evidence will not be used. It is also to be welcomed that legal aid will be available. That matches up with the equality of arms specification in the European convention on human rights. However, we do not know how that will be funded. The Government need to provide us with more detail. Will there be a levy on the entire industry so that there will be greater charges, which will then feed through to the consumer?
It is to be welcomed that the FSA will not include its own costs wrapped up in fines. I welcome also the availability of the safe harbour. Certainly, however, we have serious reservations about weaknesses in clause 95. I have a gut instinct against the ability to levy unlimited fines. However, I was probably persuaded that that was necessary to deter the larger operators, who were perhaps taking calculated risks and making a great deal of money, and that they should be hit hard where appropriate. If there is a penal fine, does the act by definition become criminal and again subject to the ECHR?
It is interesting that in the United States the FSA is part funded publicly—the stock exchange council—so that Congress retains greater control over its workings. Certainly, I welcome the proposals that fine income should be rebated gross, but I want to see how they will work in practice. Will there be aggregation over several years because of the great volatility in the fining system? What will happen about new members coming to the FSA? Will they qualify for reduced membership fees, whereas many other firms have paid increased fees for earlier years? The principle that these outcomes should not be seen as budgetary windfalls is to be welcomed.
I welcome the joining up of the eight financial scheme ombudsmen. This will give them the opportunity to raise their profile, as the umbrella group chairman told us. They will be able to make themselves better known and therefore more accessible to those members of the public who have genuine grievances that need to go to the ombudsmen.
There is still much work to be done, which is very important to the City, to the financial services industry generally and to the United Kingdom's trading position. It is also rather important to Howard Davies. As one journalist put it recently,
Howard Davis stands to become one of the 10 most powerful people in the country, with enough independent authority and discretion at his feet to excite the envy even of a senior Cabinet Minister.
So powerful will the FSA and its governing body be that its members will be on a par with Members of the upper House and the monarch, subject to the House of Commons (Disqualification) Act 1975.
The financial services industry accounts for 7 per cent. of gross domestic product directly. We know that 90 per cent. of United Kingdom households use financial services products. The industry involves at least 34,000 regulated businesses, which will be covered by the Bill when it is enacted. It is vital that we get these matters right the first time. I hope that those who have the privilege to serve in Committee will bear that in mind.
Like other hon. Members, I welcome the Bill. I recognise the huge contribution that the financial services industry makes to the UK economy, and as a London Member, I acknowledge the industry's contribution to the London economy and to the standard of living of my constituents. I also recognise the many failures of the past and the complexity of the Financial Services Act 1986 and its interaction with the Banking Act 1987.
We all know that under the previous Acts, fraud in the financial services became a regular occurrence. We all remember the pensions mis-selling scandal, which is likely to cost some £11 billion. I welcome the long overdue overhaul of the previous legislation, and I particularly welcome the central role of consumers in the Bill. It is good that, as we have heard in the debate, there has been cross-party support for the Bill, and widespread support from those directly involved.
As my right hon. Friend the Chief Secretary said, the Bill will bring about regulation that is fair, clear and accountable, safeguarding the public interest. I recognise the contribution of the Joint Committee, which formed part of the so-called scenic route of the Bill's progress. I pay tribute to members of the Joint Committee for all the work that they did in such a short time, and congratulate them on grappling with the Bill's complexities.
As the only hon. Member on the Government Benches—and as one of the few hon. Members who have spoken tonight—who did not serve on the Joint Committee, I speak with some trepidation. As my hon. Friend the Member for Huddersfield (Mr. Sheerman) said, the Bill takes us in the right direction. But I have two interlinked concerns that go to the heart of the operation of the Financial Services Authority. I hope that the Standing Committee will take both principles on board in its deliberations.
The first is the need to maintain corporate diversity, which is necessary to ensure the widest consumer choice. Our financial services market is characterised by a multitude of organisations, not all of which have the same objectives—indeed, many have widely divergent rationales. We have member-based organisations, although the majority are shareholder-based companies. Some organisations are based on self-help and thrift, and a number of them are democratic and mutual organisations. Many do not put profit at the core of their activities, but many rightly do.
We have large organisations and small, regional and national. They range from small traders, through mutuals and co-operatives, to companies and international public limited companies. Such diversity is a strength in the marketplace and, more important, provides choice for the consumer. The consumer can choose a multinational offering a wide variety of financial services products, or go to his own community, to a small, locally based, perhaps even voluntary, organisation. That choice is currently available, and it should be part of the FSA's remit to ensure that it continues.
That diversity in the marketplace is to some extent at risk. That is partly because of legislative risk, intended or unintended, and partly because of the current tendency towards consolidation in the marketplace. The tendency to reduce diversity will also undermine the Government's attempts to end social exclusion.
Why should my worries about the tendency to reduce diversity be placed at the door of the FSA? The FSA was created from a diverse regulatory structure. As was stated earlier, nine bodies have been brought together to form the FSA, including the Registry of Friendly Societies, the Friendly Societies Commission and others. Those organisations had built up a body of experience and expertise in their areas, not to mention sympathy and understanding of the unique needs of the organisations that they regulated.
That has been partly recognised in the new structure. There are separate sections for all those different organisations, but they form part of a much larger organisation, which, to some extent, is dominated by the orthodox share capital company. The worry is that the unique needs and desires of the diverse organisations that are represented will not be recognised either within the FSA or at board or senior management level.
I have already mentioned continuing consolidation in the marketplace. Whether that is good or bad, and whether it is to be encouraged or resisted, is immaterial. The question is whether it is in the interests of the consumer. Developments in the marketplace that get rid of smaller, regionally based organisations—in some cases, efficient organisations—will disadvantage consumers because it will restrict their choice of provider.
All organisations seem to like the idea of one size fits all. If that takes hold in the FSA, it will reduce the influence of those who do not fit the standard package. That will lead to a lack of sensitivity to the different needs of those organisations, whose diversity will not be recognised. We must recognise that important principle, because organisations that do not fit the mould will be disadvantaged.
The FSA is to be funded by the financial services industry. If consolidation and domination of a particular type of organisation continue, the role of other parts of the market may be ignored or downplayed.
If the FSA is to be really effective, it must address the financial exclusion agenda that the Government have set. To do that, it must defend diversity. The organisations that have traditionally served the low-income end of the financial services market—organisations that are primarily motivated not by profit but by the desire to provide a service to their members—take many different forms. Whether they are based on voluntary action and the democratic impetus of building societies, the common bond of credit unions or the good fellowship of friendly societies, those organisations have a long history of representing the interests of low-income consumers. That should be recognised as a priority by the FSA.
According to the latest studies by the Office of Fair Trading, many people are self-excluded from the financial services market because they do not have any confidence or trust in major financial services organisations. When those people are asked about the major banks or insurance companies, they describe them as large, impersonal and far away. Such institutions do not offer the type of service that low-income consumers require, so they need to find their own solutions through their own organisations.
Most of the alternatives for low-income consumers are risk averse rather than risk taking. The simple reason for that is the alternative organisations do not have the capital to support them if they run into difficulties. However, being risk averse means that they have developed a range of low-risk products. Studies show that low-income consumers are looking for low-risk products, but if consolidation continues and the risk averse are replaced by risk takers, low-income consumers will no longer have an alternative. We will also see greater instability in the market. It should therefore be incumbent on the FSA to ensure that the market is not continually subject to the stresses and strains of the business cycle and the high-risk companies that will come to dominate financial services. In other words, diversity assists the stability of the market.
Diversity also assists competition. Anyone who examines the remaining building societies will know that, because they do not have shareholders and do not have to pay a dividend, they have a competitive advantage over ordinary share capital companies. The Consumers Association's studies over the past five years show clearly that building societies offer a better range of financial services products than their competitors. If those unique providers are lost to the marketplace, we shall also lose the competition that restrains the other companies from increasing their prices. It is therefore in the interests of the members of building societies and of consumers generally to maintain that diversity.
The alternatives can also assist innovation. Many of the other types of organisation have been innovative in providing products to low-income consumers—who are, after all, their bread and butter, and the market in which they have always been involved. That is why the FSA should consider corporate diversity as one of its principles.
The FSA should also recognise the need of vulnerable consumers to access financial services. That issue has been strongly promoted by the National Consumer Council, but I raise it in the context of the Government's priority of dealing with financial exclusion. The Government want the FSA to play a role in achieving that agenda, and the Select Committee on the Treasury, when it commented on the FSA, agreed that it should involve itself in tackling financial exclusion. There is a great need for it to do so. For example, very few products on the market are suitable for low-income consumers. The commission structures that operate in the financial services market militate against anyone who cannot afford the product taking up those opportunities. Everyone recognises that low-income consumers need financial advice perhaps more than any other section of the community, but they are completely priced out of the market. The recent Moser report showed that 40 per cent. of consumers had numeracy difficulties. That demonstrates the need for such financial advice.
Unfortunately, the charges for many of the products that are coming on to the market are prohibitive. One of the reasons for the personal pensions scandal was that pensions were sold to people who did not have enough income to afford the charges. Another problem is that the burden of regulation is continuing to increase. Several hon. Members on both sides of the House have mentioned that. For instance, during the past few years it has been made even more difficult for people on low incomes to do something as simple as opening a current or deposit account—those who are currently excluded from involvement in the financial services sector.
That is already having a dramatic impact. For instance, there has been an alarming decline in the old doorstep collection market. Traditionally, all the mutual and co-operative companies reached out to loan account consumers in that way, but many are having to withdraw from the market because of the regulatory burden.
Market segmentation is another factor. I do not want to go into the rights and wrongs of red lining, although I have been told that recent studies show it does not exist; but I think we can say that some communities are disadvantaged by the development of market segmentation, and certain individuals certainly seem to find themselves excluded. The consequent increase in direct marketing means that people no longer need to go to the bank; they are directly targeted at home with offers of all sorts of loans and other financial services.
That is good for those who receive the benefits. There has been an explosion of new products for people who are reasonably well off, whose choice has been enormously increased. However, something a little more sinister is happening at the same time. Direct marketing excludes a whole section of the community. The development of market segmentation and direct marketing has produced an enormous increase in choice for the majority, but an increasing number of people are being excluded from the services that they offer.
A recent report by the Office of Fair Trading on vulnerable consumers, resulting from a detailed study, showed how the financial services market could disadvantage a consumer on a low income, living in any form of social housing, perhaps in an isolated community, possibly disabled, and without access to information technology and all its benefits.
Will not the financial services sector have to address the problem of excluded consumers if, for example, the Government's new deal for communities programme is to succeed?
I believe that implicitly. My point is that, as the Government are committed to addressing that agenda, the FSA, which will be the main regulator of financial services, must also be committed to the agenda. One way to ensure that that happens is to get the FSA to recognise the needs of excluded consumers.
I was about to read a letter from John Bridgeman, director general of the OFT, sent with the report on vulnerable consumers. It says:
When concerns about who benefits from financial services regulation and who pays for it are added to the findings"—
of the report—
the conclusion that financial regulation, in its widest sense, has failed to reflect the interests of vulnerable consumers is almost inescapable.
The report documents in great detail the reasons why consumers who are on low incomes, or vulnerable in other ways, have been excluded. It makes a major recommendation, saying that greater weight must be given to those people. Recommendation 1 states:
in assessing consumer detriment and applying Cost Benefit Analysis to policy and regulatory initiatives affecting consumer welfare, not only the OFT but other government departments, regulators, and those responsible for self-regulation should give greater weight to the detriment suffered by low income consumers.
The Government have already recognised that. When the Bill is passed, we need to ensure it will be recognised also by the new Financial Services Authority.
I understand that the Joint Committee looked at that area in some detail. It concluded that to recognise any of those concerns could detract from the FSA's role as a regulator, but it is exactly its role as a regulator that leads in part to the exclusion of those consumers.
Having been on the pre-legislative inquiry, I have great sympathy with much of what my hon. Friend says—he and I have been closely linked with the co-operative movement—but I am struggling to see the FSA's role, as opposed to the Government's clear role, which is accepted, in promoting access for people in our communities who are excluded. In part, what we have seen over recent years is a withdrawal from the market of traditional suppliers. People knocked on doors about insurance, credit and so on. One half were the saints who worked for friendly societies. The others were the sinners who charged extortionate rates of interest.
I accept my hon. Friend's point. Of course, the primary role is for the Government to play. Indeed, I commend them on the priority that they are giving to dealing with social and financial exclusion. We are awaiting a number of reports—some of the committees have been chaired by the Economic Secretary to the Treasury—but the essential point with which I am struggling—badly, I accept—is that we cannot simply leave this to the Government.
There is a role for everyone who has an influence on the financial services market. Everyone has to play their part in ensuring that all consumers are recognised and receive the support that they need to be involved in the financial services market. That includes regulators. For that reason, I ask that some consideration be given to the principles that could be put in place to ensure that the FSA recognises that role for itself.
I say all that, but obviously I accept that the FSA's primary function, which I am not trying to undermine, is as a regulator: that must be its primary purpose. We should recognise that the FSA will have to adhere also to the principles stated in clause 1 of the OFT report, which should place more stress on the need to assist vulnerable consumers in gaining access to financial service products.
Many other regulators have a duty to protect vulnerable consumers. Legislation provides that the gas regulator has a responsibility for the sick, for disabled people and for pensioners, and the water regulator has some responsibility for recognising the needs of those living in rural communities. All hon. Members will accept that, if people are to have a reasonably good quality of life, gas and water services must be provided. I simply contend that some financial service products—such as those producing a decent retirement income—are also necessary in ensuring that people have a good quality of life. I therefore ask not for revolutionary changes in the Bill but for a recognition that the regulator should have some responsibilities in meeting those specific needs.
The Bill provides that the FSA will be a statutory body with a duty to protect consumers. One of the Bill's greatest innovations is that it will put the consumer at the centre of the FSA's activities, and that is very much to be welcomed. However, that duty will recognise and meet the needs only of the majority of consumers. Surely, as a minimum, the FSA should have a duty to ensure that all consumers—including those who currently do not benefit from financial services—should have reasonable access to those services. The voice of those who are unheard should be heard, and we might be able to accomplish that by giving the FSA a role to play in ensuring that it happens. I should like that principle to be enshrined in the Bill.
I welcome this long-awaited Bill—as hon. Members have said, it has been in gestation for almost two years. Its long consideration has ensured not only that it incorporates lessons learned from the past but that we have gained from the experience and expertise of all those involved.
In considering the Bill, the members of the Committee will have to address issues of consumer choice and financial exclusion—which are becoming ever-larger priorities for the Government—and of consumer access to financial services and organisational diversity in the financial services marketplace. If they can address those issues, the Bill will be greatly improved.
I am pleased to follow the hon. Member for Edmonton (Mr. Love), some of whose comments are relevant to issues that I should like to raise—particularly on diversity, and on the role of regulation in ensuring diversity. The hon. Member for Huddersfield (Mr. Sheerman), in his intervention, highlighted some of the complexities of trying to deal with financial exclusion. The Committee will have to consider whether the Financial Services Authority should play a role in coping with the problems of such exclusion.
I particularly welcomed two statements in the Chief Secretary's speech: first, that burdens should be proportional; and, secondly, that he was seeking to reduce bureaucracy. I should like to express some concerns on behalf of two friendly societies in my constituency: the Braemar Royal Highland Society—which was also the first registered friendly society on the Scottish register—and the Lonach Highland and Friendly Society. Both friendly societies are probably better known by wider society for their annual gatherings and games, and both have a long history of community activity, going back to the early 19th century. However, both are also facing disproportionate financial burdens.
The Braemar Royal Highland Society was founded as the Braemar Wrights' society, in 1817, but took its current name in 1826. As I said, it is listed as No. 1 on the Scottish register. Its 1996 accounts state that, in that year, the society expended £3,208 on benefits, but had to expend £1,165 on registration and auditing. The ratio of expenses to benefits has increased considerably since the introduction of the Friendly Societies Act 1992, which increased the cost of running societies considerably and obviously made it far less cost-effective to run small, historic, community-based societies than was traditionally the case.
The Lonach Highland and Friendly Society is operating under even more severe financial strictures because its expenditure on benefits—the total fund paid out—in the 1997 account was—186, but its management expenses, on regulations and all the associated costs, came to £1,598. The cost of providing the service was 10 times the amount of benefit that the society was able to achieve. Before the introduction of the 1992 Act, it was able to maintain the cost of administration, but since then the complexity of forms to be completed, the cost of necessary legal advice and the costs that go with the triennial review that has to be carried out during production of actuarial reports have combined to outweigh its ability to function.
During proceedings on the Bill, I hope that we can find a way to make sure that such societies can thrive in their communities. Exempting historic societies that date back to a certain time would be a simple and neat way of achieving that, although there could be problems with the number of members a society has, or a de minimis amount of funds under management could be specified. That would achieve a simpler way of regulating such societies, which are clearly based in their communities.
The potential for a major financial scandal in those communities is limited because everyone is everyone's neighbour, so it may not be necessary for the full weight of the FSA to be used to regulate the daily activities of the societies. They have been important historically because they pre-date the welfare state and were a way for communities to provide for their future and for retirement and to safeguard against sickness. Those communities are rural and historically had larger populations so they would have been much larger societies in earlier times. In this day and age, it would be a pity if we could not find a way to allow the societies to continue to thrive in their communities.
I want to touch on a few other issues that were raised in the debate. The hon. Member for Huddersfield outlined the process undertaken by the pre-legislative Committee. I welcome that process and this is the right kind of Bill to subject to it. I hope that the membership of the Standing Committee will be diverse so that there is a different mindset as the Bill is taken forward; it needs further scrutiny and more work will have to be done.
We need a mixture of new and old minds to come together in Committee. Members on these Benches have traditionally preached and welcomed consensus. Perhaps I am going slightly off-message, but the danger in trying to achieve everything by consensus is that we lose sight of the big picture and cannot see the wood for the trees. At times, we need a little bit of grit and a little bit of diversity.
I am not sure that I am; I am wishing others well in that work.
This week's debate on an FSA is linked by a thread to last week's debate on another FSA—the Food Standards Agency. That thread is the problem that there is no such thing as a risk-free investment just as there is no such thing as absolutely risk-free food. An important point has been made about education and public awareness: we cannot gain something for nothing. When people enter the market to make money from an investment, they are putting that investment at risk. The risk is sometimes high and sometimes low, but if someone is offering an awful lot of money for little investment, the risk is probably much higher than that involved in achieving a small return.
It is important to help people to understand risk. Risk pervades an awful lot of decisions with which we have to cope and an awful lot of measures that go through the House. Politicians, the media and our education system need to provide people with a way of grappling with assessing risk and how to cope with it in daily life. I make a plea on behalf of the advice centres run by volunteers up and down the country. I visited an open day at such a centre in Stonehaven in my constituency. People have to pick up the pieces later, having failed to cope with financial management. It helps the industry and the public sector if advice centres are properly funded. If people in difficulty can get early advice, they have a chance to avoid getting into even greater problems that would leave the bank, the electricity board or the local council to which they owe money worse off than they would be if the problem could be sorted out.
As the hon. Member for Ryedale (Mr. Greenway) said, people will be confused by the fact that single regulation does not apply to everything. People will think that the product that they are buying is completely safe because part of it is regulated, but the other part may fall into another category.
I hope that the constructive spirit that has pervaded the Bill's passage to date will continue into the Committee to help the small, historic friendly societies in my constituency to thrive into the next century.
The importance and dangers of a debate on the Financial Services Authority have been highlighted by the previous two speeches. I sympathise with the concern of the hon. Member for Edmonton (Mr. Love) about the disadvantaged consumer. Over the past 10 years, there has been a dramatic change in the population's financial awareness through such instruments as employee share ownership schemes—much in vogue with the Government, but which I did a great deal to encourage after entering the House in the late 1980s. However, there are risks that individual consumers will dabble in sophisticated financial instruments, or, by contrast, that people may not have access to wealth-enhancing instruments, which is wealth-damaging in a bull market.
The hon. Member for West Aberdeenshire and Kincardine (Sir R. Smith) also highlighted one of my key worries about the FSA. Although I am in favour of the FSA overall, the diversity of the nature of the consumer is of concern. I was once regulated by the Financial Intermediaries, Managers and Brokers Regulatory Association, and I know the advantages of having specific regulatory authorities for particular activities. I only hope that the enormity of the FSA's tasks do not prevent its being sensitive to the specific requirements of individual actions.
In an earlier intervention on the Chief Secretary to the Treasury, I asked about the jurisdiction problem in a global trading market, and I seek some reassurance from the Economic Secretary to the Treasury. The Joint Committee, of which I was not a member—nor, incidentally and for the benefit of my Whip, do I look forward to serving on the Standing Committee—doubtless considered the matter. However, as a former Minister for Science and Technology, I know the problems of jurisdiction in framing legislation. We are on the eve of publication of the Government's Bill on electronic communications, and we ought to be clear about what we are talking about. From one's desk one can trade on any stock market around the world. There are problems over whether the jurisdiction within which an organisation falls is at its place of work or registration. If it is a virtual company, it may be difficult to track down.
In a global competitive world, we must understand that the City of London should not be seen to be overburdened with regulation in comparison with other centres. We face difficult conundrums. The Bill must reflect the wider importance of e-commerce, which we shall discuss in more detail when the new Bill is presented to the House. The messages we send will be crucial. There is late trading. Even big houses such as Merrill Lynch are going on to the net. Specialist houses, such as Charles Schwab and Company, are doing so. It is now easy to evade national boundaries and still invest. The question is, is one investing wisely?
Finally, caveat emptor is an important criterion. Regardless of the concerns of the hon. Member for Edmonton, we must not invest so much concern in the financial services industry that it makes its regulatory responsibilities impossible to deliver. There is a role for Government here. Let the FSA concentrate on building up a strong competitive financial community in this country, dealing with clients worldwide.
It is a great pleasure to shadow the Economic Secretary to the Treasury. I hate to say that we go back as colleagues more than 30 years—at university. She has changed not at all in that time. I cannot resist recollecting a marvellous party at the joint Oxford and Cambridge Conservative ball at Blenheim in which she participated. Our paths have gone different ways since then.
I declare an interest as in the Register of Member's Interests. I have worked in the financial services industry for the past 25 years in Britain, the United States, Hong Kong, India and Europe. I hope that I may be able to make some modest contribution to the debate from that experience.
It is axiomatic that, for a successful economy, a country needs good law and regulation and honest and open government. In 1986, when regulation started, my right hon. and learned Friend the Member for Folkestone and Hythe (Mr. Howard) pointed out to me that with the big bang opening up London to the rest of the world it was inconceivable that one could manage without regulation. One could not rely on what had previously been viewed as the high standards of integrity in Britain.
The past 13 years have been successful. Standards have risen enormously in the financial services industry. Some of the weaknesses have stemmed from the fact that inadequate resources have been devoted to tracking down crookery and to educating the retail public and there has been rather too much simple checking of rules. There has been constructive dialogue and an open relationship between participant and regulator, which I hope will continue under the new regime.
This evening has been marked by quality rather than quantity. As many hon. Members have pointed out, financial services are the biggest industry in the United Kingdom—and the biggest exporter. Given that well over 1 million people are employed in that industry, it is crucial that legislation does not damage it. As my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) pointed out, that is the reason why Conservative Members oppose the common European withholding tax and the dangers of the thin-end-of-the-wedge effect that it could have on our international business. Britain's success in financial services goes back 400 years and has ultimately been based on integrity. Regulation is not a substitute for integrity.
When the Government came to office, they were a little glib. They thought that they must start again and rewrite regulation, to put in a single regulator. It has proven manifestly more demanding to craft and draft the necessary legislation. We will not end up with a new regime that is any cheaper. In many areas, the so-called one-stop shop is an illusion. Compensation schemes will have to continue much as they were, but under a single name. Many businesses that have different types of activity will have to be regulated by different divisions.
I praise the Government for the lengths that they have gone in consulting. In particular, I pay tribute to all those who took part in the Joint Committee on Financial Services and Markets, which as we all know has virtually rewritten the Bill.
First, we want to deal with the whole complex territory of structure that has already been alluded to. Although everyone in the House would agree that, in Howard Davies, we have an outstanding individual heading the FSA, that is not the long-term answer. The structure must be right if the authority is not to run into trouble in the future.
Another matter that has been well aired is that the Bill must not fall foul of the European convention on human rights. More to my liking, it must not fall foul of our inherited liberties, which go right back to Magna Carta. It is natural justice that people should be able to defend themselves when they are charged with serious offences.
Other aspects of the structure concern me. Hon. Members may not be aware that the FSA is already arguing that it has the power to control salaries in the City—that it is necessary that the salaries in the derivatives industry should not be so constructed as to encourage bad practice. That all sounds like jolly good stuff, but I am uncomfortable with a body that can claim such powers. As my colleagues have pointed out, there must be a powerful counter-balance to the leviathan that we will create.
In relation to maintaining both competition and competitiveness, competition is international and competitiveness is domestic; We believe that there should be objectives and not merely duties. The essential point is that if, for example, US bond dealers suddenly took all their business away from London because the code of conduct was insufficiently clear, or if the number of independent financial advisers shrank by a half, it would be possible for the industry to bring a convincing judicial review that the FSA was in contradiction of such key objectives as maintaining competition and competitiveness.
I am reasonably comfortable as to the fact that the tribunal will be sufficiently independent, but I suggest that, as well as separating investigation and enforcement units within the FSA, there are strong grounds for the enforcement unit to have a 50 per cent. practitioner content. I believe that it would be healthy if there were a built-in statutory duty to continue consultations with the industry. We need to clarify the regulatory position of accountants, lawyers and actuaries. What will require them to participate in the regime, and what will not? Rule interpretations should be available to the regulatory community; that should be a requirement in the Bill.
I also believe that transparency is at the heart of protecting citizens—I am surprised that that matter is not included in the Bill as an objective. If citizens are obliged to be told clearly about charges and the operations of financial products, they have the opportunity to digest that information. However, nowhere in the objectives can I find stated a requirement for transparency of information.
Other hon. Members have made points about the process of parliamentary accountability. The process is not democratic enough. I believe that the system under which the Securities and Exchange Commission reports to the US Congress is a more appropriate form of democratic accountability than that proposed in the Bill.
Several of my colleagues raised legal exemption. I argue strongly that cases in which negligent action by the FSA could prevent a person or a firm from carrying out their business should not be exempt. We should also accept the Joint Committee's recommendation that the FSA complaints commissioners should be able to award costs against the authority where damage has been done to businesses.
If we are to maintain our competitive position, we must have clear rules. Indeed, prior to the introduction of the current version of the Bill, the Association of US Bond Traders made it known that its members could not live with lack of clarity in respect of market abuse. Let us hope that that has been resolved, as the Government believe. I still believe that clause 95 is drawn too wide. I also believe that intent should be a fundamental requirement for the market abuse regime to apply. There is still a need for greater clarification of the definition of market abuse.
In many other areas, we are becoming accustomed to having to live with rules and regulations coming down from EU directives without passing through Parliament for scrutiny and enactment. Here we have three different layers: primary legislation, secondary legislation, and the main body of what will emerge from the legislation, which are the FSA rules. We all know that flexibility is necessary because markets change, but I am concerned about some powers that currently lie within rule making that might better lie within secondary legislation, if not within primary legislation.
As the House will be aware, it is currently intended that the FSA will be empowered to make rules relating to money laundering internal controls, and then itself to prosecute under those rules. Money laundering is a field of criminality that we all want to eliminate, and it is essential to police money laundering, but I personally believe that it should be more the responsibility of this House than of the FSA.
The hon. Gentleman keeps saying, "I believe", but I understand him to be speaking for Her Majesty's Opposition. Some of his remarks do not square with what we have heard either in Committee or from other Opposition Treasury spokesmen. That worries me. Perhaps he should read the words of wisdom contained in one the finest documents that has been produced on this subject: the House of Commons Library research paper by Christopher Blair, which was published last week. It deals, not only with the Bill, but with the whole range of achievements arising from financial services legislation to date.
I agree that that publication is an excellent publication. When I use the singular rather than the plural, I am presenting the arguments that the Opposition team has discussed and agreed.
It appears that it was only at the last minute that the Government focused on which territories and which participants in the industry the Bill would cover. Much has been said today about mortgage lending, but I shall add two further points. First, the mortgage industry is in limbo until it knows whether it is to be covered. Secondly, I should like to concur with the remarks of the hon. Member for Twickenham (Dr. Cable), who raised the issue of transparency of charges and offers, which applies to bank lending as well as to mortgage lending.
Much more seriously, the Government appear to have forgotten about themselves. The Government are in the business of selling financial products and giving financial advice. We are all aware of the misadvice given by the Department of Social Security in respect of the reduction in SERPS widows pensions next April. I do not perceive the logic in the private sector having a regime of rules on the basis of which it provides financial advice and sells products, but organs of Government that do the same not being the subject of the same rules.
I raised the issue of the Post Office selling gilts, to which the Treasury responded that the Post Office was covered by the Banking Act 1987. However, the Banking Act expires when the Financial Services and Markets Bill goes on to the statute book. The Opposition believe that where the Government and Government agencies are involved in the financial services industry should be covered by the Bill.
The issue of double jeopardy has also not been wholly resolved. When an individual complains to the FSA that he or she has suffered loss, it is up to the FSA to decide whether or not to award restitution. The FSA may impose a fine if it finds someone guilty, but it can also choose whether to award restitution to the person who has suffered loss. That individual may have to go to the civil courts to claim separately, and we believe that is an unnecessary double jeopardy. It overdoes things, both for the individual and for the institution involved.
Much has been said this evening about the institutional versus retail sectors, and I shall make two key points in that regard. On the institutional side, high standards of conduct are just as, if not more, important than on the retail side. For example, Barings could have not only caused a systemic crisis but generated substantial losses for ordinary citizens where Barings was a custodian of various funds. To differentiate between the two, the institutional side needs higher standards of conduct than the retail side because so much is at risk. We know that we must protect the retail investor, but that is a different issue. Educating and protecting the retail investor is important, and the Bill provides for that. However, there is some risk of overprotecting retail investors; it is dangerous if citizens believe that compensation schemes or Governments will cover any wrong decisions that they might make.
My hon. Friend the Member for Ryedale (Mr.Greenway) pointed out that financial advisers require the machinery to allow them to check immediately whether the advice that they have given is compliant if we are to avoid the problems of retrospective and inconclusive debate.
I refer finally to the point made by my right hon. Friend the Member for Wells. In the area of banking supervision, it is crucial that decisions are taken speedily when a systemic crisis arises. Although the same Bank of England team has moved to the FSA and there will be ongoing consultation, we are concerned that, in a systemic crisis, two different arms will deal with the institutions involved. That is unfortunate, as Alan Greenspan also pointed out. I remember how close this country came to a systemic crisis in 1974.
That point touches also on the crucial issue of the chairman and chief executive. It has been argued that, like the Bank of England, the buck must stop with one man in the FSA. That is clearly true, but it is certainly not an argument for not having an experienced senior non-executive chairman with whom the chief executive may consult—which is the general practice in commerce nowadays. We want to see powers to that effect in the legislation.
This is not a red-hot party political issue. As we have heard this afternoon and this evening, there is a great deal of agreement, consent and support for the Bill as it has emerged from the Joint Committee process. However, it is one of the most important and complex pieces of legislation that the Government have brought forth. Contrary to some public perceptions, only a small number of hon. Members have experience of the financial services industry. The Bill still requires considerable improvement and we will be interested to see what amendments the Government will table. We will also table many amendments in the areas that we have discussed. There is still no requirement for cost benefit analysis and many definitions in the Bill remain unclear.
We must get the legislation right. The jobs of more than 1 million people are at risk, as is our biggest single export. We are nearly there but, as other hon. Members have said, there is much more work to be done on the Bill.
I begin by congratulating the hon. Member for Arundel and South Downs (Mr. Flight) on his first appearance as a member of the Opposition Treasury team. He is right in recalling that we were at Cambridge together, but our ways parted after that: he went into the City and I went off to protect civil liberties, and I shall continue to protect civil liberties in helping to pass the Bill.
We have had an extremely well-informed and thoughtful debate. Excellent contributions were made by several hon. Members who served on the Joint Committee of both Houses, including my hon. Friend the Member for Huddersfield (Mr. Sheerman), who served as an outstanding deputy Chairman, and my hon. Friends the Members for Stafford (Mr. Kidney), for Bexleyheath and Crayford (Mr. Beard), for Warwick and Leamington (Mr. Plaskitt) and for Erewash (Liz Blackman). The quality and tone of the debate reflects the high standards established in the Joint Committee to which my hon. Friends and many other hon. Members have referred.
I want to echo the thanks offered by hon. Members on both sides of the House to the noble Lord Burns for the exceptional way in which he chaired the Joint Committee. His transition from outstanding permanent secretary to outstanding parliamentarian is complete. I want to thank the members of the Committee from all parties and the Clerk to the Committee for their work within an exceptionally tight time scale. As well as contributing substance to our reflections on the Bill, the two reports were a pleasure to read, and I think, Madam Speaker, that you will forgive me for saying that one cannot always say that of reports produced by Committees of the House.
As many hon. Members have said, the Bill marks a new era in financial services regulation. It also marks a new approach to legislation. That has been reflected in many speeches in this debate, which have endorsed the contribution made by the process that we adopted for the introduction of the Bill to modernising our procedures and ensuring that legislation, particularly on complex and technical matters, is as good as we can possibly make it.
The consultation process was excellent, and I thank Treasury officials and, in particular, parliamentary draftsmen for their outstanding work. There is no doubt that as a result of our consultation with the industry and consumer groups, and of the work of the Select Committee on the Treasury and the Joint Committee, this is now a much better Bill. Of course, there will still be plenty of work to do in Committee, but we have a Bill of which we can all be proud.
I turn now to the helpful contribution made by the right hon. Member for Wells (Mr. Heathcoat-Amory). On behalf of the Government, I thank him for confirming that the Opposition have agreed to our proposed use of the carry-over procedure for the Bill. I know that the City and the industry will be greatly reassured to hear that there is now a clear timetable for proceeding with this enormously important work, that the House has adopted such a sensible approach to legislation about which there is no partisan disagreement, and that there is recognition across the House of the importance of the industry and the importance of the Bill to that industry. I thank the right hon. Gentleman for his kind remarks on my two appearances before the Joint Committee, which I thoroughly enjoyed.
The right hon. Gentleman raised several issues and I shall try to respond briefly to them. He mentioned the draft codes and secondary legislation. The Financial Services Authority has already published a draft code on market abuse and consulted extensively on that. It has now made an initial response to the consultation and is working with practitioners to develop a new draft of the market abuse code. That is, of course, only one consultation process that the authority is carrying out. The Treasury is itself consulting on the scope of regulated activities. We published a draft order on the scope earlier this year.
The right hon. Gentleman also raised the issue of Scottish solicitors and the devolution question. As my right hon. Friend the Chief Secretary to the Treasury made very clear, the Financial Services Authority will be responsible for regulating financial services throughout the United Kingdom, which is right. The matter is clearly reserved under devolution.
There is a technical issue of whether amendments to the Solicitors (Scotland) Act 1980 will be necessary and what the relevant procedures would be if amendments were required. We are looking at that further, although the FSA is considering the proposed regulatory regime that should apply to professionals who require regulation. I am glad to say that the Financial Services Authority is holding a special conference in Edinburgh today as part of that consultation.
The right hon. Member for Wells and several other hon. Members raised the issue of statutory immunity. I must make it clear that in no way is this immunity from criminal prosecution. It is very important that we keep in our minds the distinction between civil and criminal procedures, which crops up at various points. I remind the House that, first, it is the first principle of the Basle committee that banking supervisors should have immunity from civil actions for negligence—otherwise it would be quite impossible, as some hon. Members have pointed out, for such supervisors to carry out their task effectively.
Secondly, as my hon. Friend the Member for Erewash pointed out in a very careful and thoughtful speech, the Joint Committee accepted that statutory immunity was the right position to take, provided that there was in turn a strengthened complaints process. We have sought to implement that through the redrafted Bill. Statutory immunity does not apply to actions in bad faith; nor does it apply to actions under the Human Rights Act 1998 or to actions for judicial review. The Financial Services Authority remains fully accountable to the law and the courts.
The right hon. Member for Wells and several other hon. Members, including the hon. Member for East Worthing and Shoreham (Mr. Loughton), raised the fear of over-regulation of financial services and thus a threat to competitiveness. That is a very important consideration, and one that was uppermost in our minds in formulating policy and drafting the Bill.
The essential points on the matter were made by my hon. Friend the Member for Warwick and Leamington in a very well-informed speech. Competitiveness, as he stressed, depends on sound regulation. In the modern global economy, particularly in the financial services industry, regulation is a vital source of competitive advantage. One must get it right. If one gets it wrong, regulation can become a source of competitive disadvantage. That is why we have included in the Bill the principles to which the FSA must always have regard: competitiveness and competition. I have no doubt that we shall return to these matters in Committee, but I would be concerned about trying to impose on the FSA yet another objective.
I should stress a point that has not yet been made. There is a significant innovation in the Bill: we are subjecting the FSA, as the regulator, to competition scrutiny. The Office of Fair Trading will be able to scrutinise the FSA' s rules for the impact on competition, and if there is a concern that the rules have an unjustifiably and anti-competitive effect, the matter will go to the Treasury.
Several hon. Members referred—rightly so—to the importance of the City of London as a major financial centre. I can inform the House that, just today, we have announced the recognition of Eurex Zurich as an overseas investment exchange, giving participants in the London markets even greater choice and a new opportunity to deal directly with another overseas exchange. More overseas exchanges do business in the United Kingdom than in any other country, and today's announcement emphasises our pre-eminence as a global financial capital.
The hon. Members for Twickenham (Dr. Cable) and for Ryedale (Mr. Greenway) and my hon. Friends the Members for Erewash and for Bexleyheath and Crayford raised the extremely important question of the regulation of mortgages. We dealt with that subject in some detail in our response to the first report of the Joint Committee. The hon. Member for East Worthing and Shoreham rightly stressed that many aspects of mortgage sales are already regulated under the Consumer Credit Act 1974 and the unfair contract terms regulations, and that the sale of endowments in connection with mortgages is regulated.
We must consider the costs and benefits of bringing all aspects of mortgage sales and advice within the scope of the new Bill. In 1995—the latest year for which I have full figures—there were about 50,000 complaints in relation to some aspect of mortgages. That is about 0.5 per cent. of the 10.5 million mortgages that there are in this country. We shall review the matter very carefully. As I have said in the House on various occasions, we want to study the impact of the new code of practice of the Council of Mortgage Lenders, and we shall return to the House with a decision on the issue before the end of the year. I have received extremely useful information from some trading standards officers—notably those in Suffolk—but I shall see whether further information can be gleaned from them that would help.
As one would expect, the right hon. and learned Member for North-East Bedfordshire (Sir N. Lyell) made a most interesting and learned contribution. He specifically drew attention to the non-enforceability of contracts where one party to the contract is a non-authorised person but should have been authorised—a matter covered by clauses 24 and 26. Those clauses reproduce what has been the law since 1986. They are not a new feature of the situation. I draw the right hon. and learned Gentleman's attention to the fact that they do not make contracts in those circumstances completely unenforceable, because clause 26 gives the courts discretion to enforce a contract if it would be just and equitable to do so and if the person involved reasonably believed that there was no unlawful activity. I hope that he will be reassured on that point, but I am sure that we shall return to it in Committee.
The right hon. and learned Member for North-East Bedfordshire, the right hon. Member for Wells, the hon. Member for Arundel and South Downs and several other hon. Members spoke about the structure of the Financial Services Authority board and the split between the roles of chairman and chief executive. That is a matter on which we have reflected further following the first report of the Joint Committee. We explained in our response to the Committee why we felt, despite its recommendation, that it was wise to keep a single post holder for both posts. The FSA is not a public limited company operating in the marketplace with shareholders to whom it is accountable as well as an internal organisation to run.
The memorandum from the non-executive members of the board of the FSA, which we published in our response, clearly expressed their conviction of the need for one person to be vested with the responsibility for clear and authoritative decision making, possibly in conditions where very fast and very important decisions are required, and of the need for a clear line of accountability, not least to Ministers and, through us, to the House. We shall continue to reflect on that issue. I draw hon. Members' attention to the fact that the Bill is silent on that point.
The right hon. Member for Fareham (Sir P. Lloyd) raised the extremely important question whether the Financial Services Authority in the new regime will be better than what it replaces. My hon. Friend the Member for Stafford cogently explained the need for the new regime and the benefits that we shall obtain from it.
I shall summarise some of the advantages of having a single regulator. We avoid the danger of the inconsistency, overlaps and gaps inherent in having nine different regulators—an underlying problem that helped to give rise to the scandal of personal pension mis-selling.
We shall reduce costs. It is highly significant that the FSA in 1999-2000 will have lower real operating costs than its predecessor bodies had in 1997-98. By bringing together the staff and the rule books of the nine predecessor regulators, it will be able to share best practice and to establish the highest standards.
Perhaps most important of all, the new regime fits the new marketplace. The boundaries between the old sectors of financial services are increasingly being dissolved under the pressures of global competition and the opportunities as well as the pressures created by modern information and communications technology. As we see financial services supermarkets being created, offering a variety of different services and products, so we need a regulatory supermarket that can keep up with their regulatory requirements.
We are already seeing the advantages of the single regulator as the FSA creates its new complex group division: a complex financial services company, instead of having to deal with two or even three regulators, to manage those relationships and to meet all the compliance costs to which they give rise, can now deal with one group of staff within the FSA. As the regulatory impact assessment makes clear, we shall see real savings in compliance costs.
The hon. Member for Ryedale has extensive knowledge of the insurance industry, not least as treasurer of the Insurance Brokers Registration Council. It is our intention to repeal the main provisions of the Insurance Brokers (Registration) Act 1977. The Bill includes the power to make repeals by order, but I propose that we shall bring forward some of the more substantial or significant repeals through amendments to schedule 17, so that they can be dealt with directly in Committee.
I am sure that the House is grateful to the hon. Member for Ryedale for his interest and his efforts in making sure that the successor arrangements to IBRA command the confidence of consumers. It is far too early to conclude that the General Insurance Standards Council will not be a success. We are encouraged by the response of the industry to the challenge that we have set. I am sure that the new council will work well with the FSA to achieve high standards in this important area.
The hon. Member for East Worthing and Shoreham and some other hon. Members raised the important question of systemic risk and how dangers would be averted. The respective responsibilities of the Treasury, the Bank of England and the FSA were clearly set out in the memorandum of understanding that was agreed and published in 1997. It is a flexible mechanism, and necessarily so given the fast-moving conditions with which regulators have to deal.
The minutes of the meetings of the three bodies are not published, and rightly so. By their very nature, these discussions are likely to concern commercially sensitive and highly confidential matters that it would not be appropriate to make public. However, there is now clarity in the responsibilities of the three bodies, not least because the Bank of England is responsible as the lender of last resort. The FSA is responsible for regulation. There can be no risk of any suspicion of banks being bailed out to conceal failures of regulation.
This is an excellent Bill. I have no doubt that the excellence of tonight's debate will be reflected in our proceedings in Committee.