Amendment 1, in clause 16, page 20, line 10, leave out from P to end of line 14 and insert either
(i) did not know, and
(ii) could not reasonably be expected to have known, that P was at that time performing a controlled function without approval, or
(b) was instructed to undertake these activities by an authorised person or where the authorised person was a company director or officer, who was an approved person..
Amendment 16, in clause 16, page 20, line 24, after the, insert authorised.
Amendment 17, in clause 16, page 20, line 34, leave out second a and insert an authorised.
Amendment 18, in clause 16, page 20, line 37, leave out second a and insert an authorised.
Amendment 19, in clause 16, page 20, line 40, leave out second a and insert an authorised.
The best place to start is a setting out of what happens by virtue of clause 16. Then I shall move on to my amendments, which would broadly have the same effect, as they flow through this section of the Bill. FSMA sets the regulatory perimeter for the FSA to find lots of activities that firms can carry out, but which have to be regulated by the FSA. It gives the FSA some statutory objectives and enforcement powers when people within its perimeter transgress its rules.
A fundamental part of the FSAs role is authorisation, so there is talk of authorised persons and approved persons able to undertake functions within businesses that carry out financial services. That helps to create the regulatory boundary that we want the FSA to supervise, regulate and, where appropriate, enforce. What is interesting about clause 16 is that it will expand the FSAs remit beyond people it has approved, to identify people who are undertaking a function where perhaps they should have been approved. That is a shift in the FSAs regulatory approach.
I spoke earlier about opening up clause 14 when we discussed the Association of British Insurers submission, which questioned whether the powers in clauses 14 to 17 were needed in a generic sense. In the evidence session on Thursday afternoon last week, we spent a lot of time talking about these powers with people from the industry and those with legal expertise. We asked Guy Sears from the IMA about his understanding of the additional powers being taken by the FSA. As I said, the ABI questioned whether these additional powers were needed, while Mr. Sears, from a different perspective, said:
It would seem so to me, if we have a system that seeks in its spirit to ensure that those who carry on important parts and important roles within regulated activities should be subject to proper standards on entry and oversight by the FSA. In a sense, if they do not do that, the FSA has no ability to deal with themthat seems to me a lacuna.[Official Report, Financial Services Public Bill Committee, 10 December 2009; c. 93, Q5.]
The word lacuna was used rather a lot on Thursday afternoon. The BBA, which I cited earlier, has been sceptical about increased powers and said in relation to this area:
We support the FSA being given the additional power to suspend authorised
persons, but... this power should be limited to those persons who carry out a controlled function.
That gets to the heart of the debate. We are seeing a shift in the FSAs approach, so it can take action against someone who is not authorised to perform a controlled function but may in practice be doing so.
We need to be cautious because we must ensure that there are adequate safeguards for people who suddenly find they have fallen within the remit of the FSA, when they have not been through the approval process and might not, therefore, be aware of what is happening to them. I tabled amendments 14, 15, 1, 16, 17, 18 and 19 to clarify what will happen to people who get caught by clause 16, and to try to introduce a safeguard for them.
There is a risk that people will unwittingly undertake a controlled function as part of their responsibilities in their job. Such people might not have been through the FSAs authorisation process and might not be regulatory experts, but they might end up, for some reason, undertaking those functions. That is why I probed the Government on what defence might be available to people who undertake such functions.
I particularly focused on the protection that there might be for someone who is doing a job at the direction of somebody else in the business. What will happen if someone has been instructed to undertake that function? A board member, director or officer, or an unauthorised person, might say, We want you to do this. It is part of your duty; you must do it. Such a person might assume, because the other person is on the board as a director or officer of a business, that they have to do it. They might also assume that someone has gone through the process to ensure that they are able to do it. That might be a legitimate defence in their eyes, to prevent some of the sanctions being imposed on them. That is why, for example, amendment 1 would insert at the end of line 14 the words
did not know... could not reasonably be expected to have known that... was at that time performing a controlled function.
What can people plead in their defence to say that they undertook those functions but assumed it was okay to do so?
The amendment would move responsibility from the individual to the firm. It says that it is the firms responsibility to supervise people. Amendments 14 to 19 would amend the Bill so that the authorised personthe firm or business undertaking that activitywould pay the fine, not the individual. My argument is that the individual is acting at the direction of management. Therefore, it would be helpful to understand why the Government believe it should be the person, rather than the authorised person, who pays the fine.
It would also be helpful to understand what defence may be made by that individual to say, Actually, I am just doing what I have been told to do. Is it not reasonable for me to follow the orders of a director and officer who is the authorised person? That is the thrust behind the amendments. I would be grateful for the Ministers clarification of how that power will be implemented in practice.
The clause is about credible deterrence. Its purpose is to strengthen the FSAs approved persons regime to ensure that people carrying out key roles in firms are only those who are fit and proper to do so, and that they perform those roles to the requisite standard. For that, we need the right balance of deterrence.
I believe that for deterrence to be credible, it needs to be directed at the firm and at the individual. It is important that employees in key decision-making or customer-facing roles are individually accountable for their actions.