Clause 16

Financial Services Bill – in a Public Bill Committee at 12:00 pm on 15th December 2009.

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Performance of controlled function without approval

Amendment proposed (this day): 14, in clause 16, page 20, line 7, leave out ‘P’ and insert ‘the authorised person’.—(Mr. Hoban.)

Question again proposed, That the amendment be made.

Photo of Roger Gale Roger Gale Conservative, North Thanet

I remind the Committee that with this we are discussing the following: amendment 15, in clause 16, page 20, line 8, leave out ‘P’ and insert ‘the authorised person’.

Amendment 1, in clause 16, page 20, line 10, leave out from ‘P’ to end of line 14 and insert ‘either

(a) (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’.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

It is a pleasure to serve under your chairmanship, Mr. Gale, for this afternoon sitting of the Financial Services Bill Committee.

This morning I was stressing the importance of credible deterrents. The Government recognise that the enforcement powers that allow the Financial Services Authority to penalise individuals must be carefully framed to ensure that they are proportionate and fair. As I shall set out in a moment, I am confident that the clause provides sufficient checks and balances to ensure that penalties on individuals are appropriate and proportionate.

As I am sure the Committee is already aware, certain roles in authorised firms can be performed only by individuals who have been approved by the FSA. Such roles are known as controlled functions and apply to director-level or significant management functions, and also to certain customer-related roles. The FSA approves an individual to perform such functions if he or she is determined to be fit and proper—that is, if the FSA is satisfied with the person’s honesty, integrity and competence, among several other criteria.

Amendments 14 to 19 seek to make a firm responsible for paying the fine if one of its employees performs a controlled function without approval. That would take the onus and responsibility away from the individual to ensure his or her own approval, and place it wholly on the firm. However, the power to fine a firm if it fails to take reasonable care to ensure that controlled functions are performed only by approved persons already exists. It is set out in sections 59 and 206 of the Financial Services and Markets Act 2000. In that respect, the proposed amendments are unnecessary.

In addition, the amendments would remove responsibility from the individual employee; it would remove any incentive for the individual voluntarily to initiate the approvals process with his or her firm if only the firm could be punished for non-compliance.

The FSA wants and needs to improve compliance with the approved persons regime to ensure that all who undertake key functions are properly vetted, and are found to be fit and proper to undertake those functions. As I said, many of the controlled functions include senior management roles, and it is right that the FSA should satisfy itself that the individual in question has the ability and necessary credentials to undertake the relevant function.

Credible deterrents need to target individuals and firms. Both need to be discouraged from bypassing the rules, but currently the only enforcement action the FSA can take against individuals who perform such a role without approval is to prohibit them from working in the industry, and even then only if they are not considered to be fit and proper. There is no power to fine such individuals.

That is why the Government have proposed to give the FSA the power to fine an individual who has performed a controlled function without the necessary approval. In effect, the proposal closes a loophole whereby one way of avoiding a possible financial penalty is simply not to be approved for the relevant activity.

Let me turn to amendment 1. I understand that the intention of the hon. Member for Fareham is to provide added defence for the individual. However, the amendment would create an almost limitless loophole whereby an individual, in order to escape a fine, need only conspire with their firm to have an e-mail chain telling them what to do. I understand the purpose behind the amendment, but I do not think that that is the right thing to do.

I appreciate the hon. Gentleman’s desire to protect employees who find themselves performing a controlled function without approval in a situation where they may feel that they have no choice but to do that, but someone performing a controlled function is playing a key role within a firm. The role is important enough to warrant the checks that come with approval, and we  think that individuals with such significant roles should have matching levels of responsibility. What we need is not passive employees who know that responsibility can easily be shirked in favour of the firm. That would not improve compliance.

Of course, we need to make sure that the sanctions are targeted appropriately, and I would like to draw the Committee’s attention to the safeguard built into the clause to ensure that the FSA cannot be unduly severe. The new power cannot be used against individuals who did not know, or could not reasonably be expected to have known, that they were performing a controlled function without approval. We are not trying to catch out individuals who act in good faith.

The ultimate purpose of the clause is to discourage individuals from performing a controlled function without approval by threatening them with a disciplinary sanction. Such a measure will improve compliance and enable greater FSA scrutiny of persons who are carrying out controlled functions. If we were to allow the individual to escape all responsibility, or to limit the scope of the power to such an extent that it became almost inapplicable, we would not meet our objectives. I therefore urge the Committee to resist the amendments.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Welcome to the Chair this afternoon, Mr. Gale.

When we get to the clause stand part debate, I would like to try to probe a bit further the issue of who will be affected by the provisions. Various comments have been made to me about the sort of people who will be caught by the measure. I take the Minister’s point that amendment 1 may be too loose and may leave too many loopholes. He suggested that some safeguards were in place to protect an individual in such a situation. I am trying to distinguish between those people who deliberately set up a structure that allows them to fall outside the scope of clause 16, and those who inadvertently fall within it. I take the Minister’s point that that could give rise to some artificial arrangements.

The Minister makes a fair point about where responsibility lies. Should we ask individuals to take more responsibility for their actions within a firm and to understand what the regulators expect of them? Whether there is a legitimate reason to be concerned will depend on how the rules are applied by the FSA. Having given the FSA new powers in the Bill, we look forward to hearing what safeguards it builds in when it starts to consult on the application of those powers. I am happy to accept the Minister’s reassurance that adequate safeguards are built in, so I ask the Committee’s leave to withdraw my amendment.

Amendment, by leave, withdrawn.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I beg to move amendment 6, in clause 16, page 20, line 25, leave out ‘four years’ and insert ‘one year’.

This is a brief probing amendment. Clause 16 defines the limitation period as the period within which, from the date that misconduct takes place, the FSA can take action against an individual who undertook controlled functions without approval. What I want to know is: why four years? It seems a long period of time, but it is not the six years that applies under the statute of limitations. Why is four years the right period of time?  Should that period be longer? Or should it be—as I suggest in my amendment—a year, to give the FSA greater focus in looking out for such people and in trying to tackle the issues more quickly, so that the matter does not hang over an individual for what appears to be quite a long period?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I appreciate the probing nature of the amendment. It might be helpful if I put clause 16 and the amendment into context by drawing the Committee’s attention to clause 17, which relates to the amount of time available to the FSA to initiate disciplinary proceedings against persons who appear to the FSA to be guilty of misconduct. Currently, the FSA has two years before it must start proceedings against individuals that it believes are guilty of misconduct. We want to extend that to four years, and have made an amendment to that effect through clause 17, which we will hopefully come on to discuss in a moment.

A four-year limitation period is an appropriate time for the FSA to investigate individuals, whether they are suspected of misconduct or of performing a controlled function without approval. Let me explain why. The starting point for the provisions is that we should ensure that the FSA has enough time to prepare a case against an individual suspected of breaching the rules. There are a number of ways in which such individuals might take advantage of the current period of two years to prevent the FSA from conducting an investigation. For example, it has been known for individuals to be deliberately obstructive in order to run down the clock, hoping to escape sanction as a result. In the case of individuals performing control functions without approval, that could involve delaying the provision of information needed by the FSA to ascertain what type of role the person was undertaking, and that is clearly wrong.

Equally, a person could launch judicial review proceedings against the FSA asking a court to review the commencement of an investigation. The clock would continue to tick during such an appeal, and that would severely limit the FSA’s ability to carry out an investigation within the required time when the judicial review had finished. A sufficient period is therefore vital to allow the FSA enough time to deal with complex cases. While it could mean that complex cases take longer, it is important to allow such time to ensure that the FSA can effectively and thoroughly investigate incidences of wrongdoing and impose appropriate penalties.

I hope that the examples of judicial review, deliberately withholding information and playing it long have helped to convince the hon. Member for Fareham of my argument. I could probably cite examples of potential criminal cases that would take precedence, as a result of which the FSA’s work would only start to take place after it had been decided whether or not to prosecute. For those reasons, it is reasonable to have a period longer than two years at the moment. It is a matter of judgment whether the period is three, four or five years—and our judgment is that four years seems appropriate. It will address directly some of the problems that I have outlined in my brief contribution.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 4:15 pm, 15th December 2009

I thank the Minister for his response. He has advanced an interesting argument. It relates to subsections (4) and (5) of proposed new section 63A.  We have a limitation period of four years from the first day on which the authority knew that the person concerned had performed a controlled function without approval. The Minister put forward a good reason why a four-year period should apply and explained how someone might seek to frustrate it. In circumstances where the police had identified an offence, perhaps the hon. Member for Wolverhampton, South-West, who is a lawyer and has perhaps dealt with such matters in criminal cases, knows whether they are restricted to a four-year period. The offence would surely have been started. There was a motion of investigation by the FSA that it should not necessarily be a limitation period at all, given that that is how one might seek to frustrate the period. It is arguing that counter case that a year is not long enough.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I am not an expert criminal lawyer, but I refer the hon. Gentleman to proposed new section 63A(4), where the clock can be stopped by the issue of a warning notice. The FSA could do that. I am slightly concerned that a four-year limitation period could become an excuse for the FSA to do nothing for years, because there would be no sword of Damocles over it. It would simply need to issue a warning notice, and that would stop the clock.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I wondered about that as well, but proposed new section 63B(2) states that a

“warning notice must state the amount of the penalty”.

For the FSA to have issued a warning notice, it would have had to have gone some way through the investigation process with some certainty that the person had breached the rules, and that a penalty should be imposed for that. Is there a better way of giving the same flexibility to pursue such matters if there is time-wasting? A more generous limitation period does not seem quite the right way in which to tackle that potential mischief. I apologise for giving the hon. Member for Wolverhampton, South-West more legal expertise than perhaps he is ready to profess on this occasion.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Yes. Perhaps we should debate the timing. I am not comfortable that the mechanism is right although I accept the objective that the Minister is hoping to achieve, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I beg to move amendment 7, in clause 16, page 21, line 18, leave out subsection (5).

Photo of Roger Gale Roger Gale Conservative, North Thanet

With this it will be convenient to discuss amendment 8, in clause 16, page 21, line 23, leave out subsection (7).

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Amendments 7 and 8 are fundamentally probing amendments to understand why the subsections must be in the Bill. Subsection (5) of proposed new section 63C states:

The Authority must, without delay, give the Treasury a copy of any statement which it publishes under this section.”

I wonder why the authority has to give the Treasury a copy of the notice, given that it was on the FSA website. Everybody else has to rely on the FSA website to find that information. Why should the Treasury be treated in a special way, compared with other people interested in that statement? Why should the authority be able to charge a fee for the provision of that statement? Will the FSA now try to impose a charge for content, going down the same lines as some national newspapers, as people access its statements on the website? I am not sure why the two subsections are at all necessary.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

The subsections are entirely consistent with the provisions for other policy statements in the Financial Services and Markets Act 2000; for example, policy statements on fines imposed on approved persons in section 69 of the Act, statements on fines imposed on those that breach the listing rules in section 93, and statements on fines imposed for market abuse in section 124. Therefore, the provisions in clause 16 simply ensure that the requirements that are in place for other penalties policy statements issued by the FSA, also apply to policy statements on penalties imposed on non-approved persons performing controlled functions.

Moreover, I cannot see the rationale behind the view of the hon. Member for Fareham that those should be removed. To my mind, it is natural that the regulator should inform the Government how it proposes to use a particular power conferred on it by Parliament. Similarly, I do not think it unreasonable for the FSA to be able to recover the cost of printing its policy statements by charging a reasonable fee to those who wish to receive hard copies. Of course, in practice, the vast majority who wish to read statements and policy can download electronic copies from the FSA’s website for free. Logically, subsection (7) of new section 63C does not enable the FSA to charge for them. I do not believe that those amendments are necessary and I hope that with those few words of clarification, the hon. Gentleman will seek leave to withdraw his amendments.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am still not convinced why the Treasury should be singled out for special treatment—being sent a copy—when the people who are regulated by the FSA, the people who foot the bill, will not necessarily be sent one of those statements automatically. However, it is not an issue that I am prepared or particularly want to press; it is a point of interest. Having had my curiosity assuaged, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I beg to move amendment 13, in clause 16, page 21, line 26, leave out from ‘must’ to ‘any’ in line 27 and insert ‘comply with’.

This is another amendment that has been tabled in order to seek clarification. Subsection (8) states:

“In exercising, or deciding whether to exercise, its power under section 63A in the case of any particular person, the Authority must have regard to any statement of policy published under this section”.

We see this happen elsewhere in FSMA, where the FSA has to “have regard to” in various aspects of policy. There is what a number of people refer to as the “have regard to” factor in part 1 of the policy in section 2(3) of FSMA, where (a) to (g) refer to various things that  the authority must “have regard to”. It is not bound to comply with those, but it must bear those factors in mind when trying to discharge its general functions, which are set out elsewhere in that section. If the FSA has gone to the trouble of having a policy to deal with people who undertake controlled functions without approval, and we believe that there are sufficient safeguards in that section to prevent people suffering enforcement action when they have a reasonable defence, why should the FSA simply “have regard to”? Why does it not simply comply with the policy statement that it has published? It is very straightforward. If there is to be a policy, let it comply with it rather than say, “We will just think about it” and not always comply.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

We could obviously have a wider debate about “comply with” and “have regard to”. Amendment 13 refers to the need to “comply with”, rather than “have regard to”, the statement of policy in relation to the level of fines imposed on non-approved persons performing controlled functions. I appreciate the sentiment behind the amendment expressed by the hon. Member for Fareham, which is to ensure that the FSA applies the standards set out in its statement of policy. However, again referring to a point I made earlier, the language he proposes would not be consistent with that of other policy statements on penalties that the FSA is required to produce, as set out in FSMA. Again I would refer him to sections 69, 124 and 210 of FSMA, all of which refer to the need for the FSA to have regard to its policy statements.

The current language fulfils a specific purpose. Policy statements are intended as guidance and the term “have regard” is the usual way in which public authorities are required to take guidance into account. There may be exceptional circumstances where it is appropriate for the FSA to depart from its policy and the expression “have regard” enables it to do that. The FSA would, however, need a good reason for doing so. In practice, the amendment would achieve very little. In order to ensure that it could in all cases comply with its statement, the FSA would almost certainly resort to publishing a very high-level statement, which would be of little use to the entities it regulates. That would have the result of making the FSA’s published policy less clear. I want to reassure the Committee that drawing attention to the FSA’s duty to act reasonably and proportionately in all cases provides additional safeguards to how that is interpreted. Put simply, that is common practice when agencies are producing policy statements. They would have regard to them and only depart from them with very good reason. It is established that this is the right sort of expression to use and I hope that the hon. Member for Fareham will be persuaded of the appropriate terminology.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

If it is written like this elsewhere in FSMA, it is a good idea to write it like this in the Bill. If I had realised that consistency was such a virtue, I might have tabled amendments to change other bits of FSMA to bring them in line with my amendment. I am not sure that either I or the Committee would want to spend time doing that, Mr. Gale, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I want to probe the Minister a little further on the need for these powers and to get a better understanding of the circumstances in which they might be used. I am concerned about a recent example that I have seen: a company can be subject to enforcement action by the FSA that results in the company going into administration; the administrator is able to sell the company’s list of clients and transfer the employees to another company. The reason why the first company has been subject to enforcement action is that the activities it undertakes are clearly in breach of the rules, and some quite serious offences—or breach of the rules—has occurred. However, it then appears that the same type of operation is re-established under a different name, with broadly the same people, not long after the first company has been wound up. I think such companies are described on the FSA’s website as phoenix companies. People are familiar with such a situation occurring with double glazing and in a range of other areas, but it has also happened in relation to the sale of securities to individuals.

Before lunch, I tried to get the name of the company and the particular set of circumstances, but unfortunately I failed. However, I know that it has happened. In such a situation where there are relatively senior employees who are not approved people, yet who appear to be integral to the operation of that business, there seems to be no limit to their being able to move into another company and carry out exactly the same practices. Another set of consumers will then be fleeced by that company and the FSA will have to start the whole enforcement process again.

Will the powers that the FSA will get in the Bill be sufficient to take out that level below approved persons, who are fundamental to the business, to stop them from setting up another business in the same guise when their principals have perhaps been barred from working in the City?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury 4:30 pm, 15th December 2009

I got slightly lost part of the way through the hon. Gentleman’s example, but I began to understand it again at the end. Certainly, on the issue of phoenix companies, which he raised, what he describes is an unacceptable practice. In the past, some companies have sought to operate in such a way. One company will close and another that looks virtually identical will be set up the next day. That is not something that the Government support, and the FSA will always want to look closely at that issue.

On what clause 16 does, as the hon. Gentleman is aware, a company already has to show reasonable care when it comes to appointing individuals to a control function. Through clause 16, we are also putting in place an individual responsibility, which is a helpful way of ensuring that there is a credible deterrent. The measure is not necessarily in itself designed to solve the sort of situation that the hon. Gentleman describes, where, in effect, all or most of the senior members of the company are acting in a way that they should not. However, if individuals are not fit and proper, they can be prohibited and thereby excluded from the industry. That applies both to people performing control functions and to other people within the firm.

Through clause 16, we are closing a loophole. It is important to ensure that control functions are performed by people who are fit and proper to do so. Taking a belt-and-braces approach—focusing on both the individual and the firm—but also having the safeguards I mentioned earlier, is the right way to proceed. I hope that the Committee will feel able to support clause 16.

Question put and agreed to.

Clause 16 accordingly ordered to stand part of the Bill.

Clause 17 ordered to stand part of the Bill.