Clause 30

Financial Services Bill – in a Public Bill Committee at 5:15 pm on 15th December 2009.

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Information relating to financial stability

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I beg to move amendment 12, in clause 30, page 46, line 8, at end insert—

‘( ) The powers in section (1) can only be exercised where the overseas regulator is also able to provide the Authority with corresponding information.

( ) “Corresponding information” means information the overseas regulator can obtain in respect of financial stability from a person operating in the country or territory of the overseas regulator.’.

Photo of Roger Gale Roger Gale Conservative, North Thanet

With this it will be convenient to discuss amendment 11, in clause 30, page 46, line 20, at end add—

‘( ) In pursuit of these powers, the Authority will have regard to section 348.’.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

It may be helpful if I give a little background to amendments 11 and 12. Clause 30 introduces a new power for the FSA to require information in pursuit of its objective in connection with financial stability. It is a broad power, which is helpful because it will enable the authority to collect the necessary information to ensure that it can exercise its financial stability objective. The information will also help the Bank of England to exercise its obligations and have regard to the financial stability objective that was introduced under the Banking Act 2009. Of course, we are still left with the problem of what financial stability means and what information the authority will be required to collect if we do not know what financial stability is in practice, but it is difficult to argue against the need for collecting such information.

We need to make sure that there are some safeguards because potentially the powers are broad. Our safeguards under proposed new section 165B cover the right to make representations against the requirement to provide information and a duty on the FSA to publish a statement of its policy with respect to the exercise of the new powers. However, there is no right of appeal, and the right to make representations may be excluded by the FSA in the case of an emergency. In the FSA’s consultation on these new rule-making powers, it will be important for it to be explicit about the circumstances in which the powers would be used and in which the emergency override would be used.

I want to focus on new section 169A, which will be inserted in FSMA. That new section deals with when an overseas regulator has asked the authority to exercise its powers under section 165A, so that the overseas regulator can obtain information through the FSA in connection with financial stability. As a consequence of the current crisis, we know that there needs to be greater global  harmonisation and co-operation on the supervision of individual institutions and supervision on a macro-prudential level.

The discussions taking place in the European Commission, the Council and, indeed, the Parliament about the new authorities in Brussels demonstrate that there will be much more co-operation. Of course, one of the important tasks of the European systemic risk board is to gather information about financial stability across Europe. Clearly, the board will need to have access to information from member states to enable it to fulfil its responsibilities in analysing emerging trends.

I am wary about whether there will be two-way traffic between the UK and overseas regulators, and I am concerned that there could be a situation where an institution is based in a number of different jurisdictions. It may be the case that the lead regulator is in South Africa, Germany, Australia or wherever it may be and it requests as part of its financial stability remit that the FSA provides information on a firm that it regulates in the UK. As a nation, we are very compliant when it comes to requests and following instructions, and doubtless the FSA will want to meet such a request. However, it is important that the FSA does not just supply information to, for example, the home estate regulator or the regulator that takes lead responsibility globally for that company without being able to get information itself from the overseas regulator about some of the firms that it supervises, if the FSA is pursuing such a line of inquiry as part of its role to help to maintain financial stability in the UK.

There are some very big businesses operating in the UK who are headquartered overseas and whose activities could have an impact on financial stability. If we were not able to get information from their lead regulator country about its view of something—for example, the amount of capital the institution has back home or the practices that the board of directors has introduced in relation to capital, risk management and a whole host of such things—there might be a direct impact on financial stability in the UK. My amendment would ensure that there is some reciprocity between the UK and other regulators.

Photo of Mark Todd Mark Todd Labour, South Derbyshire

The hon. Gentleman will recall that I raised that matter last Thursday in the evidence session, when he slightly implied I was not present. I wonder whether he shares an additional concern about the inclusion of the word “territory.” I am unfamiliar with the concept of the financial stability of a territory rather than a nation state, yet that is one of the tests that may be employed. I understand why that word is used; I suspect it enables us to deal directly with some regulators in US states, where many financial institutions are regulated, but I wonder how the test of financial stability implied in the clause would be applied in that instance.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 5:30 pm, 15th December 2009

The hon. Gentleman asks a very good question and it is not something I had pondered. I recollect the exchanges about reciprocity that we had on Thursday afternoon. I do not know how one assesses a territory, or financial stability issues around the state of Delaware—where a large number of companies are  headquartered—or the fact that some insurance companies are based in the USA. I suspect the Minister might say that some Crown Dependencies may be described as territories rather than countries in the legal sense. I do not know whether that is what the Minister is aiming at. I think there may be territories linked to the United States that are not states. It may be around that area, and I am sure the Minister will have an answer.

In terms of my amendment, imposing the duty of reciprocity gives the FSA some leverage in its relationship with other supervisors to say, “You must have these powers. Supply us with information, if we are to supply you with information.” It is not a very friendly approach to take, perhaps, but it ensures that the FSA can exercise some leverage to help ensure better information flows between states, rather than simply expecting the UK to be the one that gives but never receives.

The debate we had this morning on the inclusion of section 348, in the discussion of disciplinary powers, crops up again in the second amendment I have tabled in this area. It concerns the sort of information about a company that the FSA could give; what duty of confidentiality would bind it; how much granularity of information a regulator could ask for and the use to which it is put. I suspect that might be addressed by the representations a firm could make, but it would be helpful to know the boundaries that the FSA and the Government think are in place to protect confidential data.

Photo of Mark Todd Mark Todd Labour, South Derbyshire

It is a pleasure to serve under your chairmanship, Mr. Gale. I have already made a point about the definition of one of the terms in the clause and would welcome an explanation of that.

I have quite a lot of sympathy with the amendment, with one exception. If the FSA were prevented from providing information to a regulator unless a reciprocal arrangement were in place, one can think of certain emergencies when that would be an extraordinarily unfriendly act. For the Government of this country simply to impose an obligation to say, “I am sorry. We do not have a reciprocal arrangement in place. Obviously we need to negotiate that, but some information is needed desperately,” would be almost an aggressive act of assisting in the collapse of a country’s financial system.

There are circumstances in which I could imagine the clause being used appropriately to assist a state in distress. However, the generality of the argument presented by the hon. Gentleman, which is that this ought to be balanced by an appropriate arrangement with another state, ought to be the negotiating position generally adopted, with one further qualification which is implicit in it. That is, that we should have a clear understanding of the regulatory frameworks of other states that we are dealing with, and there should be some degree of quality test and peer exchange of information, to ensure that we provide additional support and advice in those circumstances.

One thing we have learnt thoroughly from the past couple of years is the interdependence of different regulatory functions in different states and the impact of large corporate entities across borders. Therefore, the goal of the clause is entirely sound and I have sympathy with the argument presented, with the exception I have given.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I will deal with amendment 11 first, before moving on to amendment 12 and the points my hon. Friend the Member for South Derbyshire raised. Amendment 11 provides that, in exercising its powers to gather information, which are already substantial under FSMA, the FSA would have to have regard to section 348 of FSMA. That section generally restricts the disclosure of confidential information, subject to the exceptions set out in section 349, which permits disclosure for the purposes of facilitating the exercise of a public function where disclosure is in accordance with regulations made by the Treasury.

The requirements set out in sections 348 and 349 of FSMA apply to all confidential information gathered by the FSA under that Act. The ability to disclose confidential information obtained under new section 169A, inserted by clause 30 of the Bill, to an overseas regulator is already subject to section 348. The amendment is therefore unnecessary, and I hope that that clarifies matters for the hon. Member for Fareham. The amendment is not only unnecessary, but undesirable, as it would introduce uncertainty as to whether disclosure by the FSA of information it has obtained under other powers is subject to section 348. An explicit reference to section 348 in that regard might be taken to imply that the section does not apply to other information-gathering powers contains in FSMA that do not have an equivalent explicit reference. I hope, therefore, that the hon. Gentleman will not press amendment 11.

I will move on to amendment 12 and address the wider point about reciprocal co-operation. My hon. Friend the Member for South Derbyshire and the hon. Member for Fareham made valid points, as we do need to see extensive international co-operation on the whole issue of regulation. Indeed, one of the key focuses of the Government’s activity has been through the IMF, through international regulators and through regulation at a European level, all of which are necessary.

Amendment 12 would mean that the FSA could not use the new powers to assist an overseas regulator unless that regulator was able to provide it with corresponding information. I do not think that is necessary or desirable. The FSA is not obliged to respond to information requests from overseas regulators, but it will naturally want to consider them closely and co-operate when those requests are reasonable. Section 169(4)(a) of FSMA, which applies to that provision, states that in deciding whether to exercise its powers in support of an overseas regulator, the FSA may take into account, in particular, whether corresponding assistance would be given to a UK regulatory authority in the country or territory of the overseas regulator concerned.

We would not expect the FSA to co-operate with an overseas regulator unless it was in its long-term interests to do so, but I do not agree that it would be sensible to remove entirely the FSA’s discretion to decide whether to respond to information requests where the overseas regulator, for whatever reason, was unable to provide it with corresponding information. We can certainly envisage situations in which that might be the case and would not want to prevent the FSA using the new powers, where appropriate, to build co-operation and encourage change. Again, I think that it is vital that we promote best international standards and engage with other international regulators, and we want the FSA to do that.

My hon. Friend the Member for South Derbyshire raised a point about the use of the word “territory”. It is to allow us to capture illegal jurisdictions below the level of the nation state; for example, states in the US. We believe that it is necessary to capture that.

Photo of Mark Todd Mark Todd Labour, South Derbyshire

Will my hon. Friend clarify that a little? The test that I think is imposed in the clause as it stands is that the financial stability of that territory should be the basis on which the request might be considered and made. I am not reasonably familiar with the financial affairs of the US, but I imagine that the state of Delaware—not the government of Delaware, but its financial stability as a place where people might live—is guaranteed by the US Government. It is hard to see how one could imagine the financial stability of an individual American state, which is the example he gave, being placed in jeopardy by the actions of particular institutions based here.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I will reflect on that point further. My hon. Friend makes an interesting point. He mentioned Delaware; one could equally mention California, which, if it was a country, would be one of the top 10 countries in the world, economically. In designing the legislation, we have tried to get appropriate coverage and we believe that we have done that.

I do not believe that amendments 11 and 12 are necessary or desirable for the reasons that I have given. I hope that the hon. Member for Fareham will seek leave to withdraw them.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I have a vision of California seeking that information and the Governor perhaps changing his name from the Terminator to the Regulator on that basis. I appreciate the comments made by both the Minister and the hon. Member for South Derbyshire. Perhaps my amendments have gone a little too far in their wording, but I am anxious to avoid ending up in a situation where we have no levers over other regulators to provide information in a reciprocal situation. In many ways, we lead the field in reforms to financial regulation. We need to encourage other nations to step up to the plate when it comes to information exchange and disclosure. This might not be the right way to do it, but it must link through the G20 and the EU to other mechanisms that people use. There was a phrase I saw earlier today about financial regulation. It referred, I think, to the US and whether it will embrace everything but act on nothing. It is very easy to pay lip service to the intentions behind information exchange. It is a different matter to get them to introduce the legislative change that is required to facilitate information exchange. There needs to be a lot of work done at international level to get comparable powers accepted as part of the regulatory regime of other member states and other jurisdictions. I am sure that we will be very good at sharing information, but the FSA should be encouraged to think very carefully about the terms by which it provides information, and the opportunities provided by its membership of international forums to push the message that there must be effective information exchange.

Photo of Colin Breed Colin Breed Shadow Treasury Minister

I share some of those concerns. A scenario could occur where it is asked to provide information that could implicate people here, who would then  immediately be the subject of an extradition order. The information that we supplied to other countries could allow them to do that. We do not have reciprocation in extradition at present with the US. There are some concerns. To get co-operation and everything else, we want to ensure that co-operation is accepted elsewhere. The only safeguard is the wording that says “may”: we do not have to, but we may—or we may not.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The hon. Gentleman makes an important point about the language, but we need to ensure that, if we are to recognise the reality of global financial institutions and global co-operation over their regulation and supervision, there is acceptance of that and it has to be underpinned by information exchange. We need to do all that we can through a range of different forums to ensure that that happens. But there must always be that opportunity for the FSA to apply a bit of muscle or leverage here to encourage others to be as open as it is prepared to be. With that in mind, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 30 ordered to stand part of the Bill.