Clause 7 makes some changes to some aspects of the Financial Services and Markets Act 2000. I particularly want to focus on clause 7(3)(b), which inserts a new subsection in section 45 of FSMA. Subsection (3) refers to:
This is not the first time in our deliberations on this Bill that section 45 of FSMA has cropped up in debate. When we had the discussion at the start of our deliberations about the FSAs disciplinary powers, we talked about what the Government were seeking to achieve in clauses 14 to 16. It was very clear from that debate that these powers were to be used in the event that disciplinary action had been taken against a regulated firm and that these powers were penalties that could be used as part of the FSAs enforcement powers.
The discussion that we had then was also about how consumers are protected when a disciplinary action has been taken, given the constraints upon the transparency of the disciplinary process that are built into FSMA, and about how we protect people who are current customers of a firm that is subject to disciplinary action. The example that was given then was a mortgage company that was subject to enforcement action by the FSA at the same time that some of its customers were being taken to court by the mortgage company, and furthermore the issue that had led to the enforcement action being taken against the firm was about how the company handled mortgage arrears. The question was how do we ensure that existing customers are protected while disciplinary action is taking place. The response from the Minister then was the FSA has powers to stop an activity, as a preventive measure rather than as a penalty. They were powers under section 45 of FSMA:
(variation or cancellation of Part IV permissions: FSAs own-initiative power).
The change that the Bill seeks to make is to give the FSA the ability to use its powers under section 45 of FSMA where the people whom the FSA is seeking to protect are not actually customers of the firm that the FSA is taking action against. Therefore, the FSA is not only trying to protect the firms existing customers but people who have no relationship whatsoever with the firm. It is not clear to me why the FSA needs those powers. If the FSA sought to act now to vary the permission of that firm to prevent it from dealing with existing customers, by definition people who might be customers in the future but who do not have an existing relationship with the firm will automatically benefit from the exercise of those powers by the FSA.
I wondered if this measure aims to prevent a firm from commencing an activity, so the firm would have no existing consumers at all and the FSA is only trying to protect prospective consumers. However, if that is the case why would the FSA have given that firm permission to undertake those activities in the first place if it did not think that it was fit to undertake them?
So I am not quite sure what we gain by adding this extra power. Who are we trying to protect who is not already protected by the existing powers set out in section 45 of FSMA?
The amendment would delete proposed new subsection (1A) to section 45 of FSMA. That subsection has the purpose of continuing to allow the FSA to vary the permission of a firm to protect the consumers of a different firm. The FSA already has that power, as provided for by subsection (1C) of the existing section 45, so the proposed new subsection is not giving the FSA a completely new power. Instead the provision will extend protection to consumers of unauthorised firms as well as of authorised firms. I want to explain to the Committee why we think that a good idea.
The provision needs to be stated explicitly in such a way mainly as a technical consequence of the drafting of the previous subsection, which extends section 45 to cover all the FSAs objectives. A good example of why the power exists and needs to continue to exist is outsourcing. Sometimes a firmlet us call it firm A outsources back-office functions to another authorised firm, firm B. In such a situation, firm B has a contractual relationship with firm A, but may have no contractual or other relationship with the customers of firm A. If firm A fails, it may be necessary for the FSA to impose requirements on firm B, to assist in the protection of the customers of firm A. The option is useful for the FSA to have at its disposal, and the motivation for the proposed new subsection is in maintaining that option.
I want to stress that, of course, the FSA needs to use all its powers in a proportionate and reasonable manner. Although the proposed new subsection may appear very wide, I assure the Committee that it does not create an unrestrained power for the FSA that might be open to abuse. Indeed, I am not aware of any suggestion that the FSA has abused the power in the past, so the provision is very much more a technical consequence of the drafting of the previous subsection. I hope that the example is sufficiently realistic that the hon. Gentleman and others can appreciate why it is necessary.