New Clause 7

Financial Services Bill – in a Public Bill Committee at 2:15 pm on 14 January 2010.

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Removal of reduction of financial crime as an FSA regulatory objective

‘(1) The Financial Services and Markets Act 2000 is amended as follows.

(2) In section 2(2) (the FSA’s regulatory objectives) omit paragraph (d) (which provides for the reduction in financial crime to be one of its objectives).

(3) Omit Section 6 (the reduction of financial crime).’.—(Mr. Hoban.)

Brought up, and read the First time.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I beg to move, That the clause be read a Second time.

New clause 7 is very much a probing measure. I am just trying to tease out from the Minister what he sees as the FSA’s remit on financial crime and what the impact has been of giving the FSA this objective—the reduction of financial crime—in FSMA.

In the last year or so, a degree of concern has been expressed about how we tackle financial crime and about the fact that there is a multiplicity of organisations involved in tackling it. We have the Serious Fraud Office and the City of London police. There is a suggestion that adding to this confusion is the FSA’s own role in dealing with financial crime. I wondered if there is a way of streamlining the system to make it clearer who is responsible for dealing with financial crime. That led me to think about the role that the FSA plays in tackling financial crime and what sort of powers it has to do so.

On a number of occasions during our deliberations on the Bill in this Committee, we have discussed the FSA’s role in terms of enforcement. Some people might say that its role is about tackling financial crime, but I see it in a different way. I think that it is primarily about trying to enforce its own rules. The FSA’s enforcement division investigates breaches or potential breaches of the FSA’s rules; it brings cases against firms, and it comes up with penalties that could be applied if there was a breach of the rules. Of course, the FSA also has a role in dealing with criminality, in that it prosecutes for market abuse. We have seen that relatively recently in a case involving a former employee of a company called Evolution.

My view is that if we removed the objective for reducing financial crime from FSMA, it certainly would not stop the FSA from enforcement activity. In a way, that enforcement activity takes place under the FSA’s remit on consumer protection and market confidence.

So, is the objective of reducing financial crime giving any additionality? Is it taking the FSA beyond its role? Is it giving the FSA a duty to do something that it would not otherwise do? I am not clear that that objective is giving the FSA anything additional to do and therefore it may serve to confuse, rather than clarify, the FSA.

The objective in FSMA defines the FSA’s role in reducing financial crime as:

“reducing the extent to which it is possible for a business...to be used for a purpose connected with financial crime.”

That means, in practice, that the FSA must consider whether a firm is taking appropriate measures and has appropriate resources to detect and prevent financial crime. Clearly, there is always a risk with financial services businesses of financial crime. That is why we have money-laundering regulations in place. Some people seek to use financial services businesses as a route to channel proceeds of crime and various measures have been taken in recent years to tighten up the rules to deal with money-laundering.

Of course, the Treasury has given the FSA the lead role in tackling financial crime. Given that the rules on money-laundering can also be related back to consumer protection and market confidence, I am not sure that removing the financial crime objective would reduce the FSA’s scope of activity. I mentioned earlier that taking appropriate measures and having adequate resources to detect and prevent financial crime is part of the FSA’s assessment of a firm’s suitability. The FSA looks at systems and procedures. It certainly would not be interested in authorising a firm whose systems were open to abuse or gave rise to the possibility of financial crime. Again, in its work to examine the individuals employed by firms, if the FSA is interested in employees’ probity, it seems that that would happen even if the financial crime objective were removed from the FSA.

I am trying to probe what the objective enables the FSA to do that it would not do if the duty were not in the Bill. Removing the duty from FSMA might give greater clarity about who is responsible for tackling financial crime.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury 2:30, 14 January 2010

The hon. Member for Fareham started by saying that the new clause was a probing amendment, but went on to sound as though he really meant it and wanted it to be passed. I will explain to the Committee why I think that that would not be a good idea.

Tackling or preventing all financial crime is not a stand-alone objective for the FSA or other regulators and supervisors around the world; it interacts with the FSA’s other objectives of protecting consumers and market confidence and stability. That can be seen in the precise wording of section 6 of FSMA which defines the FSA’s objective as

“reducing the extent to which it is possible for a business carried on by a regulated person...to be used for a purpose connected with financial crime.”

Financial crime includes any offence involving money laundering, fraud or dishonesty or market abuse.

In practice, as the hon. Gentleman knows, the FSA has focused its financial crime work on three key areas: businesses’ systems and controls for addressing financial crime risk, businesses’ management and personnel and the effectiveness of enforcement and sanctions. It tackles financial crime such as market abuse and money laundering, works with others where appropriate on issues such as fraud and addresses threats posed by unregulated activities such as boiler rooms.

The Government recognise and value the FSA’s important achievements in shaping domestic efforts and contributing to international policy to address financial crime. At a global level, we place continued importance on intensifying efforts to strengthen work on financial crime, including action against money laundering and terrorist financing. Those efforts are seen as reinforcing wider initiatives focusing on prudential regulation and market stability. The April 2009 statement of G7 Finance Ministers and central bank governors stressed the importance of tackling financial crime.

The new clause would eliminate the overarching objective. However, the hon. Gentleman is right to say that that would not prevent the FSA from doing work on the issue. It would continue to exercise specific functions to tackle financial crime, such as supervising financial firms for compliance with money laundering regulations, by virtue of explicit powers in the regulations. Also, of course, it would still be charged with consumer protection and prudential regulation, which includes ensuring that firms protect themselves. Section 354 of FSMA would remain in force, requiring the FSA to co-operate with the police and other domestic and international agencies to tackle financial crime.

The issue, as the hon. Gentleman said, is whether removing the objective would serve any purpose. It is the Government’s view that abolishing that FSA responsibility would cause confusion and uncertainty, rather than otherwise as he implied. Presumably firms would still be expected to take the issues seriously and to take steps to protect themselves and their consumers against financial crime, even if the objective was removed. I do not think the hon. Gentleman would expect a different body to assume the functions of ensuring that authorised firms use their risk controls and other processes to protect themselves and their customers. There is no obvious replacement for the FSA in such respects. Someone will need to perform the role, and it would only lead to a duplication of costs on firms and consumers if another body had to have responsibility in that area.

I would also be concerned if we were to take the objective away from the FSA, in case that implied a downgrading in the importance of financial crime, which would detract from and undermine our wider efforts to bolster risk management practices and overall market  integrity in general. Therefore, I do not think the new clause is a good idea. I am happy to put on record some of the details of how the FSA has focused its work, but its statutory responsibility is there for a purpose, which is an important one, and I think it should remain.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am sorry if I sounded too confident in my arguments earlier. I shall try to adopt a more probing tone of voice in future, if that helps. Although I may even have persuaded myself as I was talking—perhaps I should not have suggested the amendment was probing but have gone straight for the jugular.

During the course of a brief debate, it was clear to me, as in our other debates about the FSA’s objectives, that their presence or absence does not seem to do a great deal to change the fundamental focus of the FSA. There is always a rationale to be deployed for maintaining its work in a particular area even if the objective did not exist. We talked about that in the context of the duty to promote international co-operation earlier. The Minister said that the FSA works internationally to tackle financial crime, but when I tried to broaden the international co-operation objective, to include the FSA’s other objectives, the Minister said that that was not necessary. Sometimes the objectives are convenient in an Act, but their presence or absence does not necessarily vary what the FSA will do. Even without the objective, as the Minister said, the FSA would continue to work on money laundering, continue to look at systems and management and continue to enforce those rules. That casts light on just how important objectives are in determining regulators’ activity.

I have not persuaded myself that I should press the new clause to a vote—it is still probing. I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.