Schedule 3 - Financial Conduct Authority and Prudential Regulation Authority: Schedules to be substituted as Schedules 1ZA and 1ZB to FSMA 2000

Financial Services Bill – in a Public Bill Committee at 5:00 pm on 6th March 2012.

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Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 5:00 pm, 6th March 2012

I beg to move amendment 43, page 174, line 44, leave out from ‘expenses’ to end of line 46 and insert ‘to the Bank of England in respect of the services of the Bank’s Deputy Governor for prudential regulation as a member.’.

Photo of George Howarth George Howarth Labour, Knowsley

With this it will be convenient to discuss the following:

Amendment 42, page 175, leave out lines 16 to 21.

Amendment 89, page 182, leave out lines 33 to 37.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

This group of amendments relates to some technical aspects of the wiring and administrative arrangements regarding establishing the Financial Conduct Authority.

Amendment 43 merits a little attention. Committee members will see, at the foot of page 174 of the Bill, paragraph 3(7) of proposed schedule 1ZA to the Financial Services and Markets Act 2000, which states:

“The FCA may pay expenses to the Bank’s Deputy Governor for prudential regulation in respect of that person’s service as a member” of the board of the FCA. The deputy governor will have a financial recompense, according to that provision. The amendment would, I hope, clarify the clause usefully, making it read instead: “The FCA may pay expenses to the Bank of England in respect of the services of the Bank’s Deputy Governor for prudential regulation as a member.” That is important because we want to clarify that expenses are not to supplement the salary of the deputy governor of the Bank because of time he has spent on the board of the FCA, which is part and parcel of the job description of the deputy governor of the Bank. Instead, if there is a recharge mechanism to be returned because of time spent in service of those duties, the moneys will be paid to the Bank of England, not to the individual.

I should be grateful if the Minister said that that is how the process should work, otherwise we get into strange circumstances, with other officials in the Bank  who spend time on parts of the FCA’s activities or in various meetings not getting personal expenses for that time. It would be far better and cleaner if moneys paid to deputy governors came through the Bank of England and there was a recharge mechanism, if one were needed.

It would be useful if the Minister provided an estimate of what he thinks the expenses are likely to be. What scale are we talking about? The deputy governor for prudential regulation might spend a significant, inordinate or tiny amount of time—I do not know—so the Minister should say what the scale is, because that would give us a sense of whether these are petty cash issues to be returned. Obviously, the deputy governor will be catching the bus to FCA meetings. Are the moneys simply for his bus fare or are we talking about serious multiples of tens of thousands of pounds? What is the scale?

Amendments 42 and 89 reflect two points. In the debate on the previous clause, the Minister spoke at considerable length on various points in respect of clause 5 stand part and claimed that there are lots of ways that the Bill provides for co-ordination between the FCA and the PRA, for example, across membership of boards. We look now at schedule 3, and we discover that on page 175 there is provision for the Bank’s deputy governor for prudential regulation to be on that board, but paragraph 6 states:

The Bank’s Deputy Governor must not take part in any discussion by or decision of the FCA which relates to—

(a) the exercise of the FCA’s functions in relation to a particular person, or

(b) a decision not to exercise those functions.”

Similarly,

“The chief executive of the FCA must not take part in any discussion by or decision of the PRA which relates to—

(a) the exercise of the PRA’s functions in relation to a particular person, or

(b) a decision not to exercise those functions.”

So there you have two deputy governors, supposedly sitting on those two boards to aid, as the Minister said, the co-ordination of those two bodies and to have cross membership, yet there is a provision that gags those two individuals and prevents them from getting involved in discussions on certain areas. There may be a rational reason why the Minister wants those two individuals simply to stick to strategic issues but never to discuss operational questions. He will know, because Conservative Governments over the years have struggled with this issue, that the line between strategic and operational is sometimes very difficult to define clearly.

Paragraph 5 on page 175 states that the validity of any act of the FCA is not affected if there is a vacancy in the office of the deputy governor or if there is a defect in the appointment of a particular person to those boards. But if that deputy governor for prudential regulation happens to stray in discussions into areas which relate to a particular person or to a decision on exercising a function, might there not be a serious risk that, on judicial review, a third party could indeed challenge the validity of any act of the FCA, should it be discovered that that deputy governor had uttered a phrase or misspoken in a particular way about a particular person or a particular issue?

I am concerned that there is a danger in fettering the abilities of, or limiting the topics on which, the deputy governors and the chief executive of the FCA can speak. This is not a party political point. It is a standing order point as much as anything else. If we are to enshrine such restrictions on the things that these board members can and cannot utter so that they cannot take part in a decision, would being in a room be so classified? Would every single decision of the FCA and the PRA have to be separated into generic and operational questions? I counsel the Minister that he is writing dangerous rules into this. We do not want a whole series of litigious circumstances coming along to unpick decisions of the FCA or the PRA.

Those are my concerns. It would not be right to fetter internal discussions or try artificially to define some wall in this way between these two players on those boards. It is a reasonable idea to put them on the boards of both organisations, but this half-gagging clause has a number of dangers within it. The Minister should reconsider and I should be grateful if he accepted our amendments.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury 5:15 pm, 6th March 2012

The purpose of cross-membership is to help to ensure that there is effective strategic co-ordination between the two regulators. The CEOs will not advance the interests of their own organisations when sitting on each other’s board except in so far as both regulators have an interest in effective co-ordination. Accordingly, the draft MOU makes it clear that the cross-board role of the CEOs will focus on areas of overlap. The CEOs will participate in discussions around the legislative functions which are reserved to the boards, such as setting policy and making rules. As the draft MOU makes clear, the regulators will consult each other at an early stage when developing policy. Cross-board membership of the CEOs will be useful in supporting this and ensuring that it takes place in an appropriate way. That provides the backdrop to the amendments.

We are thinking about why the CEOs should be on the board: it is to participate in policy making, where there is an overlap of interest, and to assist in areas such as making rules. For those reasons, it is not appropriate for the chief executives to take part in firm-specific decisions by each other’s boards. Such decisions might include petitioning for the insolvency of a particular firm, so at the level of firm-specific operational decisions, the PRA and the FCA must have clearly defined and separate roles, which could be undermined if the CEOs were involved in firm-specific decisions taken by the other body; their remit should be limited to strategic decisions, which is why I reject amendments 42 and 89.

On amendment 43, when the hon. Member for Nottingham East is prepared to listen to what I am saying—

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

Amendment 43 would provide for any fee paid to the CEO of the PRA for work on the board of the FCA to be paid to the Bank of England, rather than to the CEO directly. However, when CEOs of the PRA sit as a directors on the FCA board, they owe their duty as directors, with particular focus on helping to ensure effective strategic co-ordination, to the FCA. The CEO of the PRA is not on the FCA board in the capacity of a secondee of the Bank or of the PRA, as the amendment suggests.

Photo of Teresa Pearce Teresa Pearce Labour, Erith and Thamesmead

My understanding is that part of the responsibility of the deputy governor is to be on that body. Is the Minister saying that it is completely separate and not part of the job description of the deputy governor?

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

I am saying something slightly different. As a director of the FCA, he owes his duty to the FCA. That is why he is there. He is not a secondee from the Bank to the FCA, but a director of the FCA. Yes, the role of an FCA director goes hand in hand with being a deputy governor with responsibility for financial regulation, but he is not on secondment to the FCA. He is on the FCA board, taking part in decision making alongside other directors of the FCA, whereas a secondee would have a wholly different set of arrangements in place.

Let me reassure the hon. Member for Nottingham East that the expenses to which paragraph 7 refers are things such as a bus fare, for getting from the Bank to Canary Wharf or wherever, rather than a form of salary. The provision is to cover out-of-pocket costs, which is why it would be paid directly.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I am not sure whether the same principle applies, for example, to the Treasury representative who sits on the Financial Policy Committee. Does the Treasury representative get expenses in an individual capacity or get no expenses at all? It is difficult to know, when we are talking about situations that have not yet happened, although they are in shadow form and so must be established at some level. I do not want to labour the expenses point, but it is important to keep an eye on those arrangements.

I am not convinced by the Minister’s justification on fettering discussions between the deputy governors. I understand and expected the point about keeping them to strategic discussions alone, but he must surely appreciate my concerns about how things will be drawn. If paragraph 5 had also excluded the validity of an act being challenged by virtue of something under paragraph 6, it would have been a fair point. Perhaps I can gently suggest that he goes away and looks at that point, because it is a particular worry.

I do not want to press amendment 43 to a vote. There is a point of principle on the two issues, but for the sake of brevity, I shall test only one. If I can press amendment 42 to a vote, I will be happy not to press amendment 89, in the hope that the Minister might look at the point later. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

I beg to move amendment 102, in schedule 3, page 175, line 39, leave out ‘312J or 345D, or’ and insert

‘or 312J

( ) section 345D (whether as a result of section 345(2) or section 249(1)), or’.

Photo of George Howarth George Howarth Labour, Knowsley

With this it will be convenient to discuss Government amendments 94, 110, 101 and 112.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

Part XVII of the Financial Services and Markets Act 2000 makes provision for collective investment schemes such as unit trusts. It includes provision for the FSA—and in future, the FCA—to make “trust scheme  rules” about the operation of unit trust schemes. Those rules can impose duties on the auditors of such schemes. Section 249 of FSMA allows the FSA to disqualify an auditor from acting as an auditor for collective investment schemes for failing to comply with those duties. There is a parallel power in section 345 of FSMA for the FSA to disqualify an auditor or actuary who fails to comply with similar duties from acting for authorised persons.

Schedule 13 to the Bill will give the FCA and the PRA a wider range of disciplinary powers over auditors and actuaries of authorised persons. It will give them powers to fine and to censure an auditor or actuary who has failed to comply with a duty, in addition to the power to disqualify the auditor or actuary from acting for an authorised person or class of authorised persons. Government amendment 112 brings the disciplinary powers over auditors of authorised unit trust schemes into line with the new, wider range of disciplinary powers over auditors of authorised unit trusts being conferred on the FCA and the PRA by schedule 13. The remaining amendments in this group are consequential on amendment 112.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Again, there are a number of Government amendments. As the Minister said, they relate to auditors of unit trusts and open-ended investment companies. The amendments seem broadly reasonable in their framing, so I have no particular objections to the points that they raise. I think that the Minister is correct in saying that amendment 112 is probably the more important of these changes in respect of failed auditors and how the regulator needs to have certain powers framed to ensure that it can control the activities of auditors for certain other investment activities. Perhaps that is not set out in the Bill as it is currently framed. I think that those are all reasonable points and I am happy to accept the amendments.

Amendment 102 agreed to.

Amendment proposed: 42, in schedule 3, page 175, leave out lines 16 to 21.—(Chris Leslie.)

Question put, That the amendment be made.

The Committee divided: Ayes 7, Noes 10.

Division number 22 Decision Time — Schedule 3 - Financial Conduct Authority and Prudential Regulation Authority: Schedules to be substituted as Schedules 1ZA and 1ZB to FSMA 2000

Aye: 7 MPs

No: 10 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

Amendment proposed: 69, in schedule 3, page 176, line 6, at end insert—

Publication of minutes and agendas

10 (1) The FCA shall make arrangements to publish, unless publication would be inappropriate, the agendas and minutes of the meetings of its committees and sub-committees.

(2) When a meeting of any committee or sub-committee of the FCA makes a decision upon any matter of public policy, the minutes of the meeting or meetings that result in that decision shall summarise the considerations which were taken into account, both for and against the decision.’.—(Chris Leslie.)

Question put, That the amendment be made.

The Committee divided: Ayes 7, Noes 10.

Division number 23 Decision Time — Schedule 3 - Financial Conduct Authority and Prudential Regulation Authority: Schedules to be substituted as Schedules 1ZA and 1ZB to FSMA 2000

Aye: 7 MPs

No: 10 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I beg to move amendment 70, in schedule 3, page 183, line 10, at end insert ‘merit, fairness, openness and’.

This amendment is to proposed new schedule 1ZB in schedule 3. On page 183, there are a number of provisions on the appointment of members to the governing body of the Prudential Regulation Authority. Paragraph 10 on page 183 states:

The Bank must have regard to generally accepted principle of good practice relating to the making of public appointments.”

That is a broad-brush phrase. The amendment would add merit, fairness and openness to the principles that the Bank must have regard to in those public appointments. I make no apology for trying to tighten up the framing of the Bill on those public appointments. We are already in a situation where these are public appointments at arm’s length from Government Ministers, although they are still within the public domain. As such, it is important that they comply not only with generally accepted principles, but specifically with the code of practice of the Office of the Commissioner for Public Appointments, which sets out what those generally accepted principles should be.

The difficulty is that this falls into the grey area of what is and what is not a public appointment. In this instance, these are appointments to a company. The PRA will be a limited company, so we are talking about directors of a body corporate. For the avoidance of doubt, rather than the PRA using the orthodox process of nods and winks in some of these appointments, which we have seen too often, we must have open competitions, appointments on merit according to the principles of equal opportunities and of transparency and openness in the arrangements. If we put such arrangements in the Bill, it is important to be more stringent in the terms in which we frame them. We have debated issues such as the sort of person who might be  appropriate for membership of the board of the PRA, and the Minister will know that we have concerns about whether they will come from a sufficiently broad cross-section of industry and consumer voices and from all corners of the country. At the very least, I hope that the Minister will accept those basic principles.

We must ensure that those who are chosen to serve have the right abilities, experience and qualities to match the job description, and that any appointment process can stand independent scrutiny. Will the Minister explain whether appointments to the PRA will be subject to the code of the Office of the Commissioner for Public Appointments? That is an important first principle. I should also be grateful if he would reiterate who will make the appointments, what the process will be, where the vacancies will be advertised, and so on. Those are the issues that we want to test in this amendment.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

Paragraph 10 to schedule 1ZB already requires that appointments to the PRA board should take place in line with generally accepted principles of good practice relating to public appointments. The articulation of those principles is the code of practice for ministerial appointments to public bodies, which is published by the Commissioner for Public Appointments. Its aim is to ensure that public appointment processes are fair, open and transparent, command public confidence and result in appointments that are made on merit. The Bill already requires the Bank to run the appointments process according to the principles of merit, fairness and openness, so the amendment is unnecessary.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I am grateful to the Minister for confirming that the appointments will be subject to the code set out by the Office of the Commissioner for Public Appointments. That was the assurance that I sought, but it would have done no harm to have had a slightly tighter definition of the provision. He says that there is not enough specificity in our amendments, and that they are too imprecise and vague in their definition, but he refers to generally accepted principles of good practice. It is worth parking that, and remembering that that is acceptable in this context, but not in others. However, I accept the Minister’s commitment, which is very welcome, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: 119, in schedule 3, page 184, line 18, leave out ‘,318 or 328’ and insert ‘or 318’.—(Mr Hoban.)

Question proposed, That the schedule, as amended, be the third schedule to the Bill.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

This is a relatively short but important schedule. We have pointed out a number of concerns about specific elements, but we will now debate the principle of some of the working arrangements of the FCA in particular. I am sorry that the Committee declined to support our amendment 69 on the publication of the minutes of the FCA. I know that the Chancellor has been challenged on that and that the Treasury Committee has raised concerns about it. I hope that, on reflection, the Minister and his colleagues will return to the matter at a later date, because it is vital that we do not just set up functional standing orders for transacting the business of the FCA and the PRA; the arrangements need to be transparent and open. The two new regulatory  bodies are powerful and their arrangements need to be as open to scrutiny as possible. The Minister will know my hope that we should be establishing, for example, a super-affirmative process—an enhanced affirmative arrangement—for resolutions on macro-prudential policy that come from the Bank of England that will affect the work of the PRA and the FCA. It is important, because of the significance of some of the powers that the two new bodies will have over the economy and the public at large, that we have the ability to test, to challenge and to see inside their decision-making processes.

It is a pity that the members of the Treasury Committee who are on this Committee did not—to put it kindly—take the opportunity to press or cajole the Minister, at least in the public domain, about the elements of the workings of the FCA or the PRA that could have been improved. We should have had a greater sense that the FCA was going to be a consumer champion and that it would be subject to far broader consultative processes, so it is a pity that hon. Members did not go down that particular route. We will undoubtedly want to return to such issues on Report. I will not object at this stage to the workings of schedule 3, but I am not particularly motivated to support them either, so I will see what changes the Minister may come back with on Report. The glass is half full on schedule 3 for the time being.

Schedule 3, as amended, agreed to.