GRANT AND REFUSAL OF AUTHORISATION (Hansard, 12 June 1986)

§ Mr. Ashdown
I beg to move amendment No. 50, in page 16, line 5, at beginning insert 'Subject to subsection (2A) below,'.

Mr. Deputy Speaker
With this it will be convenient to consider amendment 51, in page 16, line 10, at end insert— '(2A) The Secretary of State may refuse the application if he considers that it is unnecessary having regard to the existence of one or more self-regulating organisations which are concerned with investment business of a kind with which the applicant is concerned and which have been or are likely to be recognised under section 10 above.'.

§ Mr. Ashdown
The purpose of amendments Nos. 50 and 51 is to give a reserve power to refuse direct registration should the Secretary of State wish to do that.
Many hon. Members will recognise—this point arose in Committee and it has been a subject for discussion elsewhere — that there is a danger of too much direct registration with the SIB. If that were to happen, the SIB would be swamped and its effectiveness would be undermined. It might even be possible for a group of would-be members of any SRO deliberately to undermine 564 that SRO by seeking direct registration with the SIB. The amendment copes with that by allowing the Secretary of State the powers to refuse direct registration or to delegate those powers in the case of an existing SRO.
As the Bill stands, it is possible for members of an SRO who found the rules too onerous or too rigidly enforced or who found the fees too high to remove themselves from the SRO and either apply to another SRO or to seek direct registration with an SIB. That could destroy the SRO concerned. It would also negate the whole principle of self-regulation because people would be able to apply to the superior body for direct registration and so undermine the effectiveness of the SRO.
That is the basis of amendment No. 50 and that is the danger which the amendment addresses. The power that we seek is sensible and is essentially a reserve power.

§ Mr. Tim Smith
Is the SIB seeking this power?

§ Mr. Ashdown
I am not aware whether the SIB is seeking this power. However, that is a rational judgment. The dangers that I have outlined which may confront us in future make a case for the power. I know that other hon. Members will agree with that.

§ Mr. Nelson
I have a measure of sympathy for the intent behind the amendment, as I made clear in Committee. I fear that the regime may be thwarted by people who, for a variety of reasons, apply to the designated agency instead of the SRO. The latter is the desirable course and maintains the integrity of the system of regime supervision as foreseen in the White Paper.
My hon. and learned Friend the Minister, in Committee, appeared to state that the cost and rules of either the Secretary of State or the SIB as designated agency might be so onerous as to provide a substantial disincentive for anyone to seek authorisation by that route. That needs repetition on Report. That is the major point of resistance to the amendments.
I am worried that people may treat an application for SIB authorisation as a court of appeal against refusal by an SRO to grant an authorisation. In some circumstances, many operators in the market may feel that the higher cost of attaining authorisation from the SIB is well worth while because they do not have to be subject to the day-to-day monitoring which certain SROs will and should impose. Those who seek protection under the framework as designated should be given sufficient reassurance to allow the amendments to be dropped, or my hon. Friend the Minister should later accept something along these lines.

§ Mr. Gould
This is a matter which we also argued in Committee. We have some sympathy with the amendment, for the reasons that have already been given.
There is a danger that the Securities and Investments Board's structure will be rendered unworkable because individuals, who are perhaps professional people, whose professional bodies do not seek recognition are obliged to seek authorisation or because some of the very large institutions decide that it is the simpler means of getting authorisation, preferring it to joining three or four SROs. I remain of the view that it would be worth while as a precautionary measure to have a reserve power such as this.
I suspect that the Minister, having heard these arguments before, will not be persuaded by hearing them 565 again. I nevertheless hope that he will recognise the danger and that he does not live to regret overlooking this opportunity.

§ Mr. Howard
The hon. Member for Dagenham (Mr. Gould) says that, having failed to be persuaded by these arguments in Committee, it is unlikely that I shall be persuaded by them this evening. He is correct.
I am sure that most businesses will choose to become authorised through membership of an SRO. These bodies form the cornerstone of practitioner-based regulation. They will be close to the market place and best placed to adapt the requirements for investor protection into rules which are relevant and practical for the investment activity with which they are concerned. Their familiarity with the needs of the investment businesses that they regulate will help them to devise effective monitoring and enforcement arrangements which do not impose unnecessary burdens on the businesses.
I am confident that most businesses will regard SRO authorisation as the most practicable route for them. In addition, it may well be found that the cost of direct authorisation is higher than that chargeable for SRO membership and that control by an inevitably remoter body will be less efficient for a business.
Why should a power of the sort described in the amendment be contemplated to back up the attractions of SRO membership? I believe that any coercion over the route by which a business may choose to become authorised is inappropriate. SROs will be private bodies, exercising powers over their membership by the contractual agreement between them. If powers are taken which could in effect be used to direct individual businesses to apply to join SROs, the status of those bodies cannot help but be changed. I do not believe that they should be forced to consider and, if fit and proper, to admit to membership applicants who do not want to become members.

§ Mr. Campbell-Savours
Does not the Minister understand that the amendment proposes only a reserve power? It is not imposing anything. Can he not see it in those terms?

§ Mr. Howard
I am suggesting that the exercise of that power would be inappropriate. If one takes the view that the exercise of such a power would be inappropriate—I am setting out the reasons—there is no call even for a reserve power. The conflict to which I have referred would inevitably be a cause for friction, and the success of self-regulation depends on voluntary acceptance of the spirit as well as the letter of the rules. An unwilling member is unlikely to have that sort of attitude.
Equally, the business may feel that an SRO is not the right body to regulate its activities, that its charges are excessive or that its rule book or methods present problems for the business's activities. Why should the agency be able to upset the business's commercial judgment and force it to apply to an SRO?
I realise that there is concern among some conglomerates that they may have to join several SROs for various aspects of their business and that this will be costly and bureaucratic. The proposals from the SIB for the creation of a lead regulator which would be responsible for handling overall financial surveillance should be adequate 566 to minimise duplication of effort and over-bureaucracy. Even conglomerates should find SRO membership a convenient route for authorisation.
I do not believe that large numbers of businesses will want to seek direct authorisation, but even if they did I do not agree that they would swamp the agency or that the system could not work, although the agency would have to take on more staff to consider applications and to monitor businesses thereafter. By building up its resources, and with practitioners on the board and staff, the agency would be able to cope. I hope and expect that most businesses will join SROs, but if they do not the system that we are proposing is flexible enough to deal with them. The amendment would remove the right of a business to choose how to get its authorisation. We should preserve that freedom of choice, and I invite the House to reject the amendment.

§ Mr. Ashdown
I must again express some sadness at the Minister's reply. He said, rather revealingly, that the arguments that had been put to him had not persuaded him to change his mind. We know that no powerful bodies are behind the arguments and that they must stand by themselves.
I am grateful to the hon. Member for Chichester (Mr. Nelson) for his properly qualified support and to the hon. Member for Dagenham (Mr. Gould) for his support. The hon. Member for Dagenham said — the Minister admitted it — that conglomerates might be required to register with three or four SROs. That will put cost burdens on them. The direct registration procedure might prove less expensive and less bureaucratically onerous.
The Minister said that he believed that most businesses would regard SROs as their appropriate route for authorisation. I agree. I envisage most businesses taking that route. As the hon. Member for Workington (Mr. Campbell-Savours) said, we are suggesting a reserve power. Firms might well choose a different route.
The Minister has set his face against the amendment. He ended with a curious statement — he said that we would remove a right and force businesses. That is not what we intend. We are suggesting a reserve power for use in exceptional circumstances. By rejecting the amendment, the Minister has left open the possibility of a chain of events which may cause him to change his mind.

§ Mr. Howard
I beg to move amendment No. 52, in page 16, line 15, leave out 'exempt' and insert 'appointed'.

Mr. Deputy Speaker
With this it may be convenient to consider Government amendments Nos. 64 to 68, 70, 71, 76, 84 to 86, 162 to 164, 193 and 262.

§ Mr. Howard
In reply to a similar amendment which was proposed in Committee by my hon. Friend the Member for Beaconsfield (Mr. Smith), I accepted that the phrase "exempt representative" might not be the best one to use in relation to the people covered by clause 41 in so far as it tended to suggest that they were not to be subject to the Bill's provisions at all. This is not, of course, the case. Since the conduct of an exempt representative is treated under clause 41 as the conduct of his principal for the purposes mentioned in the clause, the exempt representative would have to comply with whatever provisions of the Bill or rules and regulations made under 567 it as would have applied to his principal. The only exemption is from the requirement separately to become authorised.
Nevertheless, I am aware that the phrase has tended to give rise to an understandable misconception regarding the precise status of the persons covered by clause 41, and I accordingly undertook in Committee to consider an alternative expression that might convey a rather clearer indication of that status. The phrase "appointed representative" was proposed by my hon. Friend the Member for Beaconsfield and is, I believe, the one that best achieves that objective.