CONDUCT OF BUSINESS RULES (Hansard, 30 October 1986)

§ Mr. Michael Howard
I beg to move, That this House doth agree with the Lords in the said amendment.

Mr. Deputy Speaker
With this it will he convenient to take the following Lords amendments: No. 66, in clause 46, page 32, line 42, after "45" insert "or (Financial resources rules)". No. 108, in clause 57, page 45, line 24, at end insert— (2A) Subsection (1) above does not apply—

(a) to a contravention of rules made under section (Financial resources rules) or conditions imposed under section 46 in connection with an alteration of the requirements of those rules; or

(b) by virtue of subsection (2) above to a contravention of rules relating to a matter in respect of which rules have been or could be made under section (Financial resources rules)."

No. 109, in clause 57 page 45, line 26, leave out "this section" and insert subsection (1) above applies or of a contravention of rules made under section (Financial resources rules) above or such conditions as are mentioned in subsection (2A)(a) above". No. 444, in schedule 8 page 166, line 26, at end insert— () The rules under section (Financial resources rules) of this Act shall not apply to an insurance company which is an authorised person by virtue of section 30 of this Act.

§ Mr. Howard
This new clause provides an explicit power to make financial resources or capital adequacy rules. Requirements as to capital adequacy are recognised as an important safeguard for investors, both directly in helping to head off financial problems in the firms they are dealing with and more generally in helping to avoid knock-on problems in the market as a whole. They are a feature of the banking and insurance regimes and of existing self-regulation, for instance, in the stock exchange.
549 It has always been the Government's intention that regulators should be able to set capital adequacy requirements. Doubts were expressed in Standing Committee by the hon. Member for Dagenham (Mr. Gould) about whether the "fit and proper" test for authorisation and the general power to make conduct of business rules were a sufficient basis. We have now concluded that it is desirable to put the matter beyond doubt by introducing an explicit power. That is the effect of the amendments.

§ Mr. Gould
In view of the Minister's concluding remarks, the House will not be surprised to hear that I welcome the new clause. Before I extend that welcome and ask a brief question, I shall defend my hon. Friend the Member for St. Helens, South (Mr. Bermingham). According to my recollection—he will correct me if I am wrong—he spoke at both the Second and Third Reading stages. I assure the House that he would have dearly wished to be on the Committee but for the fact that his services were so much in demand and he was on the Finance Bill Committee. His credentials are beyond attack.
I welcome the new clause. I am delighted that the Minister has recognised—it was a view shared by all members of the Committee, not simply a view expressed by Labour Members — the importance of making a specific reference to an important requirement.
I am intrigued about one aspect. Perhaps there is an obvious answer that I do not immediately see. The provision applies to those who secure authorisation by direct application under clause 24 and to those who secure authorisation under clause 30 by virtue of being authorised in another member state. That opens up the possibility that a person who is authorised under clause 30 and authorised, therefore, in his own native country might well be subject—if I read the clause correctly—to a set of different requirements which may have no equivalent in his home country but which lay down minimum capital adequacy rules. What would be the position if a person otherwise qualified for authorisation under clause 30 but failed to meet the rules which would prevail? Perhaps there is an obvious answer, but I do not see it. I am sure that there must be a straightforward answer.

§ Mr. Howard
The rules may also apply to persons authorised under clause 30. Rules may make different provisions for different cases. It would be possible for rules to be made under the provisions to persons authorised under clause 30.

§ Mr. Gould
Is the Minister saying that somebody who would be authorised under the general provisions laid down in clause 30 could, nevertheless, be precluded from carrying out investment business if his capital base was inadequate to meet the requirements laid down under the new clause?

§ Mr. Howard
That is the effect of what I have just said.

§ Mr. Gould
Could the general requirements of obligations under the treaty of Rome, and so on, which require us to accept without let or hindrance, as it were, the right of professional people to practise their profession throughout the Community therefore be put in jeopardy by what the Minister has just said?

§ Mr. Howard
I would not want to speculate on the consequences in Community law of what we are doing. Clearly, we would not have introduced the provision and enabled it to apply in the manner that I have suggested if the view was taken that it fell foul of the treaty. I do not accept that there would necessarily be any difficulties of that kind. Clearly, in applying the provisions, regard must be had to the provisions of the treaty. The clause permits the test to be applied to persons authorised under clause 30.

§ Mr. Cash
I hope that the amount which will be prescribed under the rules will be adequate—that is the acid test—and that the amount of financial resources to be required will cover the amount of contingent liability that could arise. I dare say that that is a big question. We have some experience of professional bodies such as the Law Society where there is a significant amount of money at stake. It is important that people should be aware of how much liability they may have to incur. I should be grateful if, in the course of time, the Minister would be good enough to drop me a line saying how the rules might be devised.