`Taking account of costs of compliance

HC Deb 26 October 1989 vol 158 cc1145-52

14A. The body must have satisfactory arrangements for taking account, in framing its rules, of the cost to those to whom the rules would apply of complying with those rules and any other controls to which they are subject.'.

The amendment fulfils a commitment that I gave in Committee to my hon. Friend the Member for Richmond and Barnes (Mr. Hanley). It requires a recognised supervisory body to have satisfactory arrangements for taking account of costs of compliance with its rules, and any other controls to which its members are subject. An analogous requirement is placed on recognised bodies under the Financial Services Act by clause 189 of the Bill.

Ms. Joyce Quin (Gateshead, East)

The Opposition are not happy with the amendment, which requires the recognised supervisory bodies to be set up to take costs into account in the training of their rules. It seems to imply that if it is considered too expensive to comply with the rules a less good and less effective system will be introduced.

We expressed our worries in Committee, not in relation to this amendment—which had not yet appeared—but in relation to a Government new clause relating to the amendments to the Financial Services Act in which the principle of cost compliance was again introduced. At that time we expressed our concern that that might mean that cost-cutting would take precedence over investor protection. The concerns that we expressed were shared by other organisations, in particular the Consumers Association, which felt that that might lead to a second-rate regulatory service for consumers and investors.

We had an interesting discussion on the matter in Committee. My hon. Friend the Member for Newcastle upon Tyne, Central (Mr. Cousins) talked about how those costs would be defined. He wanted to know whether they would be the direct costs of complying or the indirect costs. The former Parliamentary Under-Secretary of State for Corporate Affairs seemed to imply in his reply that it would be both direct and indirect costs. My hon. Friend referred also to something about which I am concerned which is the possible dangers of talking-up the costs of compliance and thereby introducing the danger of giving a convenient financial excuse for not having adequate regulation.

9 pm

The hon. Member for Beaconsfield (Mr. Smith) seemed to share some of the concerns that were expressed by the Opposition. He said that writing cost compliance into the Bill was unnecessary since those responsible would presumably seek to implement the provisions in the most cost-effective way. However, writing cost compliance into the Bill makes it seem as if costs are more important than implementing the necessary measures of regulation.

In Committee the Minister said that he would look carefully at the reservations expressed by the Opposition and such bodies as the Consumers Association. He said that he would see whether he could respond to them positively on Report. Unfortunately, the reverse seems to have happened and cost compliance has also been put forward for inclusion in this part of the Bill. Instead of removing the principle, we now see it reinforced in this amendment. I do not know whether the Minister felt strongly enough to introduce that extra reference to the principle of cost compliance or whether it was his ex-colleague, the former Under-Secretary of State, who decided that he did not agree with the reservations expressed in Committee and wanted to reinforce the principle. Perhaps the Minister can explain exactly how that was arrived at.

I realise that it was one of the Government's supporters—the hon. Member for Richmond and Barnes (Mr. Hanley)—who urged the Government to include a provision of this kind. In Committee the hon. Gentleman declared an interest as the parliamentary adviser to the Institute of Chartered Accountants. He said that it was the institute that instigated the idea of cost compliance at this stage of the Bill. Can the Minister tell us that the amendment is not simply being introduced in response to one sectional interest? Opposition Members would like to be assured that the Minister has consulted widely before introducing the new amendment. Perhaps he can give us details of the consultations that he has had with various interests.

In Committee the Minister's former colleague tried to assure us that the interpretation of the principle of cost compliance would not be detrimental to consumers, the regulatory system or to investor protection. He said that he felt that it would simply mean that the regulator would seek to achieve compliance with the rules in the least costly and most cost-effective way. That emphasis on cost is still open to the other interpretation, which is simply that certain measures of investor protection or regulation might not be introduced simply because of the cost involved. We are concerned that the Bill might be interpreted in that way. We feel strongly that it should not be able to be interpreted in a way which would undermine the measures to have adequate and proper regulation of auditing. For that reason, we are unhappy about the proposed change and feel inclined to oppose it.

Mr. Hanley

The hon. Lady has rightly pointed out certain fears which may be present in the minds of those who view the clause from outside. I am happy in my conscience to state that in my view the clause is wholly reasonable because, as I said in Standing Committee, it mirrors one that has already been accepted by the House in the Financial Services Act. It merely brought into line the regulatory bodies such as the Institute of Chartered Accountants in England and Wales with the other direct regulatory bodies which exist under the Financial Services Act.

That point was aired in Standing Committee. I can do little better than to quote my hon. Friend the Minister, who said on 13 June 1989: The Government believe that it is vital that regulatory bodies pay proper regard to the direct and indirect costs of complying with the rules. It is all too easy, even for practioner-based bodies, to decide upon an approach to a regulatory problem without having assessed the cost of the various alternatives and, unless costs are properly assessed, the regulatory system risks being more burdensome than necessary."—[Official Report, Standing Committee D, 13 June 1989; c.340.] I feel strongly that the system must be cost-effective, as the hon. Lady rightly said, but it does not necessarily follow that it has to be the most costly. There has to be a balance or the whole system will collapse. We need a system that is reasonably cost-effective. We need the best system that we can get, without its imploding through too great expense.

Mr. John Garrett

The hon. Gentleman drew a direct analogy between the arrangements for taking into account the cost of compliance proposed here with what happened in the Financial Services Act. We are here discussing a largely self-regulatory profession which might take a different view of the costs and benefits of assiduity in controlling departures from standards from that taken by a body such as the Securities and Investments Board which acts directly on the authority of the Secretary of State under the Financial Services Act, so is the analogy entirely apt?

Mr. Hanley

It is indeed, but the hon. Gentleman is right to raise the subject. The joint monitoring unit that I visited recently is not the poodle, the child or the creature of a regulatory body such as the Institute of Chartered Accountants in England and Wales or the other bodies to which it refers. It is a very separate unit, and therefore analogous to FIMBRA or the other bodies which are made up of individual companies sending in subscriptions, acting not only as a regulatory body but as an advocate of the particular industry.

The way in which the self-regulatory organisations have developed shows that they have a dual role. They are not cosy clubs for members of the organisations concerned, but genuine regulatory organisations which are close enough to the bodies that they represent to understand the industry and to know any wrinkles that members of those organisations might try to use to dodge regulations. The self-regulatory system is therefore the most effective that we have.

The differences between the recognised professional bodies and the self-regulatory organisations are fewer than the hon. Gentleman might think. In my view, the similarities are greater. Of course, the self-regulatory organisations were set up specifically to take up a task with the recognised professional bodies. With the exception of one, they have existed as self-regulatory bodies for many years. They are based on a system of ethics which I believe has been proven over the years. It is a cost-effective system, but the Government have nevertheless inserted a clause providing that there must be satisfactory arrangements for taking the costs into account. That is acceptable, and shows a trust that the organisations will have to maintain.

If the hon. Gentleman's fears are borne out in future, I shall support him in calling for an end to the system. At the moment, happily, I believe that we have an extremely effective system. I am grateful to the Government for having added to its confidence by the clause, which is no more than reasonable and mirrors the Financial Services Act.

Mr. Cousins

I am grateful for the opportunity to contribute to the debate, and I thank my hon. Friend the Member for Gateshead, East (Ms. Quin) for kindly referring to the remarks that I made in Committee.

The debate on the amendment, and similar amendments, in Committee was inhibited by a sense of outrage among certain sections of the financial community about the apparent costs of the regulatory mechanisms set up under the Financial Services Act 1986. There was far too much of a stampede to give in to those pressures. As it has turned out, the chairman of the Securities and Investments Board has conducted himself extremely well in this matter. He has been calm, persistent in putting forward the correct definition, and at the same time has drawn up coherent proposals to deal with the underlying concerns that people have expressed.

The debate in Committee was far too inhibited by what one may regard as the Poujadist section of the financial markets. A number of unfortunate public statements contributed to the attempted undermining of the public standing of the regulatory bodies set up under the Financial Services Act. It has transpired that because of the chairman's integrity and persistence, and because of the way in which he bent to his task and was not distracted from it by all the noises to which he was subjected, that danger has been avoided. So long as that individual holds his current position and continues to work with the people with whom he currently works, we shall have no fears in that respect.

None the less, my hon. Friend the Member for Gateshead, East was right to draw the matter to our attention, because we are dealing not with regulatory bodies but with individual professional standards and performance. The only consideration should be securing the highest possible standards of personal professional repute.

There has been a train of examples of what can go wrong. Serious questions are being asked, not least in reports by inspectors of the Department of Trade and Industry. It is unfortunate that a shadow is being cast over the new bodies that will be set up and the current bodies, if they are to take over the task of regulation. The only consideration for the regulatory bodies, when exercising their regulatory powers over the individuals in their profession and the standards that they attain, must be to ensure that those standards are the highest.

The amendment is unfortunate, and before moving it the Government would have been better advised to have recovered from their temporary panic about the costs of setting up regulatory mechanisms.

Mr. Forth

I have been trying to understand why Labour Members are expressing concern, because I believe that they are missing the blindingly obvious. Perhaps in the wake of this evening's excitement that is understandable.

We are trying to achieve a measure of practicality and effectiveness. If we are to make the rules precisely to achieve the high standards that the hon. Member for Newcastle upon Tyne, Central (Mr. Cousins) mentioned, it is only sensible and essential to ensure that regard is paid to their cost. We do not want to end up—I do not think that it is a great danger, but let us ensure that it does not happen—with an over-enthusiastic regulatory body which rushes off and seeks to lay down rules so onerous that they drive these activities out of existence.

9.15 pm

That is the answer to the hon. Member for Gateshead, East (Ms. Quin) who asked about the consumer's interest. We have an effective profession operating in the interests of the community as a whole, which includes the business community and consumers. Consumers want a profession which operates effectively, so its rules must not only be effective but must not be so onerous as to drive people out of business. My hon. Friend the Member for Richmond and Barnes (Mr. Hanley) ably illustrated that point.

The hon. Member for Gateshead, East asked what the costs mean. That was a slightly strange question, given the profession that we are discussing. If she does not know what the costs mean, I cannot say with greater confidence what is meant.

Mr. Cousins

The Minister must descend from his talent for occasional Poujadism and return to the subject of the debate. My hon. Friend the Member for Gateshead, East (Ms. Quin) put a clear question to him. Does it mean direct costs, including indirect costs, or does it mean direct costs alone? That can make a considerable difference. The Minister would be better occupied using fewer knockabout tactics and applying his mind to those specific questions.

Mr. Forth

We are talking about professional accountants, not shopkeepers. The hon. Gentleman is in danger of getting the two confused. I shall not attempt to give a detailed answer to that question. It is not my job to set about defining the framework of costs to be taken into account. The bodies concerned will know well the kind of relevant costs involved. It would be inappropriate for me to answer, although it might be appropriate for my hon. Friend the Member for Richmond and Barnes to give us a long dissertation on the relevant costs.

Mr. Hanley

rose——

Mr. Forth

My hon. Friend is about to do so. I give way to him.

Mr. Hanley

I am grateful to my hon. Friend for his brief invitation. The best way to regulate the investment business is to have a full-time inspector based permanently on site as an independent advisers business. That would cost so much that the independent adviser would give up doing the job. He would not bother to help the public. For chartered accountants, it would mean that a person who was professionally qualified and whose ethics were such as to lead him to concentrate not only on independence but on truth and fairness would be driven out of giving investment advice.

It cannot be in the consumer's interests for all those who currently give independent advice, especially when they are backed by a royal charter and a history of service to the public, to be driven from giving a particular service to the public purely because the costs are so great that it is not worth being in the business. That is why we need. a balance between having a regulated trade, such as one advising the public, and having costs that are reasonable in terms of providing regulation over those who practise.

Mr. Forth

I am grateful to my hon. Friend.

I have tried to answer the Opposition's questions, and I hope that I have succeeded. As I am conscious of the passage of time and wish to ensure that we have every opportunity to consider the Bill in detail, I shall leave it at that and hope that the House will support the amendment.

Ms. Quin

Having listened to the Minister's few words, I am not reassured. He has not responded to some of my questions. I asked him what consultations he had had and whether he had spoken just to the one sectional interest which we knew was keen on getting the amendment introduced. He also did not answer my question about how exactly it was decided to include in the Bill references to cost compliance in addition to the one reference that had been decided in Standing Committee discussions on amendments to the Financial Services Act 1986.

The Minister said that he could not understand why we were raising these matters. Perhaps I should remind him that his former ministerial colleague in the Standing Committee, the hon. Member for Warwickshire, North (Mr. Maude), said that he could well understand the concerns that we were raising about this and also those expressed by the Consumers Association and others, although he felt that they were unfounded. I found that response easier to cope with than the present Minister's complete lack of awareness about why we feel that this issue is so important.

We want adequate and proper regulation, not cost-cutting regulation. That is why we are concerned about the amendment and why I urge my hon. Friends to oppose it.

Question put, That the amendment be made:—

The House divided: Ayes 151, Noes 57.

Division No. 355]	[9.20 pm
AYES
Aitken, Jonathan	Glyn, Dr Alan
Alexander, Richard	Goodlad, Alastair
Amos, Alan	Goodson-Wickes, Dr Charles
Arbuthnot, James	Gorman, Mrs Teresa
Arnold, Jacques (Gravesham)	Greenway, John (Ryedale)
Atkinson, David	Gregory, Conal
Baker, Nicholas (Dorset N)	Griffiths, Peter (Portsmouth N)
Bennett, Nicholas (Pembroke)	Ground, Patrick
Blaker, Rt Hon Sir Peter	Hague, William
Boscawen, Hon Robert	Hamilton, Hon Archie (Epsom)
Boswell, Tim	Hamilton, Neil (Tatton)
Bowden, A (Brighton K'pto'n)	Hampson, Dr Keith
Bowis, John	Hanley, Jeremy
Brazier, Julian	Hargreaves, Ken (Hyndburn)
Brown, Michael (Brigg & Cl't's)	Harris, David
Browne, John (Winchester)	Hayes, Jerry
Buck, Sir Antony	Hayhoe, Rt Hon Sir Barney
Burns, Simon	Hayward, Robert
Butcher, John	Hughes, Robert G. (Harrow W)
Butler, Chris	Hunt, Sir John (Ravensbourne)
Butterfill, John	Hunter, Andrew
Carlisle, John, (Luton N)	Irvine, Michael
Carlisle, Kenneth (Lincoln)	Jack, Michael
Carrington, Matthew	Jackson, Robert
Carttiss, Michael	Janman, Tim
Cash, William	Johnson Smith, Sir Geoffrey
Channon, Rt Hon Paul	Jones, Gwilym (Cardiff N)
Chapman, Sydney	Key, Robert
Chope, Christopher	Kilfedder, James
Clark, Dr Michael (Rochford)	Kirkhope, Timothy
Clark, Sir W. (Croydon S)	Knapman, Roger
Colvin, Michael	Knight, Greg (Derby North)
Conway, Derek	Knowles, Michael
Coombs, Anthony (Wyre F'rest)	Lester, Jim (Broxtowe)
Cran, James	Lilley, Peter
Davies, Q. (Stamf'd & Spald'g)	Lord, Michael
Davis, David (Boothferry)	Lyell, Sir Nicholas
Day, Stephen	Maclean, David
Devlin, Tim	McNair-Wilson, Sir Patrick
Dicks, Terry	Malins, Humfrey
Dorrell, Stephen	Mans, Keith
Dover, Den	Martin, David (Portsmouth S)
Dunn, Bob	Maxwell-Hyslop, Robin
Durant, Tony	Mellor, David
Evennett, David	Meyer, Sir Anthony
Fallon, Michael	Mills, Iain
Fenner, Dame Peggy	Mitchell, Sir David
Fishburn, John Dudley	Morris, M (N'hampton S)
Fookes, Dame Janet	Morrison, Sir Charles
Forsyth, Michael (Stirling)	Moss, Malcolm
Forth, Eric	Nelson, Anthony
French, Douglas	Neubert, Michael
Gale, Roger	Newton, Rt Hon Tony
Gardiner, George	Norris, Steve
Garel-Jones, Tristan	Oppenheim, Phillip
Gill, Christopher	Page, Richard

Paice, James	Thompson, D. (Calder Valley)
Pattie, Rt Hon Sir Geoffrey	Thompson, Patrick (Norwich N)
Pawsey, James	Thurnham, Peter
Peacock, Mrs Elizabeth	Townsend, Cyril D. (B'heath)
Porter, Barry (Wirral S)	Tracey, Richard
Porter, David (Waveney)	Twinn, Dr Ian
Portillo, Michael	Waddington, Rt Hon David
Powell, William (Corby)	Walden, George
Raison, Rt Hon Timothy	Waller, Gary
Redwood, John	Ward, John
Rhodes James, Robert	Wardle, Charles (Bexhill)
Riddick, Graham	Watts, John
Ridley, Rt Hon Nicholas	Wheeler, John
Sackville, Hon Tom	Widdecombe, Ann
Shaw, David (Dover)	Winterton, Mrs Ann
Shepherd, Richard (Aldridge)	Wood, Timothy
Smith, Tim (Beaconsfield)	Young, Sir George (Acton)
Soames, Hon Nicholas
Stern, Michael	Tellers for the Ayes:
Stradling Thomas, Sir John	Mr. David Heathcoat-Amory and Mr. Irvine Patnick.
Taylor, John M (Solihull)
Taylor, Teddy (S'end E)

NOES
Allen, Graham	Illsley, Eric
Ashton, Joe	Jones, Martyn (Clwyd S W)
Banks, Tony (Newham NW)	Leighton, Ron
Barnes, Harry (Derbyshire NE)	Macdonald, Calum A.
Battle, John	Madden, Max
Benn, Rt Hon Tony	Meale, Alan
Bennett, A. F. (D'nt'n & R'dish)	Michael, Alun
Bermingham, Gerald	Michie, Bill (Sheffield Heeley)
Buchan, Norman	Morgan, Rhodri
Campbell, Ron (Blyth Valley)	Nellist, Dave
Clay, Bob	Patchett, Terry
Cousins, Jim	Powell, Ray (Ogmore)
Cox, Tom	Quin, Ms Joyce
Cryer, Bob	Reid, Dr John
Cummings, John	Richardson, Jo
Dewar, Donald	Robinson, Geoffrey
Dixon, Don	Ross, Ernie (Dundee W)
Dobson, Frank	Skinner, Dennis
Fields, Terry (L'pool B G'n)	Spearing, Nigel
Flannery, Martin	Taylor, Mrs Ann (Dewsbury)
Flynn, Paul	Wall, Pat
Foster, Derek	Wareing, Robert N.
Foulkes, George	Welsh, Andrew (Angus E)
Fyfe, Maria	Welsh, Michael (Doncaster N)
Galloway, George	Winnick, David
Garrett, John (Norwich South)	Wise, Mrs Audrey
George, Bruce
Golding, Mrs Llin	Tellers for the Noes:
Gould, Bryan	Mr. Frank Haynes and Mr. Ken Eastham.
Hinchliffe, David
Hughes, John (Coventry NE)

Question accordingly agreed to.