§
.—(1) The Treasury may by order make provision—
(2) An order under subsection (1) may be made so as to apply—
(3) An order under subsection (1) may be made so as to apply—
(4) "Provision" means a provision of, or made under, this Act.
(5) Nothing in this section is to be read as affecting the provisions of section 373(2).".—[Mr. Timms.]
Brought up, and read the First time.
Mr. Deputy SpeakerWith this it will be convenient to discuss the following: amendment No. 198, in clause 17, page 8, line 4, leave out
a regulated activity in the United Kingdomand insert—one or more regulated activities in the United Kingdom as a business".Government amendments Nos. 67, 406, 77 to 80, 84, 116, 156, 421 and 422.Amendment No. 36, in clause 364, page 190, line 29, after "State," insert—
in exercise of an EEA right".Government amendments Nos. 423 and 424.Amendment No. 184, in page 190, line 33, leave out "in any EEA State" and insert—
Government amendments Nos. 425, 426 and 429.
- "(i) in any EEA State; or
- (ii) in exercise of an EEA right;".
§ Mr. TimmsThis large group of amendments brings together three important issues, which relate to the scope of regulation: the business test; the territorial scope of regulation; and exemptions from the general prohibition.
The amendments would introduce a form of business test in the Bill, and allow the Treasury to make orders, which amend the application of the business test when appropriate. The Government have been thinking along lines similar to the Opposition's in introducing changes to include the business test in the Bill.
Government amendment No. 406 would introduce the business test to the Bill. It would change clause 20 so that, to be classified as a "regulated activity", an activity must, among other criteria, be undertaken by way of business.
Under new clause 33, the Treasury may provide for the circumstances in which a person who would otherwise be regarded as undertaking a regulated activity by way of business would be deemed not to be doing that. An order under the new clause may apply generally to all activities, a specified category of regulated activities, or a particular regulated activity.
1002 Amendment No. 198 proposes changes to clause 17 so that it reads:
No person may carry on one or more regulated activities in the United Kingdom as a business".I hope that, in the light of the Government's proposed amendments, Opposition Members will not want to press the amendment.Amendment No. 422 would make one main change to clause 364. It would cut back the application of the clause on a subject on which the previous drafting partly exceeded the requirements of the directives. That is tackled primarily by providing that the first case specified in the clause will apply where a person: has his registered office, or head office, in the United Kingdom; carries on a regulated activity in another European economic area state; and exercises rights under a single market directive as a UK firm.
Firms that would currently fall outside the scope of the first case—essentially firms that are not passporting under the directives—may instead be treated under another case set out in the clause.
Amendments Nos. 421, 423 and 426 would make consequential drafting changes to clause 364, flowing from amendment No. 422. Amendment No. 425 is a clarifying amendment.
Amendments Nos. 36 and 184 cover territory similar to the Government amendments. I hope that the Opposition are satisfied that they do not need to press them.
Finally, some amendments deal with the implications of being exempt. Currently, the Bill is drafted on the assumption that an exempt person will not also be an authorised person. However, it is silent on whether an exempt person may become authorised. That should be possible.
An exemption enjoyed by virtue of clause 34—clause 35 in the case of appointed representatives—will often extend only to a limited range of regulated activities. A person exempt under those provisions should have the option to become authorised in order to extend the range of regulated activities he carries on. That option is subject to his meeting the qualifying or threshold conditions in schedule 6.
Once authorised, a person's exempt status ceases. His part IV permission must cover all his activities. Customers are entitled to assume that all the regulated activities carried on by a person are covered by the authorisation and subject to the necessary rules and disciplinary procedures, and that the compensation scheme will apply. If that were not the case, customers would be at greater risk when dealing with an authorised person who was also partially exempt than they would be when dealing with another authorised person who did not enjoy any exemption.
To give effect to that proposition, an exempt person can apply for a part IV permission. If that is granted, he becomes an authorised person and the exemption ceases. Amendment No. 67 makes it clear that a person must be either authorised or exempt to carry on a regulated activity. The new permission can cover the formerly exempt business, so long as the qualifying conditions in schedule 6 are satisfied.
Amendment No. 84 provides that if a person is exempt as a result of an exemption order, any application for part IV permission will be taken to include application for 1003 permission for those activities with respect to which he was previously exempt. If an activity that the now-authorised person could have carried on within the scope of the exemption is not covered by the part IV permission, that person cannot continue to carry it on without contravening clause 18.
Assuming that an activity previously carried on within the scope of an exemption is covered by the part IV permission, it is treated in exactly the same way as any other regulated activity carried on by the relevant person. If the part IV permission is cancelled or surrendered, the person will cease to be authorised under clause 30. The previous exemption will apply again, unless it has been repealed or the person no longer meets a criterion necessary to qualify for it.
The same logic does not apply to other categories of person who are exempt from the general prohibition in respect of some regulated activities. Recognised investment exchanges and recognised clearing houses, which are exempt under part XVII, are nevertheless regulated by the recognition regime under that part. It would not be acceptable for them to be authorised separately under part IV without losing their recognised status under part XVII.
Amendment No. 79 provides that appointed representatives of an authorised person may receive exempt status only if they are not themselves authorised persons. Authorised persons may carry on a regulated activity as an agent of another authorised person where that makes business sense and they have the appropriate permission to do so. The other amendments cover drafting points. Government amendment No. 156 imports the definition of "rule-making instrument" in clause 125 to the schedule of definitions set out in clause 363. I hope that those arrangements will be widely acceptable to the House.
§ Mr. Heathcoat-AmoryI am grateful to the Minister for that elucidation. I very much hope that he has the territoriality tests right. That will probably unfold over time.
I shall concentrate on the business test, because we need to know exactly why the Government have gone for a somewhat more restrictive test than the one in the Financial Services Act 1986. Generally, we welcome their incorporation of a business test in the definition of a regulated activity. It must be right to include that in the Bill. New clause 33, which has an "Alice in Wonderland" ring about it, says:
The Treasury may by order make provisionthat those who would not usually be regarded as engaged in business are to be regarded as being so, and those who would usually be regarded as carrying on business are not to be regarded as doing so. I suppose that the Treasury has to have a way of deciding what is a regulated activity, but that wording must and will cause considerable bafflement—and perhaps some amusement—to the outside world when it grapples with what it might regard as a Treasury habit of trying, from time to time, to define black as white and white as black.9.15 pm
That, however, is not really the purpose of my probe. I am asking why the Government have not simply 1004 proceeded on the basis of the concept of a business test that already exists, and is working perfectly satisfactorily under the Financial Services Act.
The Government seek to catch people who are carrying on an activity by way of business. Our amendment No. 198 asks for the words
one or more regulated activities in the United Kingdom as a businessto be inserted. Hon. Members may wonder what the difference is between carrying on an activity as a business, which is our definition, and carrying it on by way of business, which is the Government's definition; but it is rather an important distinction.It is possible to do something in a businesslike way without carrying on the business of doing so. That was made clear in a recent court case involving Morgan Grenfell and the use of derivatives by a local authority. Welwyn Hatfield borough council was held by the court to have entered into derivatives contracts "by way of business", although it was not carrying on the business of doing so. It follows that some activities will now be caught by the Bill, although exactly the same activities do not require authorisation under the Financial Services Act. In other words, the idea of an activity "by way of business" will catch more activities than our definition.
Why is the existing definition defective? Is the Government's proposal part of a deliberate policy to catch more activities? Perhaps the Minister can give an estimate of the additional ground that the new clause is intended to cover, and the reasons behind it.
§ Mr. CousinsI, too, want to concentrate on new clause 33 and amendment No. 406. What I am about to say may illuminate what was said by the right hon. Member for Wells (Mr. Heathcoat-Amory).
I am concerned about the disposal of endowments before term. There is a legal deficiency in the 1986 Act: although the purchase of a long-term endowment insurance product is a regulated activity, its disposal is not. As a result, when endowment insurances—often taken out to support mortgages—are surrendered before term, that act of surrender is not a regulated activity. There is no requirement on the provider of the endowment insurance product to ensure that the person so disposing is fully advised, and made aware of how best to maximise his or her position. Often the provider of the endowment insurance reacquires it at a stated value when a higher value could be obtained on the traded endowment market, but there is no requirement on the provider to make the existence of the market known to the person surrendering.
Of course, nothing that I have said should be construed as encouraging people to dispose of endowments. Clearly, the last thing that anyone with a long-term endowment product should do is dispose of it before term. Someone who does, however, must be enabled to obtain the best possible value.
I have been seeking an assurance from the FSA that the Bill regulates the surrender of endowments. It may be helpful if I read out the latest exchange that I have had with Howard Davies on the topic, which I received just last week. He tells me:
The definition of 'regulated activities' will be finally determined by regulations made under clause 20. The draft of these regulations which Her Majesty's Treasury have published for consultation includes in article 6 the 'regulated activity' of 'carrying out contracts 1005 of insurance'. Our view that we will be able to make rules about the surrender of tradeable endowment policies is based upon our interpretation that, in accepting the surrender of a life policy, the life insurance company would be carrying on this regulated activity.The business test as incorporated in new clause 33 and amendment No. 406 clearly covers the traded endowment market. There can be no doubt about that, but does it cover the act of disposal of the endowment, which may place that product in the traded endowment market? That is my anxiety, on which I seek the Minister's reassurance.
§ Mr. TimmsThere are different tests under different Acts—for example, the Banking Act 1987 and the Insurance Companies Act 1982, as well as the Financial Services Act. No single test has been used. The view that we took was that the test in the Financial Services Act was not the most appropriate, although new clause 33 will allow the test to be refined where it is appropriate to do so. However, the right hon. Member for Wells (Mr. Heathcoat-Amory) was right. Our approach is intended to catch, to use his term, along with any mainstream activity, any activity that falls short of constituting a business in its own right but which should be regulated under the Bill. In that sense, our approach represents a much more secure test. It has never been proposed that the incidental provision of financial services should generally be exempt from the authorisation requirement. We think that the aim is better met by the form of test that is before us.
I am grateful to my hon. Friend the Member for Newcastle upon Tyne, Central (Mr. Cousins) for letting me know that he wanted to raise traded endowment policies, although I am not sure that I have all the answers that I would like to have. Perhaps there should be further discussion on the matter. Clearly, other hon. Members feel as strongly about it as he does.
The traded endowment policy market is pretty small. It is estimated to have a value of £250 million a year. There is concern about introducing disproportionate cost.
I listened with interest to my hon. Friend's comments about the FSA's deliberations on the extent to which regulation would apply. I am personally rather dubious about the benefits of regulating all dealings in that market. It is not clear that the benefits would necessarily exceed the probable costs.
The sale of traded endowment policies to members of the public will be regulated. We will keep under review the case for extending the regulation's scope to include all dealings in traded endowment policies.
§ Mr. CousinsThe Minister may be right to say that the market is a small one, but it is a growing one. The point that I am trying to establish is that, at the point of surrender, the product provider should be obliged to make the existence of the secondary market known to the person surrendering, so that he or she is able to obtain the best advice on, and best value for, the product that they are handing back.
§ Mr. TimmsMy hon. Friend is making a point to which he has clearly given great consideration. I think that he has also had some constituency experience of dealing with the matter. I should like to reflect on the point and write to him on it with some clarification.
§ Mr. FlightThe hon. Member for Newcastle upon Tyne, Central (Mr. Cousins) made roughly the point that 1006 I wish to stress. There is indeed a substantial and growing market. Frequently, the difference between surrender value and commercial value is substantial, but many people do not even know that there is a commercial market where they could sell their endowment. So the only way of squaring the circle is by imposing an obligation on the insurance company with which people have their policy, obliging it at least to tell them that there is such a market. Whether they use that market is another matter. None the less, it is a consumer issue that has long needed to be addressed. As the hon. Gentleman said, the business definition is one way of addressing it.
§ Mr. TimmsUnder clause 110, the FSA will be able to make rules on the carrying on of the regulated activity of carrying out a contract of insurance, including the payment of a surrender value. Such rules could require the insurer, subject to general duty, to notify the policyholder of the existence of the market. Such a possibility therefore exists. However, I shall write to my hon. Friend the Member for Newcastle upon Tyne, Central on the matter, and perhaps copy the letter to the hon. Member for Arundel and South Downs (Mr. Flight).
Question put and agreed to.
Clause read a Second time, and added to the Bill.