§
.—(1) The Authority must keep itself informed about—
(2) In this Part—
exempt regulated activities" means regulated activities which may be carried on by members of a profession which is supervised and regulated by a designated professional body without breaching the general prohibition; and
members", in relation to a profession, means persons who are entitled to practise the profession in question and, in practising it, are subject to the rules of the body designated in relation to that profession, whether or not they are members of that body.
(3) The Authority must keep under review the desirability of exercising any of its powers under this Part.
(4) Each designated professional body must co-operate with the Authority, by the sharing of information and in other ways, in order to enable the Authority to perform its functions under this Part.'.—[Miss Melanie Johnson.]
Brought up, and read the First time.
§ The Economic Secretary to the Treasury (Miss Melanie Johnson)I beg to move, That the clause be read a Second time.
Mr. Deputy SpeakerWith this it will be convenient to discuss the following: Government new clause 36—Designation of professional bodies.
1007 Government new clause 37—Exemption from the general prohibition.
Government new clause 38—Directions in relation to the general prohibition.
Government new clause 39—Orders in relation to the general prohibition.
Government new clause 42—Rules in relation to persons to whom the general prohibition does not apply.
Government amendment No. 455.
§ Miss JohnsonUnder this group of new clauses, professionals will require authorisation only when they perform investment business as their mainstream activity. The Government hope that that approach will avoid the need for precautionary authorisation—meeting the concerns of the Burns committee, and of course others—while enabling the professions to provide an all-round service for their clients in appropriate cases.
We therefore propose that the authority will retain the power to ban individuals who are not fit and proper persons to carry out regulated investment activities or to cut the exemption in relation to a class of person more generally.
The authority will also be required to monitor operation of the new arrangements, which will involve monitoring the effectiveness of the complaints and redress arrangements of the designated professional bodies. The authority will also be able to make rules requiring persons who benefit from the exemption to disclose to their clients that they are not authorised persons.
New clause 35 obliges the authority to keep itself informed about the way in which designated professional bodies supervise and regulate the carrying on of exempt regulated activities by their members, and the way in which the members, who benefit from the exemption, carry on regulated activities. It also requires the professional bodies to co-operate with the authority, to enable the authority to fulfil its duty of oversight.
New clause 36 gives the Treasury the power to designate bodies for the purpose of new clause 35. Bodies will be designated only when they actively regulate their members' provision of financial services.
New clause 37 sets out the requirements that have to be met for a professional to qualify for the exemption. They include: that the person concerned must be a member of a professional body that is designated by the Treasury; that the person concerned must not receive a commission from a third party in respect of the regulated activities unless he accounts to his client for it; that the regulated activities must be provided incidentally to the provision of professional—for example, legal, actuarial or accountancy—services; and that regulated activities must not relate to sensitive products, such as life insurance.
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What amounts to a sensitive product is to be specified by the Treasury, and the regulated activities must be provided in accordance with the rules of the relevant professional body which require the activity to be complementary, and effectively subordinate, to the provision of professional services to a particular client. Those rules must be approved by the authority.
1008 Under new clause 38, the authority may direct that the exemption from the general prohibition is not to apply to certain classes of professional. The authority may only exercise this power, however, where it is satisfied that it is desirable to do so in the interests of clients.
New clause 39 enables the authority to make an order which would have the effect of banning specified persons who are not fit and proper to carry on regulated activities, taking them outside the scope of this new part's provisions. This power complements the authority's power to make prohibition orders under clause 53 of the Bill. It will enable the authority to prohibit particular firms from continuing to carry on relevant regulated activities under the proposed new part.
New clause 42 allows the authority to make rules requiring exempt professionals to disclose to their clients that they are not authorised. Subsection (3) also requires the professional bodies to make rules which are designed to ensure that members who benefit from the exemption only carry on regulated activities which arise from or are complementary to providing professional services to a particular client. If a member of a profession breaches those rules, he will be carrying on particular regulated activities in breach of the general prohibition, and therefore committing a criminal offence. Rules made by a professional bodies under subsection (3) must be approved by the authority.
Amendment No. 455 amends clause 374 so that, in all cases, orders have to be dealt with by affirmative resolution. I commend the new clauses to the House, as they are in line with the changes that I indicated in Committee that we would make.
§ Mr. Heathcoat-AmoryI am glad that the Government have proposed some provisions for excluding professionals who are regulated through their own bodies. I ought to declare an interest as a chartered accountant, although I do not intend to practise—at least not for a bit. [Laughter.] I hope that I will be the judge of the timing as well.
The Economic Secretary alluded to the fact that we debated this matter in Committee and that there was concern, not least from the Law Society of Scotland, that professionals up there would suddenly find themselves regulated by the FSA and that higher fees would be levied. Of course, there was sensitivity that they would be regulated from London instead of Edinburgh—a curious form of reverse devolution.
I presume, although the Minister did not say so, that the clauses have resulted from consultation with the professional bodies. She might say whether they are broadly happy with the way in which the proposals are set out.
I believe that it could be difficult to qualify for an exemption because the provision has been restrictively phrased. For example, the professional in question must not receive from a partner other than his client
any pecuniary reward or other advantagewhich he does not account to his client, arising out of his carrying out of the regulated activities.I can imagine a situation in which a solicitor or an accountant provides advice to a business client about taking over the lease on a shop or factory next door. Presumably, that would count as a regulated activity, 1009 and although the professional in question would receive no direct reward from an outside body, he would receive a pecuniary reward or advantage, because he would be paid by his firm for providing that advice. It could be said that he would be caught by new clause 37 and would fall to be regulated by the authority. Will the Economic Secretary clarify what she understands subsection (3) of that new clause to mean? It might be unduly restrictive and catch many people who are giving advice or engaging in regulated activities as part of their normal tasks, especially if they work for firms that provide a wide range of services to clients.
As the Economic Secretary said, the rules of the professional bodies are to be checked and authorised by the FSA. That is understandable, but there is a danger that professionals working for such firms and regulated through their professional bodies will attempt a form of dual authorisation. They will be content to be regulated by the Law Society or the Institute of Chartered Accountants, as appropriate, but—so that they can with impunity break the rules of their professional body on authorised activities—they will also seek to be authorised directly by the FSA. It might not work, but it would be an unhealthy development. If that approach were to become a trend among professional people, it would be unfortunate and counter-productive. I invite the Economic Secretary to say a few words about her discussions with the professional bodies and regulators concerned. Do they also have lingering concerns about the wording of the new clauses?
§ Mr. LoughtonWe welcome the fact that some 27,000 intermediary firms will not be brought into the clutches of the FSA, but that was breaking news as we discussed the measures in Committee. It is good to have a little more detail now, but I wish to raise a couple of issues. In particular, new clause 37 refers to the fact that regulated activities must be incidental to the provision of professional services. Can the Economic Secretary give us more detail about what "incidental" means? It could be defined in several different ways.
I am concerned about equality of regulation. We would not wish to impose yet more regulation on accountancy and legal firms that deal in financial matters, but we would wish to ensure a level playing field with those who will be fully regulated by the FSA because their very business is dealing in financial products. The dividing line is blurring, with the emergence of financial supermarkets—for want of a better term.
Some firms—usually of accountants, but sometimes of solicitors—could be described as managing assets for clients without being asset managers, which would bring them within the scope of the FSA. Such firms can offer advice to clients on the geographical split of assets, or the split between equities or bonds. The firms can also recommend professional dedicated managers, who would look after a certain section of a client's portfolio, or other firms that offer financial products that might be suitable for that client. The firms may even offer bank deposit facilities themselves. In such cases, the firms would not actually be offering financial advice to the client—although at some stage they would take a cut, which they would rightly have to disclose—that would mean that they would be caught by FSA regulations. That is a growing 1010 area of the market. Financial intermediaries who, to all intents and purposes, control a client's financial circumstances, parcel out the risk in terms of product selection to other financial managers controlled by the FSA. As I understand the proposals, those intermediaries would be subject neither to the full rigours of FSA inspections or requirements for best advice, nor to the disciplinary procedures.
The result may be that many firms that are, to all intents and purposes, financial managers will opt out of FSA regulation, because they will enjoy a more benign regime under their own professional bodies. What assurances can the Minister give that certain firms will not take advantage of that potential loophole?
§ Sir Nicholas LyellIf a professional, who is regulated by his professional body and is entitled to act for a restricted line of clients, should find that he is acting for someone who is not sufficiently within that client line, he will be considered to be transgressing and therefore guilty of illegality. That person may have received money on the basis that he would pass it on to another professional, in the way described by my hon. Friend the Member for East Worthing and Shoreham (Mr. Loughton). That money may have been placed in a bona fide investment deal that fails. If the person is asked to return the money because it was taken for a deposit, he will be obliged—because he is properly regulated—to return it.
Such spin-offs worried me with regard to unlicensed deposit takers, which we debated earlier. I can see the same problem arising in this connection, and I should be grateful if the Minister would describe how she sees matters working out. Is not the risk faced by people such as have been described equivalent to that faced by careless drivers who, instead of being fined £40 for a parking offence, get fined £1 million?
§ Mr. FlightI have one question for the Economic Secretary: who will define what is incidental—and therefore exempt—and what is not? Will it be the Treasury, which has to specify what is a regulated activity under clause 20?
§ Miss Melanie JohnsonSome of the questions that have been asked overlap. The right hon. Member for Wells (Mr. Heathcoat-Amory) asked about consultation and the professional bodies. Representatives from all the professional bodies were present when I announced the broad proposals on 13 October. They have been involved in discussions about how the proposals should be taken forward, and I believe that they are broadly content with the Government's proposals.
Several other hon. Gentlemen have asked about the distinction between what is part of a person's normal tasks and what is incidental. The first point to be made is that, in the investment services directive, "incidental" is used to mean ancillary, perhaps subordinate. That is the sense in which we are using it, and it is a fairly common use of the word in any event. Examples of an incidental activity might be advice on investments given by an accountant for tax planning purposes, or advice on investment as part of a wider portfolio of assets given by a solicitor to a couple who are negotiating a divorce settlement. I cited other examples in Committee, such as advice given in the course of probate.
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The tests are to make sure that these are genuinely not mainstream activities carried out by the professionals concerned. The other tests make sure that such activities meet the criteria for being dealt with as we propose. The advantage of this method is that 2,000 firms will fall within the scope of regulation, while some 13,000 will fall outside the scope of regulation. We are intent on regulating only when it is absolutely necessary.
That brings me to a further point raised by a number of Conservative Members regarding the checking of rules by the FSA. Of course, it is important that the professional body's rules are checked by the FSA. The hon. Member for East Worthing and Shoreham (Mr. Loughton) suggested that, if the FSA did not have oversight of its rules, there was the danger that this might be a more benign course of action for people to follow than to come under the FSA for regulation. We have foreseen that difficulty, which is why we have made sure that the FSA is involved in oversight of the professional body's rules.
The right hon. and learned Member for North-East Bedfordshire (Sir N. Lyell) followed up the points that he raised in an earlier debate about unenforceability. Although I was not convinced by his argument when we debated the issue earlier, he raised some interesting questions. If he writes to me, I shall be happy to look in more detail at the points that he raised.
Let me turn to how the line is to be drawn.
§ Mr. FlightThe issue that my hon. Friend the Member for East Worthing and Shoreham (Mr. Loughton) raised will arise under new clause 2, so it is exactly the same territory.
§ Miss JohnsonI am grateful to the hon. Gentleman for that comment. As for his point about where the line is to be drawn, the intention is that it will be set out in the professional body rules, subject to FSA approval. That relates to subsections (4) and (5) of new clause 42 and will allow more fine tuning than would be possible if we simply relied on the Bill and Treasury secondary legislation.
Finally, the hon. Member for East Worthing and Shoreham made a point about people taking advantage of the loophole. We need to ensure that there are sufficient safeguards. The rules must define activities that are not merely incidental, but are supplementary to a service provided to a client and must be approved by the FSA. That belt-and-braces approach will ensure that the problem described by the hon. Gentleman will not arise.
§ Sir Nicholas LyellI am grateful to the Minister for her invitation that I write to her, although I do not have quite the same civil service support that she does. She noted that it might be quite complicated to find out whether a matter was incidental. If it was not incidental, it might fall under the general prohibition and thus become illegal, with drastic and disproportionate consequences. Will the hon. Lady reflect on the fact that such consequences—which, as I have explained in some detail, worry me—are contrary to the Bill's aims, one of which is proportionality?
§ Miss JohnsonI am happy to reflect further on those points. We certainly want a proportioned measure. One of the strengths of our approach is that our proposals offer a 1012 proportionate response that builds on existing mechanisms to ensure that they are used to protect the consumer and that we regulate in an appropriate, but proportionate, manner. I commend the new clause to the House.
Question put and agreed to.
Clause read a Second time, and added to the Bill.