§ 11.30 a.m.
§ The Lord Advocate (Lord Cameron of Lochbroom)My Lords, I beg to move that this Bill be now read a second time.
This Bill is based on two fundamental principles. First, the need to protect the interests of investors in their dealings in the financial services sector, and secondly, the encouragement of a strong, efficient and competitive financial services sector in this country.
585 No one can seriously question the need for investor protection in the financial services field. The average investor is very much in the hands of the expert. To the non-professional the choice of investment products may appear bewildering. New products are being developed all the time. Changes take place very quickly. The machinery of investment transactions is necessarily complicated. There are opportunities for fraud and malpractice. The intention if this Bill is to minimise those opportunities and to put out of business the people who exploit them.
These points have been recognised since at least the 1930s. Indeed much of the legislative framework which this Bill replaces dates back to that time. But now that framework is outdated, inflexible and inconsistent in the way in which it treats similar investment products. It was to look into the need for changes in the provisions for investor protection that Professor Gower was appointed to undertake his review in 1981. I should like here to pay tribute to the work of Professor Gower in conducting his review, which has played an indispensable part in shaping the Bill we have before us today.
The new framework will not eliminate all risk to the investor; nor should it. If an investor, on the basis of adequate information, makes a foolish decision, he cannot expect a regulator to meet the losses arising from that misjudgment. He does have a right, however, to rely on those who do business with him or for him being fit and proper to do so and to be confident that they have to abide by rules which will protect his interests as an investor. As regards the second fundamental principle, your Lordships need no reminding that the financial services sector is a major contributor to this country's prosperity with the City of London as one of the world's leading financial centres.
There is no conflict between these two aims of investor protection and a flourishing financial services sector. The city fulfils the role I have described because people are prepared to place their money there in the first place. This Government's commitment to wider share ownership is fully established. We wish more people—new investors—to participate in the benefits of wealth creation. But they will only do that if they have trust in the honesty, competence and efficiency of those they do business with.
The sustaining of this confidence is particularly important in a world where the introduction of new technology makes it easy for business to move elsewhere. Competition between the financial centres of the world is increasing. London is very well placed to benefit from that trend. But its position cannot be taken for granted. An effective and flexible regulatory framework, underpinning the knowledge that the United Kingdom is a "clean" place to do business is a vital part of the structure for strengthening our financial services sector.
The immediate purpose of this Bill is to create a framework of regulation which will meet the two objectives I have described. But, we are not simply modernising the framework to meet today's needs. We have to ensure that this new legislation is not quickly outmoded by tomorrow's changes. Therefore, the system must be flexible enough to deal with new circumstances as and when they arise.
586 The most immediate major development in prospect is the so-called 'Big Bang' on the Stock Exchange in October. The Stock Exchange is well advanced on the new rules which will be needed after the Big Bang. These new rules are being prepared against the background of the framework and the principles which this Bill establishes. I am certain that the new arrangements will from the start provide investors with the level of protection which all self-regulating organisations will need to offer if they are to obtain recognition under the Bill.
The Bill itself, although complex in its detail, has a simple starting point. If a person is to carry on investment business in the United Kingdom he must be authorised to do so or, in very limited and special circumstances, be given specific exemption. Once authorised, he will be subject to conduct of business rules. It will be a criminal offence to do business without authorisation, and anyone who does so will be unable to enforce his contracts. For the unauthorised, draconian measures are set out in Clauses 4, 5 and 6 of the Bill.
The courts will be given power on the application of the Secretary of State or the agency to restrain those who are likely to carry on, or have carried on , business without authorisation to secure that they take no profit from such unauthorised dealing and to order redress for those who have suffered loss in dealing with them.
Clause 1 and Schedule 1 establish for the first time, comprehensive definitions of an investment and investment business. Many areas covered are already subject to existing legislation, but dealers in financial and commodity futures and pure investment advisers are brought in for the first time.
Noble Lords will be aware that there was considerable debate in another place on whether Lloyd's should be brought within the Bill. On this, our case is clear and simple: we must wait for the report of Sir Patrick Neill's inquiry before coming to any conclusions, but in any event this Bill is not a suitable vehicle for regulating Lloyd's.
Clauses 7 and 26 set out the two main routes to authorisation—through membership of a recognised self-regulating organisation or by direct authorisation. Mainstream investment businesses will be obliged to choose one or other of these routes. A special regime will however apply in the case of certain professions, particularly accountants and solicitors, who carry on some investment business incidental to their profession. The Bill also makes special provision for insurance companies and friendly societies, which are involved in the area covered by the Bill through selling endowment or unit-linked policies.
The machinery for authorisation and regulation of investment business, to which a large portion of the Bill is devoted, depends largely on two types of body—the recognised self-regulating organisations and the Securities and Investments Board. Many, if not most, investment businesses can be expected to obtain authorisation through membership of one of the self-regulating organisations. Self-regulation has proved itself as workable and effective. The Stock Exchange is an excellent demonstration of that fact. In the United States, increasing use is being made of SROs to regulate investment business.
587 Conform to Schedule 2: if an SRO is to qualify for recognition, it will have to show that its rules provide investors with a level of protection at least equivalent to that required in the case of directly authorised persons and that it has effective arrangements for enforcing them. The Bill is designed to ensure that self-regulation lives up to high standards and is not allowed to deteriorate into a "cosy club".
Clauses 11,12 and 13 provide that if the rules of a recognised SRO cease to provide equivalent protection, there will be powers to alter these rules. There will also be power to apply to the court for a compliance order if a recognised SRO fails to continue to meet any of the criteria for recognition. In a serious case, it will be possible to restrict or remove recognition of the SRO altogether. The role of self-regulating organisations will be a vital one. The Government have already introduced amendments to increase their effectiveness by removing the risk that litigation or threats of it will deter them from carrying out their functions properly.
The Securities and Investments Board has an even more central role. The Bill confers on the Secretary of State the powers to recognise self-regulating organisations to authorise individual businesses to make conduct of business rules. However, the Government believe that regulation in this area is most effective when it is conducted by those who have direct experience of the financial services industry and who are in close touch with developments in the market.
By Clause 96, therefore, the Secretary of State will be able to transfer most of his powers to a designated agency, whose members include providers and users of financial services and independent persons. Government amendments introduced into the Bill in another place will mean that, if the Securities and Investments Board meets the criteria in the Bill, it will be the only body to which powers may be transferred in the first instance. This does not affect the making of other arrangements, however, if SIB does not meet the criteria or subsequently fails to live up to the required standards. No one has sought to deny that this is a novel arrangement. A lot of time has been spent on discussing what status the designated agency should have.
I have no wish to encourage what I suggest is a sterile debate when expressed in terms of a private sector body versus a statutory commission. I believe it is more helpful to look at the issue as follows. We want an authority which is effective and accountable. Part of that effectiveness comes from the powers which the agency will wield within a clear statutory framework. These powers allow for firm and speedy action. They are extensive and represent real "teeth". Since the introduction of the Bill they have been further strengthened.
Let me outline to your Lordships some of the powers which are set out in Part I of the Bill which the agency may exercise. It will be able to withdraw or suspend authorisation in the event of breaches of the rules occurring. It will be able to restrict the kind of investment business done by any person it has authorised. It will be able to oblige a business to keep assets in the United Kingdom. It may appoint a trustee 588 to control the assets of unauthorised business. It may issue a public reprimand as to a person's misconduct. It may seek from the courts orders to restrain businesses from breaching or continuing to breach a rule and restitution orders for the disgorgement of profits unjustly earned or repayment of losses suffered by investors through a breach of the rules. Finally, it will have wide-ranging investigation powers.
However, the effectiveness of a body does not just lie in its powers. Those powers will be more effective for being in the hands of people with direct experience of the financial services industry. We must have an agency which has the confidence of and can count on the commitment of those it regulates. The solution which we have arrived at—a private sector body, but one whose chairman and members will have to be appointed jointly by the Secretary of State for Trade and Industry and the Governor of the Bank of England—is designed to meet these requirements. Because it has been proposed by the practitioners themselves and because they will be represented on it, it will be able to count on the necessary commitment of those it regulates. Because it will be financed by the practitioners and not by the Government it will be able to recruit the most suitable people and to acquire the other resources it needs without being restricted by the inhibitions by which public sector bodies are bound. Because it is practitioner-based, it will have access at first hand to the expertise I have spoken of, and can respond quickly to changing circumstances.
The Government believe, too, that it is essential that a body exercising such functions should be properly accountable. Apart from the arrangements for appointments, there are several other elements in the system which secure this. By Clause 96, powers will be transferred to an agency only if the Secretary of State is satisfied that it has and will enforce rules which adequately protect investors and are in compliance with the principles set out in the Bill. Parliament's approval will be required before this transfer of functions can take place. By Clause 97, if the Secretary of State is not satisfied that an agency to which powers have been transferred is continuing to meet the criteria set out in the Bill, then he will, once again subject to parliamentary approval, be able to resume those powers either in part or in total. Finally, by Clause 99, it will be a requirement that the agency submit an annual report which will be laid before Parliament, and will, of course, be open to either House to debate.
I have given your Lordships a sketch of the provisions of the Bill. We will consider the full picture in greater detail at a later stage. But I would like now to highlight three areas of the canvas that have been the subject of some debate already.
In Clauses 119 to 141, the Bill brings together under one statutory roof scattered provisions on public offers. It replaces the Stock Exchange (Listing) Regulations 1984 and provides a more satisfactory framework for the implementation of the three EC directives on listing. In the light of discussions with the Stock Exchange and the Law Society, we shall be proposing some amendments to these parts of the Bill.
In Clauses 147 and 148 on insider dealing, the Bill gives the Secretary of State a new power to appoint inspectors to investigate possible offences. The 589 inspectors will be able to question people on oath and require papers and documents to be produced. Refusal to co-operate may lead to loss of the right to use our markets. These are important and far-reaching powers which are evidence of the Government's determination to seek to curb this abuse.
Finally, in Clauses 152 to 155 the Bill provides a power to prevent a financial firm from a foreign country from doing specified business here if United Kingdom firms are not given access to that firm's home market as favourable as that provided by the United Kingdom. I would also mention one provision which the Government will be proposing to add to the Bill during its passage through your Lordships' House. In the light of comments on our consultative paper about auditors, we shall be proposing amendments to enable investment businesses to be required to appoint auditors and to facilitate dialogues between supervisors and the auditors of those businesses. We believe that auditors can have a constructive relationship with supervisors, one which will help supervisors in carrying out their task without undermining the relationship between an auditor and his client. We hope that the accountancy bodies will prepare, in consultation with supervisors, professional guidance to auditors about their contacts with supervisors.
A Bill which seeks to treat comprehensively a complex area with so many facets to it is inevitably itself complex and highly technical. We believe that the balance in the Bill is a sound one but the Government have shown themselves ready to respond constructively to what is said during discussion of this Bill. We have been helped in this by many useful comments by outside bodies, including, I am pleased to say, those representing Scottish interests. We have already made amendments to meet many of the points raised and we will be putting a number of further amendments before your Lordships. These will include amendments to the definition of carrying on investment business (to deal in particular with the position of corporate treasurers, corporate finance and wholesale money markets), amendments to the réegime for the professions (to deal with the position of corporate and mixed practices) and amendments to enable rules to be made prescribing capital requirements for authorised firms.
This Bill will provide our financial services industry with a regulatory framework which will not only raise the standards of investments business but also provide the resources and expertise to cope with the challenges of the City revolution. In so doing, it represents a major contribution to the protection of investors and to the maintenance and enhancement of the City's competitiveness and its reputation. I commend the Bill to the House.
§ Moved, That the Bill be now read a second time—(Lord Cameron of Lochbroom.)