HL Deb 11 May 1987 vol 487 cc501-10

8.35 p.m.

Debate resumed.

Lord Banks

My Lords, perhaps we can now return to our discussion on the delegation order. I should like to begin by apologising to the House for the fact that my name did not appear on the list of speakers. However, it is not normal to have a list of speakers for an order and I was unaware that one was being compiled.

I should like to join in the thanks which have been given to the noble Lord, Lord Lucas of Chilworth, for his explanation of the order. Certainly the passing of the delegation order will inaugurate a new era. I am sure that all of us in this House agree on the importance of investor protection. Once the new regime is in force, anyone approaching an independent financial intermediary should at least have the assurance that he is a genuinely independent intermediary and the confidence that he is financially sound. The problem has been to achieve that without inflicting on intermediaries and on providers of investment products a regime that is expensive, parasitical and bureaucratic. It remains to be seen whether or not the Government have been successful in that.

I must declare an interest in that I am a registered insurance broker and a director of a firm of registered insurance brokers specialising in life assurance and pensions. When we debated these issues before, I expressed fears in particular about the expense and the administrative burden likely to be placed on smaller intermediaries dealing in life assurance and pensions, and about the possibility that many of them might be forced out of business. As we have heard earlier in this debate, Sir Gordon Borrie, the Director General of Fair Trading, had similar fears. He feared that the number of independent intermediaries might be reduced to between 6,000 and 7,000. It is not entirely clear exactly how many such intermediaries there are in operation at the moment. However, research would suggest that the figure is about 20,000. If the numbers were reduced from 20,000 to between 6,000 and 7,000, that would be a severe reduction indeed.

As we heard from the noble Lord, Lord Lucas, there have been some relaxations of the rules since those earlier prognostications. We have learnt, for example, that there will be lower fees for those who do not actually handle clients' money. As I say, there have been other relaxations and it is now estimated that some 12,000 intermediaries will in fact remain independent. That is certainly a better outcome and it will leave a reasonable network of such intermediaries throughout the country. However, I believe that there is still cause for concern about the impact of expense. I hope that those who take the independent route will not be impelled to indulge in unnecessary and time-consuming paperwork.

A letter which recently appeared in Money Marketing of 23rd April, from a Mr. H. N. Piper in Oxfordshire, is relevant in that connection. He said: In the SIB guide to compliance obligations it states that 'Customer agreements are not needed where the services to the customer relate only to advice on life policies or unit trusts' ". Mr. Piper continues: The SIB statement was pointed out to the compliance officer of Fimbra". I should perhaps say that FIMBRA is the relevant SRO. Mr Piper continues: I have today received a letter from him saying that if I do not produce customer agreements he will refer me to the Fimbra complaints committee". Mr. Piper then comments: What is the use of SIB claiming that the cost of compliance is minimal, when the SRO in question takes no notice of the SIB guide and imposes harsher conditions? Mr. Piper concludes: This whole bureaucratic nonsense would be a great laugh if it were not for the fact that our livelihoods are being played with by people who never appear to have understood our business and now do not appear to understand their own". I have read that letter because I believe that the reaction is typical of the reaction of many intermediaries who are not opposed to the principle of regulation to the regime which is being imposed upon them. I am certain that there must be very careful monitoring by Parliament to check the costs of the SIB and the SROs, to check any empire-building tendencies in the SIB and the SROs and to check the growth of bureaucracy and of bureaucratic practice in the SIB and the SROs.

I should like to say something which may appear to be at odds with what I have already said about expense. I regret that the SIB is not imposing an obligation on those who apply to be authorised to have professional indemnity assurance. It is possible that in the light of that, FIMBRA, which is the SRO dealing with insurance intermediaries, will give up its condition that those applying should have professional indemnity assurance.

The Insurance Brokers Registration Council, on the other hand, does have such a condition and the minimum sum assured is £250,000. It is true that under the new regime there is to be a compensation scheme where the maximum payment is £48,000. However, that is only made where the intermediary is already insolvent. It does not deal with the position of claims against intermediaries which are still trading.

I realise that the absence of such a condition reduces the costs. But I would rather that intermediaries paid for professional indemnity assurance and paid less for the upkeep of SIB, FIMBRA and all the rest. It seems to me that the Insurance Brokers Registration Council is in a very unsatisfactory position. As one of those who helped to secure the passage through this House of the Bill which eventually led to the establishment of the council, I regret that. It is purely voluntary to be registered under the Insurance Brokers Registration Council and many intermediaries in the life assurance and pension world will be wondering whether, with authorisation, there is any point in remaining registered under the council. I cannot understand why the Government did not make the condition of registration under the council such that the conditions would qualify an applicant for membership of FIMBRA. Why should registered brokers specialising in life assurance and pensions have to register twice, comply with two different sets of criteria and pay two lots of fees if they wish to retain the title of registered broker? That situation seems crazy to me.

Turning to the question of polarisation, last time we discussed the matter I said that I supported the principle that all intermediaries should have to choose between being independent or being company representatives. I expressed the view that if that principle were to be applied, it should be applied across the board to banks and building societies as well. I am glad that the SIB proposals have been upheld by the Secretary of State.

I understand that building societies are pressing to act as providers of their own personal pensions, at the same time as acting as independent intermediaries selling life assurance. That would seem to be a breach of the principle of polarisation and I should welcome a comment from the Minister on that particular matter.

The application of polarisation across the board is one application of the principle of level playing fields. That principle arises in another matter; namely, that building society accounts are outside the scope of the Financial Services Act. Life offices must show the effect of inflation when they illustrate policy benefits. Building societies are not similarly restricted and can mount national advertising campaigns without mentioning the impact of inflation on their depositors' savings. I believe that that distinction is not right and again I would welcome comment from the Minister.

The principle of level playing fields may also be said to apply to the next and final point I should like to make concerning the disclosure of commissions. If an intermediary is being paid according to the recognised LAUTRO scale (LAUTRO being the SRO which deals with life offices), that intermediary need only indicate that this is the position. He does not need to specify the actual amount he is being paid unless the client asks exactly what it is and then he must reveal the amount. That seems fair to me, but I am not clear about the position as regards company representatives and tied agents of one company. Are they to be similarly treated? If not, why not?

In conclusion, I should like to make four points. First, it is right to seek to protect the investor. Secondly, the principles of polarisation and level playing fields are very important in this connection. Thirdly, the professional indemnity assurance may well be of more value in protecting the investor than many of the rules in the complicated rule book of the SIB. Fourthly, there is a need to ensure that the new structure works without unnecessary expense, without bureaucratic growth and without burdensome administration.

8.45 p.m.

Viscount Colville of Culross

My Lords, I should like to ask my noble friend a question which does not concern polarisation. I have to declare an interest. I am a director of a company which quite soon hopes to apply to the SIB for recognition in respect of quite a large area of investment business. To that end we have been working very hard in preparing rules, which I am afraid will be very complex. We appreciate that such rules have to be equivalent to the rules which the SIB has laid before the Secretary of State and which are at the moment built into the preamble to the order.

In the course of preparing these rules, in consultation as far as possible with likely members of the SRO, certain practicalities have arisen, and in one case a point of law. It will be very difficult to comply exactly with the SIB rules as they now stand. I entirely understand that the Government had to place a limit upon the extent to which amendments could be made to the SIB rules as they were published in February. However, there have been some amendments. The Government and the department had to go firm upon some set of rules in order to decide whether they would designate the SIB at all. We have now reached that stage.

There then comes the point raised by the noble Lord, Lord Williams of Elvel, and I seek specific comment from my noble friend upon the matter. As the next weeks go by there will have to be negotiation with the SIB concerning some of the finer points in the rules. I am not talking about anything at root and branch level; I am talking about matters of practicality. Will my noble friend confirm, first, that these rules as they now stand or as they ever will stand, are not part of the statutory instrument—that is, that they are not statutory? Therefore, it will be possible for the SIB to negotiate to the extent it thinks fit with the various bodies that wish to be SROs in order that there may be a practical equivalent on terms that can be achieved. If the SIB thinks fit, amendments to the rules will be able to be made fairly soon in order that a timetable may be achieved whereby the whole of this apparatus can come into effect fairly quickly—and here I am sorry to disagree with the noble Lord, Lord Tryon—otherwise there will be great uncertainty. If my noble friend is able to assist on this matter, I think that he will greatly relieve some of those who are working very hard in the world of SROs at the moment.

8.47 p.m.

Lord Boardman

My Lords, I had not intended to take part in this debate and had not put my name down. However, I shall be brief. I declare an interest as chairman of one of the clearing banks and chairman of the Committee of London Scottish Bankers.

I should like to make three points. The first concerns the complexity of the rules and indeed of the Act itself. In that I have some sympathy with the noble Lord, Lord Williams of Elvel. At an earlier stage when the Bill was going through this House I suggested that it would be more expedient to deal with the whole of the problem by means of a one-clause Bill and that every transaction must be fair, be seen to be fair, and should stop there. We have something which is very much more complicated than that.

My second point is to endorse what was said by my noble friend Lord Bruce-Gardyne as regards the problem of polarisation and the apparent conflict with Article 85 of the Treaty. This is a matter of very considerable concern to the financial institutions, clearing banks and the like. As my noble friend says, it appears that we are faced either with breaching Article 85 or of ceasing to trade. I am sure that the Minister is aware of this situation and that he will be able to give some assurance that nothing will be done to force us to take a decision to cease to trade, or to alter the whole of our procedure until we have the exemption, clearance, or whatever is necessary under Article 85. I hope that the noble Lord will then allow adequate time to make such alterations as are necessary.

Thirdly, I should like to speak in support of the noble Lord, Lord Tryon, concerning the question of time. I noticed in the debate in the other place that, in persuading that House that the matter should go through quickly and be implemented quickly, the Minister said that he must be careful to be aware that the best can be the enemy of the good. I agree that to seek perfection is perhaps undesirable when it means waiting an unnecessarily long time. However, it would be a great mistake if these regulatory rules were brought into force before more preparatory work has been done than has been the case so far. It would be a great mistake if it went off at half-cock. I hope that my noble friend will be able to say something as regards the question of that timing.

8.50 p.m.

Lord Lucas of Chilworth

My Lords, I am most grateful to noble Lords who have taken part in this short debate and to those noble Lords who thanked me for the clear explanation I gave. However, obviously I was not quite clear enough as there remain a great number of points to which I should address myself because, as the noble Lord, Lord Williams of Elvel, said, this is an important matter. We debated it at great length when we were dealing with what is now the Act. I do not believe, notwithstanding any events that my noble friend the Chief Whip has today announced, that we should just discard it as being rather immaterial against rather more weighty matters. Therefore, if your Lordships will allow me to take a little longer than is usual, it might be of benefit. 1 apologise in advance for that.

Let me turn immediately to the point made by the noble Lord, Lord Williams, with regard to the vires within the Act. I am well aware of the noble Lord's reservations about Article 9. I thought I made clear that the Government are satisfied that it has the vires to make the order in these terms. The need for such provision arises because there will be certain functions of recognition and disqualification which will be reserved to the Secretary of State.

In practice there will be close co-operation between the Secretary of State and SIB and I reject utterly the noble Lord's implication that the Secretary of State would seek to withold from SIB information about any order that he made. But in consequence of other provisions of the order Article 9 is formally necessary and in the Government's view falls squarely within the terms of Section 118(2).

Lord Williams of Elvel

My Lords, I am sorry to interrupt the noble Lord and I hope not to intervene further. Before he leaves the vires point, will he very kindly accept that there is a difference of opinion? I am not speaking from my own knowledge or from my own opinion but from advice that I have received from noble Lords who are legal experts and noble and learned Lords. I should like to put it on the record that it is not merely a frivolous point. It is a serious point we are making on the record that we do not believe the Secretary of State has vires for this matter.

Lord Lucas of Chilworth

My Lords, I know the noble Lord, Lord Williams, does not accuse me of being frivolous. I certainly do not think his point is a frivolous one at all because I recognise from what he has told me in our discussions and from his letter to me that there is a difference of opinion which embraces noble and learned Lords and others. I have given very careful consideration to all that has been put to me, and written to me, in these past few days; but I remain of the belief that the Secretary of State does have vires in this respect.

The noble Lord then asked me about the recognition of SROs and what happens if an SRO is not okay—if I may use the expression. The SIB will then have the responsibility of meeting the requirements. It is for SIB to decide whether to recognise the SRO. Anyone who is not a member of a recognised SRO on the date on which Section 3 comes into effect—I shall turn to the timetable in a short while—will have to be directly authorised if he is to carry on an investment business.

As for the other criteria for recognition, it is for SIB to decide whether an SRO's arrangements for the investigation of complaints are satisfactory. It will also be for SIB to decide whether an SRO's criteria for admission to membership provide an acceptable test of fitness and properness. I would expect here SIB to insist that an SRO had tests equally as stringent as SIB's own.

The noble Lord spoke briefly about the practice notes and he gave some examples. The practice notes are not of course part of the rules, and I think he accepts that. They constitute, however, guidance as to the ways in which SIB will interpret the rules and would expect them to operate in particular cases. I draw the attention of the noble Lord, Lord Williams, to Rule 103 of the conduct of business rules which makes clear the status of practice notes.

Perhaps a little more important, and which I feel is important in the public's understanding, is the point he put to me with regard to unsolicited calls. An unsolicited call, as we see it, is a personal visit or an oral communication made without express invitation. It means the same in the rules as in the Act. It does not include an unsolicited letter, but other rules cover the content of written commitments.

The noble Lord asked about a call made in consequence of an earlier call but a different matter being expressed. I suggest that the answer is that that would be unsolicited if the person called upon has not specifically requested it. The noble Lord also asked about clients' money and the SIB guidance on handling. I am not totally sure that I am absolutely clear on what might lay behind this. If the noble Lord was concerned about the status and effect of the opening passage of the appendix to SIB's client money rules, I can only tell him that that passage does not constitute part of the rules but is a guidance as to the action which firms might take in order to comply with the rules. Perhaps I may on this occasion study what the noble Lord said and write to him.

Finally, the noble Lord and, I believe, a number of other noble Lords asked about the ability to change SIB's rules, and particularly the ability of the Secretary of State to do so. In this connection he, the Secretary of State, will be able to intervene only in restricted circumstances. I outlined some of them—for example, on international or competition grounds. In addition, if SIB were to fall short of its obligations to provide sufficient levels of investor protection the Secretary of State could withdraw functions from SIB and either exercise them himself or transfer them to another body. Any order withdrawing or transferring functions would be subject to approval by both Houses of Parliament.

I turn now to the noble Lord, Lord Tryon, whose participations in our debates have been, so far as I am concerned, of varying quality and excitement. I understand his particular interest. He made a point about the rules being too complex and difficult to understand. The rules have been developed by a body which includes many experienced practitioners and in consultation with the practitioners who ultimately will have to comply with them. I do not share the view that they are unreadable or unworkable. It is misleading to think that apparently more simple rules would be preferable. Breach of an SIB rule can lay practitioners open to civil actions and disciplinary procedures which could affect their ability to carry on business. Therefore, it is understandable that many practitioners have pressed for the rules to be precise about what is and is not covered.

The noble Lord spoke about disagreement between a number of bodies. He said that much work had to be done. However, I would not describe them as disagreements. Perhaps interpretations have to be more readily understood. Certainly there is much to be done before the system can be brought fully into operation. Equally it is important that investors should be properly protected as soon as possible. Our objective is to implement the new system as soon as it is practicable so to do.

The key provision will be when Section 3—the provisions which make it a criminal offence to carry on investment business without authorisation—comes into force. There have to be applications for authorisation from existing firms and so on. However, I think that this process will proceed as quickly as possible. Perhaps I may say to my noble friend Lord Boardman that we are looking for an introduction of the central provisions towards the end of this year.

The noble Lord, Lord Tryon, also spoke to me about investment trust companies. I think that it would be more sensible if I wrote to him on how we see this relationship. This evening the issue has perhaps a rather narrower context. If I may do that I shall be very pleased to do so.

My noble friend Lord Bruce-Gardyne was kind enough to tell me that he was going to raise the question of polarisation and the thoughts of the Committee of London and Scottish Bankers on this matter, as did my noble friend Lord Boardman. Perhaps I can answer both my noble friends together. The committee has put to my department concerns which it has about the uncertainties for the rules of SROs to be created by the competition provisions of the Treaty of Rome.

I recognise the weight of the advice that the committee has received. Having said that, both my noble friends and the House will recognise that my department replied on 16th April to the original concerns of the committee that were put to us in a letter of 13th April. My department gave an assurance that the Secretary of State would take into account all relevant factors in deciding when, as well as whether, to take each successive step on the implementation of the Act. The factors are very likely to include the wish to bring the whole system of investor protection into operation as soon as possible, the need to ensure that the businesses involved have sufficient time to comply with the requirement of the system, and the implications of the EC competition law. When the Secretary of State is considering the implementation date of Section 3 of the Act we recognise that he will have need to pay careful attention to the position under EC competition law, including any uncertainty which might then remain.

Late last Friday, 8th May, my department received a further letter from the Committee of London and Scottish Bankers seeking a further interpretation or extension of the assurance that the department had given on 16th April. It is now Monday. That letter is now being studied. I hope that a reply will be sent quite shortly. Both my noble friends will recognise that matters of this kind require careful study and I would certainly wish to be sure that the latest suggestion from the committee is properly considered.

More generally we have kept the European Commission fully in touch with the developments of the Government's policy over the last two years or so since the introduction of the White Paper on financial services was published. We have been in touch with them at the highest level during our consideration of SIB's rules and have received no indication of concern from them about the impact of those rules on competition in the Community market. We shall seek to respond to the latest letter as quickly as we can.

Lord Boardman

My Lords, I am most grateful to my noble friend for giving way and for what he has said. I accept, and I am sure my noble friend Lord Bruce-Gardyne accepts, that the Government are looking at this very important point. We should not expect to have a full reply to those matters which have so recently been raised.

Lord Lucas of Chilworth

My Lords, I am grateful to my noble friend Lord Boardman. I shall certainly see that that reply is communicated directly to all those noble Lords who have an interest in this matter and, as convention has it, also to place it in the Library.

Perhaps I may turn to two of the major points that the noble Lord, Lord Banks, made with regard to independent intermediaries. We have very carefully considered the position of these intermediaries. Many of the representations that we received were on this point. I know that the Director General of Fair Trading fears that the rules will lead to a decline in their number. However, we believe that, taken as a whole, the new regulatory system will not be as disadvantageous as feared.

We believe that the system will offer independent intermediaries opportunities that will allow them to continue to play a major role in the market for insurance services. There are a number of reasons for this. SIB made considerable efforts to ensure the costs of the new system were no greater than were necessary for investor protection. In particular, in response to concerns, SIB reduced these, relaxed reporting requirements, and substituted a solvency requirement for minimum capital requirements for those firms which do not hold clients' money.

The burden of the requirements which remain may very well have also been overestimated. A number simply reflect existing best practice, to which I referred in my opening remarks. For example, many intermediaries already take steps to know their customers, as the expression is, while much of the information required will be provided by the companies themselves.

The noble Lord raised the question of the £48,000 protection to investors. I think I ought to speak briefly on that and the question of professional indemnity. It is hardly in the interests of investors as a whole for there to be unrealistically generous pay-outs to investors on a first come, first served basis, only then to see other investors go uncompensated when the money runs out or to have large numbers of firms crippled by excessive levies. The Act requires that the compensation arrangements must make the best provision which can reasonably be made. Bearing in mind the absence of detailed experience in running a compensation scheme across the whole financial services sector, I believe that this requirement has been met. Clearly if experience shows that there is scope for improvement, there is sufficient flexibility for the SIB to amend the scheme. We debated this at some length during the passage of the Bill and I do not think I can add anything further about compensation.

So far as the indemnity is concerned I appreciate that professional indemnity may be regarded to some extent as an alternative. I am not persuaded that adding compulsory professional indemnity cover to the compensation scheme as now proposed would add significantly to the protection of investors. I am sure there will continue to be advantages for firms taking out professional indemnity cover. It is after all only prudent for any businessman to insure against such eventualities if he wishes to avoid being forced into liquidation by an uncovered claim, but I do not see what would be gained for investors which would justify making such cover compulsory.

Lastly, my noble friend Lord Colville of Culross asked me whether there was scope for further amendment of the rules in discussion with the SROs. I appreciate that there has to be negotiation of the finer points. The rules, as my noble friend knows, are not part of the statutory system. SIB can indeed negotiate or amend the rules. When the powers have been transferred it will be open to SIB to amend its rules, so long as they continue to fulfil the conditions in the Act. Those rules will then have statutory effect, but I confirm that they do not form part of the order.

I am grateful to the noble Lord, Lord Williams, for his opening remarks when he said—and confirmed what he had said during the passage of the Bill—that he wanted a Bill of this kind. He might have liked it to have been clothed somewhat differently. I understand that. However, we have arrived at this stage and I believe that this short debate has confirmed that it would be right to transfer the powers to SIB. We have a body here which contains numbers of eminent and able people committed to securing adequate protection for investors. I believe that it has—

Lord Williams of Elvel

My Lords, before the noble Lord finishes this point I wonder whether he will kindly clarify one matter about which I am still doubtful. As I understand it, the regulations made by SIB, if the delegation order goes ahead, derive from the powers conferred on the Secretary of State and are therefore part of the statute law of the land. Am I right or am I wrong on that?

Lord Lucas of Chilworth

My Lords, they are part of the statute in so far as the Secretary of State has the power within the Act to alter those rules if, in the event, those rules fail to satisfy the conditions of the Act. The point that the noble Lord particularly wants to underline is that the rules have the force of law in the way I have described but are not in themselves statutory instruments.

Lord Mishcon

My Lords, I wonder whether the Minister, even at this late hour, would make the position clear to the House. Regulations are made under the powers given to the Secretary of State in the Act. The Secretary of State delegates that right, as I understand it, to what I prefer to call SIB. If that is so, and regulations are made under powers given under an Act, are they or are they not statutory?

Lord Lucas of Chilworth

No, my Lords.

The peroration that I was going to make would fall upon rather deaf ears after 24 minutes and at a quarter past nine in the evening. Perhaps I may finish by echoing what a number of noble Lords have said with regard to SIB and its staff, who have put in a good deal of work in setting up this framework. I am sure that once the powers are transferred the SIB will apply itself with equal vigour to the tasks which will have been delegated to it by Parliament.

On Question, Motion agreed to.