AS AN AMENDMENT TO COMMONS AMENDMENT No. 305 (Hansard, 13 November 1989)

§ Lord Elton
My Lords, I beg to move Amendment No. 305A. In debate on Amendment No. 295 questions of complexity were raised and also questions of costs.
Your Lordships will be under no illusion that the Financial Services Act is intensely resented by many to whom it is applied, both on grounds of complexity and on grounds of cost. I say to whom it is applied. In the context of self-regulation that may sound like a paradox. There is a paradox at the centre of the Act. Practitioners are responsible for applying the Act under supervision to themselves. Self-regulation is therefore conducted within strict limits laid down by Parliament and interpreted and applied by the Securities and Investments Board. Beyond those limits the "self disappears from regulation and the regulators are seen as the hostile engines of enforcement. In that atmosphere, there is a close interest among practitioners in fairness and equality of treatment between different sectors.
That brings me to Amendments Nos. 305A and 305B. Such a concern with fairness would be understandable and proper in any circumstances. Resentment sharpens the interest. Not only the practitioner but also the investor has a close interest in equality between the different sectors of which he may become a client, as whatever level of supervision is applied will be reflected precisely in the level of protection afforded to him.
The purpose of Amendments Nos. 305A and 305B is to secure equality of protection between two sectors —that of the recognised professional bodies, and that of the self-regulating organisations. Amendment No. 305, which they seek to amend, first appeared in another place and the general idea of a hierarchy of principles or core of designated rules was soon understood. It was understood to be equally applicable to all. In Standing Committee it was discovered at short notice that core rules could be designated on SROs but not on recognised professional bodies. When an attempt was made in another place to secure designation of core rules on both sectors some acrimony resulted from comparisons of the compliance standards in the two sectors. But another place decided to continue with the arrangement that we now have.
In establishing that arrangement, the Government declared their expectation of the result —that there would be equality between the sectors —but not in terms of an undertaking. Since their powers were delegated to the Securities and Investments Board, 1113 it might be thought that the undertaking or the intention was being expressed from the wrong quarter. I was therefore glad to hear my noble friend use words in regard to the earlier group of amendments which suggest that the intention that there should be absolute equality of treatment between the two sectors is one maintained by the Securities and Investments Board and one which the Government will support, and if necessary intervene on.
I think that I have said sufficient to explain that the effects of the amendment would be to require anyone deciding whether the provisions of the two sectors had an equal effect to consider in particular the adequacy of that effect in each case. The effect of my noble friend's words might be the same and, if it is, I shall be happy to withdraw the amendment.

§ Lord Peston
My Lords, obviously, I shall speak to Amendment No. 305 and the amendments to it. I do not want to go over again the ground of Amendment No. 295, of which the noble Lord, Lord Elton, reminded us, save to say that the Financial Services Act was regarded —and, certainly in my experience, is still regarded —as hostile by many people in the financial markets.
Essentially, one may approach the subject in one of two ways. One may assume that a self-regulatory body will self-regulate correctly, but occasionally the whip needs to be cracked. In other words, one may assume that we are dealing with honest men or one may assume that they cannot be relied upon to self-regulate and one devises the whole system on the assumption that one is dealing with dishonest people. It seems to me that much of the experience has been by the latter approach which is why so many practitioners find the Government's approach rather hostile. As I understand it, the Government are now, in my view, quite rightly, anxious to be less hostile. I am extremely sympathetic to what the noble Lord, Lord Elton, said; but, having said that, I do not want to go over the ground again. However, I agree with him that cost is not a trivial matter.
On Amendment No. 305, which relates to standards of protection, I should welcome a clarification of two matters. First, subsection (3) of the clause contains certain remarks about transitional periods. In determining which of the two parts of the clause will be operational, I should like to hear any further comments from the Minister about transitional periods. I should also like some clarification of the wording as some of it may mean everything and nothing. Essentially, subsection (2) of the new clause concerns the provision of an adequate level of protection. It states: regard shall be had to the nature of the investment business carried on by members of the organisation, the kinds of investors involved and the effectiveness of the organisation's arrangements for enforcing compliance". If we start from the proposition that things should be equal, the clause seems to give all kinds of grounds as to why they should be unequal. I should like a statement on equality, as I believe would practitioners.
1114 The noble Lord, Lord Elton, is right to say that equality is required here. It is required on the grounds of competition. Many of the relevant bodies compete with each other, at least at the margin, and they want to believe —certainly those who have been in touch with me over the past year want to believe this —that they are competing according to the same rules of the game. Having said that, I noted that the noble Lord used the words "absolute equality" at one stage. I am not clear whether the word "absolute" adds anything to "equality". The reason I take him up on that point is that I assume that equality is not the same as identity —it is certainly not the same mathematically —and it cannot be the same here. People want to be treated equally bearing in mind their circumstances; in other words, they do not want to be treated identically.

§ Lord Elton
My Lords, I eschewed the word "absolute" on almost every occasion. I apologise if I used the word on that occasion. There must be flexibility.

§ Lord Peston
My Lords, that enables me to proceed rapidly to the conclusion that I wished to reach; namely, that because, on the one hand, we do not want to over-regulate and because, on the other, there are so many different bodies involved, but, over all, because of the desire for fairness within the bounds of competition, I am persuaded that the noble Lord's amendments are, to say the least, worth taking seriously. They add something useful to the Bill. I should like either to believe that they are acceptable to the Government or —I am always open-minded —to hear the Government explain why they are already in the Bill. That is normally the Government's favourite answer to this kind of amendment. Either way however the operators in the City require at least some modicum of reassurance and certainly a less threatening approach to the subject of regulation.

§ Lord Trefgarne
My Lords, I have no hesitation in reassuring my noble friend about his anxieties regarding the equivalency of protection between regulators. The Government have every confidence that the SIB will make use of the revised test of recognition to ensure that high, consistent standards of investor protection are provided by both the SROs and the RPBs, as the board has indicated that it will do. However, if it became apparent that the system was not operating in the way intended, the Government would consider what steps might be appropriate to remedy the situation. I hope that that gives my noble friend the reassurance that he seeks.
Perhaps I may turn again to the question of adequacy and/or equivalence which we touched on in regard to the earlier amendment. The presence of the word "equivalent" in the Financial Services Act has been widely interpreted as requiring a close textual comparison of different sets of rules rather than the comparison of their effects. The amendment breaks that link, so ensuring that the recognised bodies are free to draw up detailed rules as appropriate for their particular membership. There is no reason to suppose that the overall standard of 1115 investor protection will decline as a result of the change.
The noble Lord, Lord Peston, asked me especially about the transitional period. The answer is that it will be up to the SROs themselves. The Government are ready to bring the new test into operation when requested, which presumably would be at the end of the transitional period that the SROs set for themselves.
I hope that in the light of those considerations and the assurances that I have given my noble friend will feel able not to press his amendments and that in a moment your Lordships will be able to agree to the amendment proposed by the other place.

§ Lord Elton
My Lords, I am grateful to my noble friend. The words that he has given to us on these amendments, when taken with the words he gave us on Amendment No. 295, amount to exactly the reassurance which I believe many practitioners require. Before I sit down again, I return to the question of absolutism raised by the noble Lord, Lord Peston. I think that there needs to be perceived equivalence for purposes of fairness. I was anxious not to include in the use of the word "absolute" the suggestion that the wording in every case should be exactly the same, because it may not be appropriate—although I believe that in many cases it would be appropriate —for recognised professional bodies to adopt the designated rules without the need for designation. That would be very welcome and further reassuring. I am most grateful to my noble friend. I beg leave to withdraw the amendment.