HL Deb 13 November 1989 vol 512 cc1094-104

295 After Clause 157, under the heading 'Amendments of the Financial Services Act 1986', insert the following new Clause —

'Statements of principle

'. In Chapter V of Part I of the Financial Services Act 1986 (conduct of investment business), after section 47 insert — 47A. — (1) The Secretary of State may issue statements of principle with respect to the conduct and financial standing expected of persons authorised to carry on investment business.

(2) The conduct expected may include compliance with a code or standard issued by another person, as for the time being in force, and may allow for the exercise of discretion by any person pursuant to any such code or standard.

(3) Failure to comply with a statement of principle under this section is a ground for the taking of disciplinary action or the exercise of powers of intervention, but it does not of itself give rise to any right of action by investors or other persons affected or affect the validity of any transaction.

(4) The discipinary action which may be taken by virtue of subsection (3) is—

  1. (a) the withdrawal or suspension of authorisation under section 28 or the termination or suspension of authorisation under section 33,
  2. (b) the giving of a disqualification direction under section 59,
  3. (c) the making of a public statement under section 60, or
  4. (d) the application by the Secretary of State for an injunction, interdict or other order under section 61(1).
and the reference in that subsection to powers of intervention is to the powers conferred by Chapter VI of this Part.

(5) Where a statement of principle relates to compliance with a code or standard issued by another person, the statement of principle may provide —

  1. (a) that failure to comply with the code or standard shall be a ground for the taking of disciplinary action, or the exercise of powers of intervention, only in such cases and to such extent as may be specified; and
  2. (b) that no such action shall be take., or any such power exercised, except at the request of the person by whom the code or standard in question was issued.

(6) The Secretary of State shall exercise his powers in such manner as appears to him appropriate to secure compliance with statements of principle under this section.

Modification or waiver of statements of principle in particular cases.

47B. — (1) The relevant regulatory authority may on the application of any person —

  1. (a) modify a statement of principle issued under section 47A so as to adapt it to his circumstances or to any particular kind of business carried on by him, or
  2. (b) dispense him from compliance with any such statement of principle, generally or in relation to any particular kind of business carried on by him.

(2) The powers conferred by this section shall not be exercised unless it appears to the relevant regulatory authority —

  1. (a) that compliance with the statement of principle in question would be unduly burdensome for the 1095 applicant having regard to the benefit which compliance would confer on investors, and
  2. (b) that the exercise of those powers will not result in any undue risk to investors.

(3) The powers conferred by this section may be exercised unconditionally or subject to conditions; and section 47A(3) applies in the case of failure to comply with a condition as in the case of failure to comply with a statement of principle.

(4) The relevant regulatory authority for the purposes of this section is —

  1. (a) in the case of a member of a recognised self-regulating organisation or professional body, in relation to investment business in the carrying on of which he is subject to the rules of the organisation or body, that organisation or body;
  2. (b) in any case, or in relation to other investment business, the Secretary of State.

(5) The references in paragraph 4(1) of Schedule 2 and paragraph 4(2) of Schedule 3 (requirements for recognition of self-regulating organisations and professional bodies) to monitoring and enforcement of compliance with statements of principle include monitoring and enforcement of compliance with conditions imposed by the organisation or body under this section.".'.

Lord Tregarne

My Lords, I beg to move that the House do agree with the Commons in their Amendment No. 295. In moving this amendment I hope that it will be convenient to the House if I speak also to Amendments Nos. 297 to 299, 306, 313 and 494.

The Financial Services Act 1986 represented a major step forward in investor protection, but experience since its enactment has shown that some modification is necessary to achieve the flexibility of operation which was intended. I am certain that your Lordships will recall the debate we had on the subject on Second Reading when we heard distinguised contributions from many noble Lords. I should especially like to recall the speech made by my noble friend Lord Jenking of Roding, who I am happy to see is in his place this afternoon, and that made by my noble friend Lord Elton. Both noble Lords brought to bear on the subject their valuable experience: one as a practitioner and the other as the chairman of FIMBRA. In the consultative process which followed, the Government were grateful for the helpful contributions from the recognised self-regulating organisations, not least FIMBRA chaired by my noble friend.

I do not propose to detain your Lordships with a detailed analysis of the effect of the amendment, although I shall be entirely happy to answer any questions that are raised. Taken together, the amendments provide for more flexibility in the operation of the Financial Services Act. First, the SIB will be able to issue a statement of principles. That statement of priciples will be the guiding light of firms engaged in investment business, and the breach of such a statement will form grounds for the exercise of its disciplinary functions. It will not, however, give use to a right of civil action for investors. I should perhaps mention that in the light of the way the SIB proposes to exercise that power, it is not the Government's present intention to commence new Section 47B.

Firms will also continue to be subject to rules which give rise to civil rights. The change that we propose in that area is to give the SIB the power to designate certain core rules as applying to all SRO members, subject to whatever modification may be necessary to adapt them to the circumstances of a particular SRO.

The SIB will also have the power to issue codes of practice which will have evidential value in relation to the principles or the rules. In addition —this is a matter covered by Amendment No. 305 to which we shall come later —the recognition test for SROs and professional bodies will be amended so that they will have to satisfy the SIB that their rules, in the context of the principles, and so forth, will afford investors an adequate level of investor protection. That test replaces the equivalent test in the Act, which has given rise to some difficulty in interpretation. The new test is one of adequacy. It will be applied in each case by the SIB, and the SIB has made it clear that it will apply it equally to all SROs and RPBs.

While the rules may differ between SROs and RPBs, the SIB has confirmed its intention to ensure that the effectiveness of investor protection will not. Any idea that one will provide an easier regime for practitioners or a greater risk for investors than the other is therefore entirely without foundation.

I should also mention Amendment No. 306, which will require the regulatory bodies to take compliance costs into account when making their rules. Experience suggests that that provision is desirable to back up the understandable desire of practitioners to achieve the desired level of investor protection at least cost. The other main effect of the amendment is to clarify the extent to which the SIB can rely upon other regulators, both domestic and foreign, and to give it the ability to use its own powers in support of action by a foreign regulator.

Moved, That the House do agree with the Commons in the said amendment. —(Lord Trefgarne.)

3.30 p.m.

Lord Jenkin of Roding

My Lords, it will be within the recollection of the House —my noble friend has already adverted to it —that in Committee on 6th March, which seems a long time ago, I moved an amendment to suggest that the regulatory system under the Financial Services Act should take a form different from that which was originally enacted and for which, I have to say, I voted in another place. I argued at the time that we needed some statements of principle coupled with what I described as a kind of Highway Code—rules of guidance.

However, my noble friend Lord Young of Graffham, who replied to the debate, went a long way towards convincing me that that by itself would not be enough. With others, I gave a good deal more thought to the matter. Some of those thoughts I expressed in a speech when I opened the Yorkshire Money Show in Bradford, because what seemed to me to lie at the heart of what was wrong with the original form was that the rules were trying to do two things: they were trying to regulate the professions, the brokers and other bodies, and trying to confer rights of compensation on individual investors. It seemed to me and to others—the Law Society among them —that any system which tried to do both those things with the same set of rules was bound to become cumbersome and detailed, which is what happened.

Therefore, I do not need to emphasise how warmly I welcome the amendments, because we have now a sensible three-tier system. We have a statement of principles by which the professions will be regulated, and there will be guidance, as I suggested. The code will not of itself give rise to disciplinary procedures but will have evidential value only. We shall have rules, themselves two-tier, which is the only point I wish to put to my noble friend. There will be rules, which are sometimes called the core rules (the SIB can designate some of its rules as core rules) which apply through the SROs to the individual members of the profession being regulated. However, it is open to the SROs to modify or amplify the rules which are not designated as core rules and it is on that point that I wish to sound a note of caution.

Perhaps I may pay tribute to the chairman of the SIB, Mr. David Walker, who has devoted an enormous amount of successful effort to the changes. It is the intention of the SIB that the rules which are promulgated by the individual SROs or RPBs should be only the minimum necessary to ensure adequacy of protection, relative to the particular professions and trades which are being regulated. There is already some evidence that at least two of the SROs, IMRO and LAUTRO —I apologise for the acronyms but they have become so usual that one is justified in using them —are proving extraordinarily reluctant to abandon any of their original rule book. That will go some way towards defeating the purpose of the new legislation.

There is a safeguard in the Bill because it requires the assent of the SIB before an SRO's rule book can so modify the SIB's own rules. I urge the Government and, through the Government, the SIB to use that power strenuously because it will defeat the purpose of these extremely beneficial amendments if the existing bureaucracies in those SROs stand guard on their existing rule book, with all its details, merely because it is there and they think that it is necessary to enable them to perform their regulatory functions.

The main core of the scheme must be the principles, the codes of guidance and the central rules (the core rules) made by the SIB. I hope that what is added at the third tier —at the level of the SROs or RPBs —will be the minimum necessary to provide an appropriate level of protection. It does not look as though that is happening at the moment.

While my noble friend and his colleagues rightly bask in the approval of the House for this string of amendments—the noble Lord, Lord Williams, shakes his head —or at least the approval of this side of the House, will he also take note of the fears that I have expressed? When I moved the amendment on 6th March, it occupied 20 lines. As I calculate it, this group of amendments occupies 26½ pages of the Bill. I am sure that the amendments are much better than my amendment, but they are much longer.

Lord Elton

My Lords, perhaps I may preface my welcome for the amendments by taking up the point made by my noble friend. We were assured outside the House that the complexity in all our regulations —I declare my interest as chairman of FIMBRA, one of the SROs —arose from the use of four words in Schedule 2 to the Financial Services Act. Those words were "at least equivalent to". My simple hope on Second Reading was that four other words might be found which had the meaning in law attributed to them in normal conversation by normal people so that we could get round that difficulty.

I should have liked to see four rows rather than about 20 lines. However, I believe that we have a means of simplification which is very welcome indeed to the industry. Exactly how simple the simplicity will be remains to be seen. As my noble friend will remember, at the appropriate stage of the Bill I said that the criteria should be simplicity and certainty: simplicity for clarity of application; and certainty for the avoidance of litigation.

My noble friend has pointed out that two of the SROs have embarked swiftly on the process of reviewing activities in the light of what is proposed here. The outcome of that appears to him to be minimal in terms of simplification. I make no comment on that because I am not familiar with their procedures. However, I regard it as supportive of my own association's approach which is to ascertain the maximum that can be done and the greatest security that it will work, before embarking on a change in the rule book. Thus what comes later may be more welcome than what comes earlier.

I also wish to say how glad I was to hear the Government's declaration of their intention not to implement the new Section 47B which has the odd effect of waiving statements of principle. It seems to me that a statement of principle ceases to be a statement of principle when it is waived. I am glad that the Government do not intend to introduce that paradox into our daily life earlier than necessary.

The other remarks which my noble friend made are more relevant to my own Amendments Nos. 305A and 305B. I shall not speak further except to say that any attempt at simplification is welcome. I hope that the Government and other authorities will give us all the assistance that they cart in making sure that the result is indeed simplification and not a change in complexity.

3.45 p.m.

Lord Bridges

My Lords, in speaking to Amendment No. 295, I too wish to declare an interest in that I am an independent board member of the Securities Association, one of the five statutory self-regulatory organisations recognised under the Act. I should tell the House that I have consulted the association about the amendment. My remarks will reflect what I have been told.

This is a complex matter. It is important to distinguish between the wood and the trees. I suggest that in considering these amendments we must bear in mind the broad objectives of the regulatory regime which was set out in the Government's original White Paper in 1985. Very briefly, those objectives were as follows: the efficiency of the markets; their competitiveness; their flexibility in changing circumstances; and, most important, confidence of the investors in the regulation of the markets.

The stated intention of the original Act was to provide a statutory framework within which the SROs could operate flexibly. One of the main vehicles for achieving the Act's objective was the group of SROs such as the TSA. I suggest to the House that events since the Act was passed have justified the decision to rely on the SROs. They have experienced practitioners at their disposal who have been heavily involved in the formation of these organisations and their continued operation. They are best equipped to spot and to stop malpractice. They can react quickly to changing circumstances I can, I think, understand some of the reasons underlying the need for Amendment No. 295. The density of the rules introduced by the Securities and Investments Board may perhaps have come as something of a surprise to the authors of the Bill. The need to reinvent the principles can therefore be welcomed. As the noble Lord, Lord Jenkin, has just suggested, it might have been wiser if that had been done at the outset.

However, my worry with the amendments as they stand is that they can be read as a move away from the concept of responsive practitioner-based regulation. For the new statements of principle and the core rules will be issued by the centre —that is, by the SIB. They will bind all investment businesses, whether they are members of the SRO or not.

I should emphasise that I can readily accept the basic notion of principles and core rules. Clear statements of principles to be followed by every investment business are highly desirable. That is a good way of setting standards. Uniformity of rules between the various SROs is also helpful to client and practitioner alike. However, I express a certain regret that the method chosen will mean direct application of these principles in core rules issued by the SIB. Many people involved in the SROs would have preferred a different route; namely, the introduction of these core rules into the rule books of each SRO. The individual investment business would then continue to see its own SRO as the single source of its regulation.

It may be pointed out from the Government Benches that the legal effect of either route is the same. I do not for a moment deny that. What I say is that it would have been better to follow a method which confirmed and strengthened the role of the SRO rather than running the risk of weakening it. As matters will stand under the present amendments, there seem to me to be certain dangers that the complexity of the system of regulation will be increased and that the authority and role of the SROs will be weakened. I feel bound to call attention to these disadvantages.

There are some other amendments which could be taken as having a further centralising effect. I refer in particular to the power of the SIB to designate certain core rules which will not be capable of waiver. The TSA was pleased to note the statement in another place that the power was intended as a reserve power, although that is not I think specifically stated in the amendment.

I hope that the Minister will be able to give us a clear message today and that he will be able to reaffirm that the Government's intentions towards the SROs will not be changed; that it is not intended to dilute the role of the SROs in the clauses proposed to the House; and that the SROs are seen as continuing to have a key role in the system of regulation, especially in writing and enforcing their own rule books for their members.

Effective functioning of the SRO system requires a committed contribution by the practitioners themselves. If the amendments are to be taken as shifting responsibilities away from the SROs to the SIB, then that commitment may be reduced. That would be bad for effective regulation and bad for achieving the Government's objective. I invite the Minister to confirm that that is not the Government's intention.

Lord Hooson

My Lords, perhaps I may apologise to your Lordships for the absence from these Benches today of my noble friend Lord Lloyd of Kilgerran who has made a very considerable contribution to your Lordships' debates. He is indisposed and in bed and I have stepped into the breach at very short notice. I do not pretend to have any detailed knowledge of company law.

With regard to these amendments, I understand that the securities associations welcome them as a way in which to overcome difficulties arising from the Financial Services Act. The amendments simplify the procedures. They will help to ensure that the regulatory structure does not become over-complex and unclear for both businesses and investors alike.

We on these Benches welcome the clarification now introduced by the amendments. It appears that investors should have increasing confidence in regulatory systems to enable them to operate flexibly in a very competitive financial market. I should add that I am putting forward the view of my noble friend on this matter. However, I must say that I agree with him.

Lord Williams of Elvel

My Lords, at the risk of appearing rather as Banquo's ghost in this feast of celebration, perhaps I may take issue with the Government, noble Lords opposite, and indeed those to my left and right politically and geographically, on some points in these amendments. In general, we welcomed the financial services legislation when it came in. I remember spending long hours in your Lordships' House debating the minutiae of that legislation. The points that I made almost ad infinitum, if not ad nauseam, were that if financial services legislation is to work properly —I speak as a practitioner of more than 20 years in this business —it has to ensure that there are clear rules for the protection of investors at the same time as ensuring that the markets can operate satisfactorily underneath those rules.

The problem I had with the legislation when it was a Bill in 1986 was that it went into far too much detail as regards the system of legislation and the system of control, with the results that we all know. The operation of the legislation has generated an enormous amount of paper and rule books inches thick. That has been a major problem.

The Government embarked on a consultative process which the noble Lord, Lord Young of Graffham, described to your Lordships when we debated the amendment of the noble Lord, Lord Jenkin, in Committee. He said at the time that he was unable to bring forward the amendments which we had hoped to see in this House but that they would be produced in another place, as indeed they were. To a certain extent the amendments mark a move forward, but to a great degree they confuse the issue. The issue should be quite simple. I preferred the speech made by the noble Lord, Lord Jenkin of Roding, in Committee to the speech he made today.

As I said, the issue should be quite simple. One has general statements of principle which people authorised to carry on investment business should pay attention to. One then has rules, the violation of which can give rise to disciplinary procedures and indeed civil action. One then has a code of guidance which states that, in general, the rules mean such and such. That code of guidance can be altered as circumstances require. That seems to me to be a perfectly clear tripartite system of operating financial services control.

However, when one starts, as the Government have started, to say that failure to comply with a general statement of principle is a ground for the taking of disciplinary action —in other words, operators can have their authorisation removed for failure to abide by a principle —one is then giving the principle the status of a rule. There will no doubt be a lot of litigation and the courts will argue about what the principle means. The whole point of a principle is that that kind of litigation on detail should not arise.

When the principle is then allowed to state, as it is in Amendment No. 295, that, the conduct … expected of persons authorised to carry on investment business … may include compliance with a code", so that the principle states that one must comply with a code, the operation of the legislation becomes rather circular. I find this measure a curious half-way house. I would prefer to go the whole way with the noble Lord, Lord Jenkin, as he stated in Committee, and say that we should have principles, clearly enforced rules and guidance which illustrates how the rules should operate.

Lord Jenkin of Roding

My Lords —

Lord Williams of Elvel

My Lords, as we are on Commons amendments, I hope I may continue. On the question of new Section 47B, the Government have said they do not intend to commence this new section. The noble Lord, Lord Elton, has welcomed it. However, if the Government do not want new Section 47B —I agree wholeheartedly with the noble Lord, Lord Elton, in his view —why have it there in the first place? Why has new Section 47B been included in the legislation if the Government are not going to commence it now? Why have a reserve power? It is quite contrary to the statement of principle that it should be waived in any particular case. That does not make any sense to me.

I understand that the SROs will have great difficulty in rewriting their rule books. That is a matter on which they have spent a great deal of time, and one on which they will have to spend a great deal more time. I should like the noble Lord to address himself to my next question, which to a certain extent picks up the question of the noble Lord, Lord Bridges. Will the SROs in practice survive? I do not wish to refer to these differences of opinion which have taken place in some SROs in the very recent past, but some SROs seem to be rather weaker than others. Indeed, there is a question as to whether one SRO may dissolve itself or possibly merge with another. I wonder whether the Government are firmly committed to the continuing central position of SROs in the whole structure of legislation.

We have spent a certain amount of time on these amendments. I have made the points I wish to make, but I should say a few words about the cost of compliance. I am afraid that investor protection does not come cheap. I very much hope that in accepting that SROs must take account of the cost of compliance with the rules, corners will not be cut so that we do not obtain proper invest or protection. The complaint about the financial services legislation in its present form is not only from operators who find it too complicated and expensive to operate but also from small investors who find that it does not give them the protection they want. That is a widespread complaint.

I hope that these amendments the Government have put forward will go some way to remove those two complaints. I think they are rather more biased towards the operators than towards the investors. As such, we do not oppose them, but we do not give them a particularly warm welcome. We believe they represent a half-way house and that the Government will have to move the whole way in the course of time.

Lord Trefgarne

My Lords, I think it is right that I should again stress that the changes being made to the Financial Services Act in no way represent any reduction in the Government's commitment to the effective protection of investors. Rather, they represent experience accumulated over the first year of the Act's operation. This experience points to the benefits to be gained, by practitioners and investors alike, from a number of modifications to the way in which the very high standard of investor protection already achieved should be maintained.

I note what the noble Lord, Lord Bridges, had to say about the role of the self-regulatory organisations. I hope I can reassure him by taking this opportunity to re-affirm what has been said in another place. Nothing in these changes should in any way be seen as a weakening of the Government's commitment to practitioner-based regulation and their recognition of the vital role of the SROs in that system. I hope that responds also to a point made by the noble Lord, Lord Williams.

I wish to refer to some of the remarks of my noble friend Lord Jenkin. I hope that he will take some comfort from the provisions of Amendment No. 306, which will require the costs of compliance to be taken into account. That point was also raised by the noble Lord, Lord Williams. I can assure my noble friend that the Government wish those costs to be the minimum necessary to protect investors adequately. I can only add that it is up to members of SROs, as well as the SIB, to ensure that this objective is achieved.

The noble Lord, Lord Williams, was concerned about breaches of principle and the possible disciplinary action that may follow. I am bound to say that I am a little curious as to how the noble Lord thinks principles should be enforced. Is he proposing that a firm that breaches the principle on, for example, due care and diligence should be immune from discipline? I am sure that that is not the case.

The noble Lord, Lord Williams, and, I believe, my noble friend Lord Elton were concerned about the position of new Section 47B. As I explained earlier, we do not propose to commence this new section in the first instance. I think it is important to realise that the power to issue statements of principle is not in any way limited in the number or type of principles selected. While I believe it is right that there should be no question of a waiver from the kinds of principles which the SIB is now proposing, the legislation provides sufficient flexibility that the SIB could choose to use this power more widely at some point in the future. At that time it might become appropriate for certain principles to be the subject of waivers and the Government could take action accordingly.

My noble friend Lord Elton referred to the question of adequacy representing possibly lower protection than equivalent. As my noble friend recognised at the Second Reading of the Bill, 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 a comparison of their effects. The amendment now being made breaks that textual link, so ensuring that the recognised bodies are free to draw up detailed rules as appropriate for their membership. There is no reason to suppose that the overall standard of investor protection will decline as a result of the change.

Throughout the course of the Bill the noble Lord, Lord Williams, has had to decide whether he was speaking from his great experience in these matters or as a member of the Labour Party speaking from the Opposition Front Bench in your Lordships' House. It seems to me that the noble Lord has had difficulty on occasions in reconciling those two different responsibilities. On this occasion he has attempted to sit on the fence between the two —with some difficulty, if he will forgive me for saying so. The fact of the matter is that the proposals now before your Lordships have the widespread approval of the practitioners, at least; and I hope that now they will have the approval of the Labour Party as well.

Lord Williams of Elvel

My Lords, before the noble Lord sits down, will he recognise that the points that I made were made by my honourable friend Mr. John Garrett in another place?

On Question, Motion agreed to.

4 p.m.