HL Deb 12 December 1996 vol 576 cc1198-200

4.6 p.m.

Lord Mackay of Ardbrecknish rose to move, That the order laid before the House on 25th November be approved [5th Report from the Joint Committee].

The noble Lord said: My Lords, this order is being introduced to extend the coverage of the Financial Services Act to bring custody services and certain activities in relation to open-ended investment companies within the definition of investment business within Schedule 1.

Let me start by explaining the provisions in paragraph 2 of the order. This deals with investment companies with variable capital, or open-ended investment companies to give them their more familiar name. Your Lordships will recall that I introduced the nickname of OEICs to the House some weeks ago. As a result of the creation of the corporate code for OEICs there are two new activities which will require authorisation under the FSA. Every OIEC must have a depositary and the ECA regulations require the depositary to be an authorised person. The depositary, normally a large institution such as a bank, will have a role similar to that of a trustee of a unit trust. The definition of investment business requiring authorisation in Schedule 1 of the FSA, includes acting as a trustee of an authorised unit trust. This order will add a similar provision in respect of the depositary of an OEIC.

The ECA regulations allow the board of an OEIC to consist of a sole director, but if there is only one director, that director must be a corporate body which is an authorised person. The order, therefore, adds acting as sole director to the coverage of paragraph 16 of Schedule 1. The effect of adding these activities to paragraph 16 of Schedule 1 means that those involved in two key areas of the corporate governance of an OEIC must be authorised and, as a result, their activities can be regulated. This is an important element of the protection for investors which is built into the OEIC structure.

Let me now turn to the bulk of the order which deals with custody. Custody is often an international and very competitive business. Indeed, your Lordships may have noticed within recent months a number of announcements of withdrawals from this market. It is carried out by a range of professional firms. The Treasury's decision to regulate custody services has not been taken lightly, or indeed in haste. There have been widespread consultations, both by the Securities and Investments Board and by the Treasury.

In December last year the Securities and Investments Board formally recommended to the Treasury that custody should be made an authorisable activity. Their arguments were based on the fact that custodians are institutions to which other people's investments are entrusted. It was not that their activities were regarded as inherently hazardous—custodians in general have sound management and control their operations well—but the value of the assets held in custody is such that the loss involved in a disaster could be vast.

The SIB was also concerned to remove an anomaly. Where custody is provided in connection with a regulated firm's investment business, a regulator recognised under the FSA can make rules governing that business. The gap arises, at least potentially, where a firm provides a stand-alone or third party operation, and holds investments other than in connection with its own investment business.

The SIB has concluded that there would be no significant costs associated with making custody authorisable. The standards proposed would codify existing good practice and provide reassurance to users of those services.

At the beginning of this year the Treasury consulted a number of custodians informally. The purpose was to gain an insight into the operation of the custody business and form a view about the SIB's recommendation and the form an order might take. The Treasury is most grateful to those who provided their views. As a result, the Treasury advised that the economic secretary should accept the SIB's recommendation, and on 9th May that decision was announced in another place.

The Treasury issued a consultation document in June setting out the way in which we proposed to put this onto the statute book. The document was circulated widely and there were just over 60 responses.

Custodians come in a range of shapes and sizes. At one extreme is the global custodian. Typically, this is a multinational bank, not necessarily based in the UK, offering services to major businesses across the world. Then there is the fund manager operating a discretionary portfolio; and the stockbroker who may arrange to hold assets in a nominee company, either its own or that of a client. The custody operation in either case may be conducted in-house or be bought in.

There is also the trustee of a fund holding assets safely on behalf of a child. The management of the assets in such a case could be placed with an investment manager but the trustee himself could be involved in providing custody services.

It is important to bear in mind that a pure custodian has no discretion as to the way in which he deals with the assets. Custodians simply act on the instructions of clients. They do not give advice or take any decisions about the sale or purchase of investments themselves. So the term "custodian" can apply to firms from the multinational bank through fund managers and stockbrokers to trustees. But it can also cover the small country solicitor holding share certificates for an investor in his safe for safekeeping.

The business which this order will bring under regulation is somewhat less than all this. We do not want to regulate our country solicitor who only safeguards assets. So the definition requires that both safekeeping and administrative services are being provided before it will bite. It is also crafted to cover firms which arrange, or offer to arrange, for such services to be provided.

We are determined that this extension of scope should not impose additional major burdens on companies. The standards which the SIB published in the summer set out the safeguards which it will expect the self-regulating organisations to maintain in regulating their members. The SROs will consult about the way in which these standards will be translated into rules in the spring. At that time, the SIB will undertake a cost benefit analysis of the anticipated effects.

The extension of the regulatory regime in this way will improve the protection provided for investors. It will ensure a level regulatory playing field, enhanced standards and boost confidence in the industry. I commend the order to the House.

Moved, That the order laid before the House on 25th November be approved [5th Report from the Joint Committee].—(Lord Mackay of Ardbrecknish.)

Lord Peston

My Lords, I thank the Minister. I know I am speaking on behalf of all your Lordships, but especially the OEICs, in welcoming the order.

On Question, Motion agreed to.