Financial Services Act 1986 (Investment Services) (Extension of Scope of Act) Order 1995 (Hansard, 24 January 1996)

§ Lord Morris of Castle Morris
My Lords, I am most grateful to the Minister for giving way. I should point out that I am here in my capacity as Deputy Chief Whip, and unfortunately not in any other capacity.

§ Lord Henley
My Lords, I am of course distraught to hear that the noble Lord will not wish to engage me in discussion on those matters. I appreciate that he and I recognise that they would not have any strict relevance to our discussion this evening.
The measure before us today is a small but necessary part of the implementation in the United Kingdom of the European Union's Investment Services Directive. The directive extends to investment firms, as from the beginning of this year, the arrangements which already apply to banks, building societies and insurance firms.
Under these arrangements, firms authorised in accordance with the minimum requirements of the directive may either establish branches or provide services directly into any other European Economic Area state.
The UK financial services industry, as noble Lords opposite will well know, with its wide range of expertise and strength in depth, and its high proportion of non-bank investment firms, is particularly well placed to take advantage of this, and the industry itself has been anxious to see the Investment Services Directive implemented.
The basic requirements of the Investment Services Directive in fact fit well with our existing authorisation and regulatory regimes. Many investment businesses in the United Kingdom will find the directive makes very little difference to the way they actually conduct themselves, although it will open up far greater opportunities to boost business in Europe. It also has the effect that our recognised investment exchanges now have the right to place screens in other EEA states if firms located in those states wish to become screen-based members.
UK firms within the scope of the directive who are already authorised under the Financial Services Act, have automatically been deemed to be authorised under the Investment Services Directive and, if they are already doing overseas business either directly or through a branch, have been accorded "passported" status.
1115 The present order has two main purposes: it extends the coverage of the Financial Services Act to ensure that all the activities covered by the directive are included; and it enables the Securities and Investments Board to apply conduct of business rules to certain activities by authorised firms which do not, in their own right, require authorisation. I commend the order to the House.
Moved, That the order laid before the House on 18th December be approved.[4th Report from the Joint Committee.]—(Lord Henley.)

§ Lord Haskel
My Lords, I must apologise for the absence of my noble friend Lord Chandos, who is delayed at a discussion about educational matters. In that, I gather he shares an interest with the noble Lord, Lord Henley. I am sure that we could debate that subject at another time, possibly in the Bishops' Bar. I thank the Minister for explaining this order. We will certainly not oppose it.
The order is important for our financial services industry, and it is particularly important for Britain, because the financial services industry is an important part of our economy. We have the largest financial services business in Europe. I agree with the Minister it is to be hoped that this order may allow businesses to grow yet more.
However, the order allows financial services business in Europe to trade in the UK; and it lays down some rules for that competition. What the Minister did not tell us in detail is that the order adds more regulations to the heavy load already carried by our financial services industry. The compliance departments in companies will have to see that these new regulations are also complied with. Fairly soon, the compliance department will be as big as the administration department.
The industry takes compliance seriously. But in spite of that effort, the financial services industry is not popular. The pensions and life insurance sectors certainly do not enjoy public confidence, particularly as it now looks as if we are still two or three years away from clearing up the mis-selling of pensions. As my honourable friend Mr. Alistair Darling, has frequently said in another place, how much more self-regulation compliance are the Government going to impose on our financial services businesses before the businesses crack and the Government are forced to introduce proper regulation? In addition to the regulations in this order, the order empowers the Government to make yet further regulations. Does the Minister have any regulations in mind with which to burden yet further the financial services industry?
As the Minister told us, these regulations allow European companies to set up business here on the back of a passporting system. What happens when something goes wrong? We seem to have great difficulty in dealing with problems when something goes wrong with companies based in the UK. It will be far more difficult when we are dealing with companies regulated by different rules in their home countries. Indeed, our regulators can fall out with their regulators. It seems to me that by opening up the financial services business to 1116 European competition while retaining our current system of self-regulation, the Government are setting up a disaster waiting to happen. I hope that the Government are giving this matter some thought. Perhaps the Minister can tell us what is the position.
This is a particular problem for the UK. Our financial services industry is larger, more diverse and more fragmented than those in other European financial centres. We have thousands of different companies, large and small, whereas in other European centres the financial services industry is owned by a few large institutions that all know each other and deal with each other. Regulation is much easier there than it is here. I hope that the Minister can assure us that the Commission will take this into account when drawing up these European regulations.
Finally, I repeat what I said a few minutes ago when dealing with the previous business in your Lordships' House. We are constantly hearing on the radio and reading in the press how the Government are busily deregulating business and industry. We are frequently told how many regulations have been scrapped. When these figures are given, I hope that the regulations we are passing today in this order will be subtracted from the total of those scrapped.

§ Lord Henley
My Lords, I am grateful for the noble Lord's warm welcome of these regulations. I am glad that he recognises the strength of the financial services sector in the United Kingdom economy and how well it does. He went on to imply a degree of criticism of the self-regulatory regime which applies and implied that some more onerous and more regulatory regime—which I believe he opposed in the earlier order which he spoke to—might be appropriate. There is a fundamental divide between us and one which probably cannot be bridged over the Dispatch Box on this occasion. I simply say that I believe the noble Lord is wrong.
I said that I am grateful that the noble Lord recognises the strength of the financial services sector. I appreciate that he had a number of concerns which he addressed. He asked whether we had any more regulations up our sleeve. I can give the noble Lord the simple assurance from this Dispatch Box that we do not. He further asked whether this legislation adds to our regulatory load. Again, I can say no to that. As I said, the provision is largely modelled on the existing system.
He implied that the system showed a great deal of trust of the overseas regulators and asked how that can be justified. As I believe the noble Lord will be aware, Lord Justice Bingham supported the home state regime in the BCCI case. That demonstrated graphically the difficulties that occur when there is no single state responsible. This directive is simply following a pattern established already for credit institutions and insurance firms. The banks and building societies have been able to passport into the United Kingdom for the past five years. Depending on the extent of their home state operations, they have been able to provide investment services in the United Kingdom throughout this time. I believe that we have had relatively few practical difficulties as a result of the operation of the passporting regime.
1117 The noble Lord asked what was happening in other European countries. Our latest information is that there are four European countries who have fully implemented this directive. They are ourselves, once this order goes through, the Netherlands, the Irish and the Swedes. There are three countries involved in the capital adequacy directive; namely, this country, the Netherlands and the Spanish. Therefore, investment firms situated in those countries will have an early opportunity to take advantage of the single market. I am very glad to stress, as the noble Lord did, that the United Kingdom, which has the strongest financial services sector, falls into that category. The Commission has made it very clear that it intends to move promptly to the institution of infraction proceedings against those member states which fail to implement properly. As a result of this measure, United Kingdom firms will now have the right to passport into all EEA states and only the Dutch, Irish and Swedish firms will have the right to passport into the United Kingdom.
I believe that the noble Lord also implied that we were over-regulating and going over the top in implementation of the directive. I am the first to reject that. I assure the noble Lord that we have taken extraordinary pains to ensure that there is neither 1118 gold-plating nor double-banking in our implementation of the directive. The implementation follows very closely on the previous implementation of the second banking directive. There is certainly a very big premium for the industry in having two regimes as similar as the two directives will allow.
Finally, the noble Lord implied that there was considerable opposition within the Community to this particular set of regulations springing from the directive. Her Majesty's Treasury sent out about 3,000 copies of its initial consultation document in 1994. It received three dozen replies—that is, 36 for those of us who date from the post-decimal era. I do not believe that that suggests extraordinarily great anxiety on the part of industry. I hope that I have dealt with most of the noble Lord's points and hope that he will accept that this very well-attended House can now give these regulations their approval.
On Question, Motion agreed to.