HL Deb 20 November 1997 vol 583 cc666-70

4.21 p.m.

Lord McIntosh of Haringey

rose to move, That the order laid before the House on 27th October be approved [11th Report from the Joint Committee].

The noble Lord said: My Lords, I must first apologise to the House for the fact that it was not possible to debate the Financial Services Act 1986 (Extension of Scope of Act) Order before it came into force on Monday 10th November.

When the Government issued their consultation document in May it was expected that the upgraded CGO system would come on stream at the end of August. By July the Bank of England had decided to delay the launch but without giving a further date. The existing form of paragraph 16A which is being amended presented a number of difficulties in drafting. Given the technical computing context, and the experience of the financial services regulators in operating the existing provision, it was particularly important that the drafting was done in close consultation with the regulators and the Bank of England. As with all legislation the paramount concern must be that the legislation should be workable. The Government were not ready to lay the order before the summer Recess but intended to do so when the House reassembled in October. It was only at the beginning of October, while the House was in Recess, that the bank announced that the system would go live on 10th November.

The order is made under a power within the Financial Services Act (Section 2) which allows a statutory instrument to be made with immediate effect but with the proviso that it shall cease to have effect if within 28 days it is not approved by Parliament. That is a particular procedure which is designed to allow regulatory protections to be applied immediately where circumstances require it in order to protect investors. Given that the upgraded CGO system was to be operational on 10th November, it was essential that the protection of the Act should commence on that day. The order was laid on 27th October and came into force two weeks later. The Bank of England and the regulators were, of course, aware of the timetable for the order. The bank agreed to alert anyone proposing to act as a sponsor of the requirements of the order of the need for authorisation. As it turned out, even by this stage, there are very few sponsored members and their sponsors are already authorised.

The order extends the definition of investment business in Schedule 1 to the Financial Services Act to cover the provision of sponsored membership services in the context of the upgraded Central Gilts Office settlement system. Its effect is to extend the protective mantle of the Act in terms of high standards and better security to people dealing in gilts.

The settlement system of the Central Gilts Office is already dematerialised; in other words, paperless. A number of firms have direct computer links to the system and their names appear on the central register.

The upgraded CGO system was, as I said, introduced on 10th November. It is designed to enhance the settlement of gilt repo transactions—which is the sale of gilts with a commitment to repurchase them at a later date at a particular price—and to introduce a facility to strip and reconstitute coupon-bearing gilts—which divides the repayment of the principal from the individual dividend payments and allows for each to be separately traded. It also provides a number of additional features, including a flexible membership structure.

As part of the more flexible membership structure, a new category of trader was introduced on 10th November, known as a sponsored member. The important feature is that the name of the sponsored member will appear on the central register even though the actual trading will be by someone else, a direct member or interface provider, who, for this purpose will be known as a sponsor.

The reasons for bringing "sponsors" within the definition of investment business in the Financial Services Act are twofold: first, sponsors will be interacting with the system on behalf of others, which creates the possibility of error, negligence or even fraud; and, secondly, the system will be similar to that operating in CREST where sponsors are already required to be authorised. It is likely that, in due course, the CREST and CGO systems will merge. The order is thus designed to improve the protection provided for investors and to provide consistency of treatment with CREST within the regulatory environment. I beg to move.

Moved, That the order laid before the House on 27th October be approved—(Lord McIntosh of Haringey.)

4.28 p.m.

Lord Mackay of Ardbrecknish

My Lords, the Captain of the Yeoman of the Guard will be relieved to hear that this is not nearly as controversial a matter as admission charges for museums. He will find that the Opposition, by and large, agree with the Motion. I shall not complain about the Motion being made now regarding something that is already in force, because I suspect that I can recall situations in which I was forced to do something similar. I see the noble Lord, Lord Eatwell, smiling at me and indicating that he probably harangued me on much the same issue. So I am being pretty careful about that.

I am in no doubt that it is important that the City moves into the new electronic age. Indeed, from the Government Dispatch Box I moved some of the affirmative orders that enabled CREST to start. This is but one more step on the road to ensuring that the City can compete in the modern world. That is extraordinarily important for our economy. I have no problems with the Motion.

Lord Bridges

My Lords, before speaking to the order, I should like to declare a recent past interest, having served for eight years as an independent member of the board of the Securities and Futures Authority, and, throughout that period, on its disciplinary committee.

Having read the account of the meeting of the Standing Committee in another place on this matter, and having read, in particular, the speech of the Economic Secretary, the substance of which has just been repeated by the noble Lord, Lord McIntosh, I have no doubt that it is right for us to assent to the order. At the same time, despite what the noble Lord, Lord Mackay, said, I cannot help feeling some mild surprise that this situation was not foreseen. It is not a situation that we wish to see repeated—that we proceed by order to ratify something which has already been in place since 10th November.

It is also pertinent to observe that the Financial Services Act 1986, under whose authority the order is to be implemented, is to wither away shortly. It is nearing the end of its life, given the announcement made by the Chancellor of the Exchequer—in May, I believe—of his intention to terminate the system of regulation established by the 1986 Act and to create a wholly new supervisory authority to be called the financial services authority. It is a matter of some concern to me that although the FSA is in the process of being set up—and many experienced staff are being transferred from the existing SFA—the new authority has no legal base whatever. I understand the Government's explanation that their legislative programme for the current Session does not permit the introduction of the necessary Bill until the next Session, but if discipline is to be maintained in the meantime, in effect under the auspices of the existing authority, there is surely a risk that some of those being disciplined when they have sufficient determination and resources to employ the requisite legal skills, may seek to have the disciplinary process overturned on judicial review on the ground that the new authority is acting ultra vires.

I urge the Government to obtain the necessary legislative cover for the new body to operate legally as soon as possible in order to avoid such a calamity. I would have supposed it possible that a single clause Bill might have been drafted, introduced and passed without controversy through both Houses of Parliament, but, from messages which reached the SFA from the Treasury, I understand that that was not possible. If nothing is done, I may find it necessary to return to the matter when we come to consider the Bank of England Bill, since it might be possible for such a clause to be inserted in that Bill. I am sure that the noble Lord, Lord McIntosh, will understand that I am speaking entirely as a private individual and I do not bear any message for him from the Securities and Futures Authority.

Lord McIntosh of Haringey

My Lords, I am grateful to both noble Lords for their response to the order and for their welcome of it, with provisos. The noble Lord, Lord Mackay, is right: I made sure that I was briefed on the fact that he had introduced the extension of scope orders which were comparable to this order. If he had complained in the way that the noble Lord, Lord Bridges, has complained I should have been able to quote them to him.

The principle that we should not be introducing orders to Parliament after they have come into effect is sound. I will convey to Treasury Ministers the message that it is undesirable and should be avoided if at all possible. The sensitivity in respect of ratification of an order which has already come into effect was the reason why I introduced my exposition of the order's provisions by an elaborate, perhaps even over elaborate, apology to the House. I extend that apology to the noble Lord, Lord Bridges, who made perfectly valid points about ratification of orders which have already come into effect.

I can reassure him about the legality of what happened in the establishment of the FSA on 28th October. The FSA is a change of name from the Securities and Investments Board and has the same status in law as the board. Provided that it does not go outside the functions of the SIB, it is not at risk of acting ultra vires and therefore there is no risk of the judicial review to which the noble Lord referred.

The powers of the FSA will be extended progressively. When the Bank of England Bill now before the House of Commons receives Royal Assent, those powers will he greatly extended with the transfer of powers from the Bank of England. But even as at present constituted, it is a legal body. It is the same body in law as the Securities and Investment Board and we do not anticipate the risk to which the noble Lord has referred.

Having said that, and I hope having reassured the noble Lord, Lord Bridges, I repeat my gratitude for the reception to the order and I commend it to the House.

On Question, Motion agreed to.