§ 11.52 a.m.
§ Lord McIntosh of Haringey rose to move, That the draft order laid before the House on 27th February be approved [10th Report from the Joint Committee].
§ The noble Lord said: My Lords, in moving that the draft order laid before the House on 27th February be approved, I shall speak also to the Financial Services and Markets Act 2000 (Designated Professional Bodies) Order 2001. It may be for the convenience of the House if I speak to the second order first because it sets the context.
§ Nearly 15,000 firms of solicitors, accountants and actuaries are currently authorised to carry on investment business by their professional bodies, which are known as recognised professional bodies, which are themselves recognised and supervised by the FSA under the Financial Services Act. Most of these firms do not carry on significant investment business but have sought precautionary authorisation to avoid committing a criminal offence under that Act. The Financial Services and Markets Act ends self-regulation as a route to authorisation and requires all firms carrying on mainstream regulated activities to be authorised and regulated by the FSA as the single statutory regulator.
§ However, we are keen to get the balance right between effective consumer protection and the level of regulation. We do not want professional firms to have to seek FSA authorisation on a precautionary basis,—the noble Lord, Lord Kingsland, referred to that in the previous debate—if they are likely to carry on only a limited range of regulated activities, such as arranging or giving business advice, which arise out of or are complementary to their professional services.
§ Part XX of the Act therefore provides an exemption for professional firms which are not already authorised, or exempt persons, for certain regulated activities. Those are that the carrying on of these activities must be governed by rules made by a 1114 professional body designated under Section 326 of the Act (a designated professional body); the regulated activities must be carried out in a manner which is incidental to the provision of professional services; the regulated activities must not give rise to the receipt from any person other than the client of a pecuniary reward or other advantage for which the professional does not account to his client; and, finally. the regulated activities must not be excluded by an order made by the Treasury under Section 327(6), the nonexempt activities order.
§ The designation order specifies the eight professional bodies whose members will be able to carry on exempt regulated activities under Part XX. I am pleased to say that all the professional bodies which are currently recognised under the Financial Services Act have confirmed to us that they will be willing to be designated for the purposes of Part XX.
§ There are two conditions for designation under Section 326. The first is that the professional body must have rules which would govern the conduct of exempt regulated activities by its members. This is already met by the recognised professional bodies. Secondly, each profession must have some statutorily recognised basis such as regulation under or regulation in statute. This requirement is similar to that which currently applies under the Financial Services and Markets Act and is, again, met by all the existing recognised professional bodies.
§ Designating these bodies for the purposes of Part XX of the Act will allow the vast majority of professional firms carrying on regulated activities which arise out of or are complementary to their professional services to continue to be supervised and regulated by their professional body. But where professional firms are engaged in mainstream financial services, such as arranging life insurance, personal pensions or managing investment portfolios, they will need to be authorised by the FSA in order to ensure the appropriate level of consumer protection.
§ In my view the provisions of this order and of the Financial Services and Markets Act 2000 (Professions) (Non-Exempt Activities) Order 2001 are compatible with convention rights within the meaning of the Human Rights Act.
§ I turn now to the Financial Services and Markets Act 2000 (Professions) (Non-Exempt Activities I Order 2001. Part XX of the Act provides an exemption in defined circumstances for certain incidental activities carried on by firms which are regulated by professional bodies. Those are that the activities must be governed by rules made by the firm's designated professional body; they must be provided in a manner which is incidental to the provision of professional services; and they must not give rise to the receipt from any person other than the client of a pecuniary reward or other advantage for which the professional does not account to his client.
§ However, we do not intend that professional firms should be able to use the Part)0(exemption to set themselves up as mainstream financial services providers such as banks, insurance companies, 1115 brokers or fund managers providing their own investment products to their clients, even in circumstances where they are able to show some connection between these products and their professional services. With these activities, there is a risk that the adoption of different tests for professional firms and other firms authorised by the FSA will prejudice the interests of consumers or affect the Government's ability to meet their international obligations. The non-exempt activities order, to be made under Section 327(6) of the Act, is intended to exclude these activities from the exemption under Part XX, and to require individual FSA authorisation for banking, insurance, broking or fund management activities.
§ The scope of the activities which any particular professional firm will be able to carry on under the Part XX exemption will be set primarily by the rules made by the relevant designated professional body and by the other constraints set out in Section 327 of the Act. The effect of this order is to identify activities which cannot be permitted by the rules of the professional body.
§ We consulted on the order in October 2000 along with the regulated activities order and received general support for this approach. However, we did receive a number of helpful suggestions, particularly from members of the professions, which we have accepted in this order. I shall deal with a few of them. There are currently arrangements for professional firms to be regulated and authorised to carry on investment business by a professional body recognised under the Financial Services Act. But there are no similar arrangements under the Banking Act or the Insurance Companies Act, and we do not believe that professional firms should be allowed to engage in these activities. In consultation, we received broad support for this policy.
§ Article 4 of the non-exempt activities order therefore specifies (a) accepting deposits, (b) effecting and carrying out contracts of insurance, and the related activities of (f) acting as a managing agent at Lloyd's, (g) entering a funeral plan contract as provider, and (h) mortgage lending. Many of the existing exemptions under the Banking Act will be replaced by exemptions specified in the exemption order or by exclusions in the regulated activities order. For example, Article 7 of the regulated activities order contains an express exclusion for accepting deposits in the course of a solicitor's profession.
§ The non-exempt activities order also specifies at Article 4(c) dealing in investments as principal, but not other related activities such as dealing as agent and arranging deals in investments. We are aware that many professional firms and others deal in investments in their capacity as trustees and in other fiduciary capacities. But the regulated activities order already contains appropriate exclusions in relation to persons acting as trustees or in other circumstances relevant to the legitimate commercial dealings of a non-financial services business or profession. We do not believe there is any need for a further exemption.1116
§ We recognise that professional firms are frequently asked to arrange deals or act as agent in connection with their professional services. We do not propose to specify those activities.
§ The main concern expressed in consultation was that insolvency practitioners might in some circumstances find themselves dealing as principals. However, we did not think it was appropriate to address that issue for professionals alone, as some insolvency practitioners will not be members of a designated professional body. We have therefore provided a separate exemption for insolvency practitioners in the exemption order.
§ Article 5 specifies managing investments, while paragraphs (d) and (e) of Article 4 specify the related activities of establishing a collective investment scheme and establishing a stakeholder pension scheme. The majority of professionals will merely be acting on instructions and so will not be managing their clients' investments. However, we recognise that some professional firms and others may be required to exercise discretion in their capacity as trustee or in another fiduciary capacity.
§ The regulated activities order already provides exclusions for investment management by attorneys, or when carried on by trustees or personal representatives, unless they hold themselves out as providing a service comprised in that activity or are remunerated separately in relation to that activity.
§ However, fund management is an area of significant risk for consumers. The exclusion in the regulated activities order does not extend to activities in relation to collective investment schemes or stakeholder pension funds, or to trustees of an occupational pension scheme who have not delegated routine decisions to an authorised person. We do not believe that it is necessary or appropriate to give professional firms an additional exemption to carry on those activities under the Part XX arrangements.
§ In consultation, some commentators expressed concern about the position of professionals who act as receivers appointed by the Court of Protection in accordance with the advice of an authorised person. The position here is similar to that of attorneys, who will be able to manage assets without authorisation as long as they delegate decisions relating to key investments to an authorised fund manager. That harks back to the last issue raised by the noble Lord, Lord Kingsland.
§ The activity that generated the largest number of comments in consultation was advice. Article 6 specifies advising on investments where the advice consists of a recommendation to buy or subscribe for a particular security or contractually based investment, or to dispose of a member's rights or interests under a personal pension scheme. Article 7 also specifies advising a person to become a member of a particular Lloyd's syndicate.
§ There is a risk to consumers whenever an adviser selects investments for his client, whether these are life assurance or pensions products, shares, including investment trusts, loan stock, including junk bonds, 1117 collective in vestment schemes or derivatives. We are conscious that professional firms provide an important safeguard for clients who might otherwise enter such transactions without proper advice. We believe that appropriate controls over such advice can be exercised by professional bodies, or, where necessary, by the FSA under Sections 328 or 329.
§ There are already a number of exclusions relevant to the activities of a professional person in the regulated activities order, which address many of those concerns, including advice that is a necessary part of his profession or is given in his capacity as a trustee or in connection with the sale of a body corporate. However, we did not want professional firms to be able to engage in selecting investments for their private clients under the Part XX exemption. We consulted on the basis that advice consisting of a recommendation to buy or subscribe for a security or contractually based investment such as a life assurance or pensions product should require authorisation. We did not propose to specify other advice, such as advice not to buy a particular investment or to dispose of an investment.
§ In consultation, there was general support for the proposition that professional firms should be able to advise on the merits of investment transactions under the Part XX exemption, but that they should not be able to give advice that amounted to selecting investments on behalf of their clients. Some additional concerns were raised, but I shall spare your Lordships those.
§ A professional firm will be carrying on the regulated activity of advising on investments only if he is advising his client in his capacity as an investor. That will often not be the case. Such advice would normally be regarded as a necessary part of the services provided by a solicitor or barrister. We do not want to create an exemption for solicitors that could not also be relied on by barristers giving advice in relation to the same matter. For the avoidance of doubt, we have also included a provision in Article 6 to make it clear that we are talking only about recommendations to buy investments from a person whose business is dealing in those investments, including a life insurance company, on a stock market, or in response to an invitation to subscribe for an investment that is, or is to be, traded on a stock market. Professional firms will not be prevented by the regulations from making recommendations in relation to private transactions between family members, between an employer and his employee or between the parties to a dispute.
§ The order strikes the right balance between allowing professional firms to carry on their professional activities without the need for authorisation by the FSA and ensuring that retail consumers receive a consistent standard of protection in relation to mainstream activities such as banking, insurance, fund management, and the selection of investments. I commend it to the House.
§ Moved, That the draft order laid before the House on 27th February be approved [10th Report from the Joint Committee].—(Lord McIntosh of Haringey.)
§ On Question, Motion agreed to.