Financial Services Authority (Hansard, 7 April 1998)

§ Mrs. Liddell

As has already been announced, we propose to publish for consultation this Summer draft legislation to reform the structure of financial services regulation. This will bring together regulation of investment business, deposit-taking and insurance business under a single regulator, the Financial Services Authority. The legislation presents an opportunity to ensure that the Financial Services Authority has the powers it needs to regulate effectively, and to provide for the scope of statutory regulation to be extended to new activities in the event that self-regulatory mechanisms fail to deliver the standards that the Government and consumers expect.

The Government have been considering how best we can carry forward the Government's manifesto commitment for fair dealing in mortgages, the most significant transaction many people undertake.

I have decided that the proposed legislation to establish the Financial Services Authority as a single regulator will include powers for the Treasury to extend the scope of activities regulated by the Financial Services Authority. The activities that could if necessary be regulated will include mortgage business. The case for regulating 152W mortgage business will be regularly reviewed by Ministers. The first review will take place before the Bill comes into force.

In the meantime the Treasury will monitor the Code introduced by the Council of Mortgage Lenders (CML) in July 1997 to see whether it can deliver the Government's objectives without statutory intervention. The Council of Mortgage Lenders is currently bringing intermediaries within the Code's scope, and introducing appeals arrangements. It is too soon to decide whether the Code, on its own, is capable of protecting mortgage borrowers to the standard that the Government are determined to see achieved.

Whether statutory mortgage regulation is introduced will depend upon a number of factors, including the extent to which the Code secures good quality advice for prospective borrowers and provides remedies for borrowers' legitimate grievances. The Treasury will ask the Council of Mortgage Lenders to report on the impact of the Code, and provide statistical background. The Treasury will also look to the Department of Trade and Industry and the Office of Fair Trading to monitor the impact of recent changes in the guidelines for non-status market lenders and brokers, and the upper limit to which these consumer credit agreements apply from £15,000 to £25,000. In addition, the Treasury will look to the Financial Services Authority for an assessment of the likely costs of activating the reserve power, to assess whether they would be commensurate with any potential benefits. Others with knowledge of the mortgage market would also be consulted before any decision is made.

The draft Bill will also make it possible to extend statutory regulation to include the conduct of retail banking and non-life insurance business. We have no plans at present to extend the scope of regulation in these areas, but standards of conduct and the risks faced by consumers will be kept under review. Regulation would be extended only after consultation, including an appraisal of the costs and benefits.

The Government have also decided to consult on the future of the Insurance Brokers Registration Council. A consultation paper has been published today by the Treasury. Copies have been placed in the Library of the House.

§ Mrs. Liddell

We intend that the draft legislation will give the Financial Services Authority wide enabling powers to make rules. The rules will have the force of law, and be capable of imposing binding obligations upon firms. The rule-making power will enable the Financial Services Authority to lay down requirements anywhere along the spectrum from broad principles to detailed requirements.

The Financial Services Authority will also be able to issue guidance on the interpretation of its rules and other regulatory matters.

The rule-making power will be exercisable for the purpose of protecting the interests of customers of financial services businesses. Consistent with the need for differentiated levels of regulation for wholesale and retail 153W business, the Financial Services Authority will be required to ensure that its rules take account of the fact that rules appropriate to business conducted with some classes of investor may be inappropriate in the case of others.

We also intend that the Financial Services Authority will be able to impose financial resources rules, supplemented by additional requirements on individual entities by means of administrative notifications.

The Financial Services Authority will be able to grant waivers, to disapply its rules on a case by case basis (subject to tests similar to those in the Financial Services Act 1986). The Financial Services Authority will be under an obligation to publish waivers, subject to considerations of commercial or regulatory confidentiality.

We intend that a right of action for damages for private persons will attach to the Financial Services Authority's rules, except financial resources rules and others specified by the Financial Services Authority. The draft legislation will create a presumption that the rules confer no right of action for damages on non-private persons, unless the Financial Services Authority were to stipulate otherwise.

We intend that the power to make rules will be reserved to the Board of the Financial Services Authority. The Financial Services Authority will be obliged to consult on any proposed rules unless the delay created would be prejudicial to the interests of existing and potential investors, policyholder or depositors. The Financial Services Authority will be obliged to publish cost benefit appraisals of its proposals and other options as part of the consultation exercise unless the Financial Services Authority reasonably believes that the proposals on which it is consulting will reduce the costs of compliance incurred by those to whom the proposals will apply or are neutral in terms of such costs or that any increase in compliance costs will be of marginal significance only. More generally, we intend that exercise of the Financial Services Authority's rule-making powers will be informed by its statutory objectives.

The Financial Services Authority has today published a consultation document with initial proposals concerning the exercise of these powers. Copies have been placed in the Libraries of the House.