§ 3.37 p.m.
§ Report received.
§ Clause 1 [The Financial Services Authority]:
Lord Newby: moved Amendment No. 1:
Page 1 , line 7, leave out ("body corporate") and insert ("private company formed under the Companies Act 1985").
The noble Lord said: My Lords, the amendments in this grouping are the first of three groups of amendments that we shall discuss today which seek to clarify the structure of the FSA and make it more transparently accountable to the three groups with which it interacts; namely, those who work in the financial services sector, those who consume its products and Parliament.
All three groups of amendments seek to strengthen the credibility of the FSA—the creation of which we support—by enabling all those who deal with it to be confident that it will be responsive to their concerns and transparent in its dealings with them. This group of amendments deals with the overall structure of the FSA. I should like to explain what we seek to achieve before moving on to explain why we believe that the amendments achieve what we seek.
The amendments have three main purposes: first, to clarify the authority's legal status; secondly, to ensure that the authority follows best practice in terms of corporate governance; and, thirdly to provide that there is a clear division of responsibility at the head of the FSA.
We believe that the amendments are necessary because at present the FSA is simply defined in Clause 1 of the Bill as a body corporate. The model which was in the mind of the Government in drafting the Bill was that of the Bank of England with non-executive members of the authority playing the role of the Court of the Bank. The problem with that approach is that the Court is not perceived as being a powerful body and its members do not have the same status and powers as the non-executive directors of a company.
Under the Bill as it stands, members of the FSA governing body may or may not be technically board members of a company limited by guarantee which it 292 is proposed will underpin the FSA. This means that there is uncertainty about the exact role and powers of the directors, particularly the non-executive directors, and that needs correcting.
Just as the role and powers of the non-executive directors are currently relatively unclear and potentially too weak, so the role of the chairman, in the absence of a chief executive, is, particularly in the longer term, potentially too powerful. This set of amendments seeks to deal with those problems.
Amendment No. 1 provides that the FSA becomes a private company under the Companies Act 1985, and Amendments Nos. 3 and 4 provide that the authority's board of directors constitute the governing body. Those amendments give the clarity and powers to the non-executive directors which we believe they need to do their job properly. Amendment No. 5 provides for a chief executive as well as a chairman, and Amendment No. 6 says that the chief executive will be called the director general. It also allows the director general and chairman to be the same person. In this group, Amendment No. 11 requires the authority to have regard to generally accepted principles of good corporate governance, and Amendment No. 16 requires that it acts in conformity with the combined code on corporate governance.
This sub-group of amendments deals both with the general desirability of the FSA following best practice in corporate governance, but it also deals with the vexed question, which occupied so much of your Lordships' Chamber in Committee, in relation to the position of the current chairman. I believe it was the majority view of the House in Committee that, were there no FSA already in existence, we would provide for both a chairman and a chief executive. But it was also the majority, if not the unanimous view of the Chamber that the credibility of the FSA had been built to date in no small measure on the widespread esteem in which the current chairman is held.
These amendments seek to square the circle by providing that there should be both a chairman and chief executive; by allowing the posts to be held by the same person; and by requiring the authority to follow the provisions of the combined code on corporate governance. The relevance of the combined code is that, while it provides for a split role at the head of the organisation to ensure a balance of power and authority, it also allows the roles to be combined. It states that,
a decision to combine the posts of chairman and chief executive officer in one person should be publicly justified. Whether the posts are held by different people or by the same person, there should be a strong and independent non-executive element on the board, with a recognised senior member other than the chairman to whom concerns can be conveyed".
Thus the presumption under the code is that there would be a separate chairman and chief executive, but that so long as a combined post was publicly justified and there was a strong independent element, it was possible for the two posts to be combined. We assume that, if these amendments are carried, the FSA would justify the current arrangements but that, when new
arrangements are made, it may well decide to split the most senior roles into a chairman and chief executive model.
In Committee, the Minister argued that a corporate model and reference to the combined code was not appropriate for the FSA because it had no shareholders. That is strictly the case, but the authority actually states in its latest annual report that it follows the provisions of the combined code. If it voluntarily does so already, there should be no difficulty in enshrining the principle in the Bill.
If these amendments are incorporated into the Bill, they will be widely welcomed. They will certainly be welcomed in the City and in the financial community. They will, I hope, be welcomed by members of the Burns Committee, whose recommendation I believe they follow. They will be welcomed by Donald Cruickshank, who argued for them in his recent report on the bank industry. I believe that they will even be welcomed by many in the FSA. They should also now be welcomed by the Government. I beg to move.
§ The Chairman of Committees
My Lords, as Amendment No. 9 is also being spoken to, I must point out to your Lordships that there is a mistake in that amendment. Where it reads, "page 228, line 24", it should read, "page 228, line 28".
§ 3.45 p.m.
§ Lord Alexander of Weedon
My Lords, if no one else rises—if my noble friend Lord Saatchi would like to rise now I will give way instantly—perhaps I may briefly support the amendment. I supported the spirit of the amendment at Second Reading and also in Committee.
I do not believe that this amendment is about whether or not there should be a distinction because the FSA has no shareholders whereas ordinary companies do; it is about a balance of fairness; it is about the confidence of the consumer and those who work in the industry; and it is about efficiency.
I see the FSA as having a vast role, greater than most public companies. Most public companies now need both a full-time chairman and a chief executive. The chairman leads the board; helps shape the policy; has what is sometimes called an ambassadorial role; has, and we know this is important in the case of the FSA, an international role and is obviously key to the taking of certain important decisions. The chief executive is largely operational, implementing strategy and policy and dealing with staffing and administrative issues.
When I was, for three years, one of the two non-executive deputy chairmen of the Securities and Investment Board, I saw just such a system in action under the executive chairmanship of Sir Andrew Large, but also with a chief executive. I had absolutely no doubt from my perception as a board member that there were two jobs that needed doing, and that each helped to balance the way in which the other discharged his responsibilities. In the two-and-a-half years when I was chairman of the Takeover Panel, we had an admirable director general, but inevitably he 294 and I would sometimes look at issues from different perspectives. I believe that the debates we were able to have, and perhaps the somewhat slightly more detached view of the chairman on internal issues, were helpful in creating the confidence that the marketplace has had in that organisation, under successive chairmen, for more than 30 years.
I am conscious that the FSA is not only very powerful, but it is also seen to be immensely powerful. There are concerns about its accountability and whether it will become an over-mighty regulator. I see checks and balances as crucial. I believe it is vital to have a strong board with a majority of non executives. I believe also that it is important to have a separate chairman and chief executive. We know that we attach the greatest importance to the FSA commanding the confidence of the consumer. But it must also command the confidence of the industry and I believe this is the best way to achieve it.
§ Lord Borrie
My Lords, the amendments now before us are a much more sophisticated set than those which dealt with a similar topic of governance and dividing the responsibilities of chairman and chief executive than were before us in Committee. They also show that those who tabled the amendments have carefully read Schedule 1, which deals with the appointment of chairmen on the one hand and the appointment of a governing body on the other, the latter to have a majority of non-executives, which, from what the noble Lord, Lord Alexander, said, is something we generally approve of, but also to have executive members.
Schedule 1 has obviously been carefully studied by those who have added their name to the amendment. However, a theme which remains unchanged from the previous occasion we discussed the matter is that best practice and the normal running of the authority comprises one person as chairman and another person as chief executive. There is some slight backtracking from that—perhaps this results from the position adopted by Mr Howard Davies and the Government—namely, that from time to time the two roles should be permitted to be combined in the one person.
What I find rather difficult to understand—after a careful reading of Schedule 1—is why these more sophisticated amendments should be considered any more helpful and useful today than was the case in Committee. Schedule 1, as drafted, provides for the appointment of chairmen and of a governing body which will have a number of executives on it. No one has said either today or on the previous occasion that one of those executives could not be termed the "chief executive" and be known as such internally and externally.
Therefore, I am still rather uncertain as regards what is sought to be achieved here. However, I recognise that there has been much briefing of journalists, particularly the excellent:people from the Financial Times. I recognise that there is much "macho" activity, if I may put it that way, on the part of those on Opposition Front Benches who are 295 concerned that they must score some kind of gain over the Government in terms of the governance of the Financial Services Authority. As I say, under Schedule 1 as drafted, it is perfectly possible for there to be a chairman and a chief executive and that those offices need not be held by the same person. That is permitted under Schedule 1. Therefore, for me, the mystery still remains as to why this series of amendments is proposed.
§ Baroness O'Cathain
My Lords, I appreciate that I am not on the Front Bench, but some of us on these Benches do not take a "macho" approach to this matter. On the basis of experience and expertise, one feels that the ideal situation in any large organisation is to split the roles of chairman and chief executive. All the reasons enumerated by my noble friend Lord Alexander hold good, but, moreover, sometimes an organization—the FSA probably falls into this category—can be subjected to great fire from all kinds of people. Splitting the roles of chairman and chief executive provides a comfort factor for the chief executive and for the board as a whole. That has worked, and there is no reason at all why it should not work in the context we are discussing. I believe that it would benefit the FSA to split the roles.
§ Lord Fraser of Carmyllie
My Lords, I support the amendments spoken to by the noble Lord, Lord Newby. When the noble Lord, Lord Borrie, congratulated someone on "spinning" in the press, I thought that he was about to deliver a fulsome tribute to Mr Howard Davies for the effective way in which he managed to put across his position on the issue we are discussing. I agree with the noble Lord that Schedule 1 permits one to set up an arrangement whereby the positions of chairman and chief executive are split. It is quite clear from the Joint Committee's report that our view was that Howard Davies should retain that combined role for as long as he remains in office. We had no doubt about that and we complimented him on what he had achieved in bringing together the various different bodies that now make up the FSA. I do not depart from those compliments now. We are not talking about his tenure of office, but about what will happen when that ends.
The noble Lord, Lord Borrie, is correct to say that what we are discussing is permitted under Schedule 1. However, I understand clearly from everything that Mr Howard Davies and others have written that when his tenure of office ends, the combination of the role of chairman and chief executive ought to be the norm. Time after time the parallel with the Governor of the Bank of England is drawn. I believe that it is undesirable that the chairman and chief executive of the FSA should be so combined in perpetuity. It is far better that they should be separated. This is in no sense—perhaps this is unusual—a criticism of the FSA itself. From time to time I visit the FSA. Every time I visit it seems to me that the FSA demonstrates a greater sureness of touch than on previous occasions. That is my strong personal view, but I appreciate that it may not be universally held.
296 The model that the Government have constructed for the authority—this powerful regulator—is that of a company with a board of directors. I believe it is appropriate that best practice should be followed in this matter. The noble Lord, Lord Newby, emphasised his other amendments in the group we are discussing. I draw particular attention to the desirability of accepting Amendment No. 16. I believe that the Government ought to be prepared to accept that amendment—if they are not prepared to accept anything else—as it does not impose a requirement on the FSA to separate these functions for all time. It requires the FSA to consider the situation when it next appoints a chairman or chief executive and to reach a decision on whether or not the two posts should be combined or separated. Amendment No. 16 states that the FSA should reach that decision in accordance with the provisions of the combined code on corporate governance,as may be operative from time to time".That amendment does nothing more than ask the FSA to take that decision in accordance with best practice and, presumably, then make public the reasons why it has reached that conclusion.
If, at the end of the tenure of office of Howard Davies, the FSA reaches the conclusion that the posts should be combined, so be it. But at least at that time those who are concerned about the FSA will be in a position to understand exactly why it is that that whole board of directors, including a majority of non-executive directors, has come to the view that the combination should persist into the future. That does not seem to me to be an unacceptable or unworthy burden to place on the FSA. I believe that if we were to do that, the confidence which I have in the FSA—this confidence may not be as widely held as the FSA might like—would be considerably enhanced.
§ Lord Wedderburn of Charlton
My Lords, I have a problem with the comments of the noble and learned Lord, Lord Fraser. I hope that I may make two points. First, this board of directors should act in conformity with best practice. However, we do not know what that will be because there is a large amount of literature on the general practices of good corporate governance, which vary from time to time. If they vary from time to time, why not let the directors take the decision (when they need to) on whether there should be a chief executive, or, indeed, other executive directors? It does not seem to me right to include this in a statute before the time at which the matter has to be considered.
Secondly, I have a further problem in relation to Amendments Nos. 11 and 16. In the particular circumstances of the body we are discussing, if it is to be a private company under the terms of the 1985 Act, and if its board is to act, as boards should, in accordance with the generally accepted principles of good corporate governance, how far does the noble Lord who spoke to the amendments regard those principles as legally enforceable, and in what manner, and which kind of claimant could pursue them? Of course, the claimant can be the company, but the company we are discussing will be particularly 297 controlled by its board of directors, as are many companies. Unless there is a real "bust up", those directors probably will not take legal action to enforce any of the principles of good corporate governance. Are these measures to be enforceable and, if so, in what manner, and by which kind of plaintiff? I hope that the Minister will give us an idea of what we are to be faced with.
§ 4 p.m.
§ Lord Boardman
My Lords, I support the amendment moved by the noble Lord, Lord Newby. I also agree with most of what he said as regards the other amendments in this group. What was said about the chairman and the chief executive was well spoken to on this side of the House this afternoon, so I shall not repeat those comments, although I have one slight reservation. I agree with the combination of the role of the chairman and chief executive which may arise from time to time; for instance, through death, illness or absence for some other reason.
However, I am somewhat cautious about combining those roles in a statute because of an individual's personality. I know that in this case the individual has done marvellous work and has been highly praised. However, it seems wrong to me that a statute should be built around the personality of one man. I accept that from time to time the roles may need to be combined; for example, if the chairman dies or the chief executive goes off and one takes over the other's job. It may be appropriate to combine the posts as a matter of necessity in those circumstances rather than fitting them to the personality of a particular individual, however qualified and competent he may be.
§ Lord Burns
My Lords, I support the general tone adopted by the noble and learned Lord, Lord Fraser of Carmyllie, and support both Amendments Nos. 11 and 16. It is not surprising that he and I see eye to eye on this matter to some degree. We have been discussing it for the better part of 12 months. Indeed, I believe it is more than 12 months ago that we first discussed this measure in the Joint Committee. My views have not changed a great deal over that period. The FSA is a powerful organisation which needs good governance. I believe that it should reflect best private sector practice. It is right, and we are content, that Howard Davies should be the executive chairman at this stage, but we argued that in the longer term the job should be divided.
I have some problems with the case which has been put forward. I do not believe it is right that we should imply now that the position should automatically change once Howard Davies moves on to other exciting challenges. That puts him under pressure and implies that his position is in some sense offside. Nor do I have much sympathy with the view that there should always be one person. That is an argument which Howard Davies comes quite close to arguing himself. If we had wanted a different style of organisation we should have had a different vehicle from the one chosen in relation to the FSA.
298 After a lot of discussion, I believe that the spirit is very much captured by Amendments Nos. 11 and 16. Basically, they say that we want good corporate governance. That allows for the posts to be combined, but there is a requirement that the case should be explained if that is to be done.
I see one role for the Select Committee which scrutinises the FSA. It should carry out a thorough check on whether the FSA is working in a way consistent with the code. It is a role played by outside organisations as regards private sector companies; they issue reports on the extent to which companies are compliant with the code. After a great deal of discussion about this issue, it seems we have found a way that does the trick. I believe that it should satisfy people on both sides of the House.
I would be very hesitant to support amendments which legislated for a particular combination of posts, but I like the idea that one can describe it as setting the challenge of good corporate governance in terms of its practices. We build in an expectation that that should happen and the Select Committee which is eventually appointed to supervise the FSA should have the job of checking that that is being done.
§ Lord Saatchi
My Lords, before I address these amendments, perhaps I may thank the Minister very much for the very helpful way in which he has dealt with the timing and the tabling of amendments and with the groupings for Report stage.
As the noble Lord, Lord Newby, and many of my noble friends have said, the basic concern of the movers of this amendment is that the FSA is a unique body which is very powerful indeed. The theme of these amendments, and many of our other proposed amendments to the Bill, resolves itself into a single question: who guards the guardians?
In Committee we proposed that the governance model for the FSA should be the combined code of corporate governance, the successor model to the Cadbury, Hampel and Greenbury codes. Therefore, in Committee we had a long debate as to whet her or not a key guardian figure might be the chairman of the FSA in accordance with the combined code. At the time the Minister said no. We also asked whether we might spell out in the Bill that the guardian role might be performed by the non-executive directors of the FSA, again in accordance with the combined code. Again the Minister said no.
The reason for the Government's reluctance to contemplate splitting the roles of chairman and chief executive at the top of the FSA and what is so puzzling to practitioners in the industry is that the FSA is the body which supervises the very companies which themselves are obliged to supervise the application of the combined code to their clients. So reasonable people are mystified as to why the rules of governance that they are expected to apply to their clients should not be applied to the body that regulates them.
299 In Committee the Government justified their objections to the splitting of the role of the chairman and the chief executive by saying that the analogy with the Cadbury approach was irrelevant. But the substance of that approach, and now the combined code, concerns the good governance of organisations. There is a great deal that we can learn from that.
It recognises that, where the exercise of power is concerned, it is vital for there to be appropriate checks and balances. As many of my noble friends and other noble Lords have said, the FSA will have enormous powers. If this House has a role to play in relation to this legislation, it surely is to ensure that those powers are circumscribed with appropriate checks and balances. I hope that noble Lords will not mind me quoting the combined code so that we are all very clear what we are discussing. The principles of good corporate governance in the combined code state that,There are two key tasks at the top of every public company—the running of the board and the executive responsibility for the running of the business. There should be a clear division of responsibilities which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision".I know that the FSA is not a public company, but the good sense of the principle is clear: that powerful organisations need a balance of power and authority at the top. As the noble Lord, Lord Newby, said, that was also the view of Don Cruickshank in his report on competition in the UK banking industry which he was asked to produce for the Chancellor of the Exchequer. He makes the same recommendation.
As the noble Lord, Lord Newby, and many of my noble friends have done on other occasions, I stress that it is not the present incumbent at the top of the FSA whom we fear; it is his heirs and successors, and the tendency of all regulatory bodies to suffer from regulatory creep. Perhaps I may give your Lordships one example of that. The original Bill that arrived in this House for Second Reading had 268 pages. The current Bill that we have in front of us has 283 pages. I do not know where the amendments come from or who thinks of them, but that is a good example of regulatory creep.
As the noble Lord, Lord Burns, said, in this concern we are echoing the thoughts of the Joint Committee and its recommendations. We would like to see a clearly accepted division of responsibilities at the top of the FSA to help to ensure a balance of power. If the present incumbent is listening to, watching the debate, or perhaps may read it in Hansard, I should like him to know that I and all my noble friends have great respect for him. However, I must reiterate what many of my noble friends have also said; namely, that it must be the object of this Chamber to look ahead and to prepare legislation to underpin the working of the FSA for 10 or 20 years, certainly well beyond the term of office of any individual.
Perhaps I may now come to what I believe is the heart of the Government's objections to splitting the roles, as I have understood them. The Government say that the FSA is not a private company and that is why 300 they say that it is not appropriate to apply the Cadbury or combined code guidelines of corporate governance to the FSA. That is the heart of their argument. The Government said that they are,mindful of the fact that parallels with other models of corporate governance are not exact".What they mean by that is that the FSA is not a private company and does not have shareholders. It is true that in any normal private company the accountability of those in power—in others words, the executive directors—is achieved because the board of directors reports to the shareholders who can remove them. As the Government say in this argument, the FSA has no shareholders. Therefore the question is: how is accountability of the executive to be achieved, and to whom?
Under our proposals, the City—those regulated by it and those outside it—would have in the chairman someone whom it could approach with its anxieties, someone who, if not instantly responsible for the issues, could take them up with the chief executive, enabling the whole system to be seen to work better.
The BBC is a good example of how this system works in practice, as we discussed on an earlier occasion. If the BBC was to be accused of political bias of a serious nature, or of some gross invasion of privacy, or of not meeting its programming obligations in a serious way, it would be clear that someone other than the executive responsible for the allegedly offending decisions would become the court of appeal. That person is the chairman of the BBC. The structure works perfectly well. We all believe that the BBC is an icon of an organisation that has performed a great public service.
I ask noble Lords to bear in mind that IMRO, the SIB and the SFA—three of the FSA's most important regulatory predecessors—all operated on a system which split the functions of the chairman and the chief executive.
§ 4.15 p.m.
§ Lord McIntosh of Haringey
My Lords, I recognise the strength of feeling expressed in the debate. I hope that all noble Lords will recognise that different views can be sincerely held on these issues. I believe that the differences are narrower than they might have appeared when we debated the matter in Committee.
These amendments cover different aspects of the FSA's governance, and some of them take us over ground discussed in Committee. I shall deal with those amendments first and get them out of the way before I move on to the amendments which approach the issue from a different angle. My noble friend Lord Borrie noted the difference between amendments which are a repetition of previous ones and those which are genuinely new.
The first group of amendments that we have seen before—Amendments Nos. 5, 6, 7, 9 and 10—relate to the role of the chairman and chief executive. I recognise that the combining of the role of the chairman and chief executive is against the recommendations of the Cadbury committee. Several 301 reports have been quoted by a number of noble Lords. I shall continue to quote them, I hope without too much selectivity. Paragraph 4.9 of the Cadbury committee report states:Given the importance and particular nature of the chairman's role, it should in principle be separate from that of the chief executive".That conclusion was endorsed by the Committee on Corporate Governance.
But the Committee on Corporate Governance was keen to emphasise the need for flexibility and common sense in applying these principles. In particular, paragraph 3.17 of its final report states that,where the roles arc combined, the onus should be on the Board to explain and justify the fact".The FSA already does that in complying with the combined code. It is stated explicitly on page 107 of its annual report.
My first point is well made by the Committee on Corporate Governance. It notes in paragraph 1.14 that strict adherence to recommendations of reports,can be seized on as an easier option than the diligent pursuit of corporate governance objectives".The success of the FSA should be judged by the extent to which it meets its four regulatory objectives. The creation of a single regulator with these clear and statutory objectives has been widely welcomed. The real question, it appears to me, is what governance structure will enable the FSA to best meet these objectives.
My second point is that the FSA is different from a typical private company. That is not to say that we have dismissed Cadbury as irrelevant, as I have said and as I shall continue to say. But the FSA differs from a private company in three crucial respects. First, as noted by the noble Lords, Lord Alexander and Lord Saatchi, it has no shareholders; secondly, its accountability is to Treasury Ministers; and, thirdly, it is required to take important decisions very rapidly. It is not alone in having to take decisions very rapidly, but a key difference is the potentially systemic consequences of the FSA's decisions.
Let us look at the issue practically. What governance structure best meets the FSA's objectives and reflects its unique circumstances? We think that the combined chairman and chief executive is the best model. It gives clarity over who is accountable for meeting the objectives; the line of accountability is clear—from the chairman of the FSA to Treasury Ministers to Parliament—and the appointment and removal of the chairman is by the Treasury.
Certainly, witnesses to the Burns committee supported the clarity given by the combined role. For example, the director-general of the London Investment Banking Association said:We are happy with the board structure arrangements that the Government has chosen".Another witness, the group chief executive of a major bank, said:The separation of Chairman and Chief Executive, particularly if we are talking about a non-executive Chairman of the FSA, will complicate the issue of accountability rather than clarify it. The important thing is the totality of the checks and balances at work".302 We believe that the combined role is appropriate where there are no shareholders' interests to protect. Paragraph 4.7 of the Cadbury report states that the role of the chairman includes the need to,alert [board members] to their obligations to their shareholders".As I said in Committee—probably at too great a length—it is significant that virtually all the other major financial regulators—including those of the United States, France and Japan—are represented by full-time executive hoard chairmen or their equivalents. It is also the role played by other UK regulators, such as the Director-General of Fair Trading, the Director-General of Telecommunications and the Rail Regulator.
The final key aspect in which the FSA differs from other companies is the need for speed in decision making. In Committee, the noble Lord, Lord Newby, gave an example of the Governor of the Bank of England, the Chancellor and the chairman of the FSA being in a room together, and said that if there were a split role at the top of the FSA the chairman would be perceived to be weak. He said:There are several ways around that, one of which is that both the chairman and the chief executive could attend the meeting and the other two could take seconds, too".—[Official Report, 16/3/00; col. 1688.]That does not make terribly good sense to me. It is not the ideal organisation where there might be—as indeed there would be under these circumstances—a great deal of urgency.
In terms of the discussions we had in Committee, we believe that a combined chairman and chief executive is the best structure for meeting the FSA's objectives, for clear accountability to Treasury Ministers and for speed of decision making.
But we also fully accept that safeguards are needed. We agree with the recommendation by the Committee on Corporate Governance, at paragraph 3.18, that,where the roles of Chairman and Chief Executive were combined, there should be a strong and independent element on the Board, with a recognised senior member".and that, in general (paragraph A.2.1 of the combined code):There should be a strong and independent non-executive element on the Board".The noble Lord, Lord Newby, quoted that part of the code.
Furthermore, paragraph A.3.1. of the code states:Non-executive Directors should comprise not less than one-third of the Board".We have more than adhered to that requirement. A majority of the members of the governing body must be non-executives. There must be a senior non-executive; and we have made clear to Stewart Boyd, the deputy chairman of the FSA, the important role that we expect him to play on the board, which, indeed, he is playing.
I hope that I have done as the combined code recommends and publicly justified our decision to combine the posts. I am therefore unable to accept the principle behind Amendment No. 5, which would require the roles to be split.
303 I turn now to the remaining amendments in the group which seem to represent new lines of thought, starting with Amendment No. 1. The effect of this amendment would be to specify on the face of the Bill that the FSA is a private company formed under the Companies Act 1985. Although the FSA was in fact, as the SIB, formed and registered under the Companies Acts 1948 to 1981—not under the 1985 Act—I agree that the best structure for the FSA is that of a private company limited by guarantee. The FSA is such a company and it continues to be such a company, as it was before it changed its name. This has been important in allowing the FSA to make effective preparations for assuming its new statutory functions.
The main effect of Amendments Nos. 3 and 4 would be to specify that the authority's board of directors would be called the "governing body". My understanding is that any other interpretation would be unlikely. While I understand the principle behind the amendments, I believe, with respect, that the Bill already has the desired effect. If more certainty is needed on that point, we shall continue to make inquiries between now and Third Reading.
I turn finally to Amendments Nos. 8, 11 and 16 which would amend paragraph 2 of Schedule 1 which sets out some requirements of the FSA's constitution. Amendment No. 8 would require the Treasury, in exercising its power to appoint and dismiss members of the governing body, and Amendment No. 11, the FSA, in the conduct of its corporate affairs, to have regard to generally accepted principles of good corporate governance. Amendment No. 16 would require the authority to act in conformity with provisions of the combined code prepared by the Committee on Corporate Governance.
Let me say at the outset that I understand the intention behind these amendments. The FSA should behave in line with accepted practice in performing those governance functions which are equivalent to those recommended for public companies. I should add though, in respect of Amendment No. 8, that the Treasury has different lines of accountability, to Ministers and hence to Parliament, and that good practice is already adopted in respect of appointments to the governing body: all directors have three-year contracts, apart from the chairman who has a five-year contract. It is our intention in future to recruit all non-executive directors using Nolan procedures; some already have been. Therefore, we are unable to accept that amendment.
Amendments Nos. 11 and 16, which were singled out by the noble Lord, Lord Burns, are intended to have the effect that the FSA should have regard to the provisions of the combined code. As the FSA does not have shareholders in the normal sense, it is not reasonable to expect it to have regard to every aspect of generally accepted principles. We have a certain amount of difficulty with Amendment No. 16, which requires the FSA to act in conformity with the combined code. Having said that, some aspects of the code are relevant: in particular the requirements to 304 ensure that there is a strong and independent non-executive element on the board, and to justify any deviation from the model of separate chairman and chief executive. The FSA already fully recognises the importance of the combined code. I have already referred to its annual report.
In respect of the corporate status of the FSA, the name and role of the governing body, and the principles of corporate governance, I have listened carefully to the concerns of noble Lords. I am glad to say that we support the principle behind Amendments Nos. 1, 4, 11 and 16. Noble Lords have certainly helped us to take forward the debate on governance in a very helpful way. The Bill already gives effect to the principles underlying Amendments Nos. 1 and 4: that the FSA should continue to be a company constituted under the Companies Acts and that its governing body must be a Companies Act board of directors. I undertake to review the relevant part of Schedule 1 in the light of Amendments Nos. 11 and 16 and to return at Third Reading with any amendments needed to achieve the effect which noble Lords sought to achieve in tabling them. On that basis, I would ask the noble Lord to withdraw the amendment.
§ Lord Newby
My Lords, I am grateful to the Minister and to all noble Lords who have taken part in this debate. Perhaps I may begin by answering the point made by the noble Lord, Lord Wedderburn, about enforceability under the combined code. The answer is to be found in paragraph 2(3) of the schedule. The Treasury, as the body which appoints and removes members of the FSA, would be able to enforce the code. If the FSA did not comply with the code, it could remove the members of the FSA and put in place people who would comply with it.
I found the Minister's response to this group of amendments extremely interesting, although I was not clear about it until the final sentence. We were seeking to achieve two things with these amendments. First, we believe that all directors should have the powers of directors in company law. That was the purpose of Amendments Nos. 1 and 4. The Minister gave us an assurance on that point. The second point related to the whole question of the extent to which the board would operate within the terms of the combined code. In the first part of the Minister's reply on that point, he said that he agreed with part of that but not with other parts of it in respect of the chairman and chief executive. He said that the Government would come forward with an amendment at Third Reading which would partially incorporate into the Bill what we have sought to achieve in these amendments, that he would pick the parts of the combined code with which the Government agree and insert them, and leave aside the parts of the combined code with which the Government do not agree, particularly in respect of the chairman and chief executive.
§ Lord McIntosh of Haringey
My Lords, I do not think I said that. I shall read again the final sentence of my reply, which brought clarity: I undertake to review the relevant part of Schedule 1 in the light of 305 Amendments Nos. 11 and 16 and to return at Third Reading with any amendments needed to achieve the effect which noble Lords sought to achieve in tabling them.
§ Lord Newby
My Lords, I am most grateful to the Minister. That is what I was just about to say. On the basis that the noble Lord has undertaken to produce at Third Reading amendments which will achieve what we are seeking to achieve, and in the spirit of cooperation which the noble Lord has already shown in terms of discussing with us what he may be proposing, I shall ask leave to withdraw the amendment.
§ Lord Wedderburn of Charlton
My Lords, before the noble Lord sits down, he was kind enough to reply to my question. I understood his reply; namely, that the Treasury would be the effective investigator and complainant if need be. In that event, with the Treasury controlling in that respect the principles on which the directors are to act, does the noble Lord think it is entirely relevant to quote, as all speakers in the debate seem to have quoted, Hampel, Greenbury or Cadbury, which concern principles relating to public companies with shareholders. Not a single item has been cited regarding private companies, although there are points that apply to private companies. The codes mentioned by the noble Lord—even my noble friend mentioned them—relate to public companies. In legal terms, there will he a great deal of difficulty in applying all of them to a private company controlled only by the Treasury.
§ Lord Newby
My Lords, they relate to governance. We are seeking to ensure that the FSA operates within the best practices of corporate governance. In terms of the problems to which the noble Lord referred, his noble friend the Minister said that that is exactly the issue with which he and his officials wish to grapple between now and Third Reading.
§ Lord Kingsland
My Lords, before the noble Lord sits down, in withdrawing his amendment, is it his understanding that the Minister has undertaken, in coming to your Lordships' House at Third Reading, to include the separation of the chairman and chief executive as one of his changes of position?
§ Lord Newby
My Lords, my understanding is that he will come forward with a provision allowing the separation of the chairman and chief executive, which is in line with our three amendments which provide for a chairman and a chief executive but allow for the possibility of those posts being combined. That is my understanding of what will happen because that is my understanding of the combined code.
§ Lord Carter
My Lords, this is Report stage; we are not in Committee. We shall ask brief questions and then I think the noble Lord wishes to withdraw his amendment.
§ 4.30 p.m.
§ Lord Peston
My Lords, I am delighted that the noble Lord wants to withdraw his amendment, but I am not keen for him to do so on the basis of a misunderstanding. My noble friend said in Committee that the Bill facilitates what the noble Lord claims his amendments facilitate. Therefore, I do not see how he can be regarded as coming back with something new when he has already told us on several occasions that the Bill already allows for that division. That is why some of us are completely mystified by the amendments in the first place. I am slightly mystified by my noble friend's incredibly conciliatory reply, but I am delighted that he made it because it enables us to proceed. However, I do not see that he can possibly go further than what he has already said.
§ Lord Elton
My Lords, before the noble Lord finally sits down, will he allow the Minister to say what he actually did mean, so that we all understand?
§ Lord McIntosh of Haringey
My Lords, I have said what I mean not only once but twice. I do not think I am called upon, like the Bellman in The Hunting of the Snark, to say it three times.
§ Lord Saatchi
My Lords, I wonder whether I may detain the Minister for a moment. Is he saying that at Third Reading he will bring forward amendments which will contain the presumption that the role of the chairman and the chief executive of the FSA will be split in the future, as the combined code of corporate governance says it will? Is that what he meant by his description of the amendment that he will bring forward at Third Reading?
§ Lord McIntosh of Haringey
My Lords, with the leave of the House, we are very much out of order now. What I said about what I would do at Third Reading referred to Amendments Nos. 11 and 16, which relate to the whole of the code of corporate governance. If the noble thinks that the code requires that there should be a separation of the chairmanship from the role of the chief executive, he had better read the code more carefully than he has done.
§ Lord Newby
My Lords, in my remarks I explained my understanding of the code in respect of the chairman and the chief executive. I believe that the Minister in responding said that he would ensure that the amendments that he brought forward expressed the spirit of what I had said in moving my amendments.
§ Lord Newby
My Lords, the Minister confirms that. Therefore, that is what I expect him to do With that assurance, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
§ Schedule 1 [The Financial Services Authority]:
§ [Amendments Nos. 2 to 11 not moved.]
Lord Kingslandmoved Amendment No. 12:
Page 228, line 32, leave out sub-paragraph (1) and insert—
("(1) The Treasury and the Authority must secure that the majority of the members of the Authority's governing body are non-executive members.
(1A) The Authority must secure that a committee of its governing body, consisting solely of the non-executive members, is set up and maintained for the purposes of discharging the functions conferred on the committee by paragraph 4.").
The noble Lord said: My Lords, in moving this amendment, I shall speak also to Amendments Nos. 13 to 15. Perhaps I may speak also to an earlier amendment in this context although it was not moved.
§ Lord Kingsland
My Lords, I just take it for granted!
These amendments concern the position of the non-executive members of the FSA's governing body. At present, under paragraph 3(1)(a) it is the authority that must secure,that the majority of the members of its governing body are non-executive members".However, the authority has no power to appoint members of the governing body. That power is reserved exclusively for the Treasury under paragraph 2(3). Therefore, the only way in which the authority can secure that the majority of the members of its governing body are non-executive is by conferring executive functions on a minority of its members.
That is an odd way of approaching the problem. If the Treasury removed non-executive members of the governing body, leaving a majority of executive members, the authority would have to remove executive functions from one or more of the remaining members in order to comply with paragraph 3(1)(a).
Would it not be more satisfactory if the obligation to secure a majority of non-executive members was joint: imposed on the Treasury, with the power to appoint and remove members of the governing body, and on the authority, with the power to determine who is responsible for exercising executive functions? That is achieved by Amendment No. 12.
Amendments Nos. 13 to 15 are intended to emphasise the point that the committee of non-executive members, established under the current provisions of paragraph 3(1)(b), is the particular committee set up to discharge the functions described in paragraph 4. We want to avoid any implication that the powers of the non-executive members are limited by paragraph 4. In particular, the use of the definition, "the non-executive committee", is most unhelpful and our amendments avoid the need to use that definition.
What lies behind all these amendments is the desire to see the non-executive members make their presence felt. The FSA is not directly accountable to this House or another place. Moreover, the FSA is not directly accountable to its paymasters, the members of the City 308 community. So we should do what we can to strengthen the position of the non-executive directors. Although the amendments are only modest improvements, we believe that they will have that desirable effect. I beg to move.
§ Lord Fraser of Carmyllie
My Lords, I rise briefly to support my noble friend in his Amendment No. 12. This is a matter that we raised in Committee. I am still baffled as to why the Government do not understand the impossibility of the situation in which we fear the FSA might be placed.
Under the provisions in paragraph 2 of Schedule 1, the Treasury is given the absolute and exclusive power both to appoint and remove directors of the FSA. If it were to exercise that power—it may be for the best of reasons—and remove a number of non-executive directors and fail to reappoint them, as my noble friend has pointed out, in such circumstances there would be only one route available to the FSA; namely, to ensure that among the majority of the non-executives on the governing body some who held executive functions would have to be removed from it. That is simply a nonsense. My noble friend has put together an elegant and simple solution which avoids any risk of the FSA being put in a position of having to attempt the impossible.
§ Lord Stewartby
My Lords, I support my noble friend Lord Kingsland. There is a curiosity in paragraph 3 on page 228, as he has pointed out. The authority is not in a position to secure that the majority of the members of its governing body are non-executive members if it does not have powers to compel the Treasury to make appointments of that kind. If all the non-executive members are to be members of the non-executive committee, which is the proposal in the Bill under headings (a) and (b) of paragraph 3(1), I cannot see why the members of the non-executive committee are to be appointed by the authority. If it is a requirement of the Bill that they should all be members of the non-executive committee, it would be sensible to include that provision, in terms, in the Bill. I hope that the Minister is able to reassure us that this is not a constitutional problem, or that if it is, as I suspect, he will be receptive to a solution along the lines put forward by my noble friend.
§ Lord Elton
My Lords, in seeking to allay my fears in this matter the Minister was kind enough to write to me pointing out that the authority had power under the schedule to secure a majority of independent non-executive directors by its command over its own constitution. Surely, if the Treasury has the superior power of dismissal it must also have the same responsibility to maintain the balance which we all seek. I hope that the Minister will find this a suitable solution.
§ Lord McIntosh of Haringey
My Lords, these four amendments, and the one which was not moved but spoken to, all concern the role of the non-executive 309 directors of the FSA. In our view—I understand from the speeches so far that it is shared by all noble Lords—the non-executive directors have a key role to play in the FSA in line with best practice in corporate governance. While I do not believe that I need refer again to the Cadbury report on this matter, perhaps I may quote with approval the noble Lord, Lord Saatchi, who in Committee on 16th March (at col. 1743) himself referred to the FSA's consultation paper. That consultation paper defines the non-executive role as normally including,Assisting their executive colleagues with the firm's governing body in setting, and monitoring, the firm's strategy; providing an independent perspective to the overall running of the business, scrutinising the approach of executive management, the firm's performance and standards of conduct; and carrying out other responsibilities as assigned by the firm, for example as a member of the board committee, such as an audit or remuneration committee".We agree with all of those descriptions.
Perhaps there has been a misunderstanding, since we have specified in paragraph 4 of Schedule 1 certain functions to be carried out only by the non-executive committee. These were described disparagingly as housekeeping functions. It is important that these functions are carried out by the non-executive committee since they include issues which it would be invidious for the executive members of the board to decide, such as determining the remuneration of the chairman and executive members.
As the noble and learned Lord. Lord Donaldson, pointed out in Committee, the confusion may have arisen in part from the use of the term "the non-executive functions" which is defined in paragraph 4(2) of Schedule 1. This is a drafting device to clarify the operation of the paragraph and does not in any sense limit the role of the non-executive members of the board. The noble and learned Lord suggested in Committee that the term should be placed in quotation marks. This would not change its legal effect, but it might help Members of the House to think of the term as if it were in quotation marks. Parliamentary Counsel is considering that suggestion. I do not believe that it would require an amendment; it would be regarded as purely grammatical.
The important point is that the role of the non-executive members is in no way restricted to the functions of the non-executive committee. As the annual report states (at page 107),all directors are equally accountable under the law for the proper stewardship of the FSA's affairs".That is confirmed by the important role played by the non-executive deputy chairman of the FSA. It is intended that he should be a key and influential member of the board, lead the non-executive majority in board discussions, provide an independent perspective to the overall running of the FSA and scrutinise the approach of the executives and the FSA's overall performance. Therefore, these amendments are not acceptable to the Government.
The question is raised whether it is possible under paragraph 3 of the schedule for the authority to secure that the majority of the members of its governing body 310 are non-executive members, since the schedule requires that the members are appointed by the Treasury. I believe that any problem here is more apparent than real. If the Treasury, for example, used its power of removal in such a way that there was no longer a non-executive majority, it is likely that it would have great difficulty in avoiding an adverse outcome from judicial review. We are confident that that would not be the case. In those circumstances, I believe that the provisions of the schedule in relation to non-executive directors are fully consistent with any standard of best corporate governance. I am, therefore, unable to accept the amendments.
§ 4.45 p.m.
§ Lord Kingsland
My Lords, my understanding of the Minister's response is that he agrees with every amendment that we have tabled but does not believe that they are necessary because that is in effect what the Bill says; or would say following a successful judicial review. If so, why is the Minister unwilling to amend the Bill to make clear what is dearly unclear to everyone else? Where greater clarity can be achieved, surely less trouble will be generated in future. For the City it would at least be one element of the Bill which was mercifully clear. Is the noble Lord unwilling to make these changes because of amour propre, as the French would say; or does he truly believe that a copy of his speech in Hansard will always accompany the Bill in every boardroom in future so that executives can ensure they are on the right track? I reserve discretion to return to this matter at Third Reading. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
§ [Amendments Nos. 13 to 16 not moved.]
Lord Kingslandmoved Amendment No 17:
Page 230, line 6, leave out ("Authority") and insert ("Treasury").
The noble Lord said: My Lords, in moving Amendment No. 17 I should like to speak also to Amendments Nos. 18 to 22. The proper investigation of complaints against the authority is one of the most important checks and balances in the Bill. It will restrain the improper or oppressive use of the authority's powers. It is vital, therefore, that the investigator should not only be independent of the authority but should be seen to be independent. It is also crucial that the investigator should carry with his or her office real, not imaginary, authority.
Amendments Nos. 16 and 17 concern the issue of the independence of the investigator from the Financial Services Authority. At present, paragraph 7(4) provides that it is the authority which decides whether the terms and conditions on which the investigator is appointed are designed to secure that he will be free to act independently of the authority. It appears, at least to the Opposition, to be wholly inappropriate for the authority itself to make this decision. The authority will have an obvious and clear conflict of interest. Amendment No. 16 requires the Treasury, rather than 311 the authority, to exercise its judgment on the independence of the investigator. We believe that that is an infinitely better solution.
The other amendments would require, first, that all complaints received by the authority should be passed to the investigator; and, secondly, that where the investigator reported that a complaint was well founded, or criticised the authority in his report, the investigator should include in that report a recommendation to the authority that it take steps to remedy the matter complained of including, where appropriate, the making of an ex gratia payment.
The latter provision will not entitle the investigator to require the authority to make compensatory payments to persons whose complaints have been shown to be well founded. If the FSA is to enjoy the statutory immunity in paragraph 19 of Schedule 1, much more should be done to apply pressure on the authority to take steps to provide remedies where it has been found to have been negligent, oppressive or unreasonable.
Many noble Lords will recall the long debate in Committee over whether all complaints should go directly to the investigator or whether they should go to the authority first for an initial review. It remains our view that complainants would prefer to deal with an independent investigator rather than the person against whom the complaint is being made.
Many complainants will be authorised persons. The investigation of a complaint by the investigator would not affect so directly the relationship between the authority and the complainant. It is also our view that the investigator might begin to take on trust the authority's views; and would not accordingly approach the investigation of complaints with the necessary independence of mind. We believe that our proposals would strengthen the current investigation arrangements without in any way prejudicing the position of the FSA.
Let us consider the relationship between the authority and the financial community. It is clear that complainants would feel hampered by a complaints procedure that was not handled in an independent fashion. Concern has been expressed—admittedly much of it in private—by many leading participants in the financial services market that a complaint might antagonise the authority, and that the relationship between the investigator, working from within the authority's headquarters, and the organisation that was the subject of his queries would be too incestuous. That is why we propose a properly independent investigator whose position would be maintained, not on the basis of the authority's own discretion, as is currently the case, but on an independent statutory basis.
The authority has the power to cause significant disruption to a company's business. It can demand documents and interviews. A firm which has come under scrutiny is likely to be put to a great deal of trouble helping the authority with its inquiries. That is all well and good if it transpires that the authority has 312 identified correctly a breach of the law. However, in cases where the authority is unable to produce the necessary evidence, a law-abiding firm which has been investigated would be unable to seek compensation for the inconvenience and the effect on its reputation resulting from such an investigation.
In this amendment we seek to redress the balance so that where a company believes its reputation and business to have been damaged by an investigation, the complaints investigator can provide compensation. I beg to move.
§ Lord Borrie
My Lords, the noble Lord, Lord Kingsland, is keen for the wording of the Bill to be plain and clear. I draw his attention, therefore, to paragraphs 7 and 8 of Schedule 1 that he has not mentioned.
Paragraph 7( 1 )(b) of Schedule 1 provides:The Authority must appoint an independent person (the investigator')".The noble Lord may say, "The Bill states that the person must be independent, but how does one achieve that?" I stress paragraph 7(3), which the noble Lord did not quote. It states:The Treasury's approval is required for the appointment or dismissal of the investigator".If the noble Lord's concern is that the Treasury should have a role, we have that provision. The Treasury has a role.
Secondly, if the noble Lord, Lord Kingsland, is concerned that there may be the appointment of a stooge, or that someone enjoying some security of tenure and who cannot be removed turns out to be a stooge, we have the provision that the Treasury's approval is needed not only for appointment but also dismissal. If there are complaints about that person being of no value as an independent person, those provisions ensure the position.
Finally, on the investigation of complaints, under paragraph 8(4) it is plain that the investigator can consider a complaint even if it has not been referred to him by the authority. That demonstrates again an independence, and the possibility of independently proceeding with an investigation, even if the matter has not been referred to the investigator. These provisions—there may be others; I do not want to spend too much time upon the matter—ensure the independence which is so much the concern of all noble Lords. I think that the role of the Treasury, which I quoted, should have been noticed by the noble Lord.
§ Lord Stewartby
My Lords, the noble Lord, Lord Borrie, points to some of the safeguards built into the schedule. It would be churlish not to accept that the Government have improved the Bill since it first appeared and have strengthened the rights of those who have complaints or may be disciplined. That is very much to be welcomed.
However, we have to accept also that the heart of the concern about the Bill, even as amended and improved, is that an extremely powerful and 313 monolithic body will have enormous powers of control of functions in the financial markets and in relation to those who exercise those functions. It is necessary, therefore, to see that there are no cracks in the process which can tip the balance unreasonably in favour of the authority.
In that connection, I refer to the issue dealt with in Amendment No. 17. In paragraph 7(4) of Schedule 1 it is the opinion of the authority which determines whether the terms and conditions on which the investigator is appointed meet the two requirements of headings (a) and (b). I can see no reason why, as my noble friend suggests, that should not be in the opinion of the Treasury. There is no harm in putting those safeguards into statute. Once the Bill is enacted such changes will not be possible. The authority would lose nothing by the amendment unless it felt that the Treasury might take a different view from itself.
It would be a great reassurance to have the opinion of the Treasury as the determining factor. I hope that, despite the changes which have been made—I acknowledge that they have improved the position of those who may have complaints—it is an amendment the Government feel able to accept.
§ Lord Elton
My Lords, I endorse what my noble friend said and go further. I draw attention to Amendment No. 18. It seems a difference of substance if the decision as to whether or not to pursue a complaint rests with the authority or an independent investigator. At present the Bill states that,The Authority is not obliged to investigate a complaint in accordance"—and so on—which … it considers would be more appropriately dealt with in another way".These may appear to be presentational points. However, presentation is important, and in this case there is the possibility that a difference of treatment may result from the different placing of authority.
§ Lord McIntosh of Haringey
My Lords, the complaints procedure is an important part of the accountability package. As noble Lords have recognised, the Bill has benefited from the scrutiny of the Joint Committee and there have been significant amendments to the Bill as a result.
The Bill should deliver an open and transparent mechanism for people to have their complaints dealt with quickly. The arrangements which the FSA envisages for the complaints scheme were outlined in a letter from the authority to the noble Lord, Lord Burns, which was copied to those who spoke in the debate in Committee and which has been placed in the Library of the House.
Amendment No. 17 would require the Treasury rather than the FSA to set the terms and conditions on which the complaints investigator is appointed. I endorse the need for the complaints investigator to be operationally independent of the FSA. The noble Lords, Lord Borrie and Lord Stewartby, indicated the ways in which the Bill has been improved to achieve that.
314 Paragraph 7(1)(b) of Schedule 1 refers to "an independent person". The Treasury's approval is required for the appointment or dismissal of the investigator (paragraph 7(3)). The FSA, in paragraph 7 of its paper of 9th March, proposes that the panel to advise the FSA board on selection of the investigator should be chaired by the non-executive deputy chairman of the FSA, include the chairs of the practitioner forum and consumer panel and, in accordance with Nolan best practice, have a fourth member selected to give an independent and external perspective. You cannot get much further away from the executive directors of the FSA. Paragraph 9 of the FSA paper proposes that the investigator should not be an employee, member or officer of the FSA.
Paragraph 7(4)(a) of Schedule 1 provides that the investigator must be free at all times to act independently of the FSA. Paragraphs 7(5) to (14) provide that there has to be extensive consultation on the nature of the complaints scheme. Paragraph 8(6) provides that the FSA can be required by the investigator to publish any response to a well-founded complaint, or one which criticises the authority. Government amendments laid in Committee prevent FSA employees from investigating complaints against the FSA and are now paragraph 8(8). The FSA., in paragraph 9 of its paper, proposes that the investigator's office be staffed by individuals who perform no duties for the FSA and that the office itself be located away from the FSA's premises. I do not believe it can be said that nothing is being done to secure the investigator's independence.
Amendment No. 17 would run counter to one of the principles of the new regime—that the Bill sets clear objectives for the FSA and a framework within which it should operate and account for itself—but how the objectives are achieved is for the FSA to determine. In this case, we have set the objective of an independent complaints investigator; it is for the FSA to achieve it. Handing responsibility for appointing the investigator to the Treasury, which would go beyond the existing power of the Treasury to approve the appointment or dismissal of the investigator, might imply a role for the Treasury or its appointee in handling operational level complaints against the FSA. That would not be the appropriate relationship between the Treasury and the FSA, whether in this case or on any other issue.
Amendments Nos. 18 to 21 would require all complaints against the FSA to go to the complaints investigator. I continue to believe that the FSA should have the chance to rectify any complaint made against it. That position was supported by the noble Lords, Lord Borrie, Lord Grabiner and Lord Faulkner, and the noble and learned Lord, Lord Donaldson, when we considered the matter in Committee.
Most complaints arrangements, including those relating to regulated firms under the current system, give the subject of the complaint the chance to put his own house in order before an independent investigator is brought in. We are really trying to set up a mechanism for cases which the FSA cannot resolve with complainants—not every single case that might arise. But the scheme still preserves transparency. If 315 the FSA decides not to investigate a complaint, the investigator should know about it and can take up the complaint if he sees fit. I hope that noble Lords will not pursue the amendments further because they run counter to any established practice of complaints procedures.
Amendment No. 22 would allow the investigator to recommend that the FSA makes an ex gratia payment when he considers that a complaint is well-founded or he has criticised the FSA in his report. The FSA has considered the case for ex gratia payments and it sets out its approach in the paper copied to many noble Lords and to which I have already referred. The FSA intends in its paragraph 10 that ex gratia payments should in principle be available for both regulated firms and their employees, and consumers. In paragraph 11, it proposes that the investigator should be able to recommend ex gratia payments in cases of maladministration by the FSA involving loss, distress or inconvenience. No amendment to the Bill is required to allow ex gratia payments. The FSA will be consulting further on the matter and it plans to issue a paper for full public consultation in late April. I hope that noble Lords will not press the amendments.
§ 5 p.m.
§ Lord Kingsland
My Lords, I can be terse to the point of being telegraphic. I should like to return to the issue of Amendment No. 17 at Third Reading. I cannot understand why the Minister is not prepared to accept that amendment.
I want to reflect on his replies to Amendments Nos. 18 to 21. I recognise that a number of noble Lords took the view that the Minister takes. Although I disagree with it, I want to reconsider the appropriateness of those amendments. When they are called I shall not move them.
However, I find his reply to Amendment No. 22 wholly unsatisfactory. In the Bill, the Government are asking for statutory immunity for the FSA, yet they are not prepared to put on the face of the Bill the power of an independent investigator to make ex gratia awards. That renders the Government's undertakings about the powers of the independent investigator and what he is capable of doing deeply suspect. Therefore, when we reach Amendment No. 22, I shall want to test the opinion of the House. In the meantime, I beg leave to withdraw Amendment No. 17.
Amendment, by leave, withdrawn.
§ [Amendments Nos. 18 to 21 not moved.]
Lord Kingslandmoved Amendment No. 22:
Page 231, line 8, leave out sub-paragraph (4) and insert—
("(4) In a case where the investigator—
The noble Lord said: My Lords, I beg to move.
§ 5.6 p.m.
§ On Question, Whether the said amendment (No. 22) shall be agreed to?
§ Their Lordships divided: Contents, 124; Not-Contents, 119.317
|Division No. 1|
|Ackner, L.||Hamwee, B.|
|Addington, L.||Hanham, B|
|Alderdice, L.||Harris of Greenwich, L.|
|Alexander of Weedon, L.||Harris of Peckham, L.|
|Anelay of St. Johns, B.||Harris of Richmond, B.|
|Astor of Hever, L.||Hayhoe, L.|
|Attlee, E.||Henley, L.[Teller]|
|Avebury, L.||Higgins, L.|
|Bagri, L.||Hogg, B.|
|Barker, B.||Holderness, L.|
|Bell, L.||Home, E.|
|Biffen, L.||Hooson, L.|
|Blackwell, L.||Howe, E.|
|Blaker, L.||Hunt of Wirral, L.|
|Blatch, B.||Hylton-Foster, B.|
|Boardman, L.||Kimball, L.|
|Bowness, L.||Kingsland. L.|
|Brabazon of Tara, L.||Kirkham, L.|
|Bradshaw, L.||Lester of Herne Hill. L.|
|Bridgeman, V.||Liverpool, E.|
|Brigstocke, B.||Lucas, L.|
|Brougham and Vaux, L.||Luke, L.|
|Burnham, L. [Teller]||McConnell, L.|
|Byford, B.||Mackay of Ardbrecknish. L.|
|Campbell of Alloway, L.||Marlesford. L.|
|Campbell of Cray, L.||Mayhew of Twysden, L.|
|Chalker of Wallasey, B.||Miller of Hendon, B.|
|Clark of Kempston, L.||Monro of Langholm. L.|
|Clement-Jones, L.||Monson, L.|
|Colwyn, L.||Murton of Lindisfarne, L.|
|Cope of Berkeley, L.||Newby, L.|
|Courtown, E.||Northesk, E.|
|Cowdrey of Tonbridge, L.||Norton of Louth, L.|
|Craigavon, V.||O'Cathain, B.|
|Crickhowell, L.||Onslow, E.|
|Dholakia, L.||Oxfuird, V.|
|Dixon-Smith, L.||Park of Monmouth, B.|
|Donaldson of Lymington, L.||Patten, L.|
|Eden of Winton, L.||Pearson of Rannoch, L.|
|Elles, B.||Phillips of Sudbury, L.|
|Elliott of Morpeth, L.||Plumb, L.|
|Elton, L.||Plummer of St. Marylebone, L|
|Ezra, L.||Rawlinson of Ewell, L.|
|Falkland, V.||Renton. L.|
|Feldman, L.||Roberts of Conwy, L.|
|Ferrers, E.||Rodgers of Quarry Bank, L.|
|Flather, B.||Russell, E.|
|Fookes, B.||Saatchi, L.|
|Forsyth of Drumlean, L.||Saltoun of Abernethy, Ly.|
|Fraser of Carmyllie, L.||Seccombe, B.|
|Gardner of Parkes, B.||Sharman, L.|
|Geddes, L.||Simon of Glaisdale, L.|
|Geraint, L.||Skelmersdale, L.|
|Glentoran, L.||Smith of Clifton, L.|
|Goschen, V.||Soulsby of Swaffham Prior, L.|
|Griffiths of Fforestfach, L.||Stewartby, L.|
|Hambro, L.||Swinfen. L.|
|Thatcher, B.||Vivian, L.|
|Thomas of Gwydir, L.||Wade of Chorlton, L.|
|Thomas of Walliswood, B.||Walker of Worcester, L.|
|Tope, L.||Williams of Crosby, B.|
|TordolF, L.||Young, B.|
|Ahmed, L.||Janner of Braunstone, L.|
|Allen by of Megiddo, V.||Jay of Paddington, B, (Lord privy seal)|
|Amos, B.||Jeger, B.|
|Ashley of Stoke, L.||Jenkins of Putney, L.|
|Ashton of Upholland, B.||Joffe, L.|
|Bach, L.||Judd, L.|
|Barnett, L.||King of West Bromwich, L.|
|Bassam of Brighton, L.||Kirkhill, L.|
|Blackstone, B.||Laird, L.|
|Borre, L.||Lipsey, L.|
|Bragg, L.||Lockwood, B.|
|Brett, L.||Longford, E.|
|Brooke of Alverthorpe, L.||Lovell-Davis, L.|
|Brookman, L.||Macdoniild of Tradeston, L.|
|Bruce of Donington, L.||Mclntosh of Haringey, L. [Teller]|
|Burns, L.||Mackenzie of Framwellgate, L|
|Carter, L, [Teller]||Mallalieu, B.|
|Christopher, L.||Massey of Darwen, B.|
|Clarke of Hampstead, L.||Merlyn-Rees, L.|
|Clinton-Davis, L.||Mishcon, L.|
|Cocks of Hartcliffe, L.||Molloy, L.|
|Crawley, B.||Morris of Castle Morris, L.|
|David, B.||Morris of Manchester, L.|
|Davies of Coity, L.||Murray of Epping Forest, L.|
|Davies of Oldham, L.||Nicol, B.|
|Dean of Thornton-le-Fylde. B.||Peston, L.|
|Desai, L.||Pitkeathley, B.|
|Diamond, L.||Prys-Daxies, L.|
|Donoughue, L.||Ramsay of Cartvale, B.|
|Dormand of Easington, L.||Randall of St. Budeaux, L.|
|Dubs, L.||Rea, L.|
|Elder, L.||Rendell of Babergh, B.|
|Evans of Parkside, L.||Renwick of Clifton, L.|
|Falconer of Thoroton, L.||Richard, L.|
|Farrington of Ribbleton, B.||Sainsbury of Turville, L.|
|Faulkner of Worcester, L.||Scotland of Asthal, B.|
|Filkin, L.||Serota, B.|
|Fitt, L.||Shore of Stepney, L.|
|Gale, B.||Simon, V.|
|Giladwin of Clee, L.||Smith of Gilmorehill, B.|
|Goldsmith, L.||Stoddart of Swindon, L.|
|Goudie, B.||Stone of Blackheath, L.|
|Gould of Potternewton, B.||Strabolgi, L.|
|Graham of Edmonton, L.||Symons of Vernham Dean, B.|
|Hardy of Wath, L.||Taylor of Blackburn, L.|
|Harris of Haringey, L.||Taylor of Gryfe, L.|
|Harrison, L.||Thornton, B.|
|Haskel, L.||Turner of Camden, B.|
|Hayman, B.||Uddin, B.|
|Hilton of Eggardon, B.||Varley, L.|
|Hollick, L.||Walker of Doncaster, L.|
|Hollis of Heigham, B.||Weatherill, L.|
|Howells of St Davids, B.||Wedderburn of Charlton, L.|
|Howie of Troon, L.||Whitaker, B.|
|Hoyle, L.||Whitty, L.|
|Hughes of Woodside, L.||Williams of Elvel, L.|
|Hunt of Kings Heath, L.||Williams of Mostyn, L.|
|Irvine of Lairg, L. (Lord Chancellor)||Woolmer of Leeds, L.|
|Young of Old Scone, B.|
§ Resolved in the affirmative, and amendment agreed to accordingly.
§ 5.16 p.m.
Lord Kingslandmoved Amendment No. 23:
Page 231, line 38, at end insert—
("() any report prepared by the Practitioner Panel under section 8(4A) and any report prepared by the Consumer Panel under section 9(4A) and the Authority's response to any such report or reports;").
The noble Lord said: My Lords, paragraph 10 requires the authority to make an annual report to the Treasury on the discharge of its functions and certain other matters. The Treasury must lay before Parliament a copy of each report.
The financial services annual report is an important means by which the authority is made accountable to Parliament. However, it is an indirect means. We would like to see far greater accountability.
The amendment would require the annual report to be accompanied by any reports prepared by the practitioner and consumer panels, together with the authority's responses to such reports. The panels have a vital role in acting as sounding boards for the authority. They will have a special insight into the way in which the authority goes about performing its functions. They should be actively encouraged to produce reports which bring their reactions to light.
Under Clause 7,
The Authority must make and maintain effective arrangements for consulting practitioners and consumers on the extent to which its general policies and practices are consistent with its general duties under section 2".
Therefore, the consultation is only in relation to general policies and practices. In our view, this is wholly inadequate. There must be an express requirement on the authority to consult the panels on proposed rules, codes, general guidance and statements, and amendments to them. That is the purpose of Amendment No. 36.
Amendments Nos. 37 and 39 would require the authority to give reasons to the panels in circumstances where the authority intends to proceed against the advice of either panel. We believe that that is important because an obligation to have regard to the representations of the panels can easily be sidestepped unless a further obligation exists to give reasons for taking a particular approach.
Amendments Nos. 38 and 40 would enable the two panels, if they so wished, to prepare annual reports on the representations that they have made and on the authority's responses. Such reports would then accompany the authority's annual report when it is submitted to the Treasury under paragraph 10 of Schedule 1.
The Bill provides no certainty as to how the panels are to be funded. Clauses 8(1) and 9(1) refer to the establishment and maintenance of the panels. It is not clear who would meet the cost if the panels wished to prepare and publish annual reports of their work. Amendments Nos. 38 and 40 provide expressly for the costs to be borne by the authority.
The Burns committee recommended that, if the authority does not act on recommendations made by the panel, at the very least it should be obliged to publish its reasons for not doing so. In the Opposition's judgment, that matter is vital. Mr David 319 Challen, the chairman of the panel (currently called, I believe, the Practitioners' Forum) expressed his fears to the Joint Committee that, in the absence of strong statutory obligations to involve practitioners, they could easily end up being marginalised. He argued that the Bill should include an obligation on the authority to give reasons if submissions by the panel are ignored. Indeed, the first annual report of the Practitioners' Forum reiterated that concern. However, so far the Minister has refused to strengthen the consultation obligation in that way.
We believe that this is a sensible amendment, designed to give the panels the weapons that they need to have a real effect on the authority. I beg to move.
§ Lord Newby
My Lords, this is the second of the three groups of amendments to which I referred when I moved Amendment No. 1. They seek to improve the accountability and transparency of the FSA's operations. As the noble Lord, Lord Kingsland, said, the way in which the practitioner and consumer panels are established under the Bill means that they could be marginalised, if the FSA so chose.
It seems to us that the amendments, which require the panels to be formally consulted and then for the FSA to give reasons why they may not have agreed with their representations, are very important. Without the amendments, it would be very easy either in many cases for the FSA to ignore the panels altogether or simply to swat aside any recommendations that the panels make. Therefore, we support the amendments.
§ Lord McIntosh of Haringey
My Lords, all the amendments in this group seek to enhance the arrangements made by the Bill for the practitioner and consumer panels. I start by saying that the arrangements already in the Bill were introduced in direct response to the recommendations of the Joint Committee. They sought to put the FSA's existing voluntary arrangements on a permanent footing.
By introducing amendments before the Bill came from another place, the Government also reinforced the requirements for the authority to consult on its proposed rules, codes and statements of policy. I believe that they represented a prime example of our willingness to make extensive and non-contentious improvements to the Bill. Those amendments introduced extensive requirements for the authority to publish a feedback statement about its consultations. Such statements are required to report in general terms the representations made and the authority's response to them.
In our view, the provisions of the Bill effectively deliver the outcome that the amendments before the House today seek to achieve. Therefore, I could respond to the amendments by saying that the Government are sympathetic to the points that have been made but that we do not consider the amendments necessary. However, I recognise that the force of the arguments go a little further than that. In particular, I accept that the Bill does not impose on the 320 authority an obligation to respond to either panel where it had issued a report on a matter that did not stem directly from a consultation in relation to specific codes, statements of policy or enforcement rules.
I should like to give further thought to the points that have been made and to the precise effect of the amendments before us. For example, Amendments Nos. 38 and 40 would enable the panels to publish reports at the expense of the authority. That raises questions about whether the authority would be able to maintain proper control of expenditure because the amendments have the effect of requiring the authority to give a blank cheque. However, the point is well taken. The panels should have resources to publish reports and the panels are to be funded by the authority. Therefore, it is implicit that the obligation under the Bill for the authority to establish and maintain the panels requires the authority to ensure that the panels have appropriate resources to perform the functions for which they are to be established—indeed, are established.
Amendment No. 23 would require a copy of any report to be laid before Parliament and, as proposed by Amendments Nos. 25 and 26 to which we shall turn shortly, before the Joint Committee. The Treasury will be under a duty to lay the authority's annual report before Parliament, and the authority has undertaken to include in that annual report a statement from the chairman of each of the panels. Indeed, statements from the chairmen of the panels were included in the last report. Of course, the Treasury can make a direction under paragraph 10(2)(b) of Schedule 1 imposing requirements about the content of the authority's annual reports.
On the general principle of not being too prescriptive, I am not attracted to the proposition of imposing an obligation on either panel to produce its own annual report. However, there is no reason that the panels should not do so if they so wish. Where the reports are produced and published, they will be available as public documents. I certainly would not rule out the possibility of the authority appending such reports when it submits its own in accordance with Schedule 1.
Amendment No. 36 would extend the requirements for arrangements for consultation on the general policies and practices of the authority, as defined in Clause 2. The arrangements under Clauses 7 to 9 were intended to supplement the specific consultation requirements under the Bill; for example, under Clause 151. However, we shall look at the various provisions to see whether matters can be clarified, and we shall come back with suitable amendments if they appear to be necessary.
Finally, I turn to Amendments Nos. 37 and 39 which are also in this group. These require the authority specifically to respond to representations made by the panels. As I said a few moments ago, it was our intention that the obligation to produce a feedback statement in response to representations would include a response to any representations made by the panels. I have noted that there are ways in which the arrangements could be reinforced.
321 As I said, I do not believe that the amendments before us are perfect in every way. However, having had the opportunity to consider the amendments before coming to the House today, and in the light of today's debate, I have concluded that there is scope for improvement to be made to the arrangements for providing feedback to the panels. On that basis, I hope that noble Lords will not press their amendments.
§ Lord Kingsland
My Lords, I listened as carefully as I could to what the Minister said and I believe that his tone was generally conciliatory towards the objective that lies behind our amendments. On all the amendments except Amendments Nos. 37 and 39 I wish to wait and see what changes, if any, the Minister advances at Third Reading.
However, I want to encourage him to say a little more about Amendments Nos. 37 and 39 because they are absolutely crucial. On many occasions, the Government have committed themselves to the principle of transparency. As a result of the introduction of the European Convention on Human Rights, if not by the natural development of the jurisprudence of our own courts, we know that it will now be a matter of routine for government authorities to have to give reasons for the decisions that they make. If those two constitutional facts are combined, your Lordships inevitably come to 1:he conclusion that, in circumstances where the authority disagrees with the practitioners' panel, it should make those disagreements public and give the reasons why it disagrees.
In my submission, that should be on the face of the Bill. If the Minister is saying that he will come back on Third Reading with his own amendments which will put those matters on the face of the Bill, then I am content to withdraw my amendments. Otherwise, I fear that I shall feel obliged to press them.
§ 5.30 p.m.
§ Lord McIntosh of Haringey
My Lords, it certainly is our intention that the obligation to produce a feedback statement in response to representations that have been made would include a response to representations made by the panel. I believe that that is the point of Amendments Nos. 37 and 39.
The noble Lord is saying that the arrangements should be reinforced by reference on the face of the Bill. I believe that there is scope for improvement. The noble Lord is right that it may well be right to put those matters on the face of the Bill. If that proves to be the case, then we shall bring forward amendments to that effect at Third Reading.
§ Lord Kingsland
My Lords, my understanding is that the Minister has undertaken to bring forward amendments which will state that the authority is obliged to give reasons for any disagreement it has with a recommendation of either of the panels. If that is the Minister's understanding, then I shall withdraw the amendment.
§ Lord McIntosh of Haringey
My Lords, what I want to say is that we believe that the authority should give reasons. How that shall be achieved precisely, I do not quite know. But we are accepting in principle the thinking behind the amendments.
§ Lord Kingsland
My Lords, I am much obliged to the Minister. He has given me the undertaking that I wanted. I am sure that he will keep to that undertaking when we see the text of the Government's amendments at Third Reading. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Newbymoved Amendment No. 24:
Page 231, line 41, at end insert—
("() A joint committee of both Houses of Parliament shall examine all the reports submitted under this section at least once a year.").
The noble Lord said: My Lords, we now move to the third group of amendments to which I referred at the beginning of today's debate. They relate to the way in which Parliament responds and has the opportunity to respond to the work of the FSA.
It is our view, and, I believe, the view or the House that the FSA is a body whose work should be looked at regularly and seriously by Parliament. With these amendments, we propose that that should be done by a Joint Committee of both Houses. In doing so, we have in mind the success of the Joint Committee under the chairmanship of the noble Lord. Lord Burns.
At present the Bill simply provides that the annual report of the FSA shall be transmitted to Parliament via the Treasury. When we discussed these matters on the last occasion, the Minister explained that it was difficult, if not impossible, for a Bill to determine how Parliament would exercise its scrutiny powers. He tried, as best he could, to be encouraging, in terms of the Government's response once the Bill is in place, when it comes to considering whether a Joint Committee should be established. He said that it was not for him to say whether any committee of either House or, indeed, both Houses should be established. He praised the work of the noble Lord, Lord Burns and said:
If I am asked what the usual channels will think, I believe I can assure your Lordships that I will speak severely to the Deputy Chief Whip and urge him that the usual channels should take this matter very seriously".—[Official Report, 16/3/00; col. 1778.]
The principal point of these amendments is really to ask whether he has now spoken to the Deputy Chief Whip. Has the Deputy Chief Whip consulted more widely? And, as a result of those consultations, are the Government now able to give a clearer steer as to how they may respond on this matter when the Bill is enacted? I beg to move.
§ The Deputy Speaker (Baroness Gardner of Parkes)
My Lords, I should point out to the House that there is one word misprinted on the Marshalled List. The amendment should read:A joint committee of both Houses of Parliament shall examine all the reports submitted under this paragraph at least once a year".
§ Lord Kingsland
My Lords, there is wide support for the view that the Burns committee was a highly successful innovation in parliamentary procedure. The wish to establish a Joint Committee as a means of parliamentary scrutiny of the activities and performance of the FSA is a wholly logical conclusion from the Burns experience.
At present, parliamentary scrutiny is strictly limited. The Bill before us envisages that it should be the Treasury rather than Parliament to which the authority is accountable. But, given the importance of the financial services market and the powers wielded by the authority, it is appropriate that there should be a greater degree of parliamentary scrutiny. For that reason, we wholly support the amendment.
§ Lord McIntosh of Haringey
My Lords, I have spoken to the Deputy Chief Whip and he has upbraided me for my levity. Indeed, he had very good reason to do so because I did not really appreciate, when they were debated at an earlier stage, the constitutional importance of these amendments.
If the amendments were carried, the House of Lords and the House of Commons would be told in legislation how to organise their business. That is not acceptable. Noble Lords who read the article by the noble Lord, Lord Rees-Mogg, in The Times on Monday, the response by the noble Lord, Lord Neill of Bladen, on Wednesday and the further contribution of the noble Viscount, Lord Cranborne, this morning will realise that both Houses of Parliament guard very jealously their own decision-making power in relation to how they consider matters which come before them.
The Bill provides that there shall be a report to Parliament. I have already made it clear that the Treasury Select Committee and any committee which this House may choose to set up have the right to have before them any official of the FSA, any of the regulated persons, authorised persons or anyone they wish to interrogate about the working of the Bill. Nothing in legislation can or should detract from that.
Standing Order No. 67 of this House makes it clear that we can set up a Select Committee or any subcommittee appointed by a Select Committee to confer and meet concurrently with a committee or subcommittee of another place, which covers the point about Joint Committees. If a committee of this House wished to confer with a Treasury committee, the other place could give its committee the necessary powers. There is nothing to prevent this House proposing to another place that it is expedient to establish a Joint Committee, whatever appears on the face of the Bill.
324 We in government are entirely supportive of any proposal for parliamentary scrutiny which may come from either House of Parliament but we would think it entirely inappropriate to place an obligation on the face of the Bill.
§ Lord Newby
My Lords, I am grateful to the Minister for that reply. It goes somewhat further than his earlier reply and his consultations have, indeed, borne limited fruit. Therefore, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
§ [Amendments Nos. 25 to 27 not moved.]
Lord Sharmanmoved Amendment No. 28:
Page 234, line 19, after ("Authority") insert ("or any person acting in the capacity of an agent of the Authority under any provision of this Act").
The noble Lord said: My Lords, Amendment No. 28 is very similar to that which was debated in Committee. It seeks to square off the circle, as it were, on statutory immunity. Part IV of Schedule 1, at paragraph 19(1), provides for exemption from liability in damages for the authority and its staff. Paragraph 19(2) provides a similar exemption for,
a person appointed to conduct an investigation".
Furthermore, in Clause 100 there is provision for a similar exemption for the competent authority carrying out its functions as the listing authority, and its staff.
Paragraph 6(2) of Schedule 1 provides the ability for the functions of the FSA to be carried out, on appointment by the FSA, by people who are competent in its opinion to do so. There is thereby a category of people functioning in discharging the duties of the FSA who are not the beneficiaries of the statutory immunity to which I referred earlier. If all the other categories of activity should enjoy statutory immunity, it seems that it should be extended to persons appointed under paragraph 6(2) of Schedule 1. I beg to move.
§ Lord McIntosh of Haringey
My Lords, clearly statutory immunity from liability in damages is a matter of great importance in the Bill. It was considered in detail by the Joint Committee which broadly approved the degree of immunity proposed by the Bill, subject to certain proposals to strengthen the complaints arrangements, which we have broadly followed. Therefore, I believe that I can safely say in the absence of the noble Lord, Lord Burns—indeed, I would have said it in his presence if he had been here—that the Bill as amended now meets the requirements of the Joint Committee.
It is not as if there is anything new about statutory immunity. The Financial Services Act and the Banking Act provide for it, as do the provisions of the Companies Act 1989 relating to the regulation of company auditors. The Pensions Act 1995 gives the Occupational Pensions Regulatory Authority the same statutory immunity as the FSA will have under the Bill. It was, after all, a Conservative government 325 who introduced that immunity. Immunity for the FSA was supported in Committee by a number of noble Lords: the noble and learned Lord, Lord Donaldson, the noble Lords, Lord Bagri and Lord Burns, and my noble friends Lord Grabiner and Lord Goldsmith. I am pleased to see that, although amendments have been tabled, they are on a somewhat narrower basis than before.
Perhaps I may therefore turn to Amendment No. 28, rather than set out the more general case for immunity. Amendment No. 28 would extend immunity to those acting as an agent of the authority. That is not a feature of any of the existing immunities which the Bill will replace and it is difficult to see why it should be a feature of the Bill. If the authority chooses to employ an agent, the agent will have a right to be indemnified by the authority for expenses and liabilities incurred within the scope of his authority. That right will extend, for example, to tortious action, as long as the action was not manifestly tortious or tortious to the agent's knowledge. That seems a not unreasonable position and, of course, the authority could offer further indemnity if it wished to do so.
I have already spoken about the limits of immunity in any case. It does not prevent actions for damages where the FSA has acted in bad faith. It certainly does not provide protection against an agent for criminal action. I do not believe that the amendment would add anything to the protection of agents or to the Bill.
§ Lord Fraser of Carmyllie
My Lords, before the Minister sits down, perhaps I may ask him a question. He may recollect that on the last day of Committee I raised the rather curious position whereby the Law Society of England and Wales might be invited by the FSA to carry out a monitoring function in relation to solicitors in Scotland. We may return to that issue at a later stage. What came through from that interesting exchange was that the FSA seemed to be intending—and I do not object to this—to use the powers granted to it under paragraph 6 of Schedule 1 to get a number of other people to carry out that responsibility on its behalf.
That may be a good idea, because it may have the effect of keeping down the fees that would be charged to those within the FSA's regulation, but I should be grateful if the Minister could give me some indication, if not now, at some later stage—possibly by letter—of whether it is the intention of the FSA to put out its monitoring function to other persons. I do not want to extend the statutory immunity wider than necessary, but, if there is to be a wholesale use of such a technique, it might be necessary to consider it carefully.
§ 5. 45 p.m.
§ Lord McIntosh of Haringey
My Lords, with the leave of the House, I do not believe that the noble and learned Lord's question strictly follows from the amendment, but I reassure him that my noble friend 326 Lord Bach has signed a letter to him about the matter which he raised in Committee. He should be receiving it any moment now.
§ Lord Sharman
My Lords, I listened with interest to what the Minister had to say on the amendment. I draw some comfort from what he was saying about the FSA indemnifying people appointed under the provision. On that basis, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Kingsland moved Amendment No. 29:
Page 234, line 26, after ("faith") insert ("or reckless").
The noble Lord said: My Lords, paragraph 19(3) of Schedule 1 provides that the authority, its officers and members of staff shall not be,
liable in damages for anything done or omitted in the discharge, or purported discharge, of [the authority's] functions",
the act or omission is shown to have been in bad faith".
Your Lordships will recall a long discussion of that matter in Committee; in particular, a captivating story by the noble Lord, Lord Grabiner, about his son and a glass house. Amendment No. 29 adds the words, "or reckless" so that the statutory immunity in paragraph 19 would not apply to reckless behaviour on the part of the authority, its officers or staff.
In Committee, the principal objection to the addition of the words, "or reckless" was that they were of uncertain meaning and that to use them would lead to endless litigation. In my view, those arguments seriously overstate the problem. First, the words "reckless" or "recklessly" are commonplace in statutes. A quick review of this Bill alone shows that they are used at least 11 times: in Clauses 69(2); 91(2); 120(2); 173(4); 206(2); 250(1); 253(1); 341(1); 392(1) and (2); and 393(1). There are probably more examples.
If "reckless" is a word so fraught with uncertainty, why does the draftsman use it so freely? That cannot be a credible argument. In any event, reckless behaviour is a well understood concept in English law. The following dictum illustrates the point. My noble and learned friend Lord Hailsham said, in R v Lawrence:
It only surprises me that there should have been any question regarding the existence of mens rea in relation to the words "reckless", "recklessly" or "recklessness". Unlike most English words it has been in the English language as a word in general use at least since the eighth century AD almost with the same meaning, applied to a person or conduct evincing a state of mind stopping short of deliberate intention, and going beyond mere inadvertence or, in its modern though not its etymological and original sense, mere carelessness".
The second point I should like to address is the fear of endless litigation. The evidence points in the other direction. At present, under the Financial Services Act the recognised investment exchanges do not benefit from any form of statutory immunity. So far as I am aware, they have not been swamped with litigation; far from it. The reality is that no one willinvly embarks upon litigation. It is usually the last resort.
327 Statutory immunity, on the other hand, is a huge privilege and should not be granted unless it is absolutely necessary. We can see the argument for the FSA to be immune from actions and damages relating to matters caused by its own negligence or carelessness. But, in our opinion, immunity from the consequences of reckless behaviour goes too far.
In summary, I believe the fears expressed in your Lordships' House and by the authority that its effectiveness as a regulator would be seriously impaired if immunity in respect of reckless behaviour was removed are exaggerated and, indeed, do not stand up to scrutiny. Undoubtedly, if the authority was to be liable in damages for the consequences of its own reckless behaviour, that would require the authority to think more carefully about the actions it proposes to take. That is what we are trying to achieve. The authority has enormous powers. We believe that among the checks and balances we should include in the Bill are provisions which will have the effect of requiring the authority to think carefully about the way in which it exercises these powers. The amendment would be a useful measure to that end. I beg to move.
§ Lord Lipsey
My Lords, perhaps I may tell a stylised version of what is essentially a true story. I arrive at my home in Wales one Friday afternoon and receive a call from a person at the Financial Services Authority who says, "We need a director of the PIA. Messrs Cheat'em & Ripoff seem to have gone bust. They are flogging pensions policies like mad in an attempt to get out of a hole but we think that the cheques may go anywhere. We require permission and your support for an intervention order against them to stop them doing business this minute". One asks questions.
Suppose I was proceeding in precisely that position under the Bill. I have no difficulty in acting in good faith. I take the best judgment I can with the facts in front of me. However, speaking as a layman and not as an expert on the jurisprudence of the word "reckless", I have great difficulty in not behaving recklessly. I cannot check all the facts in front of me. If I act, the company concerned might go under. If one stops it from trading, one has to write to its investors. The company concerned might be destroyed by the simple action of intervention. If I do not act, the investors may be ripped off. If I simply decline to take a decision, either one of those two things might happen. In that situation, it is hard not to behave in a way that would seem to be "reckless".
It might be argued that if I understood the law properly, in that position I would be protected and I should not worry too much. That might be right. However, what I would actually do is not pick up the phone on arrival in Wales. One would have a very difficult decision to take. In this case it would be taken as a layperson, as a member of the authority, without full information being available. That is why I believe that good faith is sufficient protection in this case. Indeed, it would wreck or be in danger of spoiling the 328 practical effectiveness of the authority if we were to go further in the way suggested by the noble Lord, Lord Kingsland.
§ Lord Elton
My Lords, if ever I see the noble Lord, Lord Lipsey, coming towards me in a car, I shall run for cover. It is clear that he can never be sure of not driving recklessly. It seems that he strains the meaning of language in saying that such dangers exist. I do not doubt that if they did exist they would be resolved in the first case to be brought under the Bill.
Speaking also as a layman, if the public was to hear that the Government wish to shelter the authority from behaving recklessly and thereby cause large numbers of people to lose large amounts of money and possibly their living, it would be deeply alarmed. Those who are not laymen would be similarly alarmed as practitioners, finding that they would be exposed to the reckless or careless use of enormous powers. I believe the amendment has great merit.
§ Lord Goldsmith
My Lords, in the explanation of the amendment given by the noble Lord, Lord Kingsland, I understood him to accept now, at Report Stage, and in my opinion rightly so, that it is appropriate that the authority should have immunity for acts caused by its own negligence. I hope I have correctly understood his words. That is an important statement. It is a recognition that where the authority acts carelessly in doing something which it should have recognised would cause harm and which does cause harm, still it should have immunity.
I believe that is absolutely right, for the reasons which were fully explained and explored in Committee. This amendment does not avoid that problem because the word "reckless" is being used, or sought to be used here, in a civil liability context when its more natural and appropriate place is in relation to criminal responsibility. That is an important distinction.
I was not able to check all the references to clauses in the Bill given by the noble Lord, Lord Kingsland. Those I was able to catch in which the word "reckless" is used appear to me to be cases which relate to criminal responsibility or, if not exactly criminal, to misconduct for which penalties are to be imposed.
In the context of criminal responsibility, recklessness makes sense for this reason. I should like to read a statement, which is rather long, as to the meaning of "recklessness" in the criminal context, for two reasons. I take it from Archbold, the leading textbook on criminal practice and procedure. It is a quotation from Lord Diplock. He stated:Recklessness on the part of a doer of an act presupposes that there is something in the circumstances that would have drawn the attention of an ordinary prudent"—a subsequent case added "and sober"—individual to the possibility that his act was capable of causing the kind of serious harmful consequences that the section that created the offence was intended to prevent, and that the risk of those harmful consequences occurring was not so slight that an ordinary prudent individual would feel justified in treating them as negligible. It is only when this is so that the doer of the act is 329 acting 'recklessly' if, before doing the act, he either fails to give any thought to the possibility of there being any such risk or, having recognised that there was such a risk, he nevertheless goes on to do it".Two points can be made about that. It is a difficult definition. I recall one senior circuit judge saying that when he read that to a jury, he said, "Make of that what you will; I don't know what it means". However, I suggest there is a more serious point for present purposes for your Lordships' House. The final words are,or having recognised that there was such a risk, he nevertheless goes on to do it".Driving at speed down the road, or perhaps throwing a cricket ball into the air close to a greenhouse, is apt to prompt the question, in criminal responsibility, "Did you recognise there was a risk but nevertheless went on to do it?" But in every case in which the authority acts in a way which ultimately causes damage to a regulated person, I anticipate that if the authority was to act to suspend, stop business or take any other action it wants, it would recognise that that might cause damage to the person concerned. Therefore, in every single case, if one applied this wholly inappropriate concept to civil liability, somebody would be able to argue that the authority had been reckless. Is not that the point that was made rightly and strongly in Committee by the noble and learned Lord, Lord Donaldson, as well as by the noble Lord, Lord Grabiner? They said then that in cases where a regulated person found that the authority was acting in a way that was causing him damage, he would run to his lawyers.
The noble Lord, Lord Kingsland, says it is a matter of last resort. It may be last resort if one sees one's business going down the drain. But that definition would give rise to the risks that the negligence amendment would have given rise to which the noble Lord, Lord Kingsland, rightly now does not press.
I suggest, therefore, that this amendment does not solve any problem. It leaves all the issues of difficulty of interpretation and of many litigation cases being brought still standing. It is quite different from bad faith. Bad faith is dishonesty; one can easily put that on one side of the line. Recklessness, in this context, means some sort of negligence and would give rise to all the difficulties to which attention has been drawn. I hope therefore that the noble Lord will reflect on that and not press the amendment.
§ 6 p.m.
§ Lord Boardman
My Lords, I support the amendment. The noble Lord, Lord Goldsmith, seemed to be confusing the definition of "recklessness" in a criminal context and in the context of this Bill.
The case we are considering here is of someone who acts in a reckless manner with the result that a perfectly innocent company, firm or person suffers massive loss. We are not talking of criminal recklessness. It may or may not be criminal. But in this case we are talking of someone who just does not care whether he is right or wrong; he makes a decision and to hell with what 330 happens to the loser. And the loser may well he one of those whom, when we are drafting this Bill, we must safeguard as far as possible.
The noble Lord referred to "negligence". But negligence is not a necessary aspect of recklessness. It may be a part of it and can be a contributing factor to it, but recklessness in the sense that is meant in the amendment means that the person who makes the decision does not know and does not care whether he is doing right or wrong and the person being adjudicated upon must suffer. Bad faith is when the person knows he is doing wrong. I support the amendment.
§ Lord Fraser of Carmyllie
My Lords, the noble Lord, Lord Goldsmith, advanced a lucid argument that the concept of "recklessness" should be restricted to the criminal law, and he has a body of law on his side. However, as we are dealing with the Financial Services and Markets Bill it would seem to be appropriate to examine that word in the context of this Bill.
From Second Reading onwards we have been repeatedly told that the idea of market abuse as it is set out in this Bill, particularly in Clause 115, is civil and not criminal. That has been said repeatedly by the Minister on the Front Bench. Some of us may have doubts as to whether that position can be maintained in all circumstances, but nevertheless that is the Government's position.
But if there is to be a finding of market abuse against an individual, then the authority, logically, has to determine how much of a penalty should be imposed on that individual. If we go to Clause 122, one of the matters that the authority must have in mind in determining what the penalty must be must include having regard to the extent to which that behaviour was deliberate or reckless. In those circumstances, whether the noble Lord, Lord Goldsmith, likes it or not, the fact is that in this Bill, in what is said to be a civil context, the concept of recklessness has been introduced.
§ Lord Goldsmith
My Lords, before the noble and learned Lord sits down, does he agree that questions of penalty for market abuse fall on the side of criminal responsibility with the same concepts applied arid are quite distinct from the question of liability in civil law for damage caused?
§ Lord Fraser of Carmyllie
My Lords, I thought I made it quite clear that I was not wholly persuaded that the idea of market abuse, as set out in this Bill, could always be, in all circumstances, civil, as has sometimes been said. The only reason why the Government seek to introduce this provision is that such statutory offences as insider trading have been unsuccessfully prosecuted in the past and we have to find an alternative device to catch those who have acted in such a way.
That may be my opinion. But I have been repeatedly told by the noble Lord's Front Bench that I am wrong in that; that the regime that is to be set up as a civil one and that it is in the context of believing that they are setting up a civil regime, when it comes to the 331 application of a penalty and what amount should be imposed, that the Government have said a legitimate feature to which regard should be had is the degree to which the conduct was reckless.
§ Lord McIntosh of Haringey
My Lords, this amendment or something like it was shot down in flames in Committee and has been shot down in flames again. I am astonished that the noble Lord should seek to raise it again.
As has been made clear, this is a criminal law concept which is unsuitable for application to civil liability. In introducing the amendment the noble Lord, Lord Kingsland, made reference to the number of occasions, which I do not for a moment deny, on which the word "reckless" appears in the Bill. But if he looks at those references, they either relate to misconduct or, more frequently, to offences; in other words, they apply to cases where the criminal law is involved or to the difficult area—I acknowledge this to the noble and learned Lord, Lord Fraser of Carmyllie—of where market abuse cases could be ruled as being criminal under the European convention. I have never denied that. I have always said it is a matter of degree; that it is in everybody's interest to treat as many of these cases as possible under civil law but that there are some circumstances when it will not be possible to do so.
The effect of this amendment being introduced here, now, in what is clearly an issue of civil liability, quite apart from the powerful speech of my noble friend Lord Goldsmith, was effectively destroyed in Committee. I hope the noble and learned Lord, Lord Donaldson, will not mind my quoting what he said in Committee. On 16th March at col. 1782 of Hansard, he said,I strongly support the idea of immunity … disgruntled regulated or unregulated persons will be able to go to the courts and say that the FSA has been reckless, whether or not they have any justification. There will be considerable expenditure of money and a considerable diversion of management effort and the like on the part of the FSA".On the same occasion the noble Lord, Lord Grabiner, said,In my view, if that word [recklessness] was to be introduced, it would inevitably lead to endless litigation … I believe that the provision would waste valuable court time; it would result in a waste of time for FSA officials; and there would be a corresponding waste of money. Finally, and most importantly of all, it would distract the attention of FSA officials who ought to be concerned with the functions and furtherance of the interests of the FSA in carrying out its statutory responsibilities". — [col. 1785.]There is clearly a distinction to be made between civil liability of the kind which is at issue in this part of the Bill and the disciplinary or penal regime which is the circumstances in which it has otherwise been used.
§ Lord Forsyth of Drumlean
My Lords, I thank the Minister for giving way. Perhaps I should declare an interest as a person authorised by the authority.
Is the Minister really saying to the House that as an authorised person my career could be destroyed by action by the authority which was reckless and that 332 there should be no right of redress in the courts? That is a monstrous position for any government to take. What possible justification can there be in terms of the authority's interests which stands against those of individuals who can have their careers and their businesses destroyed because of reckless conduct? Can that really be the position of a Labour Government?
§ Lord McIntosh of Haringey
My Lords, I do not think that the noble Lord could have been listening to the debate as it took place in Committee, or, indeed, to the one in the House today. The whole point of the Financial Services Authority is to stop people's careers, businesses and finances being destroyed by bad behaviour on behalf of those in the financial community. The authority has been established to protect the consumers of financial products and to protect the reputation of financial markets. If the authority were to be weakened by the kind of case outlined by the noble and learned Lord, Lord Donaldson, and the noble Lord, Lord Grabiner, then the protection that the FSA is designed to provide against mal-practice in the financial community would simply not be available.
Noble Lords opposite have made what seems to me to be not much more than a debating point. A degree of recklessness is, of course, a valid factor in determining the amount of penalties in a disciplinary regime; indeed, that is what the Joint Committee said, and it is perfectly acceptable. However, we should not allow that to detract us from the real issue, which is allowing the FSA to do its job without the constant threat of litigation. If this amendment were to be agreed to, we would be driving a coach and horses through a large part of the effectiveness of the regime of the Financial Services Authority. I do not believe that it is the wish of anyone in this House to do so.
§ Lord Kingsland
My Lords, the telling interventions of my noble and learned friend Lord Fraser of Carmyllie and my noble friend Lord Forsyth of Drumlean have really limited the number of comments that I need to make to two. First, I should say to the noble Lord, Lord Goldsmith, that it is true that I said we could see the arguments for immunity from negligence. However, as the noble Lord is well aware, we disagree with them. On balance, we think that the FSA should not have immunity from negligence, although we can see the arguments why it should. Indeed, that matter was fully debated in Committee.
Secondly, I turn to the comments of the noble Lord, Lord Goldsmith, about recklessness and the criminal law. Those comments were endorsed by the Minister who said that "recklessness" is a concept that belongs in the criminal dimension and is misplaced in the civil dimension.
I would remind the noble Lord that the use of the word "reckless" in Clause 69(2) is not in relation to market abuse but in relation to powers against "authorised persons". It has been the fundamental philosophy of the Government throughout the proceedings on the Bill—not just in your Lordships' House but also in another place—that the offences 333 connected with "authorised persons" and the penalties imposed are part of an exclusively civil regime. Yet in Clause 69 we find that the phrase "deliberate or reckless" is used. Does that mean that the Government have now changed their mind about the legal status of penalties in that clause? Does it mean that the Government have at last seen the light and that they are prepared to classify penalties as criminal under that part of the Bill? If that is so, the Government will have to look again completely at the whole way in which they deal with authorised bodies in disciplinary proceedings. Before I conclude, can the Minister confirm whether or not that is what the Government are now saying?
§ Lord McIntosh of Haringey
My Lords, I do not think that I have anything to add to what I said in response to the arguments adduced by the noble and learned Lord, Lord Fraser of Carmyllie. I accept that, at one end, there is the possibility of a criminal element.
§ Lord Kingsland
My Lords, if "recklessness" is confined exclusively to the criminal element, then penalties under Clause 69 must be criminal penalties. If they are criminal penalties, all the protections under Article 6 of the European convention apply; but those protections are not anywhere to be found in this part of the Bill. In those circumstances, I feel compelled to press my amendment and test the opinion of the House.
§ 6.14 p.m.
§ On Question, Whether the said amendment (No. 29) shall be agreed to?
§ Their Lordships divided: Contents, 83; Not-Contents, 139.335
|Division No. 2|
|Alexander of Weedon, L.||Elliott of Morpeth, L.|
|Allenby of Megiddo, V.||Elton, L.|
|Anelay of St. Johns, B.||Erroll, E.|
|Asior of Hever, L.||Feldman, L.|
|Attlee, E.||Ferrers, E.|
|Baker of Dorking, L.||Fookes, B.|
|Blackwell, L.||Forsyth of Drumlean, L.|
|Blaker, L.||Fraser of Carmyllie, L.|
|Blatch, B.||Gardner of Parkes, B.|
|Boardman, L.||Glentoran, L.|
|Bowness, L.||Goschen, V.|
|Brabazon of Tara, L.||Hambro, L.|
|Bridgeman, V.||Hanham, B|
|Brougham and Vaux, L.||Harris of Peckham, L.|
|Burnliam, L. [Teller]||Haslam, L.|
|Byford, B.||Henley, L.[Teller]|
|Campbell of Cray, L.||Higgins, L.|
|Clark of Kempston, L.||Hogg,B.|
|Colwyn, L.||Holderness, L.|
|Cope of Berkeley. L.||Home, E.|
|Courtown, E.||Howe, E.|
|Cowdrey of Tonbridge, L.||Hunt of Wirral, L.|
|Cranbome, V.||Jenkin of Roding, L.|
|Crickhowell, L.||Kimball, L|
|Dixon-Smith, L.||Kingsland, L.|
|Eden of Winton, L.||Kirkham, L.|
|Lamont of Lerwick, L.||Pearson of Rannoch, L.|
|Liverpool, E.||Plummer of St. Maiylebone, L|
|McConnell, L.||Renton of Mount Harry, L.|
|Mackay of Ardbrecknish, L.||Roberts of Conwy, L.|
|Marlesford, L.||Saatchi, L.|
|Mayhew of Twysden, L.||Salloun of Abernethy, Ly.|
|Miller of Hendon, B||Seccombe, B.|
|Monro of Langholm, L.||Skelmersdale, L.|
|Monson, I||Stewartby, L.|
|Murton of Lindisfame, L.||Thatcher, B.|
|Northesk, E.||Thomas of Gwydir, L.|
|Norton of Louth, L.||Trefgarne, L.|
|O'Cathain, B.||Vivian, L.|
|Onslow, E.||Warnock, B.|
|Park of Monniouth, B.||Young, B.|
|Ahmed, L.||Harris of Greenwich, L.|
|Alderdice, L.||Harris of Haringey, L|
|Alli, L.||Harris of Richmond, B.|
|Amos, B.||Harrison, L.|
|Ashley of Stoke, L.||Haskel, L.|
|Ashton of Upholland, B.||Hayman, B.|
|Avebury, L.||Hilton of Eggardon, B.|
|Bach,L.||Hollis of Heigham, B.|
|Bagri, L.||Howells of St Davids, B.|
|Barker, B.||Howie of Troon, L.|
|Barnett, L.||Hoyle, L.|
|Bassam of Brighton, L.||Hughes of Woodside, L.|
|Blackstone, B.||Hunt of Kings Heath, L.|
|Borrie, L.||Irvine of Lairg, L. (Lord Chancellor)|
|Bragg, L.||Janner of Braunstone, L.|
|Brett, L.||Jay of Paddington, B. (Lord Privy Seal)|
|Brooke of Alverthorpe, L.|
|Brookman, L.||Jeger, B.|
|Brooks of Tremorfa, L.||Jenkins of Putney, L|
|Bruce of Donington, L.||Joffe, L.|
|Burlison, L.||Judd, L.|
|Carter, L. [Teller]||King of West Bromwich, L.|
|Christopher, L.||Kirkhill, L.|
|Clarke of Hampstead, L.||Lester of Heme Hill, L.|
|Clement-Jones, L.||Lipsey, L.|
|Clinton-Davis, L.||Lockwood, B.|
|Cocks of Hartcliffe, L.||Longford, E.|
|Crawley, B.||Lovell-Davis, L.|
|David, B.||Macdonald of Tradeston, L.|
|Davies of Coity, L.||McIntosh of Haringey, L. [Teller]|
|Davies of Oldham, L.|
|Dean of Thornton-le-Fylde, B.||Mackenzie of Framwellgate, L.|
|Desai, L.||Mallalieu, B.|
|Dholakia, L.||Massey of Darwen, B.|
|Diamond, L.||Merlyn-Rees, L.|
|Donaldson of Lymington, L.||Mishcon, L.|
|Donoughue, L.||Molloy, L.|
|Dormand of Easington, L.||Morris of Castle Morris, L.|
|Dubs,L.||Morris of Manchester, L.|
|Elder, L.||Murray of Epping Forest, L.|
|Evans of Parkside, L.||Newby, L.|
|Falconer of Thoroton, L.||Nicol, B.|
|Falkland, V.||Peston, L.|
|Farrington of Ribbleton, B.||Phillips of Sudbury, L.|
|Faulkner of Worcester, L.||Pitkeathley, R|
|Fitt, L.||Ramsay of Cartvale, B.|
|Gale, B.||Randall of St. Budeaux, L.|
|Geraint, L.||Rea, L.|
|Gladwin of Clee, L.||Rendell of Bitbergh, B.|
|Goldsmith, L.||Renwick of Clifton, L.|
|Goudie, B.||Richard, L.|
|Gould of Potternewton, B.||Rodgers of Quarry Bank, L.|
|Graham of Edmonton, L.||Russell, E.|
|Hamwee, B.||Sainsbury of Turville, L.|
|Hardy of Wath, L.||Scotland of Asthal, B.|
|Serota, B.||Tordoff, L.|
|Sharman, L.||Turner of Camden, B.|
|Shore of Stepney, L.||Uddin, B.|
|Simon, V.||Varley, L.|
|Simon of Glaisdale, L.||Walker of Doncaster, L.|
|Smith of Gilmorehill, B.||Warner, L.|
|Stoddart of Swindon, L.||Wedderburn of Charlton, L|
|Strabolgi, L.||Whitaker, B.|
|Symons of Vernham Dean, B.||Whitty, L.|
|Taylor of Blackburn, L.||Williams of Crosby, B.|
|Taylor of Gryfe, L.||Williams of Elvel, L.|
|Thomas of Walliswood, B.||Williams of Mostyn, L.|
|Thornton, B.||Woolmer of Leeds, L.|
|Tope, L.||Young of Old Scone, B.|
§ Resolved in the negative, and amendment disagreed to accordingly.
§ 6.24 p.m.
§ Clause 2 [The Authority's general duties]:
Lord Saatchi moved Amendment No. 30:
Page I, line 19, at end insert ("; and
(c) which recognises the international character of financial services and markets and the desirability of not adversely affecting the competitive position of the United Kingdom").
The noble Lord said: My Lords, in Amendments Nos. 30 and 31 we address the question of competition and its place in the FSA's hierarchy of duties and obligations. As noble Lords will be aware, we support the concept of a single regulator. We also agree that strong regulation is a competitive asset. However, we could have an army of FSAs and an FSA man on every street corner in the Square Mile but we would not have the million jobs that exist in this industry. We would not have an industry which has a disproportionate share of global business and without which Britain would be in balance of payments deficit permanently.
Therefore we seek a balance between regulatory purity and creative innovation sparked by free competition. That search for balance is one of the key themes of our amendments throughout the Bill's passage in your Lordships' House. This principle of balance is contained in Amendments Nos. 30 and 31 which relate to the important issue of maintaining the competitive position of the United Kingdom. During Committee stage when we debated the competition scrutiny provisions in Chapter III of Part X, the Minister made clear that the competition scrutiny provisions could not override the FSA's statutory objectives. He said,
The purpose of this external competition scrutiny is not—let me emphasise this—to provide a means for the commission and the Treasury to second guess whether the objectives which Parliament has given to the FSA are the right ones".— [Official Report, 27/3/2000; col. 596.]
That is a clear warning that in pursuing its regulatory objectives the FSA will not be subject to effective competition scrutiny. This is alarming and worrying because it confirms our concerns that there is no proper balance in the Bill between the pursuit by the FSA of its regulatory objectives and the desirability of encouraging competition and the competitiveness of the UK. We believe that it is essential to seek to achieve
that balance, notwithstanding the difficulties to which that may give rise for the FSA in performing its functions.
Our amendments are small but would change the complexion of the Bill for the better. In the Bill at present the objectives of the FSA are in effect the targets it has to meet. Below those objectives in status are the "have regard tos" which we have discussed on a previous occasion. Competitiveness is one of those "have regard tos". I remind your Lordships of the conclusion of Don Cruickshank, to whose report I referred earlier. He considers competition and regulation in financial services in that report. He seeks to do very much what we are trying to do, which is to strike the right balance. He concludes at page 317 of the report:
The high potential for regulation to weaken competition in this sector means it is essential to get the legal and institutional framework right".
He then gives his recommendations, which include the recommendation that,
the FSA should have a primary competition objective, in addition to its regulatory objectives".
We agree with that. The Bill at present relegates competitiveness to a "have regard to" provision rather than a goal. That is a bad portent for the FSA's performance in future and for the industry to which it will apply its objectives.
It is all very well that the FSA will ensure compliance with the letter of the law, but if the cost and weight of compliance cut across business, in this global industry there are numerous open doors for companies to enter. As I believe I have said once before, Britain has no God-given right to 55 per cent of global trading in non-UK companies. It has no particular right to 25 per cent of the global marine insurance market. These shares can disappear. In 1900 we had a 42 per cent share of world shipping. In 1979 it was 7 per cent; today it is 1 per cent.
Therefore, our Amendment No. 30 is a modest one. It does not even go as far as Don Cruickshank recommends. It does not raise competitiveness to a regulatory objective, but it does have the effect of increasing its weight and thereby achieving a more appropriate balance. The amendment would require the FSA, in discharging its general functions, as far as reasonably possible to act in a way which recognises the international character of financial services and markets and the desirability of not adversely affecting the competitive position of the United Kingdom.
The provision applies only as far as is reasonably possible. The obligation on the FSA in the amendment is limited to a requirement to act in a way which recognises the international character of financial services and markets and recognises the desirability of not adversely affecting the competitive position of this country. Surely, that is not too much to ask, is it? If the requirement creates tension within the FSA's regulatory objectives, we regard that as a good thing and as indicating a better outcome. The difficulties of working within the competing requirements will not, I am sure, defeat the formidable resources at the disposal of the FSA. I beg to move.337
§ 6.30 p.m.
§ Lord Borrie
My Lords, on the face of it this appears to be a relatively reasonable amendment which we should all happily agree to. We should all, whether it is the FSA, the Department of Trade and Industry or the Treasury, recognise the importance of the international competitiveness of our financial sector, which has done amazingly well. As the noble Lord indicated, it will not always necessarily be top dog in the field, yet we would certainly all like it to be.
I suppose one reason why the amendment looks harmless and rather like apple pie and so forth is that it uses the word "recognises". It is like the wonderful clauses one sees in European legislation which begin with the word "whereas". Then there is a long list of exceedingly desirable things to which we should pay lip service, and perhaps more than lip service, before one reaches the real part of the law or regulation. Undoubtedly we can all agree that it is most important in the United Kingdom for the global business of the financial sector to be successful. It is certainly most important that overregulation, to which the noble Lord and I myself referred to at Committee stage, should not interfere either with competition between firms in this country or indeed with our success in terms of international competitiveness.
Perhaps I may remind your Lordships of what we are talking about as regards this section at the beginning of the Bill. We are talking about the Financial Services Authority, its role in life and, in particular, its objectives. At the moment in Clause 2(3) we have a number of elements which even the splendid Don Cruickshank mixes up at times. There is competition, the desirability to avoid anti-competitive practices and competitiveness. They are all different. There are three separate paragraphs in Clause 2(3) dealing with those three separate matters. It seems to me most suitable that after the four principal objectives of the FSA set out at the beginning of that clause that there are a number of factors, including the three elements that I have just mentioned, which should be taken into account in order to ensure the effective achievement of the principal objectives.
Unfortunately, I believe that the amendment is inappropriate because it seeks to elevate the important—indeed, I admit, vital—matter of maintaining and enhancing United Kingdom competitiveness above all the other factors into an inappropriate position. It is appropriate for the UK Government and for the Department of Trade and Industry, but it is not appropriate as a prime objective of the Financial Services Authority. Those objectives are set out here. At neither Report nor Committee stage have I heard either the principal Opposition or the Liberal Democrat opposition disagree in any way with those principal objectives.
I mention a very important point made by my noble friend Lord Eatwell in Committee at col. 1801 of Hansard on 16th March. He is not here today, but perhaps I may repeat the essence of what he said 338 because it is valid. It concerned a similar amendment though not exactly one in the same words. My noble friend Lord Eatwell said:The problem with the amendment is that if it were seen that it was an objective, or indeed one of the prime responsibilities, of the FSA to promote the competitive position of the United Kingdom, the FSA's ability to persuade other regulators to act in the interests of the UK would be impaired, since they would have a reasonable suspicion that the FSA was acting to promote the UK's interests against the interests of their national markets".Then there was an intervention from the noble and learned Lord, Lord Fraser of Carmyllie. My noble friend then made this point. The SEC, which has been mentioned earlier, is a similar body in the United States to the FSA. He said:The SEC rule gives it a duty to promote competition but not a duty to promote the competitive position of the United States, which would be a quite different requirement".It is important to distinguish those matters because I do not believe it is suitable for this authority, as distinct from the Government, the nation or whatever, to have as a prime, elevated objective the promotion of Britain's competitive position in the world in financial services.
§ Lord Fraser of Carmyllie
My Lords, as the noble Lord has indicated, this is not the first time I have intervened on this issue. In my own defence, I did begin by believing that this matter should be elevated to a regulatory objective. In the spirit of moderation I am now accepting that it should occupy a lesser role. However, it still seems to me to be extremely important that the provision should enjoy its position and should not simply be in Clause 2(3), as the noble Lord, Lord Borrie, has pointed out, and is in its present resting place.
What continues to concern me is effectively the same point as that which concerns the noble Lord, in that there should not be overregulation. We have no God-given right to have such a successful industry in the United Kingdom. I remain troubled that, unintentionally, if the FSA pursues its regulatory objectives with too much zeal without having regard to whether there is any business left to regulate, very real damage could occur to the economy of the United Kingdom. That is hugely important.
I do not wish to have the FSA replace the Competition Commission or anything like that, but in the discharge of these regulatory objectives it should understand how important it is that our international competitiveness is maintained.
My concern is simply this. I do not believe that we shall ever be able to prove not just the desirability but the necessity for this amendment until, sadly, it might be too late once the business has left the United Kingdom. Even if it is not to be put tinder this statutory requirement, nevertheless I hope that the FSA will appreciate just what a fragile financial services industry we have. If the FSA is clumsy or 339 heavy-footed in the way it imposes regulations, that success could disappear very quickly to other countries either in Europe or elsewhere.
§ Lord Boardman
My Lords, I support the amendment. The noble Lord, Lord Borrie, seemed to damn with faint praise the vast success of the City of London in the field of international financial services.
§ Lord Borrie
My Lords, that was absolutely not my intention. I hope that I have not given that impression to the noble Lord, Lord Boardman, or indeed to anyone else.
§ Lord Boardman
My Lords, I accept what the noble Lord has said. It was the impression I gained from his overall speech. The noble Lord, Lord Borrie, should be full of praise—I am sure that he is—for the great successes that the City of London has achieved in the field of financial services, particularly overseas.
This amendment is designed to recognise that and to include it with sufficient ranking in the Bill. It is designed to avoid any action being taken which is detrimental to our competitive position. That is something, surely, that the Government would wish in every way to encourage. The kind of action I have in mind—I accept it is outside this Bill—is the introduction of a withholding tax, which would be very damaging to the international financial services of the City of London.
It is right that the amendment should appear in the Bill; that it should endorse the international character of financial services; and that it should urge that no action be taken to damage the competitive position of the United Kingdom. I support the amendment.
§ Lord Elton
My Lords, I hope that the noble Lord, Lord Borrie, in his initial conflict with the noble Lord, Lord Boardman, was not blinded to the effect of what he was saying. Repeatedly in his speech, the noble Lord, Lord Borrie, referred to the "promotion" of the interests of the United Kingdom, and how wrong it was to make this a principal requirement under the Bill. But that is not what the amendment does. The amendment uses weaker language than that already in subsection (3). It seeks to include merely,the desirability of not adversely affecting the competitive position of the United Kingdom".My anxiety is not that it is too strong, but that it is too weak. I hope that my noble friend will not be driven from his position.
§ The Earl of Home
My Lords, I speak briefly in support of the amendment. I have spent 25 years promoting the City of London through the British Invisibles Export Council, more recently called British Invisibles. Potential overseas investors, when looking at London, Paris, Frankfurt or wherever to establish their European operations, now often ask not what is the attitude of the Government—in the old days of the BIEC it used to be what is the attitude of the Bank of England—but what is the attitude of the FSA.
340 I do not think any of us are at odds about the desirability of the amendment; it is more a question of where it should be placed and what emphasis one should put on it. If it is placed as high as Clause 2—and potential investors can see that it is one of the main duties to which the authority must, as far as is reasonably possible, have regard—that would be a much better way of persuading foreign investors to come here than placing it in one of six or eight clauses which appear later in the Bill. If one says that it is a part of one of the main three clauses, that is a powerful selling tool. Foreign investors are worried about a light touch—we talked previously about the Governor's eyebrows, and so on. It is that kind of emphasis that attracts foreigners to this country rather than to Paris or Frankfurt.
§ 6.45 p.m.
§ Lord McIntosh of Haringey
My Lords, I am afraid that it is necessary for me to explain again what Clause 2 does. I think that there are still misunderstandings about it.
Clause 2 sets out the FSA's general duties. In doing that, subsection (1) makes it clear that the FSA must, so far as is reasonably possible, act in a way which is compatible with its regulatory objectives and which it considers is most appropriate to meet those objectives. So the key to that is "act in a way". Subsection (2) lists the objectives and subsection (3) sets out a number of matters, sometimes referred to as principles—they may be principles of good regulation—to which the FSA must have regard in carrying out its objectives.
The purpose of these amendments is to ensure that the FSA's regulatory objectives do not adversely affect the competitive position of the United Kingdom. I agree that it is vitally important that there are checks in place to ensure that the competitive position is not adversely affected by too much or too little regulation. The United Kingdom is a world leader in the provision of financial services. I agree with everything that the noble Lord said about our share of the world financial markets. We must do what we can to keep it that way. The problem lies in the way this amendment proposes to do so.
At present, the requirement on the FSA to take account of the international character of financial services and the desirability of maintaining the competitive position of the United Kingdom is one of the FSA's principles. The amendments seek to move this principle from its position in the clause. While not making it a regulatory objective as such, they would appear to seek to give it the same status as the regulatory objectives set out in Clauses 3 to 6. This is because, if the amendment were accepted, the FSA's duties in relation to the proposed paragraph (c) would be the same as those in relation to the regulatory objectives set out in Clauses 3 to 6.
I have three problems with this. First, as I said in Committee:subsection (1) places a positive requirement on the FSA to take action. That is appropriate when discussing objectives: that is, the aims of regulation. In contrast, the need to take account of international competitiveness is something which should 341 condition the way in which the FSA goes about meeting the objectives. That is as true for competitiveness as it is for the other matters dealt with in Clause 2(3)—[Official Report, 16/3/00; col. 1803.]Secondly, as the Burns committee pointed out, and as my noble friend Lord Eatwell emphasised at Committee stage—my noble friends Lord Borrie used the same quotation—in so far as the amendments might be understood to make competitiveness an objective, they could damage the FSA's relationship with other international regulators.
Thirdly, by placing the same duties on the FSA in relation to this issue as it has in relation to the regulatory objectives themselves, the amendment introduces into the Bill a degree of ambivalence as to the relationship between those objectives and the proposed new duty. Is the proposed new duty inferior to the objectives, superior to them, or something which ranks equally alongside them? I do not know the answer, and I do not think that the FSA will know either. The danger is that we would risk introducing confusion where the Bill currently provides for clarity.
Finally, I repeat the point that I made in Committee, that the primary responsibility for maintaining the UK's international competitive position does not lie with the FSA itself—this is the point of my noble friend Lord Borrie—but with those in the industry, who are, after all, the people who built up the UK's commanding international position in the first place. This point is crucial because the FSA is not equipped to take on—nor would the industry welcome—a role that involved it in trying to pick winners among United Kingdom firms or telling them how to run their business. I am sure we could all agree that this would be likely to do more harm than good.
What the FSA must do—and I re-emphasise this because I was quoted as emphasising it in Committee—is to take into account the effect of its regulatory actions on the United Kingdom's international competitiveness, as well as competition and all the other principles in subsection (3).
Before I leave the issue of competition, there has been some misunderstanding of what Don Cruickshank said. He did indeed recommend that the FSA be given a competition objective, but that is not a competitiveness objective. Again, my noble friend Lord Borrie has properly pointed out the difference. We have explained many times why it would not be appropriate; it is simply not an objective of financial regulation.
When we responded to Don Cruickshank's interim report, his press release in response said:The Government believe that this outcome can be achieved without giving the FSA a primary competition objective in addition to its regulatory objectives. My concern has always been that the outcome should be as Ministers intend. I am not wedded to any particular means of achieving this and I welcome any changes to the Bill which deliver the outcome in practice".And that is what we did: we reviewed the way in which the principles in Clause 2(3) work and we made changes which, together with the other requirements placed on the FSA and the external scrutiny regime, ensure that the FSA gives full weight to competition 342 concerns in the way that it regulates. But, again, that is not the issue raised by this amendment, which is about international competitiveness.
We are all agreed about what we want. The noble and learned Lord, Lord Fraser, made the point very clearly in Committee when he said:The last thing I want to see is the United Kingdom as a kind of 'Wild West' of financial services competitiveness … where anything goes".— [Official Report, 16/3/00; col. 1799.]But we do have to strike a balance.
When I say that there is a misunderstanding about Clause 2(3), it may be partly my fault. I used the word "hierarchy". That may have given an impression that in some way the principles impose requirements on the FSA that are less important or less binding than the objectives. The point I was making is that in carrying out its functions the FSA will turn to the objectives because they tell it what it must aim to achieve. However, in considering them it will have to consider, at the same time, how it will go about the task. That is where the principles come into play. The FSA is bound to have regard to the principles in deciding how to meet its objectives. But although the principles and the objectives are different in purpose, they are both legally binding on the FSA. It simply would not be possible for the FSA to take into account the need to maintain the competitive position of the UK, which is in the part of the Bill which Amendment No. 31 would take out, and then assign it zero weight, so that it could forget about competitiveness once and for all. It must keep in competitiveness, together with the other objectives and principles. Competitiveness is in the right place. I urge the noble Lord not to press the amendment.
§ Lord Saatchi
My Lords, I want to see whether I have this completely straight. First, the Chancellor of the Exchequer decides to review an industry. He chooses a distinguished man to carry out a report on the industry. That man produces a report and makes a very clear recommendation. He says, "A competition objective that is weak relative to the regulator's other objectives is unlikely to be delivered effectively." Let us say that one is now that man. One gives in and says, "We will not seek to make it an objective. We will retreat to the position where the FSA is obliged only to promote the competitiveness of the UK." The Government say that that is unacceptable because the idea of promoting the competitiveness of the UK might in some way offend other regulators in other countries which would find it difficult to deal with a regulator who was so excessively patriotic in his approach. Let us now say that the man I am describing gives in on that too. He will not seek to promote competitiveness. All that is now being asked is that the Government consider it desirable not adversely to affect the competitive position of the UK. I find it extraordinary that that desire not adversely to affect the competitive position of this country is so objectionable to the Government. Nevertheless, I look forward to another view at Third Reading. At this stage, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
§ [Amendment No. 31 not moved.]
§ Clause 3 [Market confidence]:
Lord Kingslandmoved Amendment No. 32:
Page 2, line 32, at end insert(",including minimising risks to the stability of the financial system and preventing market abuse").
The noble Lord said: My Lords, in moving Amendment No. 32, I shall speak also very briefly to Amendments Nos. 33 and 34. Amendment No. 32 is intended to make clear that the authority's market confidence objective should cover not only the minimising of risks to the stability of the financial system but also the prevention of market abuse. In relation to the stability of the financial system, there is a need for clear responsibility on the face of the Bill for systemic risk.
The memorandum of understanding between the Treasury, the Bank of England and the authority, at best an opaque document, avoids addressing this issue. Someone should be required to take primary responsibility for systemic risk in our economy. We believe that it should be the authority. If market confidence is to be a regulatory objective, then dealing with systemic risk must form part of the authority's brief. The memorandum of understanding should not be allowed to stand in the way of clear responsibility and, if necessary, can be amended to reflect the provisions in the Bill.
In debate the Minister said that the prevention of market abuse was part of the FSA's market confidence objective. My noble friend Lord Alexander suggested, in response, that that should be made clear by adding to Clause 3(1) the words "and preventing market abuse". We agree with my noble friend. That is achieved by Amendment No. 32. Amendments Nos. 33 and 34 relate to an issue which we raised in Committee. Although Clause 3(2) refers to markets and exchanges and regulated activities, it does not refer to banks and other institutions which operate within the system. The addition of "institutions" in Clause 3(2)(a) and (c) will correct that omission. I beg to move.
§ Lord Newby
My Lords, at the Committee stage we supported an amendment on this issue. Having looked further at the Bill and discussed the matter further, we doubt whether the amendment is either necessary or, even if it were incorporated in the Bill, would serve the purpose which the noble Lord, Lord Kingsland, wishes. We do not think it necessary because, on our understanding, the memorandum of understanding between the Bank, the Treasury and the FSA provides a framework for dealing with systemic risk with which all three of those institutions are happy. They do not feel that there is the kind of problem referred to by the noble Lord, Lord Kingsland, about who, to put it crudely, takes the lead.
Even if there were such a provision in the Bill, that would not mean, and could never mean, that the FSA in all circumstances would have prime responsibility for systemic risk. For example, it is not the lender of last resort. In many cases the Bank will still have to take prime responsibility for dealing with a crisis 344 involving a financial institution and the FSA will simply sit on the sidelines and, presumably, hope that the Bank gets it right. The amendment is neither necessary nor sufficient for the purpose suggested by the noble Lord and, therefore, we do not support it.
§ Lord McIntosh of Haringey
My Lords, I can certainly confirm that Clause 3 already covers the FSA's responsibilities in the territory of market abuse and systemic risk, and that the reference to regulated activities and other activities connected with financial markets and exchanges covers bodies engaged in regulated activities or connected activities. However, very much for the reasons given by the noble Lord, Lord Newby, I am afraid that I cannot accept these amendments. It is not that they are unnecessary, which would be reason enough for rejecting them. Putting these words into Clause 3 would cast some doubt on what was covered by the clause.
The Joint Committee recommended that the market confidence objective should,refer to 'maintaining confidence in the soundness of the financial system', and should be expanded to include a reference to the management of systemic risk in collaboration with the Treasury and the Bank of England".Perhaps I may quote our response to that. We said that,public and market confidence in the financial system clearly requires confidence in the soundness of the system as a whole. However, other aspects are also relevant. notably maintaining confidence in the effective prudential supervision of individual institutions. Singling out one aspect could throw doubt on the FSA's role in this area and narrow its remit".That remains our position. If there was any doubt that market confidence covered systemic risk and market abuse, we would put it beyond doubt. But there is none. The market confidence objective encompasses these things, although it goes wider.
There is also no doubt that both of these things are also covered by the protection of consumers objective. If the financial system is not robust and risk is not properly contained, or if market abuse is not deterred or tackled, then consumers will not be properly protected. We must not cast doubt on the width of the protection of consumer objective since it is the interests of consumers that form the ground for exercising the relevant powers of the FSA under the Bill, most importantly the own-initiative power in Clause 43. There should be no doubt that the FSA can act quickly and decisively to head off systemic problems using these crucial powers.
The FSA's rule-making power is also exercisable on the grounds of protecting consumers. Clearly, rules must be capable of addressing systemic risks and requiring firms to take steps to control them: for example, by having adequate systems and controls in place and holding adequate financial reserves.
I think there is a danger in seeking to relate the broad issue of systemic risk to just one objective—which is what the amendment would do—with all the implications that it may have for the FSA's ability to take the necessary measures to deal with it. I see no reason to run that risk.
345 In addition, I am not sure that it would be appropriate for the market confidence objective to refer to "minimising systemic risks". First, I do not think that "minimising" is the right word. I am sure that noble Lords do not mean taking risk down to the minimum possible. No regulator anywhere can or should do that. What is important is that risks are controlled and that an appropriate balance between risk and protection is secured. Secondly, as the noble Lord, Lord Kingsland recognised, the maintenance of confidence in the financial system is not the sole responsibility of the FSA. The Treasury and the Bank of England have clear roles to play, and we should not undermine this by implying that the FSA alone has responsibility here.
The noble Lord referred to the published memorandum of understanding between the Treasury, the Bank and the FSA as being opaque. I do not believe that that is the case. It sets out in clear and comprehensive terms the responsibilities of the respective institutions. It sets out the details of the standing arrangements for ensuring that there is full and effective co-operation between the various parties. The FSA is clear as to what its responsibilities are and what is covered by their objectives. The effect of the amendment might be to introduce some confusion about the respective roles of the three institutions where currently there is none.
However, it is valuable to have these amendments moved. It is important that we are clear that market abuse and systemic risks are covered by the market confidence objective. I am glad to have had the opportunity to confirm that, but I am afraid that we cannot accept the amendments.
§ 7 p.m.
§ Lord Kingsland
My Lords, this is yet another example of the Minister agreeing that our amendments reflect what the Bill says, but not being prepared to clarify the Bill to make sure that everyone understands its intentions. If the Bill does cover market abuse and systemic risk but it is not clear that it covers them, why on earth is the Minister not prepared to accept our amendments?
The substance of the matter concerning systemic risk remains of considerable concern to me. I accept the fact that systemic risk is a matter that is capable of being, and will be, discussed by the three parties to the memorandum of understanding. But let us suppose that systemic risk is identified in those discussions and it affects a particular branch of the authorised sector. Does not the authority need power to act in relation to that systemic risk within its sphere of responsibility? Surely it does. I see the Minister nodding.
§ Lord Kingsland
My Lords, that brings me back to my main point. If it does have that power but it is not 346 expressed in the Bill, why not express it and make it clear to everyone? That in itself would be a market confidence enhancing act by the Government.
§ Lord McIntosh of Haringey
My Lords, the provision is in the Bill. I spent some time explaining how the matter is covered by the market confidence objective and the protection of consumers objective and why, therefore, it is undesirable to restrict the provision in the way in which the amendment does.
§ Lord Kingsland
My Lords, I have heard what the Minister has said. I shall look carefully at his remarks in Hansard and I may return to the matter at Third Reading. Meanwhile, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
§ [Amendments Nos. 33 and 34 not moved.]
§ Clause 5 [The protection of consumers]:
Lord Newbymoved Amendment No. 35:
Page 3, line 15, at end insert ("; and
(e) the interests of—
The noble Lord said: My Lords, this amendment deals with the situation of disadvantaged consumers. We raised the issue in Committee and I make no apologies for returning to it.
It is the case by common consent that financial products are particularly difficult for most lay men and women to understand. They are difficult for all of us to understand, but they are particularly difficult for a raft of disadvantaged groups within society whose level of financial literacy is known to be low. The amendment would simply require the FSA to have regard to the interests of a number of groups of disadvantaged consumers in the way in which it conducts its activities.
When we discussed the matter previously, this seemed a self-evidently sensible provision to place on the face of the Bill. The Minister said in response that it would at best muddy the waters and at worst lead to an unfair focus on the needs of particular groups. I have never before heard a Labour Minister say that taking particular account of the disadvantaged would be an unfair focus. I should have thought it would be a precisely fair focus. The Minister went on to say, when I pointed out that this exact provision had already found its way into the Utilities Bill which was proceeding through the Commons, that he had learnt not to look at Commons Bills until they had finished their passage because they tended to be changed, and the Utilities Bill was in many respects a case in point.
However, given the widespread support on the issue in another place, it was difficult to see why the Government might want to change the Utilities Bill and withdraw the reference to disadvantaged 347 consumers. If the Government believe the matter to be worthy of express consideration on the face of the Utilities Bill, frankly, why should it not be on the face of this Bill?
Arguably, those in the disadvantaged groups referred to in the amendment find financial products more difficult to cope with than consumers of some of the products referred to in the Utilities Bill. It seems illogical and unfortunate that the Government have not been consistent in the two Bills. I simply urge the Minister at this stage to bring consistency and fairness for disadvantaged people to the face of the Bill. I beg to move.
§ Lord Donaldson of Lymington
My Lords, from the sidelines, as always, I venture to criticise the amendment. Clause 5(2)(b) already contains a requirement for the authority to have regard to,the differing degrees of experience and expertise that different consumers may have in relation to different kinds of regulated activity".That is plainly right. But the disadvantaged consumers are not within the categories set out in the amendment. One has only to look round this Chamber to see that individuals of pensionable age are not necessarily financial illiterates. The fact that someone is disabled does make that person financially illiterate: nor does the fact that he or she has a low income—it may be bad luck. Certainly, the fact that someone lives in a rural area has no bearing on the matter. The noble Lord has selected the wrong groups. They are the right groups in relation to utilities: if one lives in a rural area the question of getting electricity, gas or whatever to one's door may be a very relevant factor to take into consideration, but I cannot see why the noble Lord wants to go further than the provision in Clause 5(2)(b). Indeed, I believe that the amendment goes in the wrong direction as compared with the provision in the Bill as drafted.
§ Lord McIntosh of Haringey
My Lords, I am most grateful to the noble and learned Lord, who says it so much better and, as the noble Lord, Lord Kingsland, would put it, telegraphically than I can. I shall try to cut out almost all of what I intended to say. The noble and learned Lord is quite right that if one looks at Clause 5 the FSA is already required to have regard to the full range of consumers' needs in pursuing its regulatory objective. To go further, the public awareness objective is aimed specifically at helping the public to understand products in this sector. The action of the FSA will inevitably, and properly, be directed at where there is greatest need.
I am justly rebuked by the noble Lord, Lord Newby, mainly for saying that I did not read Bills until they emerged from the Commons. The noble Lord is quite correct to say that this provision will survive in the Utilities and Postal Services Bills. But the noble and learned Lord has made clear the difference between the kinds of consumers who are affected by where they live, how much money they have and whether they are disabled or disadvantaged in other ways under that 348 legislation and consumers here where the disadvantage is properly expressed. Clause 5(2)(b) makes reference to,the differing degrees of experience and expertise that different consumers may have",and Clause 5(2)(c) refers to,the needs that consumers may have for advice and accurate information".Therefore, the analogy between this Bill and the Utilities and Postal Services Bills breaks down rapidly.
I said in Committee, very unkindly, that the form of this amendment would give priority to the needs of a financial adviser who had just retired to a rural area. He would qualify under the second criterion. It is not satisfactory for the amendment to go on to say that,that is not to be taken as implying that regard may not be had to the interests of other descriptions of consumer".I am afraid that that weakens the amendment beyond the point where any useful purpose is served.
§ Lord Newby
My Lords, when I moved this relatively modest amendment I had not reckoned with a broadside from the noble and learned Lord, Lord Donaldson. Therefore, I am required to muster all my strength even to stand up after such an onslaught. I am, however, grateful for the response of the Minister. He has gone further than he did at Committee stage in stressing the priority that the FSA would give to considering the problems faced by those with low levels of financial literacy. In the light of that, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
§ Clause 7 [The Authority's general duty to consult]:
§ [Amendment No. 36 not moved]
§ Clause 8 [The Practitioner Panel]:
§ [Amendments Nos. 37 and 38 not moved.]
§ Clause 9 [The Consumer Panel]:
§ [Amendments Nos. 39 and 40 not moved.]
§ 7.15 p.m.
Lord Saatchi moved Amendment No. 41:
Page 5, line 2, leave out ("may") and insert ("must on the second anniversary of the day on which section 1 comes into force and every two years thereafter").
The noble Lord said: My Lords, Amendments Nos. 41 to 46 seek to amend Clauses 10 and 11 of the Bill which relate to reviews of the FSA. One would have thought that to have a definite review of the FSA was a reasonable suggestion and something to which everyone could look forward. Extraordinarily, there is no provision for it in the Bill. The Bill provides that the Treasury may appoint an independent person to conduct a review. On the other hand, it may decide not to conduct a review; it is up to the Treasury. Therefore, the clause is, so I am told, an enabling provision. Any doubt about that is removed by the Explanatory Notes which state that,
the Treasury can commission independent reviews".
The fact is that the Treasury can do just about what it likes under the clause. Not only can it decide whether to have a review under subsection (1), but in subsection
(2) it can decide to limit the scope of the review. Subsection (3) specifically excludes the opportunity for a fundamental review. Nor is the independence of the reviewer guaranteed. The Treasury can also decide what "independent" means. Subsection (7) states,
'Independent' means appearing to the Treasury to be independent of the Authority".
We believe that the Bill hands too much power to the Treasury. The enabling provision leaves an unacceptable amount of discretion in the hands of the Treasury, and we should like to find ways to limit it. I hope that the Minister will concede that to leave the scope of the review of the FSA entirely in the hands of the Treasury cannot be satisfactory. Our amendments propose that the Comptroller and Auditor General of the National Audit Office should lake on that role. The NAO is, and has been seen to be on many occasions, unimpeachably independent. Only in the last week it reported persuasively on the operation of the Rail Regulator. The NAO has power to produce reports which go to the Public Accounts Committee and can provide a more thorough and detailed form of parliamentary scrutiny than the proposed system. The NAO already conducts reviews of other public bodies which include the principal regulators, such as those for the electricity, gas, rail, telecom and water industries.
The Government have in the past argued that the FSA does not receive public funds and so should not be scrutinised as a public body and subjected to such a review. But who can argue with the fact that Parliament is entitled to ask for a full and independent review of a body in which it places so much power and public trust? That is what this group of amendments seeks to achieve. I beg to move.
§ Lord Elton
My Lords, I rise briefly to speak to the principle of the amendments. First, I welcome the introduction of a mandatory, rather than a permissive, duty to report. Secondly, I should like to make a brief comment on the role of the Comptroller and Auditor General. I am not entirely certain that he is the right authority. It is right that there should be a powerful and independent authority to look into this matter, and I hope that in the interval between this stage and the next my noble friend will take the opportunity to consider whether the Comptroller and Auditor General is the right person to do it. But it is right that noble Lords should note that the proliferation of the devolution of government and funds to agencies has effectively shut out the Comptroller and Auditor General from the direct investigation of very large areas which used to be subject to parliamentary scrutiny. That scrutiny is rendered indirect by the arm's length arrangements. The Minister looks perplexed. If I am wrong I am very happy to be put right. But if what I say is correct I am very unhappy that matters should be left as they are.
§ Lord McIntosh of Haringey
My Lords, I am not perplexed; I simply disagree, which is quite different. These amendments do two things: first, they remove the Treasury's discretion to decide when reviews are 350 appropriate and require them to be carried out at two-yearly intervals; and, secondly, they prescribe that the independent person to be appointed by the Treasury to carry out the reviews must in all instances be the Comptroller and Auditor General.
As to when and how reviews should be commissioned, in this Bill we are doing nothing different from what is laid down in Section 6 of the National Audit Act 1983, which provides that the Comptroller and Auditor General may carry out examinations into the economy, efficiency and effectiveness of departments, not that he must do so. To introduce a requirement that these reviews should take place at two-yearly intervals, and presumably only then, is based on a profound misconception of the present situation.
§ Lord Elton
My Lords, surely the requirement to which the noble Lord refers is placed upon the Comptroller and Auditor General, but under the Bill the requirement is placed upon the Government in the form of the Treasury. There is a difference.
§ Lord McIntosh of Haringey
My Lords, perhaps I may shoot down the noble Lord's arguments one at a time rather than together with the same shot. They are both capable of being shot down in one way or another. The Opposition are quite right to draw attention to the fact that the clause gives the Treasury a good deal of discretion. It does so for a very good reason. First, it is the Treasury which is accountable to Parliament, and it is important that that -Mould be done with accountability to Parliament rather than being within the purview of the Financial Services Authority.
Secondly, the whole point of the clause is that it is forward looking. The question of whether a review is appropriate at a particular point in the future, what kind of review it should be, and who should carry it out are decisions that can only be taken at that time. The Treasury needs the discretion and flexibility to be able to take those decisions as they arise. I confirmed in Committee that we shall commission reviews when necessary but there is nothing to be gained from holding a review for its own sake.
Amendments Nos. 41 and 43 would not only have the effect of requiring a review every two years but also of making it impossible for the, Treasury to commission a review at any other time. Two years may be too long a time, but it may be too short a time. It all depends on circumstances, which we cannot foresee.
Amendment No. 44 presents a similar problem. It deletes subsection (2). It removes the power to impose restrictions on areas of the FSA's work the reviewer could examine. Subsection (2) reflects the fact that the Treasury may think it necessary to commission a review for a particular reason and not necessarily a general review of all the FSA's activities. If a review were triggered by events in the building society sector, for example, the Treasury might wish to direct the reviewer to consider the FSA's work in regulating banks as opposed to, let us say, insurance regulation.
351 The amendment also removes subsection (3) which is somewhat different. The National Audit Office Act 1983 gives the Comptroller and Auditor General responsibility to carry out reviews but it specifically prohibits the Comptroller from examining the merits of policy objective underlying the spending. That is not because those policies should be beyond question but because it would compromise the Comptroller's independence for him to become involved in questioning government policy. Subsection (3) does the same in respect of this Bill. The amendment would remove that subsection.
Amendments Nos. 42 and 44 would require the Treasury to appoint the Comptroller to carry out all reviews. It is the second point of the noble Lord, Lord Elton. Again, the problem is one of flexibility. Reviews are about getting the right things at the right time from the right person. In some instances, the right person might well be the Comptroller and Auditor General. There is nothing which would prevent the Treasury from asking him to carry out that task. But sometimes it may be more appropriate to appoint a different reviewer. For example, it may be helpful to appoint a body which is more familiar with how the financial markets work and thus the constraints within which the FSA operates.
Perhaps I may add something from my personal experience. It may well be that a review should be carried out by using survey research techniques, making inquiries by sample surveys of the views and experiences of those operating in financial markets. That is not a skill of the National Audit Office although it can subcontract that kind of skill. That possibility of going outside is not unprecedented. The value for money review of the SIB in 1996 was carried out by a private sector organisation.
This is not just the Government's view. It was the view of the Joint Committee chaired by the noble Lord, Lord Burns. It agreed that the National Audit Office should not be given the right of access to the FSA, but it noted that it was open to the Treasury to appoint the NAO to undertake an independent report into the efficiency and economy of the FSA's operations. I can confirm that the Treasury will do so where it thinks appropriate.
Finally, Amendment No. 46 would delete subsection (7). We need subsection (7) because it may not always be self-evident that a proposed reviewer is in fact independent of the FSA. So someone needs to look into the matter and take a view. Since the Treasury is making the appointment, it is the Treasury that will be best placed to do that.
For those reasons relating to the various amendments in the group—we appreciate the sincerity of noble Lords in moving the amendment; we all want to have effective review—I hope to persuade noble Lords that the way the provision is set out in the Bill is preferable to the rather more rigid alternatives proposed in the amendments.
§ Lord Saatchi
My Lords, I have fully understood what has been said. We heard earlier that the 352 Government want the FSA to be immune from criticism from below; and we have now heard that they want the FSA to be immune from criticism from above. I am sure we shall return to the matter at Third Reading. In the meantime, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
§ [Amendments Nos. 42 to 46 not moved.]
Lord Kingsland moved Amendment No. 47:
After Clause 10, insert the following new clause—
REVIEW OF REGULATORY REGIME BY COMPETITION COMMISSION
(" .— (1) The Competition Commission must immediately after the second anniversary of the day on which section 1 comes into force carry out a review of the impact of the regulatory regime created under this Act on competition in the financial system.
(2) On completion of the review, the Competition Commission must make a written report to the Treasury—
(3) A copy of the report must be—
(4) "The financial system" has the same meaning as in section 3(2).
(5) "Regulatory regime" includes the regulating provisions and practices of the Authority within the meaning of section 155.").
The noble Lord said: My Lords, Amendment No. 47 inserts a new clause. It is prompted by a recommendation in Mr Cruickshank's report in March of this year on competition in United Kingdom banking.
As well as recommending the separation of the roles of chairman and chief executive, Mr Cruickshank recommended that the Government should monitor the impact of the financial services and markets legislation on competition and financial services markets, and conduct a formal review two years after the commencement of the legislation. I am sure the Government would like to include provisions in the Bill giving effect to that recommendation; and, no doubt, it is only unavoidable commitments on the time of the parliamentary draftsman which have prevented the Government from doing so.
However, we strongly support the recommendation and have given the necessary priority to preparing an amendment. Under the new clause the Competition Commission would carry out the review after two years and make a written report to the Treasury. A copy of the report would be laid before each House of Parliament and published as the Treasury considers appropriate. I beg to move.
§ Lord Borrie
My Lords, I am a little puzzled by this interesting amendment. No reference has been made by the noble Lord to provisions in Clauses 155 and onwards relating to competition scrutiny by the Director-General of Fair Trading of the various regulatory provisions, practices and so on under the 353 new regime. The noble Lord will recall that in those provisions, which were discussed briefly in Committee, there is an ongoing responsibility to review regulatory provisions, placed upon the Director-General of Fair Trading, to see whether they interfere unduly with competition. That follows to a large degree the position under the Financial Services Act 1986.
The new provisions are better in a number of ways, but the noble Lord will recall that the provisions in Clause 155 and onwards specify that if the Director-General of Fair trading finds some problem he should refer it to the Competition Commission. In other words, the Competition Commission comes in at the second stage.
The amendment seems to cut across that specific statutory ongoing duty by proposing this one-off responsibility (if I may so put it) by the Competition Commission two years after the commencement of the legislation. I do not see how the two different aspects will work together.
§ Lord McIntosh of Haringey
My Lords, I shall have to discipline my noble friend Lord Borrie. He keeps making my speech for me—and better than I do! My noble friend is entirely right. There is no presumption against competition scrutiny in the Bill; and later parts of the Bill reflect that adequately.
Yes, we recognise that Don Cruickshank made this recommendation. He suggested a formal review two years after commencement of the legislation. We have already said that we shall respond to the recommendations of the report shortly. Clearly, I am not in a position to anticipate what the government response will be. It is a long and detailed report. It deserves, and Don Cruickshank would wish it to have, proper consideration.
Of course, there may be merit in conducting a formal review of the impact of the Bill after a period of time. But I do not think that it would be helpful for the Bill to require a review by the Competition Commission or to require it to take place on the second anniversary. The Competition Commission may be the right body. Two years may be the right period. But it may be that another body or person, earlier or later, should be responsible for it. For example, Andrew Tyrie and his helpful pamphlet gave us advance notification of many of the arguments that your Lordships would raise against the Bill as it appeared at Second Reading in the House of Commons. He suggested that there should be a report after three years. Who is to say that Mr Tyrie is right and that Mr Cruickshank is wrong?
Treasury Ministers are responsible for this legislation and will remain responsible for it. We will keep it under continual review. If we did not, Parliament would make sure that we did. If in two years' time we decide to commission a formal review from the Competition Commission, I hope that noble 354 Lords opposite will feel justified. However, I do not believe that it would be appropriate to place that on the face of the Bill now.
§ Lord Kingsland
My Lords, the distinction between Chapter II of Part X and this amendment is simple. The amendment places an obligation on the Competition Commission to conduct the review after two years. As the Minister is aware, under Chapter II, Part X, the powers of the Director-General of Fair Trading to intervene are entirely discretionary. He has no obligation to intervene. He may if he wishes, but he is not obliged to do so. Therefore, there is a hiatus which we seek to fill by the proposal.
We shall read Hansard carefully to see what the Minister said and, if necessary, return to the matter at Third Reading. In the meantime, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
§ Moved accordingly, and, on Question, Motion agreed to.