§ 7.32 p.m.
§ Lord McIntosh of Haringey
rose to move, That the order laid before the House on 14th March he approved [23rd Report from the Joint Committee].
The noble Lord said: My Lords, the primary aim of the order is to give effect to the two European directives on electronic money, which were adopted in September 2000.
Before going into the detail of the directive, perhaps it would be helpful if I said a word about what electronic money is and what it is not. That will put in context how we have framed the directives and how they translate into UK law. Electronic money, or e-money as it is better known, is best thought of as an electronic substitute for coins and bank notes. It is stored on an electronic device such as a chip card or a computer memory. It is generally intended to make payments of a limited amount.
At the moment, e-money takes two main forms. First, there are plastic cards onto which e-money can be loaded. These usually take the form of cards with an integrated chip that memorises sums previously paid to the issuer and from which the necessary sums for small purchases are downloaded. Commercial trials of card-based e-money have been undertaken in the United Kingdom by Mondex International in Swindon and VisaCash in Leeds, but they have not yet led to a national scheme. Limited extensions have also been undertaken in self-contained communities such as universities.
The second main form of e-money is stored in an individual's computer or on a central server. These electronic tokens represent value, which can he used to buy goods and services; for example, over the Internet.
By contrast, debit cards, for example, are not e-money. Although a debit card allows its holder to make payments, the monetary value is not in any sense stored in an electronic device. The card contains only the data necessary to identify its holder and to link him to his bank account. At present, these data are little more than a bank number. But even when debit cards use chip and pin technology there is still no electronic money held on the card. So credit cards do not constitute e-money as they, by definition, do not represent pre-paid value. Company specific payment cards, such as the traditional BT phone card, are not covered as these are only accepted by the sole issuer.
To date the success of e-money in the United Kingdom has not been great. Nevertheless, firms are seeking to develop strong consumer propositions for e-money. E-money is best suited to those transactions where physical cash is awkward to use. Examples include use in parking meters and in vending machines that need exact change. Further success may come 767 from multi-application SMART cards which combine an e-purse with other applications, such as a debit or credit card, a transport season ticket or even SMART cards for digital television set top boxes.
I return to the e-money directives. One of these—2000/28/EC—is largely technical and need not detain us. The meat is in the other directive—2000/46/EC. It introduces a special prudential supervisory regime for issuers of e-money. It creates a special new type of credit institution—an e-money institution—that will be authorised to issue e-money. Traditional credit institutions—notably banks—will also be able to issue e-money. Like banks, authorised e-money institutions will have what are known as passport rights, which will allow them to provide their services throughout the European Union.
The directive's regime for e-money institutions is based on the existing regulatory regime applicable to banks. In recognition of the more limited need for consumer protection and the fledgling nature of the industry, it is in many respects less complex and thus generally less onerous.
Set against this, the directive effectively limits e-money institutions only to issuing e-money. Banks, on the other hand, can undertake other activities as well, such as deposit taking. The regime for e-money institutions is also tailored to address some of the specific risks inherent in issuing e-money. For example, strict limits are placed on the investments an e-money institution can make with its outstanding e-money liabilities.
The Government take a positive and constructive view of the long-term potential of e-money. It provides a chance to create a modern and effective means of payment that will facilitate electronic commerce and novel ways of doing business.
In implementing the directive into UK law, we have struck a balance between two factors. On the one hand, there is the need to make provision for the financial integrity of e-money institutions and the protection of consumers. On the other, there is the need to ensure that the development of e-money schemes is not hampered by excessive regulation. Our general approach has been to implement the directive with a light touch. In that way regulation will not unduly burden existing e-money issuers. It will also encourage innovation and new entrants, both from within the banking sector and elsewhere.
The Treasury issued a consultation document last year seeking views on the proposed legislative measures for implementing the e-money directive. That approach received widespread support from industry and consumer groups.
Perhaps I may turn to some of the technical aspects of the order. The Government have chosen to implement the directive by making the issuing of e-money a regulated activity under the Financial Services and Markets Act 2000. That gives effect to the principal requirements of the directive. First, it ensures that persons not authorised to do so under the Act—other than those with a waiver—will be prohibited 768 from carrying on the business of issuing e-money. Secondly, it enables the Financial Services Authority to impose on e-money issuers the remaining requirements of the directive. The order defines e-money issuance in the same terms as the directive. It means that the FSA will now be responsible for offering firms guidance on the definition. I understand that it will shortly be publishing its guidance.
With regard to waivers, the directive gives member states the option of permitting their competent authorities to waive the application of some or all of the directive's provisions in relation to certain "small" or "limited" e-money issuers. The Government believe that it is important for new entrants to be able to start up and grow without the burden of unnecessary regulation. We also believe that the risks to consumers posed by such a scheme are likely to be limited.
We have therefore provided fully for such waivers. They will exempt smaller schemes from the detailed requirements imposed on authorised e-money issuers. That will foster competition and innovation in the e-money industry and encourage its development.
Larger e-money issuers will, however, be required to seek authorisation from the Financial Services Authority. If successful with its application, these firms will need to meet the prudential and other requirements of the directive.
In accordance with the deadline set by the directive, the new regime will come into force on 27th April 2002. Firms already issuing e-money on that date will be granted a transitional exclusion. For the first six months after 27th April, they will be treated as not carrying on a regulated activity under the Financial Services and Markets Act 2000. The aim is for existing issuers to use the six-month period to apply for either authorisation or waiver. Meanwhile, issuers will be able to continue their e-money activities without interruption and without needing to comply with any of the requirements of the directive or of the Financial Services Authority's rules.
The order also makes further, miscellaneous amendments to the regulated activities order. These are of a technical and clarificatory nature. They are made following consultation with the Financial Services Authority and the industry.
Finally, I confirm, that in my view, the provisions of the order are compatible with the convention rights within the meaning of the Human Rights Act 1998. I commend the order to the House.
Moved, That the order laid before the House on 14th March be approved. [23rd Report from the Joint Committee].—(Lord McIntosh of Hariney.)
§ 7.40 p.m.
§ Lord Lipsey
rose to move, as an amendment to the Motion, at end insert "but this House regrets that Her Majesty's Government have postponed fulfilling their pledge to the House to introduce a similar order for the regulation of long-term care assurance."
The noble Lord said: My Lords, before I come to the substance of the matter, perhaps I may make three points. First, I have absolutely nothing against the 769 order, I wish only that another order had come first. Secondly, the noble Lord, Lord Joffe, asked me to apologise for the fact that he is unable to be here tonight. He, having with myself signed the minority report of the Royal Commission on Long-Term Care of the Elderly, would have liked to be here to support the amendment. Thirdly, what I shall say will be critical of the Government, but I wish to say that no blame attaches to my noble friend Lord McIntosh, nor to the Treasury Ministers who have dealt with the matter.
I remind the House of the background. It was the recommendation of both the majority and minority reports of the Royal Commission that long-term care insurance should come under the regulation of the Financial Services Authority—one of the few things on which we agreed. That was strongly supported by consumer groups and the entire industry, which wants to be regulated in the sale of such products. It was resisted by only one group: Her Majesty's Treasury. I shall not go over its reasons now. When the Financial Services and Markets Act 2000 was before the House, amendments were tabled to ensure that it should be regulated. In their wisdom, the Government recognised that it would be futile to attempt to resist the amendments, as they had support in every quarter of your Lordships' House. They therefore gracefully stepped down. That was done by my noble friend, in his usual elegant and graceful language. He said:We shall aim to include long-term care products in the regulated activities order, often referred to as the scope order, which will follow the passage of this Bill … I undertake that we will give the House a full report of our conclusions, with a clear timetable for future action, at the time when the order is debated. The Government intend to lay that order before Parliament as soon as is reasonably practicable. We are determined … that the stable door will not be left open for so long that there is a serious risk that the horse will bolt".—[Official Report, 18/4/2000; col. 581.]In February 2001, nine months later, the regulated activities order appeared in this House. It did not mention long-term care insurance. I did not worry too much. After all, I had the word of my noble friend. On 16th March, my noble friend moved the order. Again, there was no mention of the promised timetable or of doing anything to implement it. I should have picked that up at the time, of course, but I did not worry, because I had the word of my noble friend. The months ticked by.
It was December 2000, eight months after the Bill, when the House had said that it wanted long-term care insurance covered, that the Treasury finally acted. It produced a consultation document, which was a little weak but better than nothing. It said that Ministers favoured regulation. It invited comment by March 2001, which we awaited.
Nothing happened, but I had the word of my noble friend that all was being done as soon as possible, so I did not worry too much. Again, months ticked by, and then—Eureka£— a letter arrived from Ruth Kelly, the Economic Secretary to the Treasury, dated 5th October, in which she said that she would shortly be 770 announcing that long-term care insurance was to he regulated by the FSA and that she hoped that regulation could be put in place as soon as possible.
I had waited a long time for that day—Eureka day. The champagne was opened. I can remember the moment at which I took my fat file of correspondence on the matter, opened the wastepaper basket and threw it in. How naïve. Again, months ticked by. In February, I received a letter from the Economic Secretary dated 31st January. Europe, it told me, had decided to move to a wider regulation of all insurance using intermediaries. It had therefore been decided that it would be right to delay providing for long-term care assurance until then—by 2004, the letter said, on present timing.
Given my experience of present timing over the matter, those words did not give me tremendous comfort. It may be that I shall be surprised by the measure in 2004, but I see the noble Lord, Lord Oakeshott, who is a gambling man, sitting opposite. Would he care to take even money on 2004—the noble Lord shakes his head—2005, 2006, what is the favourite in this market? Sometime? Never? Who knows?
That farce of dilatoriness and delay has important constitutional implications for how we do business in this House. We do business on the basis that when a Minister gives an assurance it will be seen through and delivered. Otherwise, many more amendments would be put to the vote and forced to decision from which there could be no reneging. I say in all seriousness and trying to avoid an excess of pomposity that if that convention goes, the way that we do business in this House and in another place will start to collapse. Heaven knows, it is hard enough ever to persuade the executive to accept the view of Parliament, but en occasion this Parliament presses its view. It is then incumbent on the executive to take that with utmost seriousness—not to try to delay, to destroy or to use "Yes, Minister" tactics to prevent the House getting its way but to bow the knee before the will of Parliament.
That is the high constitutional argument, but another argument weighs heavily with me. It concerns old people themselves. We did not press the amendment for the sheer pleasure of doing so. It was not some game that we were playing. The House felt that old people were in peril as a consequence of the lack of regulation of long-term care insurance. Since then, more than 2,000 policies have been sold. Those people lack the protection that regulation would have given them.
But it is more than that. The industry says—and I have no reason to disbelieve it—that it will not sell many such policies until they are regulated because old people will not have confidence in them. That is why the take-up has been quite small. So thousands more older people may lose all their assets, which they could have protected by taking out a long-term care insurance policy, as a result of the Government s culpable failure to put in place regulation.
It is a sorry tale. What is the way forward? The first way forward would be for the Government to ignore the decisions and views of the House again, as they did 771 last time, and proceed as they wish. One day, perhaps, we would see regulation, or perhaps we would not. That would not be acceptable to the House. Unless the Government give us the right assurances, we will find that future debates are more crowded and that there is much more press coverage. The conventions governing our business will be insisted on by the House. That is my view. The Government can try to prove me wrong if they choose.
The second way forward—my clear preference would be to proceed at once to bring in the order. The Government must have it ready by now. My goodness, it has been cooking away for more than two years. We could have limited consultation—the Financial Services Authority could do that if it were not tangled up in all the other regulation—and put the regulations in place as soon as possible. We should get on with it and get it done. That is my strong preference. However, there might be a fall-back. There are certain protections in place—for example, the code of the ABI for the products involved. There is, however, no protection against the wildcat independent financial adviser who sells the products to people who might not need them.
It would be worth while if those of us who have followed the subject and who have pressed it and the Government could explore interim protections—less good, I admit straightaway, than full regulation, but better than nothing—that would enable the House, in its infinite forgiveness, to forget what has been done. I hope, therefore, that my noble friend will say tonight that the Government are willing to open discussions and explore the options and that they will do their best, thinking creatively and positively, not entering the discussions with a view to blocking the proposals, about what must be done. I hope that my noble friend can agree to that. I have great trust in him, despite the things that have gone wrong. I shall be delighted to accept such an invitation, secure in the knowledge that I—and the House—have my noble friend's word. I beg to move.
Moved, as an amendment to the Motion, at end to insert "but this House regrets that Her Majesty's Government have postponed fulfilling their pledge to the House to introduce a similar order for the regulation of long-term care assurance." — (Lord Lipsey.)
§ Baroness Greengross
My Lords, I support the amendment moved by the noble Lord, Lord Lipsey. In spite of the medical advances and the advances in social care and healthcare that have been made, we know that our society is ageing fast. In the foreseeable future, there will be many more people suffering from chronic disease who will need long-term care. From my experience of the organisations that represent old people, I can say that people are getting more and more anxious. They are anxious to ensure that they can retain some dignity in later life and can ensure for themselves that they get the care they need.
772 Long-term care insurance is usually purchased by older people, although it can, of course, be purchased by people of any age. Most people do not think about it until they are of advancing years. Therefore, the people who purchase long-term care insurance policies are sometimes vulnerable when they do so, as their need is imminent. It is essential that the industry be regulated. We have had enough examples of the consequences of having no regulation or poor regulation and of the mis-selling of financial products. Home income plans are one example of a good idea to which extraordinary damage was done by just such a lack of regulation. Long-term care insurance, as we all know, is not suitable for everyone, but it has an important role to play in its own right and in appropriate cases. However, selling such insurance to the wrong person is, itself, a form of mis-selling and can do great damage to the whole market, if it happens in that way.
It is necessary that regulation be introduced. It must be introduced quickly. As the noble Lord, Lord Lipsey, said, there have been huge delays. When we are dealing with older people, such huge delays are unacceptable. Older people cannot wait indefinitely. Why should they have to?
§ Baroness Dean of Thornton-le-Fylde
My Lords, I also support the amendment moved by my noble friend Lord Lipsey. When the original amendment to the Bill was before the House, I spoke in the debate and, like my noble friend, I believed that the Treasury genuinely intended to do something about the matter. It is not as though we were discussing people with their life ahead of them. It is now nearly two years on—longer if we take into account the recommendations from the commission of which my noble friend was a member. We are talking about some of the most vulnerable members of our community.
The intermediaries directive was referred to. I gather that the Treasury Minister said that it would cover the matter and talked about a date in 2004. That depends on directives being delivered on time from Europe. There is no guarantee of that.
I should declare that I am a member of the General Insurance Standards Council. That is not why I intervened this evening. Nor was it the reason for my intervention in the debate on the original amendment. I intervened then—as I do now—because I see the life-damaging impact that the pensions scandal has had on elderly people. Many thousands of people in Britain are worried about their pension. They are worried about final salary schemes that are in huge deficit and the move to money purchase schemes, many of which are themselves worth less than they were when they were bought.
If there is one crumb of comfort that we could give to older people, it would be this regulation. There is no reason why we could not have the regulation. If it is necessary to subsume it into future regulations from 2004, because of the intermediaries directive, that could be done then. It is wrong to expect people to wait 773 for fair regulation of a major investment that has great impact on their life until 2004 at the earliest. That is why I support the amendment.
§ Lord Blackwell
My Lords, I add my support for the amendment moved by the noble Lord, Lord Lipsey. As long ago as 1996 or 1997, there was a Green Paper on long-term care. It made various proposals but, for several reasons—one of which was a change of government—none of them went forward. Since then, little has happened to develop the market, even though, as the noble Lord, Lord Lipsey, said, it is a critical issue that we must get right. There is a huge need to cover the cost of long-term care, but the matter is in a vacuum. It is important that we move forward with regulation.
I have a question for the Minister. How will the order relate to electronic money that might be stored on mobile phones? If there is an electronic wallet on a mobile phone, linking into the Internet, that would be regarded under the order as electronic money. I am less clear on the situation in respect of payments in advance that are registered on mobile phones. Such pre-payments may be primarily for the purposes of pre-paying calls, but they could also be used to pay for other services. For example, if the mobile phone holder calls a premium call number, he may be using the money stored on the phone to pay for services through the premium number or to pay for services registered back to the phone through text message ordering. It is a simple point of information. I am not clear as to how pre-payment vouchers and pre-payments stored on a phone would relate to the order.
§ 8 p.m.
§ Lord Newby
My Lords, I have considerable sympathy for 1he arguments put forward by the noble Lord, Lord Lipsey. When his original amendment came before the House, we supported it. We had expected that it would have been acted upon by now. We look forward to hearing the Minister give some reassurance that action will be taken. The noble Lord, Lord Lipsey, spoke of the possibility of introducing what I think he called "interim protections". I shall be interested to know what such measures might be. I suspect that something either is or is not formally covered by the FSA, but if there is such a thing as an interim protection, it is hoped that it could be brought forward quickly.
The only comment I wish to make with regard to the remit of the FSA in respect of any insurance products is that, at the time that the Bill was passing through this House, we were keen to ensure that the FSA would cover not only the specific area of insurance for the long-term care of the elderly, but the insurance industry more generally. At the time we were persuaded by the Minister and the Treasury that we should not press those amendments, on the basis that such a proposal would greatly increase the scope of the work of the FSA. In its first years the body would have enough on its plate simply to fulfil what was required of it under the terms of the Bill. It could not also take on insurance matters.
774 Having watched the FSA take on its new powers, I suspect that the staff are extremely grateful that, at least last year, they did not have to worry about insurance matters. However, I think that the time has now come for the whole area to be looked at again.
I turn now to the main order. It seems sensible, although in terms of order of priority, electronic money does not strike me as a hugely important area in comparison with that raised by the noble Lord, Lord Lipsey. Furthermore, it will form one of a series of amendment orders because I believe that there are a number of other areas in which the remit of the FSA is not as wide as it needs to be.
Noble Lords who participated in the debate some weeks ago on the accountancy industry will have heard me speak about the position of the split investment trust sector, in which many savers, principally pensioners, have invested substantial amounts of money in products that were sold to them as low-risk investments, but which have since proved to be extremely high-risk investments. In many cases, people have lost a large proportion, if not all, of their savings. I understand that as many as 30,000 people stand to lose in this way. It is a major problem.
A further problem that the matter has brought to light is that those people who invested in splits, other than through independent financial advisers, are not covered by the FSA. They may have lost all their money, but they are not covered by the compensation scheme and they are not covered by the financial services ombudsman. I believe that this may well be another case where the regulatory scope needs to be examined.
At the moment the FSA is undertaking a review of the entire splits sector. I believe that that review will demonstrate that there has been mis-selling of such products. Logic dictates that they should now he regulated under the Financial Services and Markets Act 2000. I should be grateful if the Minister could confirm that such products could be brought under the control of the FSA by means of an amendment order along the lines of that which we are discussing tonight.
§ Lord Kingsland
My Lords, we are most sympathetic to the substance of the amendment tabled by the noble Lord, Lord Lipsey. We also have a few technical concerns with regard to the order, of which I understand the Minister is already aware.
Article 3 states that proposed Article 9A provides that cash paid to buy electronic money is not a deposit for the purposes of the regulated activities order if the cash is immediately exchanged for electronic money. Can the Minister tell the House whether this covers a situation in which cash is paid in when applying for an electronic device?
Article 4 makes it clear that the issuing of electronic money is a regulated activity requiring a FISMA authorisation certificate, unless the requirement is waived. Waiver is dealt with by proposed Article 9C, upon which I have certain observations.
First, why, by virtue of Article 9C(2), can the activities of credit institutions never be waived?
775 Secondly, there appears to be an inconsistency between paragraph 10.2 of the Explanatory Memorandum and Article 9C(5)(c)(ii). According to the Explanatory Memorandum, the FSA can issue a waiver certificate to an issuer of e-money if it is accepted by the issuer's parent, subsidiaries of the issuer which perform functions ancillary to the issuing of electronic money or subsidiaries of the parent. However, we observe that paragraph (5)(c)(ii) excludes all subsidiaries of the issuer.
Thirdly, in our view, paragraph (6)(b) of Article 9C should be amended to make it clear that the waiver applies where some of the "one hundred persons" fall in paragraph (6)(b)(i) and the remainder in paragraph (6)(b)(ii) so as to be consistent with paragraph 10.3 of the Explanatory Memorandum.
I have a few concluding observations. First, under Article 9E, we think that the deeming provision in paragraph (3) ought to apply to the Part IV permission as well.
Secondly, contrary to the view expressed in paragraph 13 of the Explanatory Memorandum, we think that the compensation scheme ought to be extended to small issuers, at least if they are exempted under paragraph (4).
Thirdly, Article 9(4)(b) of the order suggests that the regime applies where e-money is issued from outside the UK to a recipient inside the UK. If that is so, it would be helpful to provide an exemption under Article 72 of the regulated activities order, which is the article dealing with exemptions of overseas persons generally.
Finally—the Minister will be relieved to hear—paragraph 20 of the Explanatory Memorandum states that the proposal under Article 12 seeks to ensure that a,security repayable on notice of less than one year should be treated as commercial paper",and therefore as a deposit. However, the implementing new Article 9(3) refers only to an investment which has an original maturity of less than one year, and not to a notice period. Thus, a security terminable on one month's notice does not necessarily have a maturity of less than one year as at the date of issue. This problem could be solved by inserting after the expression, "date of issue", the phrase, "or can be redeemed at any time on less than 12 months' notice without any default by the issuer".
§ Lord McIntosh of Haringey
My Lords, I have three speeches to make: one about long-term care insurance; one about split capital investment trusts and one about the order before the House. I am not sure in which order to make them. If the House will allow me, I shall deal first with the original order and then finish by dealing with the amendment, because that is the question which will be put immediately to the House.
I am grateful to my noble friend Lord Lipsey and the noble Lord, Lord Newby, for saying that they do not 776 object to the order. Perhaps I may deal with the points raised by the noble Lords, Lord Blackwell and Lord Kingsland.
The noble Lord, Lord Blackwell, asked me about pre-paid mobile phones and premium services orders. Pre-paid mobile phones which do not involve premium services would not count as e-money because the money goes back to the issuer. They are no different from existing BT phone cards. The question is whether pre-paid mobile phones can be accepted as a means of payment by persons other than the issuer. It is critical to determine whether that is the case when interpreting the definition of e-money. The case raised by the noble Lord concerns premium rate services, where third parties are paid for the services provided—although of course they are paid by the mobile phone operator rather than directly by the customer using the services. We do not yet have an answer. The FSA is considering whether such pre-paid services constitute e-money and it hopes to give its formal view shortly.
I turn now to the first point raised by the noble Lord, Lord Kingsland, which concerns the distinction between e-money and deposits in paragraph (3) and the provision that cash paid to buy electronic money, which could be used to pay for goods and services and to repay the cash by doing so,is not a deposit for the purposes of article 5 if it is immediately exchanged for electronic money".The directive states that sums received in exchange for e-money do not constitute deposits if they are,immediately exchanged for e-money".Respondents to consultation welcomed our proposal to use this wording in the implementing legislation on the grounds that it provides a clear distinction between e-money and deposit taking.
But scenarios can be envisaged where there is a time period between when a consumer purchases the e-money and when he activates his e-money account or card. We believe that "immediate" does not mean "instantaneous" and that certain such delays in issuance can be justified on operational grounds. Much will depend on the length of the delay and the reason for it, and the FSA will be responsible for interpreting this element of the directive. I understand that it agrees with our analysis.
The noble Lord's next question concerned why a waiver is not available for traditional credit institutions. It is correct that Article 9C(2) states that traditional credit institutions cannot benefit from a waiver. This is a requirement of the directive.
The noble Lord asked about the waiver for e-money accepted only by undertakings in the same group. This concerns the conditions under which the FSA can grant an exemption by means of a waiver to a qualifying e-money institution—which I am afraid we are going to have to learn to call an "ELMI"—if the e-money is accepted as payment only by the parent undertaking, subsidiaries of the ELM I which perform ancillary functions and other subsidiaries of the parent.
777 This again is a matter of the directive, which stipulates one waiver condition as being that,the e-money issued by the institution is accepted as a means of payment only by any subsidiaries of the institution which perform operational or ether ancillary functions relating to e-money issued or distributed by the institution, any parent undertaking of the institution or any other subsidiaries of that parent undertaking".We believe that the drafting of the order achieves this.
The noble Lord then asked about conditions for the waiver of geographical and close relationships, and asked whether both of the conditions with regard to permitted locations and close relationships must apply to all of the 100 persons or whether they can be combined. This relates to Article 9C(6)(b). The waiver condition is met only where all the undertakings accepting the e-money fall under either sub-paragraph (i) or (ii). It is not possible for some of them to fall under one sub-paragraph and some under the other. All the undertakings concerned must operate in a limited local area or as part of a close business relationship with the issuer for a waiver to be available.
As to the question about drafting for applications process work under Article 9E—the noble Lord, Lord Kingsland, raised the issue of the deeming provisions—we believe that the order achieves the desired application of the warning and decision notice procedures contained in the Financial Services and Markets Act. The order provides that the relevant provisions of the Act,apply to the revocation of a certificate … As they apply to the cancellation of a Part IV permission".The further words suggested by the noble Lord are therefore not necessary.
Turning to the issue of a compensation scheme for small issuers, the Government believe that it is important to allow e-money to develop under as light a regulatory touch as possible while taking into account the need for prudential regulation of large-scale issuers. Such issuers may not exist at present, but they will in the future as e-money develops. Not only are current e-money schemes fairly small but also the amount of e-money that consumers are likely to hold is limited. The directive noted that e-money is largely used for lower value payments, so the losses that a consumer may suffer in the event of an e-money issuer's failure are correspondingly likely to be fairly low.
As to the overseas persons exemption, the noble Lord asked whether I could clarify that Article 9(4)(b) of the order, which refers to issuants on a services basis, also applies where the e-money is issued from outside the United Kingdom to a recipient in the United Kingdom. He queried whether it would not be appropriate to provide an exemption in terms of Article 72 of the original regulated activities order. Article 9(4)(b) must be read in the context of the rest of the Financial Services and Markets Act—and neither he nor I wish to do that. In particular, Section 19 of the Act makes it clear that the carrying on of a regulated activity requires authorisation only if it is carried on in the United Kingdom. So where an overseas person issues e-money in the United Kingdom, whether by way of a branch or otherwise, he 778 will require authorisation. We have not applied the exclusion for overseas persons in Article 72 of the order to the activity of issuing e-money. The directive requires us to prohibit persons who are not credit institutions from carrying on the business of issuing e-money. It is therefore not open to us to apply the existing exclusion for overseas persons to e-money.
The noble Lord's final point concerned debt securities, and he quoted paragraph 20 and the amendment to Article 12. The intention is that if a debt security is repayable on notice of less than a year, including repayment on demand, it is treated as commercial paper and it is a deposit. The current definition provides that the investment,must be redeemed before the first anniversary of the date of issue".This is too rigid as it excludes debt securities which are capable of running on for more than one year, even where they are repayable on notice of less than a year or on demand. We are satisfied that the drafting catches this kind of investment.
That is speech number one. Speech number two relates to split capital trusts. We appreciate the work being carried out by the noble Lord, Lord Newby, and the attention that he has drawn to the problem of split capital investment trusts. It is a problem and he is right to draw attention to it in public. We share his concerns about the problems which appear to be arising with some—but by no means all—split capital investment trusts.
The FSA has put useful information for investors in split capital investment trusts on its website and will shortly be releasing the responses to the issues paper it published earlier this year. This will help to decide whether there are allegations of mis-selling and collusive behaviour which need to be investigated further. Ministers will then be in a position to consider whether the regulation of investment trusts is appropriate or whether further regulation would be appropriate.
It would be a mistake to think that there is nothing the FSA can do with its existing powers. Where split capital investment trusts are held in an ISA or unit trust, or where a firm gave advice, then FSA rules apply. Where a firm gave advice on whether or not to buy a split capital trust, FSA rules on suitability apply FSA advertising rules will also apply to sales brochures and publicity material. FSA powers to deal with market abuse mean that the FSA can censure or fine anyone, authorised or not, who, for example, creates false or misleading impressions about a financial product. In addition, most investment trusts are companies listed on the London Stock Exchange and the listing rules apply to them. These govern how shares are offered for sale. In addition to these FSA powers, there may also be a case for action to be taken under company law. I should add that it would be wrong to assume that investment trust companies have fallen foul of these rules before the FSA has properly investigated.
There is still a problem about investors who bought direct from the provider. Where an investor bought a split capital investment trust on an execution only 779 basis—that is, direct from the provider, without advice—and feels that the promotional literature misled him or her as to the nature of the product, he or she should complain direct to the company in the first instance and, if they are not happy, should go to the financial ombudsman.
It is necessary to say how we would regulate investment trusts. As I have said, some of the aspects of the operation are already investigated. If further regulation is required, it would depend on how we proposed to regulate them. The regulated activities order would need to be amended. I can confirm specifically that the noble Lord is right in thinking that there will be more regulated activities amendment orders in the future and this could be one of them.
If the decision was to regulate the products in the same way as unit trusts or open-ended investment companies—having mentioned ELMIs, I am reminded of OEICs. Separate legislation would be required setting out the product regulation. Beyond this, the FSA would need to consult on any proposed regulation and be sure that it was supported by cost-benefit analysis. I hope that that covers the range of points made by the noble Lord, Lord Newby.
I turn now to the matter raised in the amendment moved by the noble Lord, Lord Lipsey. I should respond first to the noble Lord's comment about what was said during the passage of the Bill. I indicated that the Government would aim to include long-term care insurance in the regulated activities order. I also outlined the various processes which the Government still needed to go through before determining what measures should be taken to ensure that consumers in this area are fully protected. These include completion of the work of the Treasury committee, completion of the process of regulatory impact analysis, and the necessary consultation with interested parties.
As the noble Lord said, I undertook in this House in April 2000 that the Government would give the House a full report of our conclusions on the matter, with a clear timetable for action when the regulated activities order was debated in the House. That debate took place on 16th March 2001, and I did not do that. I formally apologise to the House for that failure. I did not explain why we had not included the regulation of long-term care. I did not provide a timetable for future action. However, I should like now to give a full explanation of why that was missing, and outline our timetable for the regulation of long-term care insurance. I ought to begin with a firm assurance that we do intend to regulate long-term care insurance.
The conclusions of the Treasury committee were published as part of the Treasury's consultation document on long-term care insurance regulation in December 2000. The noble Lord, Lord Lipsey, did indeed receive his copy and responded to the consultation. The purpose of the committee was not to examine whether or how long-term care insurance should be subject to regulation, but to explore with the financial services industry ways in which long-term care insurance products could be made more attractive 780 to a wider audience. The main recommendation was that the Treasury should promulgate a set of CAT standards which operate on a voluntary basis.
However, when following the public consultation the Government decided to bring in statutory regulation, they decided against additionally setting CAT standards for LTCI products. Such detriment as might arise in future would he addressed through statutory regulation. CAT standards are useful for those products that consumers can choose off the shelf; but LTCI is not bought that way. It is bought alongside other products and with help from advisers. So we believe that the best way forward is to let the market develop and innovate in a regulated environment.
We published the first consultation document in December 2000, and consultation closed at the end of March 2001, which was too late for legislation to be included in the original regulated activities order made in March 2001. But with the subsequent decision to regulate the sale of general insurance products more generally, announced at the end of December 2001, the Economic Secretary decided to dovetail regulation of long-term care insurance with implementation of the wider general insurance regime. I understand that she wrote to the noble Lord, Lord Lipsey, to explain the decision in January 2002.
The Government are fully committed to legislate to regulate long-term care insurance. There are, however, good reasons why we have not yet legislated to regulate it. We intend to dovetail the regulation of long-term care with the implementation of the European Community insurance mediation directive. I shall respond to the point made by the noble Baroness, Lady Dean, about the timetable.
The regulation of both mediation of long-term care insurance and mediation of other forms of insurance—because, of course, contracts are already regulated; it is the question of mediation and advice with which we are concerned here, the conduct of business regulation—will need to be compatible with the EU insurance mediation directive which we expect to be adopted in the summer.
Doing things in parallel brings with it the advantage that we can create a seamless regime for the regulation of long-term care insurance and other related insurance products—for example, private medical and critical illness insurance. One of the difficulties in attempting to do it separately is the difficulty of defining a contract of long-term care insurance. Many of the products on the market are a mixture of life insurance, critical illness insurance and provision for long-term care. The FSA Consumer Panel's response to the long-term care insurance consultation was that there were problems with all these products that could be addressed by regulation. There is a risk that pressing ahead with long-term care now and fitting the general regime around it could produce an overall structure that distorts the market and might cause anomalies for the consumer who buys these and closely related products. We cannot anticipate such potential problems in advance. The only way to avoid 781 them is to take the regime forward at the same time. That is my basic response to the first way referred to by the noble Lord, Lord Lipsey.
My response to his second way is that, even if we did go ahead and regulate long-term care insurance as soon as we could, there is still a need to prepare difficult and technical legislation, to undertake public consultation and to put orders through Parliament. The FSA would need to consult on its rules, and then give time for the industry to gear itself for the detailed regulatory regime. That process could take more than a year; therefore, we should be talking about autumn 2003 anyway. The burdens on industry would be increased, because it would have to respond to two streams of consultation as well as needing to seek permission from the FSA twice. Even though I acknowledge that many firms are keen to see regulation brought in quickly, they would not welcome two rounds of compliance costs in quick succession. Therefore, we argue that regulating separately from insurance mediation would be inefficient, requiring two public consultations, two sets of legislation, and two sets of FSA consultation and FSA rules.
Regulating long-term care insurance in advance of other forms of mediation will also give rise to substantive difficulties. Any regime for long-term care insurance will, from mid-2004, have to comply with the new general insurance regime which will implement the insurance mediation directive. This is a technical directive which has yet to be finalised and adopted. We could not be certain that a regime that we put in place quickly would be directive compatible. If we did so, we would have to amend the LTCI regime when we implemented the insurance mediation directive. That would cause difficulty for the industry and could confuse consumers.
There will also be real advantages for consumers in developing the overall regime in a way that takes account of the work that we have already done on long-term care, but firms up the detail of that regime alongside related products. In that way, we can develop a smoother regime that offers consumers protection across the board in a way that is proportionate to the risks inherent in the products.
The noble Lord, Lord Lipsey, and the noble Baroness, Lady Dean, asked about the timetable. The Government plan to legislate later this year, once the insurance mediation directive has been adopted and the new general insurance regime can be finalised. The Council of Ministers reached a common position on the insurance mediation directive on 5th March 2002. The European Parliament is starting the process of its Second Reading, which it must complete by mid-July. We expect the directive to be adopted by the Council shortly after that. It is possible that it could be changed or rejected by the European Parliament, but we do not think that is likely and we are working on the assumption that the directive will be adopted in July or soon after. Once it is in its final form and has been adopted, we shall consult on the implementing legislation. We are preparing now so that we can issue 782 consultation as soon as possible, within a few weeks of the directive being adopted. Following that, we shall put the legislation before Parliament.
Once we have legislated, the FSA will prepare and consult on its rules. Once the rules have been finalised, we expect firms to be able to apply for authorisation. We expect the regime to become fully operational by mid-2004. That is to give the FSA time to develop its rule books and register many thousands of insurance intermediaries, who will be brought within the scope of regulation. The General Insurance Standards Council has more than 6,000 members and 1,000 applicants, all of whom will need to be registered. The regime will also cover certain insurance intermediaries not covered by GISC. Bearing in mind that we shall also be regulating mortgage lenders for the first time, it will be seen that this is an enormous extension in the scope of responsibilities of the FSA.
The noble Lord, Lord Lipsey, made a third point about the need to protect consumers in the run-up to regulation. Ministers and officials will certainly discuss with the FSA and the industry ways of maximising the current protections for consumers in the run-up to regulation. We shall be happy to involve him and any other noble Lords who have taken part in the debate in the consultation. Insurers who effect and carry out contracts of insurance, including the contracts of long-term care, are regulated by the Financial Services Authority. They have to comply with FSA rules on areas such as capital requirements, fitness and properness. The insurance mediation activities—advising on and arranging contracts of insurance—need to be brought under FSMA regulation. Some protections are already in place because of the compulsory jurisdiction of the Financial Ombudsman Service, which ensures that consumers have access to an independent and free service that provides redress. The ABI has its own code of best practice. The General Insurance Standards Council has a code of conduct. If an insurer is a member of the General Insurance Standards Council, its rules require that it ensures that intermediaries who distribute its products who are not in GISC membership understand that they have to comply with the various ABI codes.
IFACare is a national organisation of independent financial advisers with a special interest: in providing financial planning services to those concerned with current or future need for long-term care. IFACare has more than 250 IFA members, all of whom are regulated by the FSA—not in respect of selling long-term care insurance, but they have to meet FSA fitness and propriety and other requirements.
Ministers and officials will be talking to the industry about the existing protections, options for strengthening them, and marketing them more effectively in the run-up to full regulation to give customers a better service and better reassurance. We are happy to include other noble Lords in that process.
783 Once again, I apologise to the House for not describing sooner the outcome of the work on long-term care insurance and the timetable of its regulation. I am pleased to have had the opportunity to rectify that and to set the matter straight on our future plans. I am convinced that implementing long-term care insurance as part of the wider general insurance regime under the scope of the insurance mediation directive will benefit consumers by introducing a seamless and comprehensive regulatory regime covering long-term care insurance and other related insurance products.
§ Lord Lipsey
My Lords, I thank all those who have spoken in support of my amendment this evening. It will not have escaped the Minister's attention that they came from all four quarters of your Lordships' House. I noticed the reference by my noble friend Lord McIntosh to the further orders that will come before the House. We shall have many more opportunities to debate amendments on the subject, should that prove necessary.
I noted carefully the arguments that my noble friend the Minister made. Of course I accept in full his apology for the omission when the relevant legislation was debated. I am sure that it was an oversight and no culpability should fall on him. It is my fault for not being here to ask him about it at the time.
I am not convinced by my noble friend's argument that we should wait for the rest of the package to come along. The matter should have been dealt with ages ago. We would then have had to make some changes to accommodate the European directive at that stage. It is not enough to wait and wait until an excuse comes along for further postponement. I agree that there are some practical defects in doing it in that way. That is why we should explore ways in which adequate protection can be given.
I very much welcome the Minister's assurance that he and the Treasury team will discuss the matter with the industry and with interested Members in this House. I hope that we can find a way forward. I assure him and the House, as he would expect, that if such a way forward is not found, we shall continue to press these matters, not simply because of their constitutional impact, but because of the argument so powerfully put by the noble Baroness, Lady Greengross, and my noble friend Lady Dean that old people cannot afford to wait for these protections, because otherwise the protection may not be there after they have gone. I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ On Question, Motion agreed to.