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Mr. Heathcoat-Amory: I am grateful to the Minister for that elucidation. I very much hope that he has the territoriality tests right. That will probably unfold over time.

I shall concentrate on the business test, because we need to know exactly why the Government have gone for a somewhat more restrictive test than the one in the Financial Services Act 1986. Generally, we welcome their incorporation of a business test in the definition of a regulated activity. It must be right to include that in the Bill. New clause 33, which has an "Alice in Wonderland" ring about it, says:

that those who would not usually be regarded as engaged in business are to be regarded as being so, and those who would usually be regarded as carrying on business are not to be regarded as doing so. I suppose that the Treasury has to have a way of deciding what is a regulated activity, but that wording must and will cause considerable bafflement--and perhaps some amusement--to the outside world when it grapples with what it might regard as a Treasury habit of trying, from time to time, to define black as white and white as black.

9.15 pm

That, however, is not really the purpose of my probe. I am asking why the Government have not simply

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proceeded on the basis of the concept of a business test that already exists, and is working perfectly satisfactorily under the Financial Services Act.

The Government seek to catch people who are carrying on an activity by way of business. Our amendment No. 198 asks for the words

to be inserted. Hon. Members may wonder what the difference is between carrying on an activity as a business, which is our definition, and carrying it on by way of business, which is the Government's definition; but it is rather an important distinction.

It is possible to do something in a businesslike way without carrying on the business of doing so. That was made clear in a recent court case involving Morgan Grenfell and the use of derivatives by a local authority. Welwyn Hatfield borough council was held by the court to have entered into derivatives contracts "by way of business", although it was not carrying on the business of doing so. It follows that some activities will now be caught by the Bill, although exactly the same activities do not require authorisation under the Financial Services Act. In other words, the idea of an activity "by way of business" will catch more activities than our definition.

Why is the existing definition defective? Is the Government's proposal part of a deliberate policy to catch more activities? Perhaps the Minister can give an estimate of the additional ground that the new clause is intended to cover, and the reasons behind it.

Mr. Cousins: I, too, want to concentrate on new clause 33 and amendment No. 406. What I am about to say may illuminate what was said by the right hon. Member for Wells (Mr. Heathcoat-Amory).

I am concerned about the disposal of endowments before term. There is a legal deficiency in the 1986 Act: although the purchase of a long-term endowment insurance product is a regulated activity, its disposal is not. As a result, when endowment insurances--often taken out to support mortgages--are surrendered before term, that act of surrender is not a regulated activity. There is no requirement on the provider of the endowment insurance product to ensure that the person so disposing is fully advised, and made aware of how best to maximise his or her position. Often the provider of the endowment insurance reacquires it at a stated value when a higher value could be obtained on the traded endowment market, but there is no requirement on the provider to make the existence of the market known to the person surrendering.

Of course, nothing that I have said should be construed as encouraging people to dispose of endowments. Clearly, the last thing that anyone with a long-term endowment product should do is dispose of it before term. Someone who does, however, must be enabled to obtain the best possible value.

I have been seeking an assurance from the FSA that the Bill regulates the surrender of endowments. It may be helpful if I read out the latest exchange that I have had with Howard Davies on the topic, which I received just last week. He tells me:

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    of insurance'. Our view that we will be able to make rules about the surrender of tradeable endowment policies is based upon our interpretation that, in accepting the surrender of a life policy, the life insurance company would be carrying on this regulated activity."

The business test as incorporated in new clause 33 and amendment No. 406 clearly covers the traded endowment market. There can be no doubt about that, but does it cover the act of disposal of the endowment, which may place that product in the traded endowment market? That is my anxiety, on which I seek the Minister's reassurance.

Mr. Timms: There are different tests under different Acts--for example, the Banking Act 1987 and the Insurance Companies Act 1982, as well as the Financial Services Act. No single test has been used. The view that we took was that the test in the Financial Services Act was not the most appropriate, although new clause 33 will allow the test to be refined where it is appropriate to do so. However, the right hon. Member for Wells (Mr. Heathcoat-Amory) was right. Our approach is intended to catch, to use his term, along with any mainstream activity, any activity that falls short of constituting a business in its own right but which should be regulated under the Bill. In that sense, our approach represents a much more secure test. It has never been proposed that the incidental provision of financial services should generally be exempt from the authorisation requirement. We think that the aim is better met by the form of test that is before us.

I am grateful to my hon. Friend the Member for Newcastle upon Tyne, Central (Mr. Cousins) for letting me know that he wanted to raise traded endowment policies, although I am not sure that I have all the answers that I would like to have. Perhaps there should be further discussion on the matter. Clearly, other hon. Members feel as strongly about it as he does.

The traded endowment policy market is pretty small. It is estimated to have a value of £250 million a year. There is concern about introducing disproportionate cost. I listened with interest to my hon. Friend's comments about the FSA's deliberations on the extent to which regulation would apply. I am personally rather dubious about the benefits of regulating all dealings in that market. It is not clear that the benefits would necessarily exceed the probable costs.

The sale of traded endowment policies to members of the public will be regulated. We will keep under review the case for extending the regulation's scope to include all dealings in traded endowment policies.

Mr. Cousins: The Minister may be right to say that the market is a small one, but it is a growing one. The point that I am trying to establish is that, at the point of surrender, the product provider should be obliged to make the existence of the secondary market known to the person surrendering, so that he or she is able to obtain the best advice on, and best value for, the product that they are handing back.

Mr. Timms: My hon. Friend is making a point to which he has clearly given great consideration. I think that he has also had some constituency experience of dealing with the matter. I should like to reflect on the point and write to him on it with some clarification.

Mr. Flight: The hon. Member for Newcastle upon Tyne, Central (Mr. Cousins) made roughly the point that

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I wish to stress. There is indeed a substantial and growing market. Frequently, the difference between surrender value and commercial value is substantial, but many people do not even know that there is a commercial market where they could sell their endowment. So the only way of squaring the circle is by imposing an obligation on the insurance company with which people have their policy, obliging it at least to tell them that there is such a market. Whether they use that market is another matter. None the less, it is a consumer issue that has long needed to be addressed. As the hon. Gentleman said, the business definition is one way of addressing it.

Mr. Timms: Under clause 110, the FSA will be able to make rules on the carrying on of the regulated activity of carrying out a contract of insurance, including the payment of a surrender value. Such rules could require the insurer, subject to general duty, to notify the policyholder of the existence of the market. Such a possibility therefore exists. However, I shall write to my hon. Friend the Member for Newcastle upon Tyne, Central on the matter, and perhaps copy the letter to the hon. Member for Arundel and South Downs (Mr. Flight).

Question put and agreed to.

Clause read a Second time, and added to the Bill.

New Clause 35

Authority's general duty

.--(1) The Authority must keep itself informed about--
(a) the way in which designated professional bodies supervise and regulate the carrying on of exempt regulated activities by members of the professions in relation to which they are established;
(b) the way in which such members are carrying on exempt regulated activities.
(2) In this Part--
"exempt regulated activities" means regulated activities which may be carried on by members of a profession which is supervised and regulated by a designated professional body without breaching the general prohibition; and
"members", in relation to a profession, means persons who are entitled to practise the profession in question and, in practising it, are subject to the rules of the body designated in relation to that profession, whether or not they are members of that body.
(3) The Authority must keep under review the desirability of exercising any of its powers under this Part.
(4) Each designated professional body must co-operate with the Authority, by the sharing of information and in other ways, in order to enable the Authority to perform its functions under this Part.'.--[Miss Melanie Johnson.]

Brought up, and read the First time.

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