Tenth Standing Committee on Delegated Legislation
Thursday 15 March 2001
[Mr. Humfrey Malins in the Chair]
Financial Services and Markets Act 2000 (Regulated Activities) Order 2001
The Economic Secretary to the Treasury (Miss Melanie Johnson): I beg to move,
That the Committee has considered the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I. 2001, No. 544).
The Chairman: With the leave of the Committee it will be convenient to consider the draft Financial Services and Markets Act 2000 (Carrying on Regulated Activities by way of Business) Order 2001 and the draft Financial Services and Markets Act 2000 (Exemption) Order 2001.
Miss Johnson: This is the first parliamentary debate on secondary legislation under the Financial Services and Markets Act 2000. I shall turn to the orders shortly, but it is appropriate to make one or two general comments first.
On the importance of the financial services industry to the United Kingdom's economy as a whole, financial services account for 5.8 per cent. of gross domestic product and employ more than 1 million people. Millions more rely on its services through their insurance policies and pensions. London is the global leader in the trading of foreign equities, is the world's leading centre for equity investment and has the largest market in foreign exchange. The London market is the leading international insurance centre. Proper regulation of the financial services sector is therefore crucial. Individual investors cannot monitor the minutiae of all financial products and markets, so confidence in the stability of markets and in the integrity of product providers depends on a system of regulation capable of safeguarding the public interest.
The Financial Services and Markets Act 2000 provides a far-reaching overhaul of financial services regulation. It establishes the Financial Services Authority as a single statutory regulator of UK financial services. In place of nine regulators, there will be one. In place of eight dispute procedures, there will be one ombudsman. In place of five compensation schemes, there will be one. Those changes will benefit both practitioners and consumers.
The 2000 Act was subject to a great deal of consultation and scrutiny, both in Parliament and outside222 organisations responded to consultation on the draft Bill. The Association of Unit Trusts and Investment Funds welcomed the Bill's overall aim of simplifying the regulatory structure. Similar sentiments were expressed by other organisations, including the British Bankers Association, the Futures and Options Association, the Association of British Insurers and the Consumers Association. The draft Bill was subject to pre-legislative scrutiny prior to its introduction in the House, and a joint committee of both Houses of Parliament was established to consider aspects of it. It was scrutinised in no fewer than 35 sittings in Committee in this House, and it was considered in another place.
Good progress continues to be made on implementing the 2000 Act. We are seeking Parliament's approvalincluding through this debateof seven statutory instruments, which will set the boundaries of the new framework for financial regulation. Together, the instruments will define the extent of FSA regulation and the framework for the marketing of financial services and for the provision of financial services by professional firms. We expect shortly to seek Parliament's approval of a number of other statutory instruments to complete legislation under the 2000 Act on market abuse, recognition requirements for clearing houses and investment exchanges, and appointed representatives of authorised persons.
I am now in a position to provide greater certainty about the latest date on which the main provisions of the 2000 Act will come into force. That date is known in financial services jargon as N2. In doing so, I have taken into account the importance of firms and consumers enjoying the benefits of the new regulatory framework as soon as is practicable and the need to give financial services firms a reasonable time to prepare between announcing a firm date and N2. I can now announce our aim that N2 will be no later than the end of November this year. As soon as I am in a position to announce the actual day of N2, I shall do so. I should make it clear that that is not an aspiration or a working assumption. Firms should prepare for N2 on that basis.
The legislation for which we are seeking Parliamentary approval will enable the FSA to finalise many of its rules, and give financial services firms greater certainty about how the Financial Services and Markets Act 2000 will affect them in detail. Assuming that we continue to make progress, the FSA expects to be able to make the key provisions of its rulebook by the end of July.
Although the announcement about the date for N2 means that the main provisions of the Act will come into force no later than the end of November, there will be some variation. Mortgages have not hitherto been subject to regulation, so it is appropriate to give the FSA and mortgage lenders more time to prepare for regulation. We intend regulation of mortgages to begin nine months after N2. I hesitate to use the term N3 for that date, but it might be easiest. We intend the provisions for funeral plan contracts to come into force on 1 January 2002. Deposit taking by credit unions, regulated for the first time under the 2000 Act, will take place from 1 July 2002.
A number of the Act's provisions will have to be commenced prior to N2. For example, the FSA itself will have to be established in order to make its rules. The Financial Services and Markets Act Tribunal must also be established to begin its work of determining, for example, cases arising from applications before N2 for authorisation after N2.
The provisions to be commenced early will be set out in commencement orders in the usual way. Some measuresto make statutory instruments and interpretative provisionshave already been brought into force by the first commencement order.
I turn to the orders that are the subject of the debate. The regulated activities orderRAOis the most important piece of secondary legislation under the 2000 Act. It defines the scope of what the FSA is to regulate. The RAO has been issued twice for public consultation, in February 1999 and October 2000.
The RAO sets out the activities and investments that will be subject to regulation by the FSA. Under existing legislation, those are contained in different financial services, banking and insurance legislation. Specifying all the regulated activities in a single order will be a key benefit of the new framework. The estimated 665 firms that are currently subject to authorisation by more than one regulator will especially appreciate that. Some are subject to as many as four regulators.
The boundaries of FSA regulation are to be set by Treasury Ministers accountable to this House. Although the Act provides various accountability mechanisms for the FSA, the scope of what it regulates is a matter reserved for Ministers. For them to extend the scope of FSA regulation to areas where it did not hitherto apply would require an affirmative resolution process with a debate and vote in both Houses, as does the subject of today's debate.
In a majority of cases, the RAO brings about only small changes to the existing scope of regulation. For example, article 25(2) of the order states:
``Making arrangements with a view to a person who participates in the arrangements buying, selling, subscribing for or underwriting investments . . . (whether as principal or agent) is also a specified kind of activity.''
That provision is substantially derived from paragraph 13(b) of schedule 1 to the Financial Services Act 1986, but introduces a new exclusion. That is for arranging deals in investments where the arrangements merely provide the means by which one party to a transaction is able to communicate with other parties. The change, although highly technical and specific, will ensure that information transmitters such as telecommunication companies and internet service providers will not be wholly regarded as arranging deals in investments. The change is typical of the adjustments that we have made to many of the provisions of the RAO, compared with existing legislation.
I draw the Committee's attention to the significant changes contained in the RAO. The order brings into the scope of FSA regulation for the first time mortgages, pre-paid funeral plans, stakeholder pension schemes, and aspects of Lloyd's insurance. The grounds for bringing those activities into regulation vary, but in all cases it will, if necessary, enable a different balance to be struck between the interests of firms and consumers compared with an absence of regulation. Regulation will also provide an easier means of redress for consumers. We have also introduced a new risk management exclusion that is designed to replace the permitted person regime in the Financial Services Act 1986. The new areas of regulation were, of course, subject to consultation with those affected.
The RAO will reduce the scope of regulation in relation to debt securities. We have therefore excluded deposit-taking sums received in consideration of debt securities of more than one year. Where the securities have a maturity of less than one year, we have excluded such sums from the scope of deposit taking only where securities are offered to professional investors and have a minimum denomination of £100,000. The scope of the activity of arranging deals in investments has also been excluded for the reasons that I noted previously.
We have reduced the scope of regulation in relation to vehicle breakdown insurance, where we have removed the requirement that such insurance be normally available throughout the mainland of Great Britain for the exclusion from the activity of affecting and carrying out contracts of insurance to apply. We are satisfied that customer protection will not be prejudiced where the scope of regulation is being reduced.
The exemption order, as its name suggests, exempts from the requirement for FSA authorisation named persons in respect of classes of regulated activity or, in some cases, particular regulated activities. There are bodies for which authorisation by the FSA would be either inappropriate or unnecessary. In most cases, those bodies carry out a public policy function such as the Bank of England or a tourist board. Alternative mechanisms therefore exist to ensure that they undertake regulated activities in a way in which consumers' interests will not be damaged. Moreover, as public policy bodies, potential competition concerns from their exemption from FSA authorisation do not arise.
Our broad intention under the exemption order has been to ensure that those persons who were exempt under previous legislation do not need to seek FSA authorisation. In several cases, however, it has been unnecessary to provide a specific exemption where one had been provided previously. That is because the test for whether a person is carrying on regulated activities, and hence may conceivably need an exemption, is that they do those activities by way of business. We have concluded that in several cases, for example Church bodies, that is not the case.
It makes no sense under a single regulator of financial services for persons to be authorised in respect of some activities and exempt in others. Under the new regime, a person's part IV permission can simply be extended to take account of activities for which they were previously exempt. Having said that, where we do not want the Financial Services and Markets Act 2000 to apply to the activities of persons who will be authorised under the new regime, but who had an exemption for certain activities under previous legislation, that has been achieved by an exclusion in the RAO. Some exemptions, such as that for nationalised industries accepting deposits from other nationalised industries, have been removed because they are no longer necessary. Furthermore, some exemptions have been updated to reflect wider developments such as, for example, developments in the gas and electricity markets.
Finally, I shall turn to the business order. As I have already noted, a person is carrying on regulated activities only if he or she does so by way of business. That term is not further defined in the 2000 Act and will have its usual meaning. However, there are circumstances in which, although a person might otherwise be regarded as carrying on activities by way of business for the purposes of FSA regulation, we want to deem him not to be doing so. The converse also applies because there are circumstances in which somebody would usually be regarded as not carrying on an activity by way of business, but we wish to regard him as doing so.
Existing legislation on banking, insurance and investment services contains slightly different business tests. We have therefore used the business order to retain the business tests for predecessor legislation, which will make easier the transition to the new framework for all financial services firms since the business tests with which they are familiar will continue to apply.
I draw the Committee's attention to a section of the business order that implements one of the recommendations from Paul Myners' report to the Chancellor on institutional investment. That change will enable trustees of an occupational pension scheme to invest in an authorised fund, which invests in private equity, without trustees having to be authorised. That is in line with the Government's objective of encouraging greater investment in private equity. I commend the orders to the Committee.