Eighth Standing Committee on Delegated Legislation
Thursday 22 March 2001
[Mr. John Butterfill in the Chair]
Draft Financial Services and Markets Act 2000 (Professions)(Non-Exempt Activities) Order 2001
The Economic Secretary to the Treasury (Miss Melanie Johnson): I beg to move,
That the Committee has considered the draft Financial Services and Markets Act 2000 (Professions)(Non-Exempt Activities) Order 2001.
The Chairman: With this it will be convenient to consider the draft Financial Services and Markets Act 2000 (Designated Professional Bodies) Order 2001.
Miss Johnson: The two orders concern the arrangements under the Financial Services and Markets Act 2000 for the provision of financial services by members of the professions who are not authorised by the Financial Services Authority.
Nearly 15,000 firms of solicitors, accountants and actuaries are currently authorised to carry on investment business
Sitting suspended for a Division in the House.
Miss Johnson: I shall start at the beginning of what I was saying before the Division.
Nearly 15,000 firms of solicitors, accountants and actuaries are currently authorised to carry on investment business by their professional bodies, which are known as recognised professional bodies. Those are in turn recognised and supervised by the FSA under the Financial Services Act 1986. Most of the relevant firms do not conduct significant investment business, but have sought precautionary authorisation, to avoid committing a criminal offence under that Act.
The Financial Services and Markets Act 2000 ends self-regulation as a route to authorisation and requires all firms carrying on mainstream regulated activities to be authorised and regulated by the FSA as the single statutory regulator. However, we are keen to get the balance between effective consumer protection and regulation right. We do not want professional firms to have to seek FSA authorisation on a precautionary basis if they are likely only to conduct a limited range of regulated activities, such as arranging or giving business advice arising from, or complementary to, their professional services.
Part XX of the 2000 Act therefore provides an exemption for certain regulated activities, for professional firms that are not already authorised or exempt persons. Those activities must be governed by rules made by a professional body designated by an order under section 326 of the Actknown as the designation order. The regulated activities must be carried on in a manner incidental to the provision of professional services, and the regulated activities must not give rise to the receipt, from any person other than the client, of a pecuniary reward or other advantage for which the professional does not account to his client. Finally, the regulated activities must not be excluded by an order made by the Treasury under section 327(6), the non-exempt activities order.
The designation order specifies the eight professional bodies whose members will be able to carry on exempt regulated activities under part XX. I am pleased to say that all the professional bodies that are currently recognised under the Financial Services and Markets Act 2000 have confirmed to us that they are willing to be designated for the purposes of part XX.
There are two conditions for designation under section 326. The first is that the professional body must have rules that would govern the conduct of exempt regulated activities by its members. That condition is already met by existing recognised professional bodies. The second is that each profession must have some statutorily recognised basis, such as regulation under, or recognition in, statute. The requirement is similar to that which currently applies under the Financial Services Act 1986, and is again met by all the existing recognised professional bodies.
Designating those bodies for the purposes of part XX of the 2000 Act will allow the vast majority of professional firms carrying on regulated activities that arise out of or are complementary to their professional services, to continue to be supervised and regulated by their professional body. However, we do not intend that professional firms should be able to use the exemption to set themselves up as mainstream financial services providers such as banks, insurance companies, brokers or fund managers, providing their own investment products to their clients, even in circumstances where they are able to show some connection between such products and their professional services.
There is a risk that the adoption of different tests for professional and other firms authorised by the FSA in respect of such activities will prejudice the interests of the consumer, be unfair on authorised firms and affect the Government's ability to meet international obligations. The non-exempt activities order, to be made under section 327(6) of the 2000 Act, is intended to exclude those activities from the exemption under part XX and to require individual FSA authorisation for banking, insurance, broking or fund management activities. The scope of the activities that any particular professional firm will be able to carry on under a part XX exemption will be set primarily by the rules made by the relevant designated professional body and by the other constraints set out in section 327 of the 2000 Act. The effect of the order is to identify activities that cannot be permitted by the rules of the professional body.
We consulted on both the non-exempt activities order and the regulated activities order in October 2000, and received general support for that approach. We also received a number of helpful suggestions, particularly from members of the professions, which we have accepted in this order. We are especially grateful to the professional bodies for their comments.
As a result of the changes that we have made, we are confident that the non-exempt activities order strikes the right balance between allowing professional firms to carry on their professional activities without the need for authorisation by the FSA, and ensuring that retail consumers receive a consistent standard of protection in relation to mainstream activities such as banking, insurance, fund management and the selection of investments.
In my view, the provisions of both orders are compatible with the convention rights within the meaning of the Human Rights Act 1998, and I commend them to the Committee.
Mr. Howard Flight (Arundel and South Downs): I echo the welcome to you, Mr. Butterfill, as Chairman of the Committee.
I have endeavoured to consult widely, and have found no material comment on or criticism of the orders. My first minor query concerns the designated professional bodies. I can envisage future reforms to the Law Society, for example, given the difference between firms of country solicitors and major city firms, from which further self-regulatory bodies arise. Would a further order be required to deal with that, or is there an automatic mechanism to do so?
Secondly, on the activities that cannot be exempted, articles 4(d) and (e) mention
``establishing . . . a collective investment scheme''
``establishing a stakeholder pension scheme''.
Does that mean that a law firm may act for a company or fund management business in establishing those vehicles? It would be perfectly natural to subcontract to a lawyer the task of setting them up, but that would not include managing them. I assume that the task of establishing them is not intended to be a non-exempt activity. I should be grateful if the Minister would clarify what the word ``establishing'' means.
Sir Teddy Taylor (Rochford and Southend, East): I am just wondering whether we are considering all three sets of regulations together.
The Chairman: No. The order relating to financial promotion is being considered on Monday, so it is not in order to speak to it today.
Sir Teddy Taylor: I am so sorry.
The Chairman: The two orders that we are considering are the Financial Services and Markets Act 2000 (Professions) (Non-Exempt Activities) Order 2001 and the Financial Services and Markets Act 2000 (Designated Professional Bodies) Order 2001.
Sir Teddy Taylor: It is rather confusing, because I thought that our invitation referred to a different order, No. 544. Obviously, I was wrong and that order will be considered at another time. Is that correct? I thought that all the orders were to be considered together.
The Chairman: The orders were originally intended to be considered together. All Committee members should have received notification that one order had been withdrawn and would not be considered until Monday, when I shall chair the Committee.
Sir Teddy Taylor: As this is important for democracy, it would help me a great deal if you would tell me whether the same Committee will consider that order, because I certainly have not received any notification of that.
The Chairman: I am not sure whether I can tell you.
The Vice-Chamberlain of Her Majesty's Household (Mr. Graham Allen): I know that the Committee of Selection is very flexible about such matters, and I am sure that if the hon. Member for Rochford and Southend, East (Sir T. Taylor) has not been selected for that Committee, a substitution would be possible if he were to make representations through the usual channels.
The Chairman: Even if that were not the case, Sir Teddy, you would be entitled to attend and speak in any event, but you would not be entitled to vote.
Mr. Flight: I have received notice, but not of the time on Monday.
The Chairman: It is 4.30 pm as usual.
Sir Teddy Taylor: I want to ask a question about the order relating to non-exempt activities. Under the heading, ``Activities to which exemption from the general prohibition does not apply'', the order refers to article 59 of the regulated activities order, which deals with funeral plan contracts. I was surprised and concerned to see it stated in another draft order, which is not being considered now, that the exemption would not apply if the funeral was intended or expected to take place within one month. That astonished me.
The Minister is a clever person and I am not, so will she say why it has been decided that the exemption will not apply if the funeral is expected or anticipated to take place within one month? What is the purpose of that and how does one go about complying with it? It strikes me that if someone is about to diewe certainly hope that none of us is about to dieit is possible to have a rough idea whether that person will die within the next few days, but it might be difficult to estimate whether someone is going to die within four weeks, and if I, as the professional, had entered into the wrong contract, I could end up in prison. That seems to be a strange arrangement. Will the Minister give the Committee some guidance on that point? I have never seen anything like it.
Article 59, to which we are referring, is also article 59 in statutory instrument 2001/544, which we are not allowed to discuss. It states:
``A `funeral plan contract' is a contract . . . under which''
certain things happen
``unless, at the time of entering into the contract, the customer and the provider intend or expect the funeral to occur within one month.''
What is the logic of that?
I find the situation very strange; perhaps you can help me, Mr. Butterfill. What is the point of an order referring to legislationI am talking about the non-exempt activities order, which refers specifically to article 59when we have not considered that legislation? I feel confused. Perhaps when I have been here longer I might understand such matters, but I would like to know what the point of the one-month rule is, and why the Government want to introduce it.