1. The draft Financial Services and Markets Bill
establishes the Financial Services Authority (FSA) as a single,
statutory regulator for a considerable part of the UK financial
services industry (though not all of itsee Scope
below), with specific regulatory objectives. In the Chancellor
of the Exchequer's words, "The Bill sets clear objectives
for the FSA [and] ... equips it with all the statutory functions
and powers needed to operate a single regime for authorisation
and regulation of financial services businesses."
Howard Davies, the Chairman of the FSA, has described the Financial
Services and Markets Bill as "following an unusual and scenic
route from the Treasury to Buckingham Palace."
It has, at least to date, proved an interesting and constructive
2. An incomplete draft Bill was published in July
1998, with a document containing an overview of financial regulatory
reform and draft Explanatory Notes. There was then a period of
open consultation which generated some 220 submissions to the
Treasury. In February 1999 the Treasury Select Committee of the
House of Commons published a report on the draft Bill, Financial
In March the Government published a Progress Report summarising
the main issues raised during the consultation period and explaining
the Government's response. Our Committee was the next step in
the process of consultation. The Government intend that the Bill
itself should begin its conventional Parliamentary procedures
in May or June, complete all its Commons stages this session,
be subject to an innovative carry-over procedure, start in the
House of Lords at the beginning of the next session, and receive
Royal Assent in spring or early summer of 2000.
3. This is the first occasion on which a Joint Committee
of both Houses of Parliament has been charged with scrutinising
a draft Bill. The first formal step in setting up our Committee
was taken on 23 February when the House of Commons resolved "That
it is expedient that a Joint Committee of Lords and Commons be
appointed to report on the consultative document on the draft
financial services and markets bill presented by Her Majesty's
Command on 21st December 1998 and any further draft of the bill
which may be laid upon the Table of both Houses by a Minister
of the Crown and to report by 30th April 1999." The formal
powers of our Committee and the Commons membership were agreed
to by the House of Commons on Friday 26 February. The House of
Lords appointed its members on Tuesday 2 March and also sent a
Message to the Commons proposing a day and time for our first
meeting. It is a sign of the importance with which we viewed our
task that our first meeting was held within an hour of that Message
4. Given the limited time available for examining
the draft Bill and any further drafts which might be laid, we
decided that we might best fulfil our task of pre-legislative
scrutiny by concentrating our inquiry on six specific issues:
- Proposed statutory objectives and principles
of the FSA;
- Scope of the new regime;
- Proposed arrangements for the accountability
of the FSA;
- Discipline, enforcement and the Tribunal;
- Market abuse;
- Financial Services Ombudsman Scheme.
We also decided not to consider issues surrounding
the transition to the new regime, important though they may be.
In announcing our decisions we invited anyone who wished to do
so to submit a paper on any or all of the issues listed.
5. Over 60 memoranda were received in response to
that invitation. In addition we have had access to the responses
to the consultative document on the draft Bill which had been
submitted to the Treasury and the memoranda given to the House
of Commons Treasury Select Committee. Many of the memoranda prepared
specifically for our Committee are being published as Appendices
in Volume II of our Report;
some have been reported to both Houses and placed in the Libraries
of the two Houses and the House of Lords Record Office.
6. We also held seven sessions of oral evidence.
We opened our inquiry with evidence from the FSA and Patricia
Hewitt MP, the Economic Secretary to the Treasury. Following these
two general sessions, we took evidence on the specific issues
we had identified. We adopted a somewhat novel structure for these
meetings, taking evidence from panels of witnesses who were able
not only to reply to our questions but also to respond to the
comments and suggestions of their fellow panellists. We also took
the unusual step of inviting David Roe, the head of the Treasury
Bill team, and Andrew Whittaker, Deputy General Counsel, FSA,
to attend each evidence session and reply to any questions which
arose during the meetings. This proved a very useful expedient.
We are grateful to them both for the expertise and enthusiasm
with which they approached the task.
7. As the format of our evidence session shows, we
viewed our inquiry as another important part of the process of
consultation. We therefore regarded it as essential that the evidence
we took from the FSA and the Economic Secretary on 16 and 18 March
should be published as soon as possible. The minutes of the two
evidence sessions were published on 20 and 24 March respectively.
That we were able to meet this tight deadline was due in no small
part to the efforts of those who took the verbatim transcript
of the meetings and those involved in printing them. We are grateful
to them all. All the oral evidence taken during the inquiry has
been published as daily parts but it is also being reprinted,
for ease of reference, in Volume II of our Report.
8. The timetable to which we were working meant that
we invited witnesses at short notice and with no flexibility about
dates. We are grateful to everyone who accepted our invitation
to give oral evidence and to the many organisations and individuals
who sent us memoranda. Their contributions assisted us greatly
in our task and we hope that they will find our Report an equally
useful contribution to their consideration of the draft Bill.
In the little time available, we have had to be selective as to
whom to call, and the coverage of our hearings has inevitably
been less balanced and comprehensive than we would have wished;
for instance, we have taken no evidence from overseas. Our power
to travel has taken us no further than Canary Wharf, for a useful
informal briefing by the FSA.
9. We should also like to thank our three specialist
advisers, Dr Eilis Ferran, Director of Studies in Law, St Catharine's
College, Cambridge; Professor David Llewellyn, Professor of Money
and Banking, Loughborough University; and Professor Alan Page,
Professor of Public Law, University of Dundee, for their contribution
to our inquiry.
10. We are pleased to have had the opportunity to
take part in this consultative process and have appreciated its
many positive aspects. First we have all enjoyed the experience
of working closely with members of "the other place"
and have, we believe, brought the best features of each House
to bear during the scrutiny of the draft Bill. Second, as we acknowledged
above, we have been very impressed by the commitment of everyone
involved and their willingness to make herculean efforts to fit
in with our timetable and produce relevant and considered comments
on the draft Bill. Third, we have been impressed by the genuine
process of consultation in which we have been engagedit
has been far from a merely cosmetic exercise.
11. There have, however, been some difficulties.
The first has been the very tight timetable within which we have
had to work. To require a Committee to set itself up from scratch
and report within 8 weeks places a great strain on everyone involved.
Many members of our Committee are also members of other Select
Committees and it has been difficult to find convenient meeting
times. The necessary tasks of identifying suitable witnesses,
finding specialist advisers, and even compiling a comprehensive
mailing list, all take time which cannot easily be spared. In
the light of our experience, we recommend for any similar situation
in the future that, at the least, the terms of reference of the
Committee should be agreed, a Chairman-elect identified and staff
allocated and, if possible, membership of the Committee decided
before the Committee is expected to begin work, so that all necessary
preliminary steps can be taken and the Committee can begin its
scrutiny with the minimum of delay.
12. Another difficulty related to the availability
of documents. The main body of the draft Bill, containing 233
Clauses and 10 Schedules, was published in July 1998. Certain
parts, which at that time had not been drafted, were published
only on 14 April 1999. These parts included provisions reproducing
the regulatory regime for collective investment schemes, replicating
the existing powers and functions of the London Stock Exchange
as the competent authority for listing, establishing a common
approach to the role of financial regulators in insolvency and
winding-up procedures and rationalising the existing provisions
controlling the disclosure of confidential regulatory information.
We recognise the importance of these issues but in the short time
remaining before we were required to report to the two Houses
were unable to examine or comment on these sections of the draft
13. The Bill includes extensive delegation of powers.
In this connection, we have been greatly assisted by the paper
produced by the House of Lords Delegated Powers and Deregulation
Committee which is printed as Annex B to our Report. That Committee,
in offering its comments, noted that "If the draft bill were
to be introduced in its present form, the Committee would have
to draw the attention of the House to a number of issues."
We discuss some of these issues in later paragraphs of our Report.
We recommend that in responding to our Report the Government
should respond also to the points made by the Delegated Powers
and Deregulation Committee.
14. The House of Lords Liaison Committee in a Report
agreed on 31 March welcomed the Delegated Powers and Deregulation
Committee's decision to submit a memorandum to our Committee on
the delegated powers in the draft Bill and hoped that that example
might be followed in future. "When a draft bill is made available
for pre-legislative scrutiny, it can only be beneficial for the
delegated powers to be made subject to scrutiny at an early stage."
15. A further problem relates to the skeleton nature
of the draft Billmany of the ultimate provisions will depend
on the content of the delegated legislation, some of which has
not yet been drafted. We accept this general approach, which balances
the certainty of a statutory framework against the flexibility
needed to regulate a fast-moving industry; but it poses particular
problems for pre-legislative scrutiny. Much also depends on the
outcome of the FSA's consultations: the FSA have already issued
21 Consultation Papers; their programme of consultation and response
extends throughout this year and into the next. The uncertainty
about the final form of many of the Bill's provisions has inevitably
made our task more difficult.
16. Finally, this draft Bill has raised several important
issues of compatibility with the European Convention on Human
Rights (ECHR). Following the passage of the Human Rights Act 1998,
the then Leader of the House of Commons told the House on 14 December
1998 that the Government wishes there to be a standing Joint Committee
on Human Rights, whose remit will include "the examination
of draft legislation where there is doubt about compatibility
with the ECHR".
On the basis of our experience, the two Houses should establish
a specialist Human Rights Committee as soon as possible.
17. We recommend below that the Government should
produce a written response on the ECHR issues raised by this draft
Bill as soon as possible. It is our intention to invite the Minister
to meet us again to discuss that response; we will then complete
our work by making a second report. We intend to do this before
the end of May.
1 Hereafter referred to as the draft Bill Back
Services and Markets Bill: A Consultation Document,
Part One, HM Treasury, July 1998 Back
Bar Association and Combar Spring Lecture, 3 March 1999 Back
Report from the Treasury Committee, Session 1998-99, HC 73. See
also Fourth Special Report, Government's Response, HC 347 Back
Notice No 2, 10 March 1999 Back
list of Appendices see Volume II Back
list of memoranda reported see Volume II Back
Services and Markets Bill: Additional Provisions Omitted from
July 1998 Draft, HM Treasury,
April 1999 Back
Report 1998-99, HL Paper 49, para 9 Back
4 and 61; Q 388 Back
Hansard, col. 604 Back