Joint Committee on Financial Services and Markets First Report


  IV. SCOPE

63. "The main aim of the Bill is a single, coherent system that does not make unnecessary distinctions between different sectors of the financial services industry...However, where there are good reasons for change...the Government is willing to act....Many people have stressed the need to anticipate the rapidly changing nature of the industry ....the Bill ensures that this can be done, subject to approval by Parliament".[71]

64. Mr Davies, in referring to that Consultation Document, noted that the Bill "seeks to allow us the flexibility which will be needed to respond to changing markets in the future ... Financial markets change rapidly and regulation needs to adapt to those changes if it is to play its crucial roles of protecting customers and maintaining confidence in the financial system".[72]

65. The Bill has been drafted to cover a potentially very broad range of business. However, as the Government explained in its Consultation Document, it is its intention that the scope of regulation should broadly cover the type of business regulated at present. The scope of regulated activities is indicated in general terms in the Bill with the precise scope to be set out in secondary legislation. The Government promised when publishing its initial Consultation Document that a draft of the relevant statutory instrument would be published, at the latest, when the Bill was introduced. In fact the Treasury published a consultation document on regulated activities and the draft statutory instruments on 25 February 1999.[73] Responses are requested by the end of April.

66. Although it is not the Government's present intention to make major changes to the current scope of regulation, it has said that where there are compelling reasons to do so, such as in relation to Lloyd's, it will make changes to the existing regime. The Government has also made clear its intention to keep under review the case for including within the legislation certain activities which are not regulated at present. Areas for consideration include:

  • mortgage advice;

  • credit unions. The Treasury issued a consultation document on the regulation of credit unions in November 1998. The consultation period closed in February 1999 and the Government is currently considering the responses received;

  • pre­paid funeral plans. The Treasury issued a consultation document in January 1999. Responses are requested by 30 April; and

  • long-term health care insurance. The Government is considering the regulation of long­term health insurance in the light of the recommendations made by the Royal Commission on the Long Term Care of the Elderly, chaired by Sir Stewart Sutherland, which reported in March 1999.[74]

Other activities, currently excluded, are general insurance, motor insurance, occupational pension schemes, credit cards and other unsecured credit.[75]

67. Changes will also be made to the regime applying to professionals, such as solicitors and accountants, who at present may be authorised by their professional bodies to carry out investment business incidental to the practice of their profession. The Government is proposing measures to reduce unnecessary authorisation of professionals. Those professionals who will still require authorisation must be authorised by the FSA. The Government expects "this change will ensure an overall reduction in the number of authorised persons, while maintaining high standards of investor protection".[76]

68. Eight professional bodies in a joint submission to our Committee[77] indicated their support for the aims of the proposals as specified in the consultation document and for the Treasury objective that "the costs of regulation [should] be proportionate to the benefits" but expressed concern that the detailed provisions of the draft Order do not appear to achieve these policy objectives. While agreeing that professional firms which intend to provide mainstream investment business services should be authorised by the FSA, they seek to ensure that the legislation "does not fetter the ability of clients to discuss their affairs freely with their chosen professional adviser."[78]

69. In its report on the draft Bill, the Treasury Select Committee concluded that the definition of "financial advice" needed to be drawn as narrowly as possible to prevent unnecessary regulation.[79] The Government, in its Response,[80] agreed that it was important that the definition of regulated activities was sufficiently clear to avoid, as far as possible, people having to be authorised unless it was necessary for the protection of consumers.

70. It has been suggested that, despite the intention to draw the definition of financial advice as narrowly as possible, some 20,000 professionals will have to register. This seems likely to overwhelm the FSA. We did not have sufficient time to explore this issue in oral evidence. We support the Government's intention to ensure that authorisation is not required unnecessarily and urge the Treasury to ensure that its intentions are carried out.

Regulated activities

71. The Regulated Activities Order will be made pursuant to Clause 11 of, and Schedule 2 to, the draft Bill, which together set the parameters of what may constitute regulated activities under the new regime. The draft Order sets out in detail the activities which will be required to be regulated, and broadly covers those activities currently subject to regulation under the existing banking, insurance and financial services legislation.[81] It is under these provisions that other activities such as mortgages or long­term health insurance could be brought within the scope of the Bill. Views on whether regulation should be extended to cover them were mixed.

72. In making decisions about bringing other activities within the scope of the Bill it will be helpful to establish some principles. Mr Davies[82] said that he would want to ask a series of questions, "Is it something where the costs of being locked into the product are so high that the decision is very important to start with? Is it something which is characterised by many repeat purchases?" We have looked at the question of widening the scope to other activities with such principles in mind, particularly the complexity of the product, and the length of the contract.

MORTGAGES

73. In 1998 there were approximately 1.1 million new mortgages for home purchases; with remortgages, further advances and top­ups included the total would be nearer 1.8 million. Mortgages are therefore one of the largest categories of long­term financial products purchased by retail consumers.[83]

74. The Government announced in April 1998 that the case for regulating mortgage business would be regularly reviewed by Ministers. The first review would take place before the Bill comes into force. In the meantime the Treasury would be monitoring the Code introduced by the Council of Mortgage Lenders (CML) in July 1997 to see whether it could deliver the Government's objectives without statutory intervention. Whether statutory mortgage regulation is introduced "will depend upon a number of factors, including the extent to which the Code secures good quality advice for prospective borrowers ... and provides remedies for borrowers' legitimate grievances."[84]

75. We received various views about the extension of regulation to cover mortgages. The Building Societies Association (BSA) argued that conduct of business regulation should not be extended to mortgages. It believed that the CML Mortgage Code and the joint BBA/BSA Banking Code provided appropriate safeguards for consumers and could be readily amended where necessary. Bringing those areas into statutory regulation would create very significant costs of compliance which would have to be passed on to consumers.[85] The BBA and the ABI, in a joint submission, considered it very important that the regulatory regime under the Bill should provide an appropriate level of consumer protection, "taking into account, inter alia, the nature of the financial services in question and, where appropriate, the existence of alternative means of regulation, such as industry codes of conduct. The conduct of mortgage business is currently governed by such a code of practice....All significant mortgage providers adhere to the Mortgage Code and, since last year, mortgage intermediaries have also been covered by the Code. We consider it to have been an effective alternative to statutory regulation and the changes to the compliance machinery for the Code, currently in the pipeline,...will further enhance its effectiveness." [86]

76. The CML emphasised its belief that the regulatory framework for selling mortgages must deliver sufficient consumer protection in an effective and cost effective way. In its view the Mortgage Code provides such a framework and it is a secondary issue whether regulation should be on a voluntary or statutory basis in the longer term.[87] The Law Society of Scotland supported the CML's approach to the evolving nature of mortgage regulation.[88] It appears to us, however, that the trend is moving away from voluntary to statutory regulation. The CML is disappointed that the Government has decided to remove the option of giving power to the FSA to endorse voluntary codes. Endorsing the Mortgage Code would, it argued, have been a way of ensuring that the FSA could influence future developments in mortgage market regulation.[89]

77. The Kensington Mortgage Company (KMC), the first "non­conforming" mortgage company to sign up to the Council of Mortgage Lenders Code of Mortgage Lending Practice, in its memorandum to our Committee, argued that "Voluntary regulation is ineffective because by definition not all lenders and mortgage intermediaries fall within it." Effective disclosure and transparency were essential if customers were to be able to make informed choices about suitable products and customers would be unable to make like­for­like comparisons unless the whole industry adhered to the same standards.[90]

78. The Consumers' Association, in its response to the July 1998 Consultation Document, said that "Entering into a mortgage is one of the major financial decisions consumers make and to leave that market outside the statutory framework seems a startling omission....Statutory regulation should not be taken to mean detailed prescriptive regulation in every case, but universal coverage would give consumer confidence that the FSA is indeed a single regulator for the whole of the financial services market. Furthermore it would allow the FSA to effectively punish those firms which did not comply with the rules. A major drawback of self regulatory codes is that the only real sanction available to those operating the code is to expel firms from the market. This nuclear option is seldom used."

79. The FSA Consumer Panel considered that "Despite the Government's rhetoric it is regrettable that the Bill fails to provide a one­stop shop for consumers in terms of the FSA's scope." It recommended that the remit of the FSA be extended to include mortgages and long­term care insurance. While recognising that the Treasury is waiting to evaluate the effectiveness of the Mortgage Code, the Consumer Panel recommended that mortgages should be included from the outset. Their reasons included: that a mortgage is one of the most significant financial transactions people make; that the choice between mortgages is bewildering and complex; that a voluntary body is unlikely to be able to take effective action against large companies who are non­compliant; that it is difficult for the FSA and non­statutory bodies to work together to provide effective consumer protection because of information sharing problems; and the growth in new types of home income plans, many of which are on the boundary between investment products which the FSA will regulate and mortgages that may fall outside the FSA's scope.[91]

80. "Most mortgage providers....are already regulated by the FSA as are those mortgage advisers who also give financial advice on investments. But this regulation does not currently extend to mortgage advice....In addition, a large number of firms who currently do not give investment advice and hence are not regulated by the FSA....give mortgage advice to their customers."[92] The FSA found it difficult to be precise about the number of firms which would be affected. Around 20,000 currently provide advice on mortgages and they suggested that of these 20,000 firms "a few thousand who are not currently authorised for investment business might seek authorisation for mortgage advice; others might choose to become appointed representatives of mortgage providers; and no doubt some firms currently providing mortgage advice would choose to cease that activity if it became subject to statutory regulation."[93]

81. The FSA thought that the total cost of regulating mortgage advice could be substantial, with the final sum depending in part on whether the regime applied only to loans for home purchase or whether it included all loans secured on people's homes. The costs would include additional compliance costs and an increase in the FSA's own costs which are in turn met by fees levied on regulated firms. The FSA's initial assessment was that the regulation of mortgage advice could require an additional 100-200 FSA staff.[94]

82. The Minister confirmed that issues about scope would be dealt with under secondary legislation and that a final judgement did not therefore have to be taken at the point where the Bill was introduced. "It is something we have to make a final judgement on when we come to publish and introduce the secondary legislation that will determine the scope of the Act and, therefore, we can make this decision later in the year."[95]

83. The Bill requires the FSA in deciding on any extension of its scope to go through cost-benefit analysis, both of its own costs and industry's costs, and to explain why it is that the examples of consumer detriment that it might find would be corrected by the new regulatory framework.[96] The FSA has not yet done that analysis in relation to the mortgage code because the CML code is new. "We will need to go through a process of looking at how far the CML code has dealt with the kind of problems that there were in the market and whether going beyond that into our regulation would achieve a better outcome at a reasonable cost."[97]

84. We are persuaded by the arguments of the Consumer Panel and the Consumers' Association that mortgages should be included from the outset. We recognise the importance of the transaction, the complex choice that is now available between fixed and variable rate mortgages, the wide range of initial discounts that are on offer, and the associated penalties for early repayment in some circumstances. Therefore we recommend that a decision in principle be taken now to bring mortgage advice within the scope of the FSA. We recognise that the timetable for implementation will have to take into account the need to manage the appropriate transfer from a voluntary code to statutory regulation and the availability of regulatory resources.

LONG­TERM CARE INSURANCE

85. The Consumer Panel also raised the position of long­term care insurance, endorsing the view of the Royal Commission on Long term Care that long­term care insurance should be subject to conduct of business regulation by the FSA because most purchasers will be financially naïve; there will be scope for high pressure selling to people who are elderly and vulnerable; there will be a limited number of products on the market; and many financial advisers will not have sufficient knowledge of the benefit system to give full advice.[98]

86. The IFAA regarded the current unregulated status of long­term care products as "a scandal" and welcomed the fact that new products and developments could be brought within the scope of the regulatory system without the need for further legislation.[99] It also suggested a finessing of the current proposals and offered a third option between either regulating in­house or not regulating at all: "Allow voluntary regulators to regulate under an inspection and systems control regime created by the FSA." The IFAA argued that such a system would not have too great an impact on the structure of the FSA but would ensure effective and structured regulation in areas which are deemed to be of lesser risk. "While the intellectual argument for the current Bill is the 'one stop shop', intermediaries who trade across the borders of financial services, mortgages and general insurance will face three regulators and three lots of costs. More importantly their clients will face a confusing array of regulators and complaint schemes."[100]

87. We agree that long-term care insurance should be included. For the most part this would involve extending the product coverage within the regulated sector. We agree that a decision in principle should be taken and that it should be implemented without delay.

GENERAL INSURANCE

88. At present proposed regulation of general insurance is limited to the authorisation and prudential oversight of insurance companies and Lloyd's and to certain other proposals in relation to Lloyd's provided for in Part XVI of the draft Bill. "Following consultations in 1998 on the need for statutory regulation of insurance brokers and other general insurance intermediaries, the Government is looking to the insurance industry to develop effective voluntary standards of professional practice that will command widespread support. It has been encouraged in this regard by the work done towards creating a General Insurance Standards Council (GISC)....Under proposals made by the insurance industry for this standards body, membership of the Financial Services Ombudsman Scheme will be a pre-condition of GISC membership."[101] We welcome this development.

OTHER FINANCIAL SERVICES

89. Although we do not recommend that any other activities should be brought within the ambit of the FSA at this time, we recognise that the concept of a one-stop shop is an important development for consumers. We therefore expect the FSA to put in place a system of signposting to ensure that consumers concerned about any financial service are directed to the appropriate body if an activity about which they are concerned does not come within its remit.

Lloyd's

90. "The Lloyd's insurance market is currently regulated for solvency purposes by the Treasury. Other aspect of Lloyd's business are regulated by the governing body of Lloyd's, the Council, under powers conferred on it by the Lloyd's Acts 1871-1982. The Government believes that holders of insurance policies at Lloyd's should enjoy the benefits of the same kind of supervisory regime as those with policies issued by other insurers. A greater independent element in the oversight of Lloyd's is long overdue. The Bill therefore gives the FSA extensive intervention and authorisation powers over Lloyd's."[102] The Government has agreed with Lloyd's a process whereby the supervision and regulation of Lloyd's includes a statutory base and the Bill provides for external oversight of that regulation.[103]

91. We understand that many of the professional operators of Lloyd's market consider it regrettable that the Lloyd's Acts cannot be repealed or amended to permit the regulation of the Lloyd's market by the FSA. Mr Jonathan Agnew, Executive Chairman of LIMIT plc and a former member of the Council of Lloyd's, for example, noted that the regulation of Lloyd's is still governed by a series of Lloyd's Acts, the most recent of which is the Lloyd's Act 1982. "Some of you on this Committee may think it inappropriate that a collection of commercial businesses in a period of rapid change should be governed by an Act which was passed at a time 17 years ago which long predated the present situation of Lloyd's and the present state of the insurance market."[104]. Mr Agnew suggested that public legislation to amend or repeal the Lloyd's Acts would be hybrid[105] or even that they could be amended only by a further private Act promoted by the Council of Lloyd's, a view which appeared to be shared by the Minister.[106]

92. Mr Agnew proposed that the Bill should be amended to allow the Treasury, on the written application of Lloyd's, and with the approval of the FSA, to amend by secondary legislation any provision of the Lloyd's Acts which concerns the regulation of Lloyd's.[107] The Association of Lloyd's Members expressed concern about this suggestion. While recognising that the 1982 Act restricts Lloyd's in many ways, "some of which may be commercially disadvantageous", they believe that it also contains vital safeguards for members of Lloyd's. They therefore suggest that any amendment to the Act should be required to have been previously approved by a substantial majority of the members of Lloyd's. "A further essential safeguard would be that any amendment should be approved in advance by the FSA."[108] We have not had the opportunity to take further evidence on this issue and are therefore unable to make a recommendation. However, we have noted Mr Agnew's proposal and we recommend that the Treasury give it active consideration before introducing the Bill.

Territorial scope

93. In its July Consultation Document the Government stated that "The FSA will be responsible for regulating business conducted in the UK by overseas firms....[it] will also be responsible for the regulation of all the regulated business conducted by firms that are based and run from here."[109] Several responses to the Consultation Document queried the territorial scope of the Bill and in particular expressed concern that Clause 8 of the Bill as drafted would imply a significant extension of the UK's regulatory jurisdiction in respect of regulated activities carried on abroad by businesses based here. The Government has confirmed that it is not its intention to extend the territorial scope of the current investment business, banking and insurance regimes and that this would be clarified.[110] In the Consultation Document on regulated activities it has therefore reproduced the dual approach of the current Section 1(3) of the Financial Services Act 1986 with an outward or "from the UK" element and also an inward or "in and into the UK" element. We welcome the intention to clarify this matter though as the consultation process on the draft Order has not yet been completed do not feel competent to comment on whether it will in fact meet the concerns which have been expressed.

94. Another aspect of scope touches on the provision of investment advice given by solicitors in Scotland. The Law Society of Scotland, while recognising that financial services regulation is a reserved matter for the Westminster Parliament, observed that the Scottish Parliament would have responsibility for the regulation of Scottish solicitors. At present the Bill seeks no amendments to the existing primary legislation governing Scottish solicitors.[111] Ms Hewitt confirmed that "the regime we are setting in this Bill will be a United Kingdom­wide regime" but added that the Government would be looking at what amendments might be needed to legislation such as the Solicitors (Scotland) Act 1980 to ensure that it achieved the single financial regulator that it wants.[112] We invite the Government to indicate how it intends to ensure that Scottish solicitors, in common with members of the other professions, are not faced with unnecessary regulatory overlap.

Double Jeopardy

95. The market abuse regime overlaps with criminal offences on insider dealing and market manipulation and also with rules applicable to authorised and approved persons. We received some evidence to the effect that this raises the issue of double, or multiple, jeopardy. The Treasury argued that the creation of a single regulator significantly reduces the exposure of firms to multiple jeopardy from the different constituent organisations of the FSA. In addition the FSA, together with other investigative and prosecuting authorities, is currently working on draft guidelines covering the investigation of cases which might be of interest to two or more agencies. "The intention behind the guidelines is to ensure close liaison and co-operation between these agencies, and to avoid any unnecessary duplication of effort." The Treasury have given us more detail of their proposals in this area.[113] We consider this to be a sensible and workable approach.

Financial Promotion

96. The new financial promotion regime proposed in the draft Bill seeks to rationalise and modernise the legislative framework for financial promotions in the UK. In considering its approach the Government has also focused on how to deal with "questions posed by recent developments in technology, such as the advent and increasing use of the Internet, scripted messages and multi-media communications." One of the Government's main aims for the new financial promotion regime is to avoid, as far as possible, discriminating between different communications media and also to ensure that legislation is sufficiently flexible to adapt to further technological changes.[114]

97. The Real Time Club expressed concern about several aspects of the Treasury's consultation documents on financial promotion and regulated activity. It regarded the FSA's demand for extra-territorial jurisdiction as "technically and legally unenforceable" and the proposal that the FSA should have power to require the removal of any promotional material from the Net without any provision for appeal to the Courts as "overly draconian."[115]

98. The changing nature and growth of communications pose challenges to the regulatory authorities which seem likely only to increase in the future. We recommend that the Government should carry out a review of these likely challenges and ways of dealing with them.


71  Financial Services and Markets Bill: A Consultation Document, Part One, Chapter 3 Back

72  FSA: Meeting our responsibilities, August 1998, p5 Back

73  Regulated Activities-A Consultation Document, February 1999 Back

74  Cm 4192 Back

75  Appendix 1 Back

76  Regulated activities-A Consultation Document, HM Treasury, February 1999, para 1.3 Back

77  The Institute of Chartered Accountants in England and Wales (ICAEW), The Institute of Chartered Accountants of Scotland, The Institute of Chartered Accountants in Ireland, The Association of Chartered Certified Accountants, The Law Society, The Law Society of Scotland, The Law Society of Northern Ireland, The Institute of Actuaries Back

78  Appendix 39 Back

79  Op cit, para 50 Back

80  Fourth Special Report from the Treasury Committee, Session 1998-99, HC347 Back

81  Op cit, para 2.1 Back

82  Q 67 Back

83  Appendix 8 Back

84  HC Debs, 7 April 1998, col 149Back

85  Appendix 23 Back

86  Appendix 13 Back

87  Appendix 29 Back

88  Appendix 48 Back

89  Appendix 29 Back

90  Appendix 45 Back

91  Appendix 10 Back

92  Appendix 8 Back

93  Ibid Back

94  Appendix 8 Back

95  Q 124 Back

96  Q 65 Back

97  Q 65 Back

98  Appendix 10 Back

99  Response to consultation document Back

100  Appendix 37 Back

101  Appendix 1 Back

102  July Consultation Document, Part One, para 16.1 Back

103  Q 135 Back

104  Q 176 Back

105  Bills which are declared "hybrid" are subject to extended proceedings in Parliament Back

106  QQ 135, 176 Back

107  Q 176 Back

108  Appendix 17 Back

109  July Consultation Document: Part One, para 3.6 Back

110  Treasury Progress Report, para 9.2 Back

111  Appendix 48 Back

112  Q 123 Back

113  Appendix 62 Back

114  Consultation document on Financial Promotion, March 1999 Back

115  Response to Treasury's Consultation Documents on Regulated Activities and Financial Promotion Back


 
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