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Lord McIntosh of Haringey: I am afraid that I disagree about both non-executive directors and about market abuse. It seemed to me at the time and seems to me now that the amendments about non-executive directors appeared to be based on a misunderstanding of the role of non-executive directors. Noble Lords opposite have persistently referred to the functions of the non-executive directors committee, which is the committee comprised only of non-executive directors, while ignoring the fact that all of the points they were making were perfectly well covered by the role of non-executive directors as directors; in other words, as members of the board, which is wider than their responsibilities as members of the non-executive committee. That misunderstanding eviscerated the arguments for the amendments relating to non-executive directors. That is as true now as it was then.

When the noble Lord talks about the danger of confusion, I can say only that what I said at the outset seems entirely clear. There is a danger of confusion if we insert a reference to market abuse in this set of objectives, which is concerned only with regulated business or business that should be regulated. If we were to insert a reference to market abuse, we should appear to be restricting the FSA's objectives in the area of market abuse because the market abuse regime extends to the unregulated as well as to the regulated.

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Of course, it is possible, as the noble Lord said, that financial crime may reduce confidence in the markets. Financial crime such as insider dealing and market manipulation can damage markets and the interests of consumers. There is an overlap between the objectives, but not all financial crime damages market confidence and it would be as inappropriate to put market abuse under the heading of financial crime as it would be to put it under the heading of consumer protection.

3.30 p.m.

Lord Alexander of Weedon: Having heard two-thirds of this discussion, I ask the Minister whether he can indicate whether the point of anxiety as expressed by other noble Lords could be met if we added to Clause 3(1), which states:

    "The market confidence objective is: maintaining confidence in the financial system",

the words:

    "including the prevention of market abuse".

Lord McIntosh of Haringey: That seems to me to suffer from the same objections to which I have referred.

Lord Alexander of Weedon: I understand that Clause 3(1) not only applies to regulated activities but also to the activities of those who are not regulated. Therefore, that subsection could include a provision on the prevention of market abuse.

Lord McIntosh of Haringey: No, the objectives as set out in Clauses 3, 4, 5 and 6 are the regulatory objectives that are set out in Clause 2. Clauses 3, 4, 5 and 6 expand on the detail of those objectives but they do not go beyond the objectives that are concerned with regulated business or business that should be regulated. If the noble Lord or any other noble Lord were to table an amendment to that effect I would consider it with all due seriousness.

Lord Elton: Doubtless we shall return, with great pleasure, to this issue in Part VIII. In so doing I believe that we should have regard to the language used as it will impinge on those who are not professionals in this area or lawyers. As the noble Lord has said, Part VIII applies to the unregulated market and it applies a code of conduct, with the assistance of the courts, that will regulate that market quite tightly. It seems to me that we shall need another word to describe that when we get there. However, I do not want to delay matters at this stage.

Lord McIntosh of Haringey: As the noble Lord has put words into my mouth, perhaps I should make it clear that market abuse applies to the unregulated as well as to the regulated community.

Lord Kingsland: I am deeply disappointed with the series of replies that the Committee has received from the Minister. Tempted though I am to divide the Committee on this issue, I shall content myself with the

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task of reading his labyrinthine observations and return to the matter on Report. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 48 not moved.]

Lord McIntosh of Haringey moved Amendment No. 49:

    Page 2, line 18, leave out ("any exercise of its general functions") and insert ("anything done in the discharge of those functions").

The noble Lord said: Clause 2 sets out the FSA's general duties. The FSA's general duties are that in discharging its general functions under the Bill it must act in a way that is compatible with its objectives, as set out in Clause 2(2), and that it must have regard to the matters in Clause 2(3). The FSA's objectives concern the aims of regulation. The matters in Clause 2(3), commonly referred to as the "principles", condition the manner in which the FSA regulates.

Their effect is to act as checks on regulation, helping to ensure that the FSA regulates in the optimum way. Optimal regulation will rarely be the absence of regulation. Unless appropriate protections are in place, consumers will be loathe to trust their money to the industry. The result would be under-investment, under-insurance and too little saving in the economy.

Well regulated markets attract consumers; they are more efficient and more effective at doing their job, allocating resources within the economy to where they are best employed. However, one can have too much of a good thing. Over-regulation can have the same effect as under-regulation, driving out consumers, this time by increasing the prices that they must pay rather than the risks that they face.

The overall effect of Clause 2 is to help to ensure that we get the right amount of regulation--neither too much nor too little. Among the key things to which the regulator must have regard in achieving that is the need for players in the market to be able to engage in healthy competition. Healthy competition between firms is in the interests of consumers, firms and the industry itself. It is a vital element of economic growth.

Clause 2(3)(f), therefore, places the FSA under a duty to have regard to the need to minimise the adverse effects on competition that arise from any exercise of its general functions. The FSA has to consider carefully, whenever it makes rules, whenever it prepares codes, whenever it gives general guidance or whenever it determines its general policy, the need to come up with a result, in terms of how it regulates, that causes the least damage to competition. That is vital. Regulation, of necessity, will almost always have an effect on competition. That is simply the effect of imposing restrictions on people.

Government Amendment No. 49 is a technical amendment which makes a drafting change. At present Clause 2(3)(f) refers to the exercise of the FSA's general functions, which repeats what is said in the chapeau to the clause. I did not know what a chapeau to a clause was, but it is the centred, italic

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heading to be found above a clause which, strictly speaking, is not part of the Bill. The amendment just tidies up the drafting.

In the spirit in which I was urged to respond to an earlier amendment which had not been spoken to, perhaps I may be allowed to refer to Amendment No. 50, tabled by my noble friend Lord Eatwell, together with the noble Lords, Lord Taverne, Lord Newby and Lord Sharman. It would have the effect of deleting Clause 2(3)(g). That subsection was inserted into the Bill in another place in the light of the recommendations of Don Cruickshank's interim report on banking services. I have not checked on the concordance between the interim report and the final report, but the thrust of that report's recommendations was that the FSA should ensure that it takes full account of competition concerns in the way that it regulates.

Clause 2(3)(g) builds on the requirement in Clause 2(3)(f) to minimise adverse effects on competition by placing the FSA under a further duty to have regard to the desirability of facilitating competition between those it regulates as well. This is very much in line with the duty in Clause 2(3)(d) concerning the facilitating of innovation in connection with regulated activities.

Clause (2)(3)(g) requires the FSA, in going about its job, to consider whether there are ways of doing things which can make it easier for regulated firms to compete, just as it has to consider whether there are things that it can do to make it easier for firms to come forward with innovative products or ways of doing things. The whole area of transparency and giving consumers information, for example, is relevant to that principle. In deciding whether and in what form to publish aggregate information--for example league tables--it is right that the FSA should be influenced by the desirability of facilitating competition as well as the need to minimise adverse effects. In other words, it is about doing things rather than not doing things.

I must emphasise that that does not turn the FSA into a competition regulator, nor does it give it a function of promoting competition. That is not an objective. It conditions the way in which the FSA goes about meeting its objectives. I beg to move.

Lord Borrie: Perhaps it is convenient for me to speak to Amendment No. 50, which is grouped with Amendment No. 49, as my noble friend Lord Eatwell has asked me to move it on his behalf, together with those who have added their names to the amendment. My noble friend is unavoidably absent at the moment but may be present in the Committee later.

I believe that all noble Lords will agree that prudential regulation, to which a lot of this Bill refers, should not stifle competition. Clause 2(3)(f) deals with it by saying that,

    "In discharging its general functions, the Authority must have regard to ... the need to minimise the adverse effects on competition".

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However, as my noble friend Lord Eatwell has already emphasised, one of the key roles of the authority must be the management of risk. In response to my noble friend a few days ago, the Minister agreed that the management of risk is clearly part of the authority's statutory objective of securing market confidence.

Unfortunately, "facilitating" or "promoting"--I am not sure that I yet understand the Minister's distinction between those two activities--competition, as set out in paragraph (g) of this clause, may very well involve an increase in risk both to consumers and, indeed, to the financial system as a whole.

When the Financial Services Authority is properly seeking to protect the public against financial risk, in what way should it have regard to the need to facilitate competition? Does paragraph (g) mean that the authority should expose consumers to certain risks simply in order to facilitate competition? Does the Minister envisage extra risks for the consumer which he or the authority will be prepared to tolerate in order to assist competition?

To my mind, paragraph (f) is one thing, while paragraph (g) is another and they do not necessarily combine correctly in the Bill. Of course the authority should always test its activities against the criterion of any adverse effects they may have on competition. However, that is covered in paragraph (f) and also in the detailed competition scrutiny provisions set out in Part X and Part XVIII of the Bill, which we shall no doubt come to in a few weeks' time. In my view, what the authority should not be doing is promoting competition or, I suggest, facilitating it.

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