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Financial Services and Markets Bill

3.10 p.m.

Lord McIntosh of Haringey: My Lords, I beg to move that the House do now again resolve itself into Committee on this Bill.

Moved, That the House do now again resolve itself into Committee.--(Lord McIntosh of Haringey.)

On Question, Motion agreed to.

House in Committee accordingly.


Schedule 3 [EEA Passport Rights]:

Lord McIntosh of Haringey moved Amendment No. 121:

The noble Lord said: I turn to a very important part of the Bill for the financial community: the mechanisms whereby firms from other member states in the European Economic Area exercise their rights under various European directives and the treaty to carry on regulated activity on the basis of their home state authorisation. It also concerns the equivalent mechanism whereby UK firms can exercise their directive rights in other member states.

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The European single market represents a great opportunity for the UK financial services industry, which is the strongest and most competitive in Europe. It also increases the openness of the UK financial markets, to the benefit of those markets and the UK consumer. The amendments in this group relate to Schedule 3, which deals with the directives. We shall turn to Schedule 4 and treaty rights when we deal with the next group of amendments.

Government Amendments Nos. 121 and 123 concern Part III of Schedule 3 which sets out the arrangements for UK firms to passport into other member states. They tidy up provisions relating to the carrying on of insurance business by a UK firm exercising EEA rights that derive from the EC insurance directives. Amendment No. 121 replaces the defined term "main agent" in the context of firms operating on an establishment basis with language consistent with that used in the insurance directives. Amendment No. 123 removes the incorrect reference to "main agent" as the arrangements for authorised agents do not apply to an undertaking operating on a services basis.

I turn to Amendments Nos. 122 and 124 tabled by noble Lords opposite. Amendment No. 122 would make it a condition for an outgoing UK firm to exercise a passport right under the ISD to provide cross-border services (that is, without a permanent establishment in another member state) of which the FSA has notified the host state regulator. Amendment No. 124 would require the FSA to pass on a notice of intention to provide services within a month and to inform the firm that it has done so as soon as practicable.

We accept that those changes would be consistent with the directives and would make our implementation of the requirements more explicit. At present, it is intended to deal with those points using the rule-making power under paragraph 19(8) of the schedule. We shall consider further whether we should make changes along those lines, in which case we should also cover the position under the second banking directive. If we make changes along those lines we would probably also delete the rule-making power as it would be unnecessary.

On that basis, I would be grateful if noble Lords would not press those two amendments.

Lord Elton: Can the Minister tell the Committee the time-scale of the reconsideration that may involve the abolition of the rule-making power?

Lord McIntosh of Haringey: If it were to be done by an amendment it would have to be done on Report. If it were to be done within the rule-making power we could do it at any time.

Lord Kingsland: If I understand the Minister correctly, he is inclined to accept the substance of Amendments Nos. 122 and 124 but does not wish to

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put them on the face of the Bill. He would rather wait until they can be implemented through delegated legislation.

Lord McIntosh of Haringey: The matter is slightly more complicated than that. In the spirit of trying to be helpful, we have not yet decided whether it would be desirable to put it on the face of the Bill. We may be able to do it by using rule-making powers, but if we have to put it on the face of the Bill we are prepared to do so. Fundamentally, we agree with the objectives of the amendments and they raise a valid point.

3.15 p.m.

Lord Kingsland: I am obliged to the Minister. As he is aware, it is argued that both these amendments are necessary. They are not an optional extra. I see the noble Lord shrug so perhaps I should give my reasons why I think that is the case. If it turns out that the noble Lord has second thoughts, I shall wish to return to this matter on Report.

On Amendment No. 122, in our view Part III of Schedule 3 does not appear to reflect the requirements of the investment services directive. If those requirements are not complied with, the host state regulator can properly refuse to allow the passport to operate. If a United Kingdom firm thought that it was using the passport to avoid local authorisation requirements, it could be breaking the local law and, indeed, on the UK model it could find that its investment agreements are unenforceable.

That oversight relates to the notifications that need to be given under the investment services directive. Paragraph 19(1) of Schedule 3 provides that a UK firm can exercise an EEA right under the investment services directive as soon as it has given the authority notice of its intention to provide the relevant services. Only in the case of the insurance directives must it wait until the authority has given notice to the host regulator and told the firm that it has done so. With great respect to the Treasury, I believe that there has been an omission by the Government in that regard.

On my interpretation of the second-banking directive and the investment services directive, the position in relation to cross-border services is as follows: under Article 20(1) of the second banking directive a United Kingdom credit institution merely has to notify the authority and thereafter can use the passport. Article 20(2) provides that the authority must notify the competent authorities of the host member state within one month, but that is not a condition precedent to using the passport. That was confirmed by the Brussels Commission in Part C of its June 1997 guidance on the second banking directive.

However, the equivalent provision under the investment services directive--Article 18--is phrased differently. Like Article 20(1) of the second banking directive, Article 18(1) requires the United Kingdom firm to notify the authority. Article 18(2) provides that the authority must within one month notify the competent authorities of the host member state, as in

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Article 20(2) of the second-banking directive. However, crucially, Article 20(2) goes on to provide that the firm,

    "may then start to provide the investment service in question".

That clearly means that a United Kingdom firm cannot use its passport to provide cross-border services under the investment services directive unless it has notified the authority and the authority has actually notified the competent authorities of the host member state. That is what the amendment seeks to achieve.

The second-banking directive requires that the actual notification received by the authority must be sent and the investment services directive requires that the information received must be forwarded to the host state regulator. Therefore, merely notifying does not appear to be sufficient.

Amendment No. 124 imposes the obligation on the authority to inform the host state regulator within one month, as required both by the second-banking directive and by the investment services directive, and to tell the firm that it has done so. This latter requirement is to enable the firm, if it is an ISD firm, to know that it can now use the passport because the requirement in new paragraph 19(1)(b) has been fulfilled. There is no need for the authority to notify a firm under the second banking directive; but it seems sensible that the authority should tell the firm so that the firm knows that there will be no problem when it provides cross-border services in the host member state, even though, as is made clear in paragraph 19(1)(b), the freedom to provide cross-border services does not depend on that taking place.

Lord McIntosh of Haringey: I am grateful to the noble Lord for his detailed exposition of the two amendments. If I have failed to cover some of the points in my original speech, that is only because when moving my amendment I took the opportunity to speak before he had done so. However, I certainly do not claim that his amendments are not necessary and I should now like to consider how best to give effect to their substance. The noble Lord is quite right to say that we need to deal with the second banking directive at the same time. My point was only that when we are making these changes it could be that there will be other changes that we shall wish to make concurrently, including examining the possibility of doing away with rule-making powers.

The noble Lord made two points on which I should like to comment. First, as regards the risk of leaving UK consumers exposed, I should make it clear that the FSA will have the power to act if necessary, but it is only right that the main responsibility should lie with the EEA firm's home state authority. Secondly, on the question of whether the FSA can intervene against an EEA firm, the FSA can intervene using its powers in Part XII in respect of the passport activities. It can also intervene in the normal way in respect of any additional permissions under Part IV.

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The noble Lord's exposition of Amendments Nos. 122 and 124 will be most helpful when we consider our next move between now and Report stage. If we may, we should like to talk to the noble Lord about this in more detail, if he can spare the time.

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