Select Committee on Delegated Powers and Deregulation Seventh Report



SEVENTH REPORT


16 FEBRUARY 2000


By the Select Committee appointed to report whether the provisions of any bill inappropriately delegate legislative power, or whether they subject the exercise of legislative power to an inappropriate degree of parliamentary scrutiny; to report on documents laid before Parliament under section 3(3) of the Deregulation and Contracting Out Act 1994 and on draft orders laid under section 1(4) of that Act; and to perform, in respect of such documents and orders, the functions performed in respect of other instruments by the Joint Committee on Statutory Instruments.

FINANCIAL SERVICES AND MARKETS BILL

Introduction

Pre-legislative scrutiny

1.  This bill establishes a new statutory framework for the regulation of financial services in the United Kingdom. It establishes the Financial Services Authority[1] (previously called the Securities and Investment Board) as the single regulator for financial services.

2.  The bill has had a lengthy gestation period, and indeed has been the only public bill so far to have been subject to the new procedure whereby public bills may be "carried over" from one session of Parliament to the next, rather than falling at the end of the session.[2] The proposals were announced by the Chancellor of the Exchequer in May 1997, and in July 1998 the Treasury published a draft bill. The draft bill underwent particularly detailed pre-legislative scrutiny. Firstly, it was reported on by the Treasury Select Committee in the House of Commons, which heard oral evidence from the then Economic Secretary, Patricia Hewitt MP. Following that evidence the Government accepted several of the points which the Treasury Select Committee had put to Ms Hewitt during its enquiry.[3]

3.  More detailed pre-legislative scrutiny of the draft bill was carried out by a Joint Committee of both Houses, chaired by Lord Burns ("the Burns Committee"), constituted to scrutinise the draft bill. The Joint Committee also considered a progress report published by the Treasury in May 1999 in response to its public consultation on the bill. The Burns Committee published its first report in April 1999[4] and its second report in June 1999.[5]

4.  The Delegated Powers and Deregulation Committee considered a draft of the bill while it was being considered by the Burns Committee. We made a number of recommendations in our submission to that Committee dated 31 March 1999. This submission is published as Appendix 2 to this report.

5.  Our conclusions on the draft bill were as follows:

"The Committee has made recommendations for amendment of the draft bill in the following paragraphs of this report; paragraph 20, where we recommend the submission by the F.S.A. of an annual report to the Secretary of State, and for parliamentary scrutiny of this report; paragraphs 22 and 23, where we question the delegation of power in clauses 55(2) and 80(5) of the draft bill; and paragraph 30, where we suggest that orders made under clause 18 should be made subject to the affirmative resolution procedure.

In making these suggestions we are conscious that, in addition to the lack of parliamentary control, statutory immunity is to be granted not merely to individual officers or members of the F.S.A. staff but to the F.S.A itself. We believe the suggestions that we are making would go a long way to meet powerfully held anxieties about the nature and exercise of these F.S.A. powers and also in all probability reflect what the F.S.A itself would regard as good practice. Our current view is that the F.S.A. should only be granted powers which are not subject to Parliamentary control if protections along the lines we have indicated are included in the legislation. If the further protections we have recommended are not contained in the bill which will be presented to the House of Lords for second reading, then we reserve the right to report to the House at that time that the powers delegated to the F.S.A. in the bill represent an inappropriate delegation of powers."

6.  The Joint Committee commented as follows on the Committee's contribution:

"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.

7.  The Treasury welcomed and responded to our suggestions in its published response to the Joint Committee in June 1999, when the Bill was introduced into Parliament. In addition, in Annex 3 to the Treasury's excellent memorandum on the delegated powers in the bill introduced into this House, which is printed with this report, the Treasury lists each of the points we made in our original submission, together with the action which the Government has taken in response to each. The fact that the Government has responded so positively to each of our recommendations makes our present task much simpler than it otherwise would have been, even though the bill now looks very different to the draft bill we considered a year ago.

The effect and value of pre-legislative scrutiny

8.  The arrangements for pre-legislative scrutiny flowed from recommendations made by the Select Committee on Modernisation of the House of Commons in its First Report, on the Legislative Process, in July 1997.[6] Several departmentally related Commons committees, and one ad hoc Commons committee,[7] have reported on draft bills.

9.  The House of Lords has been involved in the pre-legislative scrutiny of three draft bills. Two draft bills have been considered by Joint Committees, and one by separate select committees of the two Houses. The three draft bills concerned have been as follows:

  • The draft Financial Services and Markets Bill;
  • The draft Local Government (Organisation and Standards) Bill was referred to an ad hoc joint committee of 8 peers and 8 MPs, which was appointed on 27 May 1999 and reported on 27 July 1999.[8] The Chairman was Lord Bowness;
  • The draft Freedom of Information Bill was referred to an ad hoc Lords select committee of 11 members which was appointed on 17 June 1999 and reported on 27 July 1999.[9] The Chairman was Lord Archer of Sandwell. The same draft bill was simultaneously considered by the House of Commons Public Administration Committee.

All three bills were considered last session. So far this session the House of Lords has not been involved in formal pre-legislative scrutiny.

10.  The Delegated Powers and Deregulation Committee commented on each of these draft bills.

11.  When reporting the ad hoc pre-legislative scrutiny Committees have commented on the mechanics of the procedure in which they were involved, including the tight time constraints under which they worked and, in the case of the Lords-only Committee on the draft Freedom of Information Bill, the desirability of operating by Joint Committees in future. Although each Committee has considered that the procedure was worthwhile, it is inevitably only at a later stage in the parliamentary process that the benefits of the procedure can be evaluated fully. However, the fact that once ad hoc Committees have reported they cease to exist means that these Committees are not able to evaluate the effect of their own work. As a result, there has to date been no systematic evaluation of the pre-legislative scrutiny procedure as it affects the House of Lords.

12.  Nevertheless, some general observations on the likely benefits of the procedure may be, and have been, made. As the Lords Committee on the draft Freedom of Information Bill commented:

"This ... pre-legislative scrutiny procedure ... is to be welcomed. It enables Parliament to make its views known to the government, and it enables the government to respond, more effectively than the traditional legislative process. A characteristic of the traditional procedures in modern times is the reluctance of governments of all political complexions to accept amendments to bills once they have been formally introduced into Parliament."

13.  Additionally, the Royal Commission on the Reform of the House of Lords observed of pre-legislative scrutiny that "apart from being more likely to produce better legislation, it should also reduce the chance of differences of view between the two chambers at a late stage in Parliamentary proceedings."[10]

14.  Now that the present bill has been introduced into the House of Lords it is possible to see how beneficial the pre-legislative scrutiny exercise has been. The Financial Services and Markets Bill was heavily amended in the light of the pre-legislative scrutiny it received. As the Treasury's memorandum states: "many helpful recommendations were made which have helped substantially to improve the Bill in many respects. Further improvements have been made as a result of consideration in Standing Committee and Report Stage during the Bill's passage through the Commons."[11]

15.  This is, of necessity, a large and complex bill, which now contains some 400 delegated powers. It now extends to over 400 clauses and 19 Schedules. As the Treasury's memorandum explains, "the delegation of powers through the Bill reflects the inevitable complexity of financial regulation and the need, against a background of markets continuously developing, in some cases very rapidly, for regulation to be able to adapt effectively."[12] We have no doubt that the pre-legislative scrutiny process has added considerable value to the parliamentary examination of this bill.

The present bill

16.  The Department's memorandum is a remarkable achievement. The bill was extensively amended in Committee and at Report Stage in the Commons and all those working on the bill must have been under intense pressure yet they have produced a memorandum of over 100 pages within a day of the first reading of the bill in this House. The memorandum is clear, comprehensive and well written and will be a valuable tool for those wishing to take part in the debates on the bill and serves as an introduction to the bill as a whole and not just to the delegated powers.

17.  The most significant feature of the delegated powers in this bill is that the majority are conferred not on Ministers but on the Financial Services Authority and are not subject to any form of Parliamentary control. The Committee considered this fact carefully at the pre-legislative scrutiny stage. We accepted in principle that the delegation of powers to the F.S.A. was appropriate, but only if this delegation were made subject to a number of safeguards. Our comments have led to changes which are discussed in Annex 3 of the Treasury's memorandum. These changes are significant. They include:

  • an obligation on the F.S.A. to submit an annual report to the Treasury, to be laid before Parliament - the Treasury will have power to ensure that each report covers the use of delegated powers;
  • the amendment of the bill to require a separation of functions within the F.S.A. between those responsible for bringing any disciplinary proceedings and the body responsible for adjudicating on these proceedings;
  • the amendment of the bill to make plain that compliance with the F.S.A.'s market abuse code is a "safe harbour" for commercial transactions;
  • conferring the power to define "private person" on the Treasury (rather than the F.S.A.) and making this power exercisable by statutory instrument.

Human rights

18.  For the most part we are satisfied with the way in which the Bill has been amended during the parliamentary process. But there is still concern over whether the substantial powers which are - rightly in our view - being delegated to the F.S.A. will be exercised in a way which will be compatible with the European Convention on Human Rights. As a public body the F.S.A. will be under a duty to be satisfied when exercising its rule-making powers on the compatibility of the resulting rules with the Convention rights. But in view of the concern about this we recommend that the F.S.A., in its annual report to be laid before Parliament[13] should include a statement that, in its view, the provisions of the delegated legislation it has made in the reporting period under the Financial Services and Markets Act 2000 are compatible with the Convention rights as defined in section 1 of the Human Rights Act 1998.

Clause 36

19.  Exemption orders under this clause are subject to negative procedure but paragraph 44 of the memorandum says that the Treasury are considering whether the first exercise of the power should attract affirmative procedure. The House may consider that an amendment of the Bill to that effect would be appropriate.

Clause 183

20.  This clause confers a Henry VIII power to amend the definitions relating to "control" in clauses 170, 171, 172 and 397. The bill provides negative procedure. While the Committee always examines anxiously the proposal that a Henry VIII power should not be subject to affirmative procedure this seems an appropriate case for negative procedure.

Clause 229

21.  Subsection (5) confers a power to define the boundaries of the term "collective investment scheme". The bill provides negative procedure but paragraph 170 of the memorandum says that the Government intends to introduce amendments to provide affirmative procedure "in certain cases". The Committee welcomes this.

Clause 240

22.  Subsection (5) confers a power to modify the rule-making powers conferred on the SA by the clauses. The bill provides negative procedure which the Committee considers appropriate for this limited power even though it could be regarded as a Henry VIII power.

Clause 256

23.  At present open-ended investment companies are established by and regulated under regulations made under the European Communities Act 1972. The clause confers a new power to make regulations for those purposes and to revoke the existing regulations. The power is a Henry VIII power (see subsection (3)(f) and (g)) and is clearly a licence for law-making in a specialised area of investment and company law. The bill provides affirmative procedure and that and the previous history suggests that this is an appropriate delegation of powers.

Clause 339

24.  Clause 338 places restrictions on the disclosure of confidential information by the Authority. Clause 339 allows regulations to create exceptions from clause 338. The power is wide and the Committee wishes to draw attention in particular to subsection (2)(d) allowing the disclosure of confidential information "by any recipient if the disclosure is ... for prescribed purposes". The Committee has commented in its Report on the Electronic Communications Bill on a very similar power in that bill: "The House may wish to consider amending the bill to restrict the powers in a way which clearly limits it to information needed for regulatory and other public functions." (5th Report, paragraph 5).[14] The Committee reports in similar terms on the power in Clause 339.

Recommendation

25.  The Committee wishes to draw to the attention of the House the width of the power in clause 339 to allow the disclosure of confidential information. We have recommended that the House may wish to consider amending the bill to restrict this power in a way which clearly limits it to information needed for regulatory and other public functions.

26.  We have also recommended that the Bill should be amended so that the first exercise of the power to make exemption orders under clause 36 should attract affirmative procedure.

27.  As a reassurance against concern over whether the substantial powers which are being delegated to the F.S.A. will be exercised in a way which will be compatible with the European Convention on Human Rights we recommend that the F.S.A., in its annual report to be laid before Parliament should include a statement that, in its view, the provisions of the delegated legislation it has made in the reporting period under the Financial Services and Markets Act 2000 are compatible with the Convention rights as defined in section 1 of the Human Rights Act 1998.

28.  There is nothing else in the bill which the Committee wishes to draw to the attention of the House.[15]


1  F. S. A. Back
2  Private bills are often "carried over" in this way. Back
3  Third Report from the Treasury Select Committee Session 1998-99, Financial Services Regulation (HC 73-I), paragraph 7. Back
4  Draft Financial Services and Markets Bill: First Report (HL Paper 50 I-II Session 1998-99, HC 328 I-II Session 1998-99). Back
5  Draft Financial Services and Markets Bill: Second Report (HL Paper 66 Session 1998-99, HC 465 Session 1998-99). Back
6  HC 190, Session 1997-98. Back
7  On the draft Food Standards Bill. Back
8  HL Paper 97. Back
10  Cm 4534, paragraph 4.33. Back
11  Paragraph 10. Back
12  Paragraph 11. Back
13  Under paragraph 10(3) of Schedule 1 to the Bill. Back
14  HL Paper 30. Back
15  This report is also published on the Internet at the House of Lords Select Committee Home Page (http://www.parliament.uk), where further information about the work of the Committee is also available. Back

 
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