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House of Lords

Friday, 16th March 2001.

The House met at eleven of the clock: The LORD CHANCELLOR on the Woolsack.

Prayers--Read by the Lord Bishop of Hereford.

Financial Services and Markets Act 2000 (Regulated Activities) Order 2001

Lord McIntosh of Haringey rose to move, That the order laid before the House on 27th February be approved [9th Report from the Joint Committee].

The noble Lord said: My Lords, with the leave of the House, I should like to speak also to the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 and the Financial Services and Markets Act 2000 (Exemption) Order 2001.

Those of us who carry the campaign medals from the Financial Services and Markets Bill 2000 will recall that, complicated though the primary legislation was, the regulations which were to follow the primary legislation threatened to be even more complicated. We now come to Parliament with the secondary legislation under the Financial Services and Markets Act.

The Financial Services and Markets Act 2000 provides a far-reaching overhaul of financial services regulation. It establishes the Financial Services Authority as a single statutory regulator of UK financial services. In place of nine regulators, there will be one. In place of eight dispute procedures, there will be one ombudsman. In place of five compensation schemes, there will be one. That will benefit both practitioners and consumers. The Financial Services and Markets Act was subject to a great deal of consultation and scrutiny both within Parliament and outside. I do not need to detain your Lordships with the history of that.

We are making good progress on the implementation of the Act. We are seeking Parliament's approval, including through this debate, of seven statutory instruments--the orders before the House are the first three--which will set the boundaries of the new framework for financial regulation. The instruments will, between them, define the extent of FSA regulation, the framework for the marketing of financial services and the provision of financial services by professional firms. We also expect to seek shortly Parliament's approval of a number of other statutory instruments. Those will complete legislation under the Act on market abuse, recognition requirements for clearing houses and investment exchanges and appointed representatives of authorised persons.

The Economic Secretary to the Treasury was able to announce on Wednesday the latest date on which the main provisions of the Act will come into force, a date

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known in financial services jargon as N2. In doing so, she took into account the need for firms and consumers to enjoy the benefits of the regulatory framework as soon as practicable, balanced against the need to give financial services firms a reasonable time to prepare between announcing a firm date and N2. She announced our aim that N2 be no later than the end of November this year. As soon as she is in a position to announce the actual day of N2, she will do so. I should make clear that this is not an aspiration or a working assumption. Firms should prepare for N2 on that basis.

The legislation for which we are seeking parliamentary approval will enable the FSA to finalise many of its rules and give financial services firms greater certainty about how the Financial Services and Markets Act will affect them. On the basis of our continuing to make progress, I understand that the FSA expects to be in a position to make the key provisions of its rule book no later than the end of July. I should add that while the target for N2 means that the main provisions of the Act will come into force no later than the end of November, there will be some variations to that.

In respect of mortgages, given that this is an activity which has not hitherto been subject to regulation, it is appropriate to give the FSA and mortgage lenders more time to prepare for regulation. We intend regulation of mortgages to begin nine months after N2. In respect of funeral plan contracts, we intend the relevant provisions to come into force on 1st January 2002. Deposit taking by credit unions will also be regulated for the first time under the Financial Services and Markets Act. That will take place from 1st July 2002.

Finally, on implementation, a number of the provisions of the Act will need to be commenced prior to N2. For example, the FSA itself will have to be established in order to make its rules. The Financial Services and Markets Act Tribunal will also need to be established in order to begin its work of determining cases arising, for example, from certain applications before N2 for authorisation after N2. The provisions to be commenced early will be set out in commencement orders in the usual way. Some provisions--the powers to make statutory instruments and interpretative provisions--have already been brought into force by the first commencement order.

I now turn to the orders which are the subject of this debate. It is no exaggeration to say that the regulated activities order is the most important piece of secondary legislation under the Financial Services and Markets Act. It defines the scope of what is to be regulated by the FSA. The regulated activities order was issued twice for public consultation: once in February 1999 and then again in October last year. The order sets out the activities and investments which will be subject to regulation by the FSA, and which are, under existing legislation, contained in different financial services, banking and insurance legislation. Having all the regulated activities specified in a single order will be one of the key benefits of the new

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framework and will be appreciated, in particular, by the estimated 665 firms which are currently subject to authorisation by more than one regulator.

The boundaries of FSA regulation are to be set by Treasury Ministers accountable to this House. The Act provides various accountability mechanisms for the FSA itself. But we should be clear that the scope of what the FSA regulates is a matter firmly reserved for Ministers. Moreover, if Ministers wish to extend the scope of FSA regulation where it had not hitherto applied, that requires, as with this debate, an affirmative resolution process with a debate and vote in both Houses of Parliament.

I turn now to the scope of regulation set out in the regulated activities order. It is fair to say that in nearly all cases the order brings about only small changes to the existing scope of regulation. Thus, for example, Article 25(2) of the order states:


    "Making arrangements with a view to a person who participates in the arrangement buying, selling, or underwriting investments ... (whether as principal or agent) is also a specified kind of activity".

This provision is substantially derived from paragraph 13(b) of Schedule 1 to the Financial Services Act 1986. But we have introduced a new exclusion for arranging deals in investments, where the arrangements merely provide the means where one party to a transaction is able to communicate with other such parties. This change, although highly technical and specific, is designed to ensure that information transmitters, such as telecommunications companies and Internet service providers will not be regarded wholly as arranging deals in investments. This change is not untypical of the adjustments we have made to many of the provisions of the regulated activities order compared with existing legislation.

Perhaps I may draw the attention of the House to areas of significant change in the regulated activities order. The order brings into the scope of FSA regulations for the first time mortgages, pre-paid funeral plans, stakeholder pension schemes and aspects of Lloyd's insurance. The grounds for bringing these activities into regulation vary for each activity, but in all cases it will, if necessary, enable a different balance between the interests of firms and consumers to be struck compared with the absence of regulation. And, if redress is necessary, regulation will provide easier means of redress for consumers.

We have also introduced a new risk management exclusion which is designed to replace the permitted person regime in the Financial Services Act. These new areas of regulation were of course subject to consultation with those affected. The regulated activities order will reduce the scope of regulation in other cases. These are in relation to, first, the issue of debt securities, where we have excluded from the scope of deposit taking sums received in consideration for the issue of debt securities over one year; where the securities have a maturity of less than one year, we have excluded from the scope of deposit taking such sums only where the securities are offered to professional investors and have a minimum denomination of £100,000.

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Secondly, the order will reduce the scope of the activity of arranging deals in investments, for the reasons that I have given previously. Thirdly, we have also reduced the scope of regulation in relation to vehicle breakdown insurance, where we have removed the requirement that such insurance be normally available throughout the mainland of Great Britain, for the exclusion from the activity of effecting and carrying out contracts of insurance to apply. We are satisfied that in those areas where the scope of regulation is being reduced, consumer protection will not be prejudiced.

I shall turn more briefly to the exemption order and the business order. In my view, the provisions of the regulated activities order, and of the business order and the exemption order, are compatible with the convention rights within the meaning of the Human Rights Act 1998. The exemption order, as its name suggests, exempts from the requirement for FSA authorisation, named persons in respect of classes of regulated activity or, in some cases, particular regulated activities. There are bodies for which authorisation by the FSA would be either inappropriate or unnecessary. In almost all cases, these are bodies which are carrying out some kind of public policy function such as the Bank of England or a tourist board. Alternative mechanisms exist, therefore, of ensuring that they undertake regulated activities in a way which does not damage the interests of consumers. Moreover, as public policy bodies, potential competition concerns from their exemption from FSA authorisation do not arise.

Our intention under the exemption order has been broadly to ensure that those persons who were exempt under previous legislation do not need to seek FSA authorisation. In a number of cases, however, it has not been necessary to provide a specific exemption where one had been provided previously. That is, first, because the test for whether a person is carrying on regulated activities in the first place, and hence might conceivably need an exemption, is that they do the activities by way of business. We have concluded that in a number of cases, for example, Church bodies, this is not the case.

Secondly, it makes no sense under a single regulator of financial services for persons to be authorised in respect of some activities and exempt in others. Under the new regime, a person's Part IV permission can simply be extended to take account of activities for which they were previously exempt. Having said that, we do not wish the provisions of the Act to apply to the activities of persons who will be authorised under the new regime, but who had an exemption for certain activities under previous legislation. This has been achieved via an exclusion in the regulated activities order.

Thirdly, some exemptions have been removed because they are no longer necessary. An example is that for nationalised industries accepting deposits from other nationalised industries. Lastly, some exemptions have been updated to reflect wider developments; for example, developments in the gas and electricity markets.

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Finally, I turn to the business order. As I have already said, a person is carrying on regulated activities only if he does so by way of business. That term is not further defined in the Act and will have its usual meaning. But there are circumstances where, although a person might otherwise be regarded as carrying on activities by way of business for the purposes of FSA regulation, we wish to deem him not to be doing so. The converse also applies: there are circumstances in which somebody would usually be regarded as not carrying out an activity by way of business, but we wish to regard him as in fact doing so.

Existing legislation on banking, insurance and investment services each has slightly different business tests. We have therefore used the business order to, in effect, retain the business tests for predecessor legislation. This will make easier the transition to the new framework for all financial services firms as the business tests with which they are familiar will continue to apply.

I have been informed that the City Liaison Group has asked the Treasury to clarify a few technical points on the regulated activities order, and I shall ask Treasury officials to clarify those points in due course.

Finally, I should draw the attention of the House to one section of the business order which implements one of the recommendations by Paul Myners in his report to the Chancellor on institutional investment. The change will enable the trustees of an occupational pension scheme to invest in an authorised fund which invests in private equity without the trustees themselves having to be authorised. This change is fully in line with the Government's objective of encouraging greater investment in private equity. I commend the change, the business order, the regulated activities order and the exemption order to the House. I beg to move.

Moved, That the order laid before the House on 27th February be approved [9th Report from the Joint Committee].--(Lord McIntosh of Haringey.)


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