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Lord Newby: My Lords, I am grateful to the Minister for his detailed explanation of the orders. Those of us who sat through the long discussions on the Bill find it fascinating to return to these issues.

I have only one substantive point to make on the orders. It relates to the question of mortgage intermediaries and mortgage advice. Noble Lords may recall that there was much discussion when the Bill was passing through the House about the whole question of bringing mortgages within the scope of the Bill and about the point at which that activity should be regulated. The problem at the moment is that neither mortgage intermediaries nor those giving advice on mortgages are to be regulated. We are in the interesting situation where the industry wants more rather than less regulation in this area; it wants these two categories of people to be brought within the scope of the legislation.

So far as concerns mortgage intermediaries, about half of all borrowers seek advice from intermediaries before approaching a particular lender. My

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understanding is that the FSA has suggested that one way forward would be to make a rule requiring lenders to take responsibility for ensuring that mortgage intermediaries comply with the FSA's rules for lenders on providing borrowers with pre-sale information. However, this proposal has met with widespread opposition from lenders and intermediaries alike, because it is really regulation by the back door. It would be costly and wasteful. The FSA believes that if there should be control over what information intermediaries provide, it should be in a position to regulate that process by authorising intermediaries directly.

The second, broader, issue concerns the fact that there is no provision for the regulation of mortgage advice. Again, the consultation has suggested fairly unanimously that this should be brought within the scope of the Act. My recollection is that when we were looking at these two different areas when the Bill was passing through the House, the strong advice that we had from the Treasury and the FSA in relation to mortgage advice was that it should not be brought into the scope of the Bill at that stage because it would place a considerable additional burden on the FSA in terms of the range of businesses that were being regulated and that the matter should be left for the time being and looked at later.

In view of the preponderance of advice and opinion within the mortgage industry that mortgage advice and mortgage intermediaries should be brought formally within the firm regulatory framework of the FSA, can the Minister say where discussions have got to on these issues and, secondly, whether, in the light of the consultation, there will be a serious look at bringing these two areas of activity within the scope of the regulations?

11.15 a.m.

Lord Kingsland: My Lords, yesterday, in the 10th Standing Committee on Delegated Legislation in another place, a very full debate took place on these three orders between my honourable friend Mr Howard Flight and the Minister, Miss Melanie Johnson. In those circumstances, nothing would be gained by rehearsing what was said in every detail. That is, of course, on the assumption that the Minister's responses today will reflect those of his honourable friend in another place.

Lord McIntosh of Haringey: My Lords, the noble Lord, Lord Kingsland, has that assurance.

Lord Kingsland: My Lords, I had hoped that it was not an unreasonable assumption as only 24 hours have passed.

The Minister was kind enough to see me, together with Mr Charles Abrams, the distinguished financial securities lawyer, to discuss these orders some weeks ago. Although we were not as successful as we had hoped, I should like to thank the Minister and his officials for all the time that they took over our concerns.

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I should also like to pause here, if I may, to pay a tribute to Mr Charles Abrams, who does not, at the moment, enjoy the best of health. His remarkable grasp of the Act has played a major part in shaping the Opposition's approach to it throughout its long passage through another place and through your Lordships' House. But I know that the Minister will agree that Mr Abrams' contribution has transcended matters of party politics. It is no exaggeration to say that he has made a major contribution to everyone's approach to the Bill, whether in government or opposition, whether in the City or the professions; and, in doing so, he has performed a significant act of public service.

I cannot let the orders go without saying some things about them. It is a sadness that your Lordships' House is unable to amend orders, especially when such orders will play a leading role in the future activity of the most successful sector of our economic life in the United Kingdom.

I wish to refer to four matters which are raised by the first order; that is the regulated activities order. The first concerns arranging deals in investments falling under Article 25(2) of the Financial Services Act. That article covers all arrangements made in order to enable participants to buy or sell investments. The scope of the "arranging deals in investments" category of regulated activity should, in our view, be much more restricted. Were I able to amend the order, I would suggest the following amendment:


    "Making arrangements with a view to inviting, influencing or persuading someone to enter into a transaction under which a person who participates in the arrangements will buy, sell, subscribe for or underwrite investments falling within paragraph (1)(a), (b) or (c) (whether as a principal or an agent)".

Secondly, I am still concerned with those parts of the order which deal with specific exemptions for professionals when providing professional services under Article 67. There is still no specific exemption for lawyers and accountants.

There is, indeed, now a more relaxed exemption than in the previous version of the order for "necessary activities", which applies if the activity is reasonably thought to be necessary. However, this still does not solve the problem where professional firms will not want to risk getting "reasonably thought to be necessary" wrong, and so commit a criminal offence. Moreover, the exemption is made worse because it applies only if no other activities carried on by the professional firm consist of other regulated activities; and this seemingly applies anywhere in the world, if my interpretation of Article 67(1)(a) is correct.

I therefore propose that Article 67(1) should be amended as follows:


    "(1) There are excluded from Articles 21, 25(1) and (2) 40 and 53 any activity which


    (a) is carried on in the course of carrying on any profession or business which does not otherwise consist of carrying on regulated activities in the United Kingdom; and


    (b) either:


    (i) may reasonably be regarded as a necessary or desirable part of other services provided in the course of that profession or business; or

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    (ii) relates only to negotiating or the legal or commercial consequences of an investment transaction or an agreement therefor".

The exemption for arranging deals with or through FISMA-authorised firms may be helpful. However, in many other cases there will be no FISMA-authorised firm involved. This exemption cannot apply in these cases. It is therefore necessary to provide an exemption which is expressly directed to the position of professions.

The consultation document issued by the Treasury in February 1999, with the first draft of the regulated activities order, stated expressly in Section 3 that the Government wanted to avoid professionals seeking authorisation on a precautionary basis merely in order to ensure that, in advising their clients in a professional capacity, they did not commit a criminal offence. The Treasury indicated that the regulated activities order would therefore seek to define activities regulated under the Bill in a way which leaves as little room for doubt as possible, thereby minimising the number of firms which seek authorisation on a precautionary basis.

It is surely inappropriate, in any case, that firms which only provide legal or accountancy advice to corporations or private individuals, on transactions, or negotiations, should be regarded as providing a financial service. In our view, these are not investment activities at all; they are merely "professional activities connected with investments".

Thirdly, I turn to the signature of investment agreements. There should be an exemption from Article 21 (dealing with investments as agent) where a person merely signs an investment agreement on behalf of another person in circumstances where it is not itself a party and has no discretion as to the terms of that agreement. I am advised that the FSA regards this as constituting "dealing as an agent"; the person signing is binding the party to the agreement by signing for him and is, therefore, agreeing to do whatever it is that that party has to do "as agent". The person signing does not "agree to buy [or sell] as agent" anything; he merely agrees that the party to the agreement will buy or sell.

It would seem to us that the appropriate exemption in the order should read as follows:


    "(1) There shall be excluded from Article 21 any transaction which is or is to be entered into by a person as agent only in that he signs or will sign an agreement for that transaction as signatory for one of the parties to that agreement at the direction of that party.


    (2) For the purposes of sub-paragraph (1) above, a person signs an agreement at the direction of a party only if the party has approved that agreement or an agreement in substantially the same form as that agreement".

Fourthly, I turn to the definition of "shares". The definition in Article 76(1)(b) treats as "shares" interests in any unincorporated body constituted under the law of a country or territory outside the United Kingdom. Accordingly, the Netherlands, Antilles or Cayman Islands or indeed Channel Islands limited partnership will be treated as a company as well as a collective investment scheme.

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When it comes to marketing, therefore, it will always be necessary to fall within exemptions from both the Public Offers of Securities Regulations 1995, which apply to "shares" within what would be Article 76(1)(b), and the restrictions on marketing collective investment schemes, under Section 238(1). As I understand it, this is because, if there is no exemption, both the Section 238 restrictions and the prospectus requirement under the POS regulations apply, whether or not the unincorporated body is open-ended. This contrasts with a corporate collective investment scheme--a body corporate is a collective investment scheme only if it is open-ended. If it is, the POS regulations do not apply to it. The definition should therefore be changed.

I should like to mention two further matters arising under this order, although I am still not quite sure, having read the proceedings in another place, what is the Government's position on them. The first of these concerns the definition of "close relatives" under Article 3(1).

The definition of "close relatives" in the exemptions ought to include trustees of trusts where the only beneficiaries are close relatives. This is especially important in relation to the exclusions for activities carried on in connection with a body corporate. Many family companies use trustees--for example, if a spouse is given only a life interest or any children are minors. Unless the definition of "close relatives" is extended in this way, the exclusions cannot be used.

The final area of uncertainty concerns the removal of the ISD passport for non-UK EEA banks. The regulations should reinstate the unilateral ISD passport which has been granted to non-UK EEA credit institutions--in other words, the passport similar to the passport granted by the investment services directive to non-bank investment firms which has been granted by the Treasury to credit institutions from the EEA which are not incorporated in the UK.

As I recall, when we asked for the reinstatement of the unilateral passport when the Bill was going through this House, the Government stated that the Treasury had never unilaterally granted any such passport. I have always been puzzled by that statement and respectfully disagree with it.

The Treasury has indeed granted this passport. The passport covers the ISD activities not covered by the second banking directive, especially arranging deals in the secondary market and receiving and transmitting orders. As I understand it, the FISMA does not continue this unilateral ISD passport and, consequently, will significantly prejudice incoming EEA banks. It will also be helpful to the United Kingdom to continue this passport because United Kingdom banks can similarly be benefited when they use their outgoing passport.

Finally--your Lordships will be relieved to hear--perhaps I may make one observation on the draft of the Carrying on Regulated Activities By Way of Business Order.

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We, of course, support the proposed exemption of pension fund trustees from the need to be FISMA-authorised which is imposed by Article 4(1). The exemption appears in Article 4(1)(b) and applies even if decisions to invest in private equity funds within paragraph (6) are not taken by FSIMA-authorised or exempted firms or overseas persons. This exception to the general rule that the exemption applies only if all decisions on investments are taken by firms falling within these permitted categories reflects an important recommendation in the Myners report, as it removes a regulatory obstacle to venture capital investment by pension funds.

However, in our view, the exemption does not go far enough. All that it achieves is to ensure that the actual decision can be taken by the pension fund trustees. They still need to be advised by one of these permitted persons. This means that the trustees still have to find a permitted person who knows about venture capital, become its client and, at least in the case of FISMA-authorised firms, go through a "know your customer" inquiry. Indeed, if the FSA conduct of business rules reflect the existing IMRO requirements in this regard, the FISMA-authorised firm has to treat the pension fund as a private client and comply with the suitability requirement. In our view, this is both cumbersome and expensive and still represents a significant regulatory obstacle. We recommend that the requirement in paragraph (6)(b) should be deleted.

We also think that the definition of "relevant investment" in paragraph 7 should be restricted. This is because "shares" include interest in non-UK collective investment schemes. Otherwise, the two-tier fund (where the body corporate itself invests in relevant investments; for example, where the body corporate is an investment trust or venture capital trust) becomes a three-tier fund, where the fund in the second tier is not restricted to private equity. If this amendment is not accepted, it would surely be appropriate to allow for these three-tier funds to be established through UK collective investment schemes as well.

I would, without in any way embellishing upon them, like to associate myself with the remarks of the noble Lord, Lord Newby, with respect to mortgage advisers and mortgage intermediaries.

11.45 a.m.

Lord McIntosh of Haringey: My Lords, I am grateful to both noble Lords for the care with which they have responded to these orders. I shall do my best to respond to the points that have been made.

I start with the issue of mortgage lenders. This was referred to mainly by the noble Lord, Lord Newby, but with the assent of the noble Lord, Lord Kingsland. The Treasury's consultation in 1999 showed that what prospective borrowers really need is clear and comparable information about the mortgages on offer. We decided that there was no need to regulate mortgage advice and that we did not need to regulate mortgage brokers, only mortgage lenders. Lenders should be more familiar with those who distribute

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their products. That has the advantage of reducing the work of the FSA to a reasonable level, allowing a slightly faster introduction than might otherwise be possible. Some 8,000 additional brokers would need to seek authorisation from the FSA as opposed to the 200 or so lenders.

The Government are committed to reviewing the operation of the Financial Services and Markets Act in the round two years after N2; that is, before the end of 2003, in response to the Cruickshank review. Experience in those two years could point to the need for less rather than more regulation in this area. However, I think it will be clear that we have not ruled out the possibility of extending regulation if that is necessary. We shall return to that issue in due course.

As to whether we should regulate advice, surely mortgages are not inherently complex. One borrows money against one's home and one pays off the loan over an agreed term. The original consultation showed that there was a lack of clarity and transparency over redemption penalties, for example. That was the main cause of consumer detriment. As regards mortgages, customers are not entrusting their own funds to financial firms; it is the other way round. We think that the review that I mentioned will deal with the issue which was raised.

The noble Lord, Lord Kingsland, made a number of points. I shall try to deal with them as best I can. He mentioned arranging deals in investments. It was proposed that we should include an exclusion from the activity of arranging deals in investments where the arrangements consist only of an activity which is not a regulated activity. But as the purpose of the regulated activities order is to specify regulated activities, it does not make sense to exclude activities which are not regulated activities. What we have done is to reduce the scope of the activity of arranging deals in investments by including a new exclusion from the activity where the arrangements merely provide the means by which one party to a transaction, or potential transaction, is able to communicate with other parties.

The noble Lord, Lord Kingsland, also referred to Article 67 on specific exclusions for professional firms. We have not included a specific exclusion from the activity of arranging deals in investments for professional firms because we doubt that merely preparing or negotiating legal documentation for a transaction would amount to arranging deals in investments. If the activities of a professional firm spill over to arranging deals in investments, the firm may be able to rely on the exclusion in Article 67 which will be available where, first, the activity is carried on in the course of a profession which does not otherwise consist of regulated activities and, secondly, may be reasonably regarded as a necessary part of other services provided in the course of that profession. In any case we have liberalised the exclusion in Article 67, which is based on paragraph 24 of Schedule 1 to the

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Financial Services Act 1986, by changing the wording from,


    "is a necessary part of other services",

to,


    "may reasonably be regarded as a necessary part",

to make it more useful to professional firms.

The fallback is that if a professional firm's activities do not fall within the exclusion in Article 67, it will be open to the firm to submit to the regime for professionals in Part XX of the Act. But, to give a specific exclusion for the activity of arranging deals in investments for professional firms would undermine the regime in Part XX without any of the checks and balances which are built into that regime.

I hope that my remarks will be less complex as regards signing an investment agreement. We do not agree that merely signing an agreement comprises dealing as an agent. We do not believe that that concern is well founded. I understand the concern about the definition of shares because of the scope of the Public Office of Securities Regulations of 1995. The right solution would seem to be to change the Public Office of Securities Regulations, not the regulated activities order. The definition of shares reflects that in the 1986 Financial Services Act, and the change proposed seems a rather odd way of dealing with the problem, if there is a problem, which could have a number of unintended consequences.

I turn to the definition of a close relative. We have already amended the exclusion in Article 70--articles carried on in connection with the sale of a body corporate--so that "close relative" includes trustees of trusts where beneficiaries are close relatives. It is not appropriate to amend the definition of close relative in the rest of the regulated activities order.

On the universal passport issue to cover ISD activities, this is a matter for regulations to be made under Schedule 3 to the Financial Services and Markets Act. I was interested in the remarks of the noble Lord, Lord Kingsland, about pension fund trustees. I referred to that in the closing minute of my introductory speech. It is a deliberate policy to require trustees to get advice from an authorised person. That in turn reflects requirements of the Pensions Act. Where there is more than one tier, each fund must have as its primary purpose investment in private equity. We have gone a long way in implementing Mr Myners' recommendations but we do not think that we should go the extra mile which the noble Lord, Lord Kingsland, proposes.

I hope that that deals with the issues raised in the debate. I commend the orders to the House.

On Question, Motion agreed to.


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