Financial Services and Markets Act 2000 (Regulated Activities) (Amendment No. 3) Order 2006

My Lords, I am grateful to the noble Lord, Lord Davies of Oldham, for his comprehensive introduction to the orders before us this evening. I wish that I could give such a warm welcome to the orders themselves. I expect that all those years ago in Lisbon the Government thought that going along with the EU Council as good Europeans was a good idea when they approved the financial services action plan. It seemed like a good idea to create a single European market in financial services, as that would provide wider and deeper capital markets, which would in turn benefit businesses and individuals with better-value sources of finance. But that terrific idea has turned into a monster comprising 17 directives at a cost to the UK of anything up to £24 billion over the next three years to 2010—the magical date forthe implementation of the Lisbon agenda. The cost to the whole of the EU will be around three times that figure. The UK has easily the most successful and sophisticated financial market in the EU. From a consumer protection perspective, it is hard to see why the cost bears so heavily on the UK. That cost will not help the UK to remain one of the two big players on the global financial stage. The FSAP is focused on intra-European issues, which may be fine for most of Europe’s financial markets, but the only real global payer in the EU is London and the FSAP does nothing to help London to succeed in global financial markets. The financial services action plan may well go down in the financial history of this country, if not the whole of Europe, as a costly mistake, but we are not here to debate the FSAP. We are here to concentrate on MiFID, as we are allowed to call the directive this evening, which is being implemented by the orders before us and some other negative instruments. It is perhaps no surprise that our general view is not quite on all fours with that expounded by the Minister. The most that we can say is that these orders make the best of a bad job. The history of the passage of MiFID through Europe is a lesson in itself. The original requirements as contained in a second investment services directive were deregulatory, but they were defeated by an unholy alliance of France, Italy and Germany protecting their own investment exchanges. An ambush in ECOFIN in 2003 with an inexperienced Treasury Minister representing the UK resulted in the pass being sold. How often have we heard of that toxic combination—three countries at the heart of the European project protecting powerful vested interests at home up against a UK that did not have its full firing power in action? Perhaps even more appalling is that the final formal adoption of MiFID took place in 2004 at an Agriculture and Fisheries Council, which could not pretend a competence in the extraordinarily complex issues lying behind the directive. The Minister who let us down at ECOFIN, who is no longer in Parliament, said at the end of the meeting that the result was, "““misguided and profoundly anti-competitive””." At the same stage, Sir Callum McCarthy, chairman of the FSA, called it a, "““bad result for Europe and an unattractive result for the UK””." In practice, some of the worst aspects of that directive have been mitigated through the subsequent processes in the European Parliament and by the Committee of European Securities Regulators, but this end result is not the finest hour for Europe and it is certainly not the finest hour for the UK’s financial services industry. The processes of European Union rule-making leave much to be desired, but our financial services industry has demonstrated its qualities of pragmatism and adaptability. The industry has concentrated on working with the Government and the FSA on practical implementation approaches that minimise any potential harm from MiFID. I acknowledge that the Treasury and the FSA have consulted extensively and have made changes in response. The views that we have received from many different parts of our financial services industry have been unanimous on the constructive way in which the Treasury and the FSA have approached their tasks. But let us not pretend that the financial services industry was doing any more than making the best of a bad job. We can see how bad a job is involved by looking at the costs and benefits. Even the regulatory impact assessment concluded at paragraph 33 that, "““the one-off cost of implementation significantly exceeds the expected ongoing benefits””." There are very wide estimates of costs and benefits contained in the RIA—the Minister cited some figures this evening, but the FSA calculates implementation costs in the range of £0.9 billion to £1.2 billion with ongoing costs of £100 million. The direct benefits are said to be around £200 millionper annum. No business in this country would contemplate an investment on the basis of those metrics. Many of the costs bear disproportionately on the smaller end of the industry, such as independent financial advisers, who believe that the costs will not produce any tangible benefits for consumers or for the firms concerned. One of the problems is that many of the costs remain unclear because the precise nature of implementation remains unclear—an example here is the nature and scope of investment managers’ transaction reporting obligations. MiFID is yet another example of European regulatory burdens being imposed by a Government who have not put the UK’s interests first. The Government are desperately keen to get this order through this week so that the FSA can issue yet more rules within the deadline of 31 January for transposing the directive, but I hope that the Minister will explain to the House where we sit in the context of other EU countries. I have been told that the only other country in the EU that is ready to transpose the directive by 31 January is Bulgaria, but I expect that that is common title-tattle. When will France be transposing the directive? What about Germany, Italy, Spain and the other countries that claim some significance for their financial services industries? I should also mention the status of cross-border business. I am sure that the Minister has read the consultation documents from the Committee of European Securities Regulators on the implementation of MiFID. Regulators always come in for their fair share of criticism, but committees of regulators who are not accountable to anyone are even worse. But in this case CESR has produced some good analysis of the passport proposals. Its report published last month shows the very real difficulties that exist under the MiFID proposals for home and host regulators. The MiFID proposals envisage that a host regulator regulates ““conduct of business”” requirements of a branch, while the home regulator concentrates on ““organisational and control matters””. As the Minister will know, such a distinction is not one that exists in a pure form in the real world and hence it requires a very high degree of co-operation between the various regulators to ensure that there is a seamless approach to regulation. Let us take the example of a branch of a company based in country A that operates in country B but also trades, without having a branch, with the citizens of country C. The various regulators will have to make sure not only that country A and country B regulators do not overlap with each other or leave regulatory gaps but also that the activities in country C are covered, presumably by the regulator of country A, since country B’s regulators will have no locus. This is not about administrative protocols; at heart, it is an issue of consumer protection. Is the Minister happy that the access to comparable consumer redress arrangements will exist throughout Europe before firms start to trade throughout Europe on the basis of MiFID? We are rightly proud of our consumer arrangements for complaints and compensation. Can the Minister assure the House that if a Polish financial services business, for example, has a branch in Denmark through which it trades with UK consumers, our consumers will have redress arrangements comparable to those that exist for wholly UK business? If the Minister cannot answer that question strongly in the affirmative, will he explain on what basis the Government consider it appropriate that these orders should be approved? I understand that CESR is still issuing consultation papers on various issues, which means that some issues will be resolved after the FSA has issued its rules. This in turn means that there remains significant uncertainty for UK firms that want to proceed with detailed implementation so as to be ready for the November 2007 implementation date. Will the Minister say something about those remaining issues and how the Government expect the FSA to deal with the possibility that the goalposts will be moved before we reach implementation? Lastly, the Minister will be aware that the scale of MiFID implementation will stretch the resources of all financial services firms, both big and small, not only for the rest of this year but for some time to come. There simply is not the capacity to cope with any more regulatory requirements other than those that are absolutely essential. Will the Minister confirm that the Treasury and the FSA are fully aware of this and committed to giving the industry a proper breathing space to absorb MiFID, and that, if necessary, they will stand up to Europe on further regulatory burdens in this area?