Financial Services Bill

My Lords, Amendment 35A adds two new subsections to proposed new Section 3A of FSMA as inserted by Clause 5(3). The financial stability objective is not defined in this Bill, as it was not when the Bank of England was given its financial stability objective in last year’s Banking Act. We sought then to get a definition in the statute or, failing that, a requirement to define what is meant by "financial stability" in the code of practice. As I recall, more than one definition had surfaced during the consideration of that Act and we thought that clarity would be aided by a definition. We did not succeed in that. However, we now have a financial stability objective proposed for the FSA and rather different considerations apply. The FSA will be able to use some of its powers solely on the basis of it being desirable for its financial stability objective. Under Clause 7, the FSA’s powers are proposed to be considerably enhanced. For example, its own-initiative power in Section 45 of FSMA could, if Clause 7 is passed into law, be used by the FSA if it is desirable in order to meet any of its regulatory objectives. At present, the FSA can use this power only in relation to consumer protection. Similarly, the general rule-making power in Section 138 of FSMA is extended from consumer protection to all of the FSA’s objectives by Clause 7. These are massively widened powers and we will debate them when we get to Clause 7. For the purposes of Clause 5, the relevance is that the FSA has an undefined financial stability objective which it can now invoke to justify the use of various of its powers. I hope that the Government share our belief in regulatory powers needing to be clear in order to give certainty to the regulated community. Clause 5, taken with Clause 7, creates major new uncertainty. The Banking Act creates a requirement for the Treasury to issue a code of practice setting out how the special resolution powers would be used. This was welcomed by the financial services sector even if the content did not always satisfy those who looked to the code for answers. I believe that this Bill would be improved by something similar. Amendment 35A calls for the FSA to issue a statement of policy of both its understanding of the objective and in what circumstances it intends to use its powers to achieve its objective. It also requires the FSA to consult the Treasury, the Bank of England, and people who could be affected by the statement. It would clearly not bind the FSA in all circumstances, but it would give reassurance to the financial services bodies that might be affected by what is meant by it. The amendment was prompted by the memorandum submitted by the City of London Law Society to the Public Bill Committee in another place. It is concerned about the breadth of the rule-making powers and the lack of constraints on the use of those powers. In relation to Clause 5, it believes that a statement of policy is the very least of the amendments that should be made to give greater clarity about the objective. The City of London Law Society said that it understood that the Government’s main concern was to ensure that the FSA took account of the systemic risk posed by common patterns of behaviour by, and relationships between, regulated firms. I do not know if that is what is intended to be covered; I suspect that there are other things as well—but whatever that is, the FSA ought to be clear about it. I hope that the Minister will share that desire for clarity. I beg to move.